0000950109-95-003003.txt : 19950811
0000950109-95-003003.hdr.sgml : 19950811
ACCESSION NUMBER: 0000950109-95-003003
CONFORMED SUBMISSION TYPE: S-4/A
PUBLIC DOCUMENT COUNT: 12
FILED AS OF DATE: 19950809
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PROVIDENCE JOURNAL CO
CENTRAL INDEX KEY: 0000080816
STANDARD INDUSTRIAL CLASSIFICATION: []
FILING VALUES:
FORM TYPE: S-4/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-57479
FILM NUMBER: 95560268
BUSINESS ADDRESS:
STREET 1: PROVIDENCE
STREET 2: 75 FOUNTAIN STREET
CITY: PROVIDENCE
STATE: RI
ZIP: 02902
BUSINESS PHONE: 4012777031
MAIL ADDRESS:
STREET 1: 75 FOUNTAIN STREET
CITY: PROVIDENCE
STATE: RI
ZIP: 02902
S-4/A
1
AMENDMENT NO. 3 TO FORM S-4
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1995
REGISTRATION NO. 33-57479
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THE PROVIDENCE JOURNAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 2710, 4830 05-0481966
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBERS) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
75 FOUNTAIN STREET, PROVIDENCE, RI 02902
(401) 277-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
STEPHEN HAMBLETT
THE PROVIDENCE JOURNAL COMPANY
75 FOUNTAIN STREET
PROVIDENCE, RI 02902
(401) 277-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
BENJAMIN P. HARRIS, III, ESQ.
EDWARDS & ANGELL
2700 HOSPITAL TRUST TOWER
PROVIDENCE, RI 02903
(401) 274-9200
AND
JOHN L. HAMMOND, ESQ.
THE PROVIDENCE JOURNAL COMPANY
75 FOUNTAIN STREET
PROVIDENCE, RI 02902
(401) 277-7000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger of Providence Journal Company with and into
Continental Cablevision, Inc. pursuant to the Agreement and Plan of Merger
described in the accompanying Joint Proxy Statement-Prospectus have been
satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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THE PROVIDENCE JOURNAL COMPANY
CROSS REFERENCE SHEET
SHOWING LOCATION IN THE JOINT PROXY STATEMENT-PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS IN FORM S-4
CAPTION IN JOINT PROXY STATEMENT-
ITEMS IN FORM S-4 PROSPECTUS
----------------- ---------------------------------
A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Cover Page of Registration
Statement; Cross Reference
Sheet; Outside Front Cover
Page of Joint Proxy
Statement-Prospectus
Item 2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front and Outside
Back Cover Pages of Joint
Proxy Statement-
Prospectus; Table of
Contents; Available
Information; Information
Incorporated by Reference
Item 3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............... Summary; Risk Factors
Item 4. Terms of the Transaction..................... Summary; Background of the
Transactions; Pre-Merger
Transactions; The Merger;
Description of New
Providence Journal Capital
Stock; Description of
Continental Capital Stock;
Comparison of Rights of
Stockholders of Providence
Journal and New Providence
Journal; Comparison of
Rights of Stockholders of
Providence Journal and
Continental; Certain
Federal Income Tax
Considerations
Item 5. Pro Forma Financial Information.............. Summary; Description of
Providence Journal and New
Providence Journal
Item 6. Material Contacts with the Company Being
Acquired.................................... The Merger; Pre-Merger
Transactions
Item 7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
Be Underwriters.............................. *
Item 8. Interests of Named Experts and Counsel....... Experts
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. *
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Information With Respect to S-3 Registrants.. *
Item 11. Incorporation of Certain Information by
Reference.................................... *
Item 12. Information With Respect to S-2 or S-3
Registrants.................................. *
CAPTION IN JOINT PROXY STATEMENT-
ITEMS IN FORM S-4 PROSPECTUS
----------------- ---------------------------------
Item 13. Incorporation of Certain Information by
Reference.................................... *
Item 14. Information With Respect to Registrants Other
Than S-3 or S-2 Registrants................. Joint Proxy Statement-
Prospectus Cover Page;
Summary; Description of
Providence Journal
Publishing Business;
Description of Providence
Journal Broadcast
Television Business;
Description of Providence
Journal;
New Providence Journal and
Description of New
Providence Journal Common
Stock
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15. Information With Respect to S-3 Companies.... *
Item 16. Information With Respect to S-2 or S-3
Companies.................................... *
Item 17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................... *
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Consents or
Authorizations Are to Be Solicited.......... Joint Proxy Statement-
Prospectus Cover Page;
Summary; The Special
Meetings; Risk Factors;
Background of the
Transactions; Pre-Merger
Transactions; The Merger;
Proposal to Approve and
Adopt the Providence
Journal Cable Division Sale
Bonus Plan; Rights of
Dissenting Stockholders;
Description of Providence
Journal and New Providence
Journal
Item 19. Information if Proxies, Consents or
Authorizations Are Not to Be Solicited in an
Exchange Offer............................... *
--------
* Omitted because inapplicable or answer is in the negative.
PROVIDENCE JOURNAL COMPANY
August , 1995
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Providence Journal Special Meeting") of Providence Journal Company
("Providence Journal") to be held on September , 1995 at 10:00 a.m. at the
offices of Providence Journal, 75 Fountain Street, Providence, Rhode Island.
At the Providence Journal Special Meeting, stockholders will be asked (i) to
approve the transfer of all the businesses of Providence Journal other than its
cable television operations to a new corporation ("New Providence Journal") and
the distribution to the stockholders of Providence Journal of all of the
outstanding shares of New Providence Journal (the "PJC Spin-Off"); (ii) to
approve and adopt an amendment to the Charter of Providence Journal required to
facilitate the PJC Spin-Off; (iii) to approve and adopt an Agreement and Plan
of Merger (the "Merger Agreement"), which provides for the merger (the
"Merger") of Providence Journal, which will hold only the cable television
businesses of Providence Journal after the PJC Spin-Off, with and into
Continental Cablevision, Inc. ("Continental") and, prior to the Merger, the
purchase by Continental of all of the cable television businesses of King
Broadcasting Company, which is currently 50% owned by Providence Journal; and
(iv) to approve the Providence Journal Cable Division Sale Bonus Plan, which
provides incentives to a group of executives of Providence Journal's cable
television division in order to maximize the operating performance of the cable
business pending completion of the Merger, with bonuses payable only if the
Merger is consummated (the maximum amount of the bonuses payable pursuant to
the Providence Journal Cable Division Sale Bonus Plan is $5,200,000).
As a result of the Merger, all outstanding shares of common stock of
Providence Journal will be converted into shares of Continental's Class A
Common Stock. In order to protect the tax-free nature of the PJC Spin-Off and
the Merger, the shares of New Providence Journal Common Stock received in the
PJC Spin-Off and the shares of Continental Class A Common Stock received in the
Merger may not be transferred by Providence Journal stockholders for a period
of one year following the effective date of the Merger, except in certain
limited circumstances. Assuming no adjustments are made in the amount of
consideration provided in the Merger Agreement, as described below, and giving
effect to the Continental stock dividend specified in the accompanying Joint
Proxy Statement-Prospectus (which will have the effect of splitting the
Continental common stock on a 25-for-1 basis), Continental will issue to our
stockholders an aggregate of 30,725,207 shares of Continental Class A Common
Stock, representing an aggregate estimated value of $596,069,000, or $19.40 per
share. Based on the foregoing, the Merger would result in the stockholders of
Providence Journal receiving approximately 362.80 shares of Continental Class A
Common Stock per share of Providence Journal common stock that was outstanding
on August 1, 1995; this represents an estimated value of $7,038.33 per
Providence Journal share. The value of $19.40 per share of Continental Class A
Common Stock was arrived at by Continental and Providence Journal as a result
of arm's length negotiations between the parties and does not necessarily
reflect the price at which such shares will trade following the consummation of
the Merger.
The shares of Continental Class A Common Stock to be issued in the Merger
will be reduced if certain cable subsidiaries of Providence Journal, in which
there are currently minority interests outstanding, are not wholly owned at the
time of the Merger. If none of these minority interests were purchased by the
time of the Merger, the maximum reduction in the consideration to be paid in
Continental Class A Common Stock would be $53,910,000, and the Merger would
result in the stockholders of Providence Journal receiving approximately 329.99
shares of Continental Class A Common Stock, representing an estimated value of
$6,401.80, per share of Providence Journal common stock that was outstanding on
August 1, 1995.
As a result of the Merger and assuming that no reductions are made due to
minority interests remaining outstanding, the Providence Journal stockholders
would receive shares of Continental Class A Common Stock, representing
approximately 17.3% of the outstanding Continental Common Stock (treating the
Continental Series A Preferred Stock as if it were converted into Continental
Class B Common Stock) and approximately 2.2% of the voting power of
Continental.
As a result of the PJC Spin-Off, New Providence Journal will own all the
businesses and assets of Providence Journal unrelated to its cable television
business. Each stockholder of Providence Journal at the time the PJC Spin-Off
is carried out will receive, through a distribution by Providence Journal, one
share of Class A Common Stock of New Providence Journal for each share of
Providence Journal Class A Common Stock held and one share of Class B Common
Stock of New Providence Journal for each share of Providence Journal Class B
Common Stock held.
The Merger is subject, among other things, to approvals by various
governmental entities and other third parties, including the Federal
Communications Commission, and will not be consummated until those approvals
have been obtained. In addition, the stockholders of Continental must approve
the Merger. We do not expect the Merger to be completed until the fourth
quarter of 1995.
Your Board of Directors has carefully considered the terms of the proposed
Merger with Continental and believes that the PJC Spin-Off and the Merger,
including the transactions contemplated thereby, are in the best interests of
and fair to Providence Journal and its stockholders. The Board has unanimously
approved the PJC Spin-Off, the related Charter amendment, the Merger and the
Providence Journal Cable Division Sale Bonus Plan and recommends that
stockholders vote FOR each of the proposals.
The accompanying Joint Proxy Statement-Prospectus sets forth the respective
voting rights of stockholders of Providence Journal with respect to these
matters. We hope you will be able to attend the Providence Journal Special
Meeting. However, even if you anticipate attending in person, we urge you to
complete, sign, date and return the enclosed proxy card promptly to ensure that
your shares will be represented at the Providence Journal Special Meeting. If
you do attend, you will, of course, be entitled to vote in person.
Thank you, and I look forward to seeing you at the meeting.
Sincerely,
[SIGNATURE]
Stephen Hamblett
Chairman of the Board and
Chief Executive Officer
PROVIDENCE JOURNAL COMPANY
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1995
TO THE STOCKHOLDERS OF PROVIDENCE JOURNAL COMPANY:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Providence Journal Special Meeting") of Providence Journal Company
("Providence Journal") will be held on September , 1995 at 10:00 a.m. local
time at the offices of Providence Journal, 75 Fountain Street, Providence,
Rhode Island, for the purpose of considering and voting upon the following
matters:
(1) A proposal to approve (i) the contribution (the "Contribution") by
Providence Journal of all of its businesses and assets unrelated to its
cable television businesses to The Providence Journal Company ("New
Providence Journal"), its newly created wholly owned subsidiary, in
exchange for which New Providence Journal will assume all liabilities
related to such businesses and assets and issue to Providence Journal a
number of shares of New Providence Journal's Class A common stock ("New
Providence Journal Class A Common Stock") and New Providence Journal's
Class B common stock ("New Providence Journal Class B Common Stock") equal
to the number of outstanding shares of Providence Journal's Class A common
stock ("Providence Journal Class A Common Stock") and Providence Journal's
Class B common stock ("Providence Journal Class B Common Stock"),
respectively, and (ii) the distribution (the "Distribution") of one share
of New Providence Journal Class A Common Stock to the holder of each share
of Providence Journal Class A Common Stock and one share of New Providence
Journal Class B Common Stock to the holder of each share of Providence
Journal Class B Common Stock, each as outstanding immediately prior to the
Distribution. The Contribution and the Distribution discussed above are
hereinafter referred to collectively as the "PJC Spin-Off."
(2) A proposal to approve and adopt an amendment to the Charter of
Providence Journal (the "Providence Journal Charter Amendment") required in
connection with the PJC Spin-Off to permit Providence Journal to distribute
one share of New Providence Journal Class A Common Stock to the holder of
each share of Providence Journal Class A Common Stock and one share of New
Providence Journal Class B Common Stock to the holder of each share of
Providence Journal Class B Common Stock.
(3) A proposal to approve and adopt the Agreement and Plan of Merger
dated as of November 18, 1994, as amended and restated as of August 1, 1995
(the "Merger Agreement"), by and among Continental Cablevision, Inc.
("Continental"), Providence Journal, King Holding Corp., King Broadcasting
Company ("KBC") and New Providence Journal, and each of the transactions
contemplated thereby, including (i) the merger (the "Merger") of Providence
Journal, which at the time of the Merger will hold only Providence
Journal's cable television businesses and assets, with and into Continental
and (ii) prior to the Merger, the purchase by Continental for $405,000,000
of all of the cable television businesses owned by KBC (the "King Cable
Purchase"), upon the terms and subject to the conditions set forth in the
Merger Agreement, as more fully described in the accompanying Joint Proxy
Statement-Prospectus. A copy of the Merger Agreement is attached as Annex I
to the accompanying Joint Proxy Statement-Prospectus and certain related
documents are attached as exhibits thereto.
(4) A proposal to approve and adopt the Providence Journal Cable Division
Sale Bonus Plan, which provides compensation bonuses to certain executives
of Providence Journal's cable television operations upon and subject to the
consummation of the Merger.
(5) Such other business as may properly come before the Providence
Journal Special Meeting or any adjournments or postponements thereof.
The proposals described in items (1), (2) and (3) above are hereinafter
collectively referred to as the "Providence Journal Proposals".
Each proposal shall be voted upon separately by the Providence Journal
stockholders entitled to vote at the Providence Journal Special Meeting;
however, failure of the stockholders to approve any of the
Providence Journal Proposals will result in the abandonment by Providence
Journal of the PJC Spin-Off, the Merger and the related transactions.
Stockholders should be aware that, in the event that the PJC Spin-Off and the
Merger are approved, the following actions, among others, will take place in
connection with the consummation thereof:
(i) Providence Journal will incur indebtedness in the amount of
approximately $410,000,000, which will be an obligation of Continental
after the Merger. This indebtedness, together with $405,000,000 to be
provided by Continental for the King Cable Purchase and the other
indebtedness described in (ii) below, will be used to consummate the buyout
of the 50% owners of KHC, to purchase interests in certain cable
subsidiaries not presently wholly owned by Providence Journal, to pay
transaction costs associated with the Merger, to repay all existing
indebtedness, to pay taxes due as a result of the King Cable Purchase and
to pay certain deferred compensation.
(ii) New Providence Journal will also incur indebtedness required to meet
the foregoing obligations, among others, in the amount of approximately
$275,000,000. This indebtedness will remain an obligation of New Providence
Journal after the Merger.
The Providence Journal Board of Directors has fixed the close of business on
August 25, 1995 as the record date for the determination of stockholders
entitled to notice of and to vote at the Providence Journal Special Meeting and
any adjournments or postponements thereof. Only stockholders of record at the
close of business on such date are entitled to notice of and to vote at the
Providence Journal Special Meeting. A list of Providence Journal stockholders
entitled to vote at the Providence Journal Special Meeting will be available
for examination for any purpose germane to the Providence Journal Special
Meeting, during ordinary business hours, at the principal executive offices of
Providence Journal, 75 Fountain Street, Providence, Rhode Island 02902, for 10
days prior to the Providence Journal Special Meeting.
The holders of shares of Providence Journal Class A Common Stock and
Providence Journal Class B Common Stock are entitled to vote upon the matters
to come before the Providence Journal Special Meeting, including the Providence
Journal Proposals. The required votes on the matters to come before the
Providence Journal Special Meeting are detailed in the accompanying Joint Proxy
Statement-Prospectus.
Providence Journal stockholders entitled to vote at the Providence Journal
Special Meeting have a right to dissent to the Merger and, if the Merger is
consummated, to obtain payment for their shares of Providence Journal by
complying with the provisions of the Business Corporations Act of the State of
Rhode Island, as detailed in the accompanying Joint Proxy Statement-Prospectus.
Your vote is important regardless of the number of shares you own. Each
stockholder, even though he or she now plans to attend the Providence Journal
Special Meeting, is requested to promptly sign, date and return the enclosed
Proxy in the enclosed postage-paid return envelope. You may revoke your Proxy
at any time prior to its exercise. Any stockholder present at the Providence
Journal Special Meeting or any adjournments or postponements thereof may revoke
his or her Proxy and vote personally on each matter before the Providence
Journal Special Meeting.
By Order of the Board of Directors,
[SIGNATURE]
Harry Dyson, Secretary
August , 1995
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
AND ADOPT THE PJC SPIN-OFF, FOR THE PROPOSAL TO APPROVE AND ADOPT THE
PROVIDENCE JOURNAL CHARTER AMENDMENT, FOR THE PROPOSAL TO APPROVE AND ADOPT THE
MERGER AGREEMENT AND FOR THE PROPOSAL TO APPROVE AND ADOPT THE PROVIDENCE
JOURNAL CABLE DIVISION SALE BONUS PLAN.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE.
CONTINENTAL CABLEVISION, INC.
August , 1995
Dear Stockholder:
You are cordially invited to attend a Special Meeting in Lieu of the Annual
Meeting of Stockholders (the "Continental Special Meeting") of Continental
Cablevision, Inc. ("Continental") to be held on September , 1995 at a.m.
local time, at the offices of Sullivan & Worcester, One Post Office Square,
Boston, Massachusetts 02109.
At the Continental Special Meeting, stockholders will be asked to approve and
adopt an Agreement and Plan of Merger (the "Merger Agreement"), providing for
(i) the merger of Providence Journal Company ("Providence Journal"), which,
following an internal corporate restructuring, will own only Providence
Journal's cable television businesses, with and into Continental (the "Merger")
and (ii) prior to the Merger, the purchase by Continental of all of the cable
television businesses of King Broadcasting Company, which is currently 50%
owned by Providence Journal, for a purchase price of $405,000,000.
As a result of the Merger, all outstanding shares of common stock of
Providence Journal will be converted into shares of Continental Class A Common
Stock. Assuming that no adjustments have been made to the amount of
consideration to be paid to the stockholders of Providence Journal, as
described below, and after giving effect to the stock dividend specified in the
accompanying Joint Proxy Statement-Prospectus (which will have the effect of
causing each outstanding share of Continental Class A Common Stock and
Continental Class B Common Stock to become 25 shares of such class of stock),
Continental would issue to Providence Journal stockholders an aggregate of
30,725,207 shares of Continental Class A Common Stock representing an aggregate
estimated value of $596,069,000, or $19.40 per share. The value of $19.40 per
share of Continental Class A Common Stock was arrived at by Continental and
Providence Journal as a result of arm's length negotiations between the parties
and does not necessarily reflect the price at which such shares will trade
following the consummation of the Merger.
The shares of Continental Class A Common Stock to be issued in the Merger
will be reduced if certain cable subsidiaries of Providence Journal, in which
there are currently minority interests outstanding, are not wholly owned at the
time of the Merger. If none of these minority interests were purchased by the
time of the Merger, the maximum number of shares of Continental Class A Common
Stock that Continental would be required to issue would be 27,946,340.
As a result of the Merger and assuming that no reductions are made due to
minority interests remaining outstanding, the Providence Journal stockholders
would receive shares of Continental Class A Common Stock, representing in the
aggregate approximately 17.3% of the outstanding Continental Common Stock
(treating the Continental Series A Preferred Stock as if it were converted into
Continental Class B Common Stock) and approximately 2.2% of the voting power of
Continental.
The Merger is subject to, among other things, the approvals of various
governmental entities and other third parties, including the Federal
Communications Commission, and will not be consummated until those approvals
have been obtained. In addition, the stockholders of Providence Journal must
approve the Merger and related transactions. As a result, it is expected that
the Merger will be completed during the fourth quarter of 1995.
Your Board of Directors has carefully considered the terms of the proposed
Merger and believes that the Merger and related transactions are in the best
interests of and fair to Continental and its stockholders. The Board has
unanimously approved the Merger and the related transactions and recommends
that stockholders vote FOR that proposal.
In order to permit Continental to issue shares of Continental Class A Common
Stock to the Providence Journal stockholders as provided in the Merger
Agreement and to effect the Continental stock dividend described above,
Continental stockholders will also be asked to approve and adopt an amendment
to the Restated Certificate of Incorporation of Continental (the "Continental
Recapitalization Amendment"), which increases the total number of authorized
shares of Class A Common Stock, Class B Common Stock and Preferred Stock
available for issuance by Continental. The Board has unanimously approved the
Continental Recapitalization Amendment and recommends that stockholders vote
FOR that proposal.
The stockholders will also be asked to elect two Class C Directors of
Continental to serve a three-year term and to ratify the appointment by the
Board of Directors of Deloitte & Touche LLP as Continental's independent
auditors for the current fiscal year ending December 31, 1995.
The accompanying Joint Proxy Statement-Prospectus sets forth the respective
voting rights of holders of shares of Continental stock with respect to these
matters. We hope you will be able to attend the meeting. However, even if you
anticipate attending in person, we urge you to complete, sign, date and return
the enclosed proxy card promptly to ensure that your shares will be represented
at the Continental Special Meeting. If you do attend, you will, of course, be
entitled to vote in person.
Thank you, and I look forward to seeing you at the meeting.
Sincerely,
[Signature]
Amos B. Hostetter, Jr.
Chairman of the Board and Chief
Executive Officer
CONTINENTAL CABLEVISION, INC.
NOTICE OF SPECIAL MEETING
IN LIEU OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1995
TO THE STOCKHOLDERS OF CONTINENTAL CABLEVISION, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting in Lieu of the Annual Meeting
of Stockholders (the "Continental Special Meeting") of Continental Cablevision,
Inc. ("Continental"), will be held on September , 1995 at a.m. local time
at the offices of Sullivan & Worcester, One Post Office Square, Boston,
Massachusetts 02109, for the purpose of considering and voting upon the
following matters:
(1) A proposal to approve and adopt the Agreement and Plan of Merger,
dated as of November 18, 1994, as amended and restated as of August 1, 1995
(the "Merger Agreement"), by and among Continental, Providence Journal
Company ("Providence Journal"), The Providence Journal Company (a newly
formed subsidiary of Providence Journal, which ultimately will hold the
non-cable businesses and assets of Providence Journal), King Holding Corp.
and King Broadcasting Company ("KBC"), and each of the transactions
contemplated thereby, including (i) the merger (the "Merger") of Providence
Journal, which at the time of the Merger will hold only Providence
Journal's cable television businesses and assets, with and into Continental
and (ii) prior to the Merger, the purchase by Continental for $405,000,000
of all of the cable television businesses owned by KBC (the "King Cable
Purchase"), upon the terms and subject to the conditions set forth in the
Merger Agreement, as more fully described in the accompanying Joint Proxy
Statement-Prospectus. A copy of the Merger Agreement is attached as Annex I
to the accompanying Joint Proxy Statement-Prospectus and certain related
documents are attached as exhibits thereto.
(2) A proposal to approve and adopt an amendment to the Restated
Certificate of Incorporation of Continental (the "Continental
Recapitalization Amendment") to increase the total number of authorized
shares of capital stock of Continental from 17,700,000 to 825,000,000,
including an increase in (a) the number of authorized shares of Common
Stock, $.01 par value per share ("Continental Common Stock"), from
15,000,000 to 625,000,000, of which 425,000,000 will be shares of Class A
Common Stock with one vote per share ("Continental Class A Common Stock")
and 200,000,000 will be shares of Class B Common Stock with ten votes per
share ("Continental Class B Common Stock"), and (b) the number of
authorized shares of Preferred Stock, $.01 par value per share
("Continental Preferred Stock"), from 2,700,000 to 200,000,000, of which
1,142,858 are currently designated Series A Convertible Preferred Stock
("Continental Series A Preferred Stock").
(3) The election of two Class C Directors of Continental to serve a
three-year term.
(4) The ratification of the appointment by the Board of Directors of
Deloitte & Touche LLP as Continental's independent auditors for the current
fiscal year ending December 31, 1995.
(5) Such other business as may properly come before the Continental
Special Meeting or any adjournments or postponements thereof.
The proposals described in items (1) and (2) above are hereinafter
collectively referred to as the "Continental Proposals".
The Continental Board of Directors has fixed the close of business on August
15, 1995 as the record date for the determination of stockholders entitled to
notice of and to vote at the Continental Special Meeting and any adjournments
or postponements thereof. Only stockholders of record at the close of business
on such date are entitled to notice of and to vote at such meeting. A list of
Continental stockholders entitled to vote at the Continental Special Meeting or
any adjournments or postponements thereof will be available for examination for
any purpose germane to the Continental Special Meeting, during ordinary
business hours, at the principal executive offices of Continental located at
The Pilot House, Lewis Wharf, Boston, Massachusetts 02110, for 10 days prior to
the Continental Special Meeting.
Shares of the Continental Class A Common Stock, Continental Class B Common
Stock and Continental Series A Preferred Stock are the only securities of
Continental whose holders are entitled to vote upon the Continental Proposals
and the other proposals to be presented at the Continental Special Meeting.
Each proposal shall be voted upon separately by the Continental stockholders
entitled to vote at the Continental Special Meeting; however, failure of the
stockholders to approve either of the Continental Proposals will result in the
abandonment by Continental of the Merger.
Continental stockholders entitled to vote at the Continental Special Meeting
have a right to dissent to the Merger and, if the Merger is consummated, to
obtain payment for their shares of Continental stock by complying with the
provisions of Section 262 of the Delaware General Corporation Law ("Section
262"). A copy of Section 262 is attached as Annex III to the accompanying Joint
Proxy Statement-Prospectus.
Your vote is important regardless of the number of shares you own. Each
stockholder, even though he or she now plans to attend the Continental Special
Meeting, is requested to sign, date and return the enclosed Proxy without delay
in the enclosed postage-paid return envelope. You may revoke your Proxy at any
time prior to its exercise. Any stockholder present at the Continental Special
Meeting or at any adjournments or postponements thereof may revoke his or her
Proxy and vote personally on each matter brought before the Continental Special
Meeting.
By Order of the Board of Directors,
[Signature]
Robert B. Luick, Secretary
August , 1995
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED
THEREBY, FOR THE PROPOSAL TO APPROVE AND ADOPT THE CONTINENTAL RECAPITALIZATION
AMENDMENT, FOR THE ELECTION OF DIRECTORS OF CONTINENTAL AND FOR EACH OF THE
OTHER PROPOSALS BEING SUBMITTED TO THE CONTINENTAL SPECIAL MEETING.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST , 1995 PRELIMINARY COPIES
CONTINENTAL CABLEVISION, INC.
AND
PROVIDENCE JOURNAL COMPANY
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD SEPTEMBER , 1995
------------
CONTINENTAL CABLEVISION, INC.
PROSPECTUS
30,725,207 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE
------------
THE PROVIDENCE JOURNAL COMPANY
PROSPECTUS
38,825 SHARES OF CLASS A COMMON STOCK, $1.00 PAR VALUE PER SHARE
46,825 SHARES OF CLASS B COMMON STOCK, $1.00 PAR VALUE PER SHARE
------------
This Joint Proxy Statement-Prospectus (this "Joint Proxy Statement-
Prospectus") is being furnished to stockholders of Continental Cablevision,
Inc., a Delaware corporation ("Continental", which term includes its
consolidated subsidiaries unless the context indicates otherwise), and
Providence Journal Company, a Rhode Island corporation ("Providence Journal"),
in connection with the solicitation of proxies by the respective Boards of
Directors of such corporations for use, in the case of Continental, at its
Special Meeting in Lieu of the Annual Meeting of Stockholders and, in the case
of Providence Journal, at its Special Meeting of Stockholders (together, the
"Special Meetings") (including any adjournments or postponements of such
meetings) to be held on September , 1995 at the times and places and for the
purposes specified in the respective accompanying Notices of Special Meetings
and at any adjournments or postponements thereof. This Joint Proxy Statement-
Prospectus and forms of Proxy for the Special Meetings will be mailed to the
stockholders of Continental and Providence Journal on or about August , 1995.
(continued on next page)
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT-
PROSPECTUS. THE PROPOSED MERGER AND RELATED TRANSACTIONS DESCRIBED HEREIN ARE
COMPLEX TRANSACTIONS. STOCKHOLDERS OF CONTINENTAL AND PROVIDENCE JOURNAL ARE
STRONGLY URGED TO CAREFULLY READ AND CONSIDER THIS JOINT PROXY STATEMENT-
PROSPECTUS IN ITS ENTIRETY, AND SHOULD CAREFULLY CONSIDER THE "RISK FACTORS"
SET FORTH HEREIN BEGINNING ON PAGE 23.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVEDBY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACYOF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TOTHE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS AUGUST , 1995
This Joint Proxy Statement-Prospectus relates to the Agreement and Plan of
Merger, dated as of November 18, 1994, as amended and restated as of August 1,
1995 (the "Merger Agreement"), by and among Continental, Providence Journal,
The Providence Journal Company, a newly formed Delaware corporation ("New
Providence Journal"), King Holding Corp., a Delaware corporation and a
subsidiary of Providence Journal ("KHC"), and King Broadcasting Company, a
Washington corporation and a wholly owned subsidiary of KHC ("KBC"), and
certain related transactions. A copy of the Merger Agreement is attached hereto
as Annex I. Pursuant to the Merger Agreement, Providence Journal, which,
following an internal corporate restructuring, will hold only Providence
Journal's cable television businesses and assets, will merge with and into
Continental, and Continental will be the surviving corporation.
At the Special Meeting in Lieu of the Annual Meeting of Stockholders of
Continental (the "Continental Special Meeting"), Continental stockholders will
be asked to consider and vote upon the following proposals:
(1) A proposal to approve and adopt the Merger Agreement.
(2) A proposal to approve and adopt an amendment to the Restated
Certificate of Incorporation of Continental (the "Continental
Recapitalization Amendment") to increase the total number of authorized
shares of capital stock of Continental from 17,700,000 to 825,000,000,
including an increase in (a) the number of authorized shares of Common
Stock, $.01 par value per share ("Continental Common Stock"), from
15,000,000 to 625,000,000, of which 425,000,000 will be shares of Class A
Common Stock with one vote per share ("Continental Class A Common Stock")
and 200,000,000 will be shares of Class B Common Stock with ten votes per
share ("Continental Class B Common Stock") and (b) the number of authorized
shares of Preferred Stock, $.01 par value per share ("Continental Preferred
Stock"), from 2,700,000 to 200,000,000, of which 1,142,858 are currently
and will remain designated Series A Convertible Preferred Stock
("Continental Series A Preferred Stock").
(3) The election of two Class C Directors to serve a three-year term.
(4) The ratification of the appointment by the Board of Directors of
Deloitte & Touche LLP as Continental's independent public accountants for
the current fiscal year ending December 31, 1995.
The proposals described in items (1) and (2) above are hereinafter
collectively referred to as the "Continental Proposals".
Each of the proposals described in items (1) through (4) above will be voted
upon separately by the holders of Continental Class A Common Stock, Continental
Class B Common Stock and Continental Series A Preferred Stock (collectively,
the "Continental Voting Stock"); however, failure of either the Merger
Agreement or the Continental Recapitalization Amendment to be approved by the
Continental stockholders will result in the abandonment by Continental of the
Merger (even if the Merger is separately approved). The proposal relating to
the approval and adoption of the Merger Agreement and each of the transactions
contemplated thereby must be approved by a majority of the votes entitled to be
cast by holders of the Continental Voting Stock, voting as a single class. The
proposal relating to the approval and adoption of the Continental
Recapitalization Amendment must be approved by 66 2/3% of the votes entitled to
be cast by the holders of the Continental Voting Stock, voting as a single
class, and separately by a majority of the votes entitled to be cast by holders
of the Continental Series A Preferred Stock. (See "Description of Continental
Capital Stock".) All of the holders of the Continental Series A Preferred Stock
have executed irrevocable proxies in connection with such separate class vote
on the Continental Recapitalization Amendment; however, such irrevocable
proxies are not sufficient to adopt the vote required to be taken by all
holders of the Continental Voting Stock, voting as a single class.
At the Special Meeting of Stockholders of Providence Journal (the "Providence
Journal Special Meeting"), Providence Journal stockholders will be asked to
consider and vote upon the following proposals:
(1) A proposal to approve the contribution by Providence Journal of all
of its businesses and assets unrelated to its cable television businesses
(the "PJC Non-Cable Business") to New Providence Journal,
ii
its newly created wholly owned subsidiary (the "Contribution"). In exchange
for such Contribution, New Providence Journal will assume all liabilities
related to such businesses and assets and issue to Providence Journal a
number of shares of New Providence Journal Class A Common Stock, $1.00 par
value per share ("New Providence Journal Class A Common Stock"), and New
Providence Journal Class B Common Stock, $1.00 par value per share ("New
Providence Journal Class B Common Stock"; and, together with New Providence
Journal Class A Common Stock, the "New Providence Journal Common Stock"),
equal to the number of shares of Providence Journal Class A Common Stock,
$2.50 par value per share ("Providence Journal Class A Common Stock") and
Providence Journal Class B Common Stock, $2.50 par value per share
("Providence Journal Class B Common Stock", and together with the
Providence Journal Class A Common Stock, the "Providence Journal Common
Stock"), respectively, outstanding immediately prior to the Contribution.
Providence Journal will then distribute the shares of New Providence
Journal Common Stock, one share of New Providence Journal Class A Common
Stock to the holder of each share of Providence Journal Class A Common
Stock and one share of New Providence Journal Class B Common Stock to the
holder of each share of Providence Journal Class B Common Stock, each as
outstanding immediately prior to such distribution (the "Distribution").
The Contribution and the Distribution collectively constitute the "PJC
Spin-Off".
(2) A proposal to approve and adopt an amendment to the Charter (the
"Providence Journal Charter") of Providence Journal (the "Providence
Journal Charter Amendment") required in connection with the PJC Spin-Off to
permit Providence Journal to distribute one share of New Providence Journal
Class A Common Stock to the holder of each share of Providence Journal
Class A Common Stock and one share of New Providence Journal Class B Common
Stock to the holder of each share of Providence Journal Class B Common
Stock.
(3) A proposal to approve and adopt the Merger Agreement and each of the
transactions contemplated thereby, including (i) the merger (the "Merger")
of Providence Journal, which at the time of the Merger will hold only the
former Providence Journal businesses and assets related to cable television
(the "Providence Journal Cable Business") with and into Continental, and
(ii) prior to the Merger, the purchase by Continental of all of the cable
television businesses and assets of KBC (the "King Cable Business") for a
cash purchase price of $405,000,000 (the "King Cable Purchase"). The
Providence Journal Cable Business and the King Cable Business are
hereinafter collectively referred to as the "PJC Cable Business".
(4) A proposal to approve and adopt the Providence Journal Cable Division
Sale Bonus Plan (the "Cable Division Sale Bonus Plan"), which provides
incentives in the form of bonuses to certain executives of Providence
Journal's cable television division upon and subject to the consummation of
the Merger.
The proposals described in items (1), (2) and (3) above are hereinafter
collectively referred to as the "Providence Journal Proposals".
Each of the proposals described in items (1) through (4) will be voted upon
separately by the Providence Journal stockholders entitled to vote at the
Providence Journal Special Meeting; however, failure of the Providence Journal
stockholders to approve any of the Providence Journal Proposals will result in
the abandonment by Providence Journal of the PJC Spin-Off, the Merger and the
related transactions. The affirmative vote of a majority of the votes of
holders of the outstanding shares of Providence Journal Common Stock, voting
together as a single class, is required to approve the Merger and the PJC Spin-
Off. The affirmative vote of the holders of a majority of the outstanding
shares of both the Providence Journal Class A Common Stock and the Providence
Journal Class B Common Stock, with each class voting separately, is required
for approval of the Providence Journal Charter Amendment. No vote of the
stockholders of Providence Journal is required to approve and adopt the Cable
Division Sale Bonus Plan; however, Providence Journal is seeking the approval
of 75% of such votes because failure to obtain such 75% approval could result
in some or all of the payments under the Cable Division Sale Bonus Plan being
non-deductible for federal income tax purposes to Providence Journal and in the
imposition of an excise tax on the recipients of such payments.
iii
As described under "Rights of Dissenting Stockholders--Providence Journal",
holders of Providence Journal Common Stock who exercise and perfect dissenters'
rights under the Rhode Island Business Corporations Act ("Rhode Island Law" or
"RIBCA") will be entitled to payment of the fair value of such stockholders'
shares of Providence Journal Common Stock and will not receive shares of
Continental Class A Common Stock or New Providence Journal Common Stock as a
result of the Merger or the PJC Spin-Off, as the case may be. (See "Rights of
Dissenting Stockholders--Providence Journal".)
Assuming no adjustments are made as described herein, the value ascribed
under the terms of the Merger Agreement to the 30,725,207 shares of Continental
Class A Common Stock to be issued to the Providence Journal stockholders (the
"Continental Merger Stock") is $596,069,000 (or $19.40 per share), or an
aggregate estimated value of $7,038.33 per share of Providence Journal Common
Stock that was outstanding on August 1, 1995. The Continental Merger Stock
valuation was arrived at by Continental and Providence Journal as a result of
arm's length negotiations between the parties and does not necessarily reflect
the price at which such shares will trade following the completion of the
Merger. (See "Risk Factors--Risk Factors Related to the Continental Merger
Stock--No Public Market; Possible Volatility of Stock Price".)
Assuming that the Merger, the King Cable Purchase and the foregoing
transactions were consummated as of the date hereof and all subsidiaries
comprising the PJC Cable Business (the "PJC Cable Subsidiaries") were wholly
owned by Providence Journal, (i) the holders of Providence Journal Common Stock
would own Continental Class A Common Stock, representing approximately 17.3% of
the outstanding Continental Common Stock (treating the Continental Series A
Preferred Stock as if it were converted into Continental Class B Common Stock)
and approximately 2.2% of the voting power of Continental, and (ii) each holder
of Providence Journal Common Stock would own the same number and class of
shares in New Providence Journal (which will then hold all of the PJC Non-Cable
Business) as such holder owns in Providence Journal immediately prior to the
PJC Spin-Off. (See "The Merger--Ownership of Continental Stock after the
Merger" and "Ownership of New Providence Journal after the PJC Spin-Off and the
Merger".)
In order to protect the tax-free nature of the PJC Spin-Off and the Merger,
the Continental Merger Stock received in the Merger and the shares of New
Providence Journal Class A Common Stock and New Providence Journal Class B
Common Stock received in the PJC Spin-Off may not be transferred by Providence
Journal stockholders for a period of one year following the effective time of
the Merger (the "Effective Time"). (See "The Merger--General Provisions--
Restrictions on Transfer of Continental Merger Stock" and "Restrictions on
Transfer of New Providence Journal Common Stock".)
The Board of Directors of Providence Journal recommends that stockholders of
Providence Journal vote FOR each of the proposals, including the Providence
Journal Proposals, and the Board of Directors of Continental recommends that
stockholders of Continental vote FOR each of the proposals, including the
Continental Proposals.
This Joint Proxy Statement-Prospectus also constitutes a prospectus of
Continental with respect to the Continental Class A Common Stock to be issued
in connection with the Merger. At the Effective Time, the shares of Continental
Class A Common Stock issued in connection with the Merger will not be listed on
the Nasdaq National Market ("NASDAQ") or on a national securities exchange.
Continental has agreed to list the Continental Merger Stock on NASDAQ or a
national securities exchange by no later than the date that the restrictions on
transfer of the Continental Merger Stock have expired, which is one year after
the Effective Time.
This Joint Proxy Statement-Prospectus also constitutes a prospectus of New
Providence Journal with respect to the New Providence Journal Class A Common
Stock and the New Providence Journal Class B Common Stock to be issued in
connection with the PJC Spin-Off in accordance with the terms of the Merger
Agreement. The shares of New Providence Journal Class A Common Stock and New
Providence Journal Class B Common Stock issued in connection with the PJC Spin-
Off will not be listed on NASDAQ or on any securities exchange.
All information contained in this Joint Proxy Statement-Prospectus relating
to Continental and its subsidiaries has been supplied by Continental, and all
information contained in this Joint Proxy Statement-
iv
Prospectus relating to Providence Journal and its subsidiaries has been
supplied by Providence Journal. The pro forma information contained herein
relating to Continental has been prepared by Continental and includes
historical financial information regarding Providence Journal that was supplied
to Continental by Providence Journal and KHC. The pro forma information
contained herein relating to New Providence Journal has been prepared by
Providence Journal and includes historical financial information regarding
Providence Journal.
This Joint Proxy Statement-Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Continental and Providence Journal on or
about August , 1995.
----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY STATEMENT-PROSPECTUS
OTHER THAN THOSE CONTAINED HEREIN, IN CONNECTION WITH THE SOLICITATION OF
PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CONTINENTAL OR PROVIDENCE JOURNAL (OR ITS SUCCESSORS). THIS JOINT
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF CONTINENTAL, PROVIDENCE JOURNAL OR NEW
PROVIDENCE JOURNAL SINCE THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS.
----------------
Until the date that is 25 days after the Effective Time all dealers effecting
transactions in the Continental Class A Common Stock, whether or not
participating in this distribution, may be required to deliver a copy of this
Joint Proxy Statement-Prospectus.
v
TABLE OF CONTENTS
AVAILABLE INFORMATION...................................................... 1
INFORMATION INCORPORATED BY REFERENCE...................................... 1
SUMMARY.................................................................... 2
The Companies............................................................ 2
The Special Meetings..................................................... 3
Security Ownership of Management......................................... 4
The Continental Recapitalization Amendment and the Continental Stock
Split................................................................... 4
The Pre-Merger Transactions.............................................. 5
Ownership of New Providence Journal after the PJC Spin-Off and the
Merger.................................................................. 6
The Merger............................................................... 7
Restrictions on Transfer of the Continental Merger Stock and New
Providence Journal Common Stock......................................... 8
Payment for Shares....................................................... 8
Working Capital and Capital Expenditure Adjustments...................... 8
Ownership of Continental Stock after the Merger.......................... 9
Recommendation of the Boards of Directors................................ 9
Opinion of Financial Advisor............................................. 10
Effective Time of Merger................................................. 10
Conditions to the Merger................................................. 10
NASDAQ Listing........................................................... 10
Acquisition Proposals.................................................... 11
Registration Rights...................................................... 11
Undertakings Regarding Public Offering................................... 11
Termination Fees and Expenses; Indemnification........................... 12
Corporate Governance..................................................... 12
Interests of Certain Persons............................................. 12
Certain Federal Income Tax Considerations................................ 13
Accounting Treatment..................................................... 13
Rights of Dissenting Stockholders........................................ 13
Voting Agreement......................................................... 14
Noncompetition Agreement................................................. 14
Comparison of Rights of Stockholders..................................... 14
Market Prices and Dividend Data.......................................... 15
Cable Division Sale Bonus Plan........................................... 15
Providence Journal Summary Consolidated Financial Data................... 16
New Providence Journal Summary Pro Forma Financial Data.................. 17
Providence Journal Cable Summary Combined Financial Data................. 18
Continental Summary Consolidated Historical Information.................. 20
Continental Summary Pro Forma Financial Data............................. 22
RISK FACTORS............................................................... 23
Risk Factors Related to the Continental Merger Stock..................... 23
Risk Factors Associated with the PJC Spin-Off and the Merger............. 27
Risk Factors Related to the New Providence Journal Common Stock.......... 27
Interests of Certain Persons in the Transactions......................... 30
BACKGROUND OF THE TRANSACTIONS............................................. 32
Continental's Reasons for the Merger; Recommendation of Continental Board
of Directors............................................................ 32
Providence Journal's Reasons for the PJC Spin-Off and the Merger ........ 32
Recommendation of Providence Journal Board of Directors.................. 36
Opinion of Financial Advisor to Providence Journal....................... 38
Other Information Provided............................................... 43
vi
THE SPECIAL MEETINGS....................................................... 44
Matters to Be Discussed at the Special Meetings.......................... 44
Record Dates; Stock Entitled to Vote; Quorum............................. 45
Required Votes........................................................... 45
Solicitation and Voting of Proxies....................................... 46
Ownership of Continental Securities...................................... 47
Ownership of Providence Journal Securities............................... 50
PRE-MERGER TRANSACTIONS.................................................... 53
New Indebtedness......................................................... 53
King Cable Purchase...................................................... 53
Kelso Buyout............................................................. 53
PJC Spin-Off............................................................. 53
Certain Intercompany Transactions........................................ 55
THE MERGER................................................................. 55
General Provisions....................................................... 55
Conditions Precedent..................................................... 59
Certain Covenants........................................................ 62
Representations and Warranties........................................... 67
Indemnification.......................................................... 68
Tax Matters.............................................................. 69
Certain Employee Matters................................................. 69
Termination.............................................................. 71
Regulatory and Other Third Party Approvals............................... 72
Amendment; Waiver........................................................ 72
Ancillary Agreements..................................................... 73
Ownership of Continental Stock after the Merger.......................... 74
Ownership of New Providence Journal Stock after the PJC Spin-Off and the
Merger.................................................................. 74
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. 74
Federal Income Tax Consequences of Certain Transactions.................. 74
Backup Withholding....................................................... 76
PROPOSAL TO APPROVE AND ADOPT THE CONTINENTAL RECAPITALIZATION AMENDMENT,
ELECTION OF CONTINENTAL DIRECTORS AND RATIFICATION OF APPOINTMENT OF
ACCOUNTANTS............................................................... 77
PROPOSAL TO APPROVE AND ADOPT THE PROVIDENCE JOURNAL CHARTER AMENDMENT AND
THE CABLE DIVISION SALE BONUS PLAN........................................ 78
Providence Journal Charter Amendment..................................... 78
Administration........................................................... 78
Review and Authorization................................................. 78
Eligibility to Receive Awards............................................ 78
Bonus Pool............................................................... 79
Conditions............................................................... 79
General Restrictions..................................................... 79
Amendment................................................................ 79
DESCRIPTION OF PROVIDENCE JOURNAL PUBLISHING BUSINESS...................... 80
General.................................................................. 80
Circulation and Pricing.................................................. 80
Advertising.............................................................. 81
Production and Raw Materials............................................. 81
Other Publishing Activities.............................................. 82
vii
Acquisitions............................................................. 82
Competition.............................................................. 83
Employees................................................................ 83
Properties............................................................... 84
DESCRIPTION OF PROVIDENCE JOURNAL BROADCAST TELEVISION BUSINESS............ 84
General.................................................................. 84
Industry Background...................................................... 84
The Stations............................................................. 86
Competition in the Television Industry................................... 90
Programming Investments.................................................. 91
Local Marketing Agreements............................................... 92
Operating Strategy....................................................... 92
Acquisition Strategy..................................................... 93
Licensing and Regulation................................................. 94
Employees................................................................ 98
Properties............................................................... 98
DESCRIPTION OF PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL............... 99
Other Investments and Assets............................................. 99
Legal Proceedings........................................................ 99
Capitalization of Providence Journal and Pro Forma Capitalization of New
Providence Journal...................................................... 100
Selected Consolidated Financial Data of Providence Journal............... 101
Management's Discussion and Analysis of Financial Condition and Results
of Operation of Providence Journal...................................... 101
Pro Forma Condensed Financial Statements................................. 112
Pro Forma Condensed Balance Sheet........................................ 113
Pro Forma Condensed Statements of Operations............................. 114
Market Price of New Providence Journal Common Stock and Dividend Policy
of New Providence Journal............................................... 115
Executive Officers and Directors of Providence Journal and New Providence
Journal................................................................. 116
Compensation of New Providence Journal Directors......................... 119
Executive Compensation................................................... 120
Stock Incentive Plans of Providence Journal Assumed by New Providence
Journal................................................................. 125
Compensation Committee Report on Executive Compensation.................. 129
Stockholder Return Performance Graph..................................... 131
Certain Relationships and Related Transactions........................... 132
Ownership of Providence Journal Capital Stock and New Providence Journal
Capital Stock........................................................... 132
DESCRIPTION OF NEW PROVIDENCE JOURNAL COMMON STOCK......................... 133
New Providence Journal Common Stock...................................... 133
Certain Provisions in the New Providence Journal Certificate............. 134
NPJ Rights Agreement..................................................... 135
COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND NEW PROVI-
DENCE JOURNAL............................................................. 137
DESCRIPTION OF PROVIDENCE JOURNAL CABLE TELEVISION BUSINESS................ 138
Business................................................................. 138
Cable Television Business................................................ 138
Development of Providence Journal Cable.................................. 139
Providence Journal Cable's Systems....................................... 141
Technological Developments............................................... 142
Franchises............................................................... 142
viii
Programming.............................................................. 143
Competition.............................................................. 143
Properties............................................................... 145
Employees................................................................ 146
Legal Proceedings........................................................ 146
Selected Combined Financial Data of Providence Journal Cable............. 147
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Providence Journal Cable............................... 149
DESCRIPTION OF CONTINENTAL................................................. 155
Business................................................................. 155
Domestic Cable Television Business....................................... 155
Domestic Operating Strategy.............................................. 156
Regulatory Response...................................................... 160
Development of Continental and its Business.............................. 162
Domestic Continental Systems............................................. 164
Domestic Acquisitions and Investments.................................... 167
International Operations................................................. 169
Strategic Investments.................................................... 172
Competition.............................................................. 176
Properties............................................................... 178
Employees................................................................ 178
Legal Proceedings........................................................ 178
Capitalization........................................................... 179
Selected Consolidated Financial Information of Continental............... 180
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Continental............................................ 182
Pro Forma Condensed Financial Statements................................. 193
Pro Forma Condensed Balance Sheet........................................ 194
Pro Forma Condensed Statements of Operations............................. 197
Market Price of Continental Common Stock and Dividend Policy of
Continental............................................................. 200
Directors, Executive Officers and Other Officers of Continental.......... 200
Executive Compensation................................................... 204
Compensation of Directors................................................ 207
Certain Transactions..................................................... 207
Beneficial Ownership of Continental Capital Stock After the Merger....... 208
DESCRIPTION OF CONTINENTAL CAPITAL STOCK................................... 212
Continental Common Stock................................................. 212
Unissued Continental Preferred Stock..................................... 214
Continental Series A Preferred Stock..................................... 214
DGCL and Certain Provisions of the Continental Restated Certificate and
the Continental
By-Laws................................................................. 217
Transfer Agent........................................................... 219
CONTINENTAL SHARES ELIGIBLE FOR FUTURE SALE................................ 219
General.................................................................. 219
Rule 144 and 145 Restrictions............................................ 220
Rule 701................................................................. 221
Outstanding Registration Rights.......................................... 221
DESCRIPTION OF CONTINENTAL INDEBTEDNESS.................................... 222
ix
COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND
CONTINENTAL............................................................. 226
Rights To Purchase Or Redeem Shares.................................... 227
Required Vote for Certain Business Combinations........................ 227
Charter Amendments..................................................... 228
By-Law Amendments...................................................... 228
Voting Rights.......................................................... 229
Rights Agreement....................................................... 229
Preemptive Rights...................................................... 229
Transferability of Shares.............................................. 229
Special Meetings....................................................... 230
Corporate Action Without A Meeting..................................... 230
Dividends.............................................................. 231
Liquidation............................................................ 231
Appraisal or Dissenters' Rights........................................ 231
Provisions Relating To Directors And Officers.......................... 232
Stockholder Nominations and Rights of Preferred Stockholders to Elect
Directors............................................................. 232
Removal................................................................ 233
Derivative Suits....................................................... 233
Conflict of Interest Transactions...................................... 233
State Anti-Takeover Statutes........................................... 234
LEGISLATION AND REGULATION............................................... 234
Cable Communications Policy Act of 1984................................ 235
Cable Television Consumer Protection and Competition Act of 1992....... 235
Federal Regulation..................................................... 236
Copyright Regulation................................................... 244
State and Local Regulations............................................ 244
Regulation of Telecommunications Activities............................ 245
RIGHTS OF DISSENTING STOCKHOLDERS........................................ 246
Continental............................................................ 246
Providence Journal..................................................... 248
PAYMENTS AND DISTRIBUTIONS TO STOCKHOLDERS............................... 251
LEGAL MATTERS............................................................ 252
EXPERTS.................................................................. 252
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEXES:
Annex I-- Amended and Restated Agreement and Plan of Merger............ I-1
Annex II-- Opinion of Financial Advisor to Providence Journal.......... II-1
Annex III-- Section 262 of the Delaware General Corporation Law........ III-1
Annex IV-- Sections 7-1.1-73 and 7-1.1-74 of the Rhode Island Business
Corporations Act...................................................... IV-1
Annex V-- Providence Journal Cable Division Sale Bonus Plan............ V-1
x
DEFINITION CROSS REFERENCE SHEET
SET FORTH BELOW IS A LIST OF CERTAIN DEFINED TERMS USED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS AND THE PAGE ON WHICH SUCH TERM IS DEFINED:
DEFINED TERM PAGE
------------ ----
12 7/8% Debt.............................................................. 193
1984 Cable Act............................................................ 142
1992 Cable Act............................................................ 33
1994 Credit Facility...................................................... 186
1995 Credit Facility...................................................... 186
401K Plan................................................................. 70
ABC....................................................................... 29
Accreted Value............................................................ 215
AHN....................................................................... 99
Aliens.................................................................... 95
Allowed Transferee........................................................ 216
ASCAP..................................................................... 244
Assumed Awards............................................................ 30
Assumed Options........................................................... 30
ATV....................................................................... 96
Audit Bureau.............................................................. 80
BBT....................................................................... 155
Bear Stearns.............................................................. 10
BED Partnerships.......................................................... 190
Bell Atlantic............................................................. 33
BMI....................................................................... 244
Borrowers................................................................. 225
Boston Ventures Investors................................................. 201
Break-Up Fee.............................................................. 12
BV Co. III................................................................ 50
BV Co. IV................................................................. 50
Cable Division Sale Bonus Plan............................................ (iii)
Cable Employees........................................................... 69
CableLabs................................................................. 173
Cable LP.................................................................. 146
Cable Partners............................................................ 173
Callable Notes and Debentures............................................. 224
Capital Cities............................................................ 167
Capital Expenditure Adjustment............................................ 9
Caps...................................................................... 187
CBS....................................................................... 29
Class B Holder............................................................ 213
Class A Right............................................................. 135
Class B Right............................................................. 135
Closing................................................................... 60
Closing Date.............................................................. 27
CNN....................................................................... 138
Code...................................................................... 4
Co-Investment Agreement................................................... 50
Colony.................................................................... 18
Colony Cablevision........................................................ 18
DEFINED TERM PAGE
------------ ----
Combined Company.......................................................... 40
Combined Operating Income................................................. 226
Combined Total Debt....................................................... 226
Comcast................................................................... 41
Commission................................................................ 1
Communications Act........................................................ 29
Comparable Cable Companies................................................ 41
Consolidated Operating Income............................................. 223
Consolidated Total Debt................................................... 223
ContCable................................................................. 50
Continental............................................................... (i)
Continental By-Laws....................................................... 8
Continental Class A Common Stock.......................................... (ii)
Continental Class B Common Stock.......................................... (ii)
Continental Common Stock.................................................. (ii)
Continental Merger Stock.................................................. (iv)
Continental Named Executive Officers...................................... 204
Continental Preferred Stock............................................... (ii)
Continental Preferred Stock Investors..................................... 201
Continental Proposals..................................................... (ii)
Continental Proposed Transaction.......................................... 40
Continental Recapitalization Amendment.................................... (ii)
Continental Record Date................................................... 3
Continental Redeemable Common Stock....................................... 190
Continental Registration Statement........................................ 26
Continental Restated Certificate.......................................... 15
Continental Retirement Plan............................................... 206
Continental Rightsholders................................................. 221
Continental Series A Preferred Stock...................................... (ii)
Continental Special Meeting............................................... (ii)
Continental Stock Split................................................... 4
Continental Voting Stock.................................................. (ii)
Contribution.............................................................. (iii)
Contribution and Assumption Agreement..................................... 6
Copley/Colony............................................................. 7
Corporate Advisors........................................................ 49
Corporate Offshore Partners............................................... 50
Corporate Partners........................................................ 50
Cox....................................................................... 41
CPS....................................................................... 156
Credit Agreement Lenders.................................................. 222
CTAM...................................................................... 158
CTPAA..................................................................... 159
C-SPAN.................................................................... 138
DBS....................................................................... 2
Delaware Court............................................................ 246
xi
DEFINED TERM PAGE
------------ ----
DGCL or Delaware Law...................................................... 13
DMA....................................................................... 85
Digital Cable Radio....................................................... 176
Directors Upon Default.................................................... 215
Distribution.............................................................. (iii)
Distribution Date......................................................... 135
Dynamic................................................................... 146
Dynamic Partnership....................................................... 7
E!........................................................................ 162
EEO....................................................................... 242
Effective Time............................................................ (iv)
ERISA..................................................................... 50
ERISA Affiliates.......................................................... 70
ESPN...................................................................... 138
Eurodollar................................................................ 223
Exchange Act.............................................................. 1
Exchange Agent............................................................ 251
Expiration Date........................................................... 135
FASB...................................................................... 109
FCC....................................................................... 23
Fintelco.................................................................. 170
Floating Rate Debentures.................................................. 224
Fox....................................................................... 29
FPGT...................................................................... 50
GAAP...................................................................... 19
GMIMC..................................................................... 50
Going Forward Rules....................................................... 162
Goldman Sachs............................................................. 32
HBO....................................................................... 138
Hearst.................................................................... 167
Homes..................................................................... 2
Hospital Trust............................................................ 52
HSN....................................................................... 160
IUP....................................................................... 120
IXC....................................................................... 173
Joint Proxy Statement-Prospectus.......................................... (i)
Journal................................................................... 80
Journal 401(k) Plan....................................................... 124
KBC....................................................................... (ii)
Kelso Buyout.............................................................. 5
Kelso Partnerships........................................................ 5
KHC....................................................................... (ii)
King Cable Business....................................................... (iii)
King Cable Purchase....................................................... (iii)
King Videocable........................................................... 18
Lazard.................................................................... 32
LEC....................................................................... 172
Linkatel.................................................................. 30
LMA'S..................................................................... 92
Losses and Expenses....................................................... 61
Lowell Sun Companies...................................................... 82
DEFINED TERM PAGE
------------ ----
Management Group.......................................................... 224
Mandatory Tender Offer.................................................... 190
Maximum Amount............................................................ 7
Maximum Severance......................................................... 124
Merger.................................................................... (iii)
Merger Agreement.......................................................... (ii)
MMDS...................................................................... 24
MTA....................................................................... 173
MTV....................................................................... 138
NAB....................................................................... 85
NASDAQ.................................................................... (iv)
NBC....................................................................... 29
NCC....................................................................... 159
N-COM..................................................................... 164
NCTA...................................................................... 201
NEA....................................................................... 159
New Borrowing Group....................................................... 225
New Cable Indebtedness.................................................... 5
New Providence Journal.................................................... (ii)
New Providence Journal By-Laws............................................ 15
New Providence Journal Certificate........................................ 15
New Providence Journal Class A Common Stock............................... (iii)
New Providence Journal Class B Common Stock............................... (iii)
New Providence Journal Common Stock....................................... (iii)
Nine...................................................................... 171
Non-Callable Notes and Debentures......................................... 224
Noncompetition Agreement.................................................. 14
North Central Cable....................................................... 185
Notes and Debentures...................................................... 229
NPJ Indebtedness.......................................................... 5
NPJ Permitted Transferees................................................. 134
NPJ Rights Agreement...................................................... 15
NPJ Transfer Restrictions................................................. 8
NPT....................................................................... 156
Offering.................................................................. 11
Opinion................................................................... 10
Optus..................................................................... 171
Original Cable Indebtedness............................................... 40
Original Continental Merger Stock......................................... 39
Original Merger........................................................... 10
Original Merger Agreement................................................. 39
Original Providence Journal Transactions.................................. 10
Palmer.................................................................... 74
Palmer Systems............................................................ 74
Palm Springs System....................................................... 12
PCS....................................................................... 173
Permitted Class B Transferee.............................................. 213
Permitted Transfer........................................................ 57
Permitted Transferee...................................................... 57
xii
DEFINED TERM PAGE
------------ ----
PJC Broadcasting Business................................................. 2
PJC Cable Business........................................................ (iii)
PJC Cable Subsidiaries.................................................... (iv)
PJC Non-Cable Business.................................................... (ii)
PJC Outstanding Shares.................................................... 7
PJC Publishing Business................................................... 2
PJC Spin-Off.............................................................. (iii)
PPVN...................................................................... 175
Precedent CATV Transactions............................................... 41
Preferred Stock Purchase Agreement........................................ 214
PrimeStar................................................................. 174
Providence Journal........................................................ (i)
Providence Journal Business Combination................................... 227
Providence Journal ByLaws................................................. 14
Providence Journal Cable.................................................. 18
Providence Journal Cable Business......................................... (iii)
Providence Journal Charter................................................ (iii)
Providence Journal Charter Amendment...................................... (iii)
Providence Journal Class A Common Stock................................... (iii)
Providence Journal Class B Common Stock................................... (iii)
Providence Journal Common Stock........................................... (iii)
Providence Journal Named Executive
Officers................................................................. 120
Providence Journal Nominees............................................... 12
Providence Journal Option Plans........................................... 30
Providence Journal Pension Plan........................................... 123
Providence Journal Proposals.............................................. (iii)
Providence Journal Record Date............................................ 3
Providence Journal Retirement Plans....................................... 30
Providence Journal Special Meeting........................................ (ii)
Providence Journal Stock Incentive Plans.................................. 30
Providence Journal Transactions........................................... 10
Prudential Notes.......................................................... 187
PSN....................................................................... 91
PTAR...................................................................... 95
QVC....................................................................... 160
RBOC...................................................................... 172
Registrable Shares........................................................ 221
Registration Agreements................................................... 221
Registration Effective Date............................................... 26
Registration Rights Holders............................................... 11
Requested Rulings......................................................... 74
Restricted Business....................................................... 14
Restricted Group.......................................................... 222
Restricted Holder......................................................... 57
Restricted Subsidiaries................................................... 222
RFP....................................................................... 173
RIBCA or Rhode Island Law................................................. (iv)
Rights.................................................................... 135
Rights Agreement.......................................................... 15
RSPA III.................................................................. 206
DEFINED TERM PAGE
------------ ----
RSPA Offer................................................................. 206
SBA........................................................................ 50
SCV........................................................................ 170
Section 16(b) Period....................................................... 126
Section 74................................................................. 13
Section 262................................................................ 13
Securities Act............................................................. 1
Selling Stockholders....................................................... 190
Series A Certificate of Designation........................................ 214
Series A Redemption Price.................................................. 215
SERP....................................................................... 206
Seven...................................................................... 171
Service.................................................................... 10
SFAS 109................................................................... 25
SFAS 114................................................................... 110
SFAS 115................................................................... 110
SFAS 121................................................................... 110
SMATV...................................................................... 144
Social Contract............................................................ 23
Special Meetings........................................................... (i)
StarSight.................................................................. 99
Stations................................................................... 84
Stock Acquisition Date..................................................... 135
Stock For Loan Exchange.................................................... 206
Stock Liquidation Agreement................................................ 189
Stock Units................................................................ 120
Subject Stockholders....................................................... 190
Summary Compensation Table................................................. 204
Superior Proposal.......................................................... 67
Swaps...................................................................... 187
TCG........................................................................ 172
TCI........................................................................ 33
Termination Date........................................................... 71
The Sunshine Network....................................................... 175
Transfer................................................................... 57
Transfer Restrictions...................................................... 8
Trust...................................................................... 14
Turner..................................................................... 162
TVFN....................................................................... 30
UHF........................................................................ 84
Unrestricted Subsidiaries.................................................. 222
USA........................................................................ 138
VCC........................................................................ 170
VCR........................................................................ 29
Vencap..................................................................... 50
VHF........................................................................ 84
Voting Agreement........................................................... 14
Westerly................................................................... 55
Working Capital............................................................ 8
Zing....................................................................... 176
xiii
AVAILABLE INFORMATION
Continental has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Continental Class
A Common Stock described in this Joint Proxy Statement-Prospectus. New
Providence Journal has filed with the Commission a registration statement on
Form S-4 under the Securities Act with respect to the New Providence Journal
Class A Common Stock and New Providence Journal Class B Common Stock described
in this Joint Proxy Statement-Prospectus. Each of Continental and New
Providence Journal will file with the Commission a registration statement under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the Continental Class A Common Stock and New Providence Journal
Class A Common Stock and New Providence Journal Class B Common Stock,
respectively.
Such registration statements and exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such materials can be obtained
by mail from the public reference branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
INFORMATION INCORPORATED BY REFERENCE
Neither Continental nor Providence Journal is currently required to file any
reports with the Commission under the Exchange Act, and accordingly, no
information relating to Continental or Providence Journal is incorporated
herein by reference.
1
SUMMARY
The following is a summary of certain information contained in this Joint
Proxy Statement-Prospectus. This summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information set
forth elsewhere in this Joint Proxy Statement-Prospectus and its Annexes, all
of which should be reviewed carefully.
THE COMPANIES
CONTINENTAL. Continental is currently the fifth largest cable television
system operator in the United States. Continental's five management regions
operate cable television systems in 16 states, principally in suburban areas
and mid-sized cities. As of June 30, 1995, Continental's systems and those of
its domestic affiliates passed approximately 5,437,000 occupied dwelling units
("Homes") and provided cable service to approximately 3,133,000 basic
subscribers. Giving effect to the Merger and other pending acquisitions
described herein, Continental anticipates that it will become the third largest
cable television system operator in the United States, passing approximately
7,116,000 Homes and serving approximately 4,117,000 basic subscribers in 20
states. Continental also participates in cable television and
telecommunications ventures outside of the United States. Continental has
acquired, subject to receipt of regulatory approvals, an approximate 50%
interest in the largest cable television system operator in Argentina, which
currently serves over 600,000 subscribers; has a 25% equity interest in a joint
venture that is constructing a cable television system to serve Singapore's
approximately 820,000 households; and has formed a joint venture in Australia,
in which Continental currently holds a 46.5% equity interest, and which is
constructing a network to provide cable television, local telephone and a
variety of advanced broadband interactive services to business and residential
customers. Continental continues to pursue other international cable television
and telecommunications investments. Continental recently signed a memorandum of
understanding relating to the provision of cable television, telephony,
multimedia and interactive services in Japan. In addition, Continental has made
investments in the telecommunications and technology industries, including
companies offering competitive access telephony and direct broadcast satellite
("DBS") service in the United States and in various programming ventures.
Continental was incorporated in the State of Delaware in 1963. Continental's
principal offices are located at The Pilot House, Lewis Wharf, Boston,
Massachusetts, and its telephone number is (617) 742-9500.
PROVIDENCE JOURNAL. Providence Journal is a diversified communications
company with operations and investments in several media and electronic
communications businesses. The principal areas of Providence Journal's
activities are newspaper publishing, television broadcasting and the operation
of cable television systems. Providence Journal's newspapers, known
collectively as the Journal, have the largest circulation in the Rhode Island
and Southeastern Massachusetts market (the "PJC Publishing Business"). In
television broadcasting, Providence Journal owns or partially owns and operates
nine network-affiliated television stations in geographically diverse markets,
including five stations serving areas that are among the fifty largest domestic
television markets (the "PJC Broadcasting Business"). As of June 30, 1995,
Providence Journal's owned or partially owned cable television operations
included systems passing approximately 1,262,000 Homes and serving
approximately 773,000 basic subscribers in nine states, making Providence
Journal the 15th largest cable system operator in the United States. Providence
Journal was a founding partner of the Television Food Network and is involved
in various other programming ventures.
Providence Journal was incorporated in the State of Rhode Island in 1884. Its
principal executive offices are located at 75 Fountain Street, Providence,
Rhode Island, and its telephone number is (401) 277-7000. Unless the context
otherwise indicates, the term "Providence Journal" refers to Providence Journal
and its consolidated subsidiaries.
NEW PROVIDENCE JOURNAL. New Providence Journal was incorporated in the State
of Delaware on November 15, 1994 and is currently a wholly owned subsidiary of
Providence Journal. In the event the Providence Journal Proposals are approved
by the required vote of stockholders of Providence Journal and
2
the other conditions in the Merger Agreement are satisfied or waived,
Providence Journal will transfer the PJC Publishing Business, the PJC
Broadcasting Business and all other assets and liabilities of the PJC Non-Cable
Business to New Providence Journal, the shares of which will be distributed to
the stockholders of Providence Journal in the PJC Spin-Off. Following the
Merger and the other transactions described in this Joint Proxy Statement-
Prospectus, New Providence Journal will be an independent company engaged in
the same businesses (other than those relating to the Providence Journal Cable
Business) and having the same Board of Directors and management as Providence
Journal had prior to the consummation of the Merger and the other transactions
described herein. The principal executive offices of New Providence Journal are
located at 75 Fountain Street, Providence, Rhode Island, and its telephone
number is (401) 277-7000.
THE SPECIAL MEETINGS
CONTINENTAL. The Continental Special Meeting will be held at the offices of
Sullivan & Worcester, One Post Office Square, Boston, Massachusetts, 02109 on
September , 1995, beginning at local time. The purpose of the Continental
Special Meeting is to consider and vote upon the Continental Proposals and
certain other proposals. (See "The Special Meetings--Matters to Be Discussed at
the Special Meetings--Continental".)
The record date for the Continental Special Meeting is August 15, 1995 (the
"Continental Record Date"). Accordingly, holders of record of Continental
Voting Stock as of the Continental Record Date will be entitled to notice of,
and to vote at, the Continental Special Meeting.
The presence in person or by proxy of shares representing a majority of votes
entitled to be cast by holders of the Continental Voting Stock as of the
Continental Record Date is required to constitute a quorum for the transaction
of business at the Continental Special Meeting.
The Merger Agreement and each of the transactions contemplated thereby,
including the Merger, must be approved by a majority of the votes entitled to
be cast by the holders of the Continental Voting Stock, voting as a single
class. The Continental Recapitalization Amendment must be approved by 66 2/3%
of the votes entitled to be cast by the holders of Continental Voting Stock,
voting as a single class, and separately by a majority of the votes entitled to
be cast by the holders of the Continental Series A Preferred Stock. All of the
holders of the Continental Series A Preferred Stock have executed irrevocable
proxies in connection with such separate class vote on the Continental
Recapitalization Amendment; however, such irrevocable proxies are not
sufficient to adopt the vote required to be taken by all holders of the
Continental Voting Stock, voting as a single class. The election of Directors
will be determined by a plurality of the votes cast at that Special Meeting by
the holders of the Continental Voting Stock, voting as a single class.
PROVIDENCE JOURNAL. The Providence Journal Special Meeting will be held at
the offices of Providence Journal on September , 1995, beginning at 10:00 a.m.
local time. The purpose of the Providence Journal Special Meeting is to
consider and vote upon the Providence Journal Proposals and the approval and
adoption of the Cable Division Sale Bonus Plan. (See "The Special Meetings--
Matters to Be Discussed at the Special Meetings--Providence Journal".)
The record date for the Providence Journal Special Meeting is August 25, 1995
(the "Providence Journal Record Date"). Accordingly, holders of record of
Providence Journal Common Stock as of the Providence Journal Record Date will
be entitled to notice of, and to vote at, the Providence Journal Special
Meeting.
The presence in person or by proxy of shares representing a majority of votes
entitled to be cast by holders of Providence Journal Common Stock as of the
Providence Journal Record Date is required to constitute a quorum for the
transaction of business at the Providence Journal Special Meeting.
3
The Merger Agreement and each of the transactions contemplated thereby,
including the Merger, and the PJC Spin-Off must be approved by a majority of
the votes entitled to be cast by the holders of Providence Journal Common
Stock, voting as a single class. The Providence Journal Charter Amendment must
be approved by a majority of the votes entitled to be cast by the holders of
both Providence Journal Class A Common Stock and Providence Journal Class B
Common Stock, with each class voting separately. Although stockholder approval
of the Cable Division Sale Bonus Plan is not required in order to implement the
plan, Providence Journal is seeking approval of 75% of the votes entitled to be
cast, which is the vote required by the Internal Revenue Code of 1986, as
amended (the "Code"), to render some or all of the payments under the Cable
Division Sale Bonus Plan deductible to Providence Journal for federal income
tax purposes and to avoid the imposition of a federal excise tax on the
recipients of such payments.
SECURITY OWNERSHIP OF MANAGEMENT
CONTINENTAL. Giving effect to the Continental Recapitalization Amendment and
the Continental Stock Split described below in "The Continental
Recapitalization Amendment and the Continental Stock Split", as of August 1,
1995, Directors and executive officers of Continental and their respective
affiliates may be deemed to be the beneficial owners of 91,373,425 shares of
the outstanding Continental Common Stock (treating the Continental Series A
Preferred Stock as if it were converted into Continental Class B Common Stock),
which constitute in the aggregate approximately 65.61% of the total votes
entitled to be cast by the holders of Continental Voting Stock. It is
anticipated that each of such Directors, executive officers and their
respective affiliates will vote their shares in favor of each of the
Continental Proposals and the other proposals. (See "The Special Meetings--
Ownership of Continental Securities" and "Description of Continental--
Beneficial Ownership of Continental Capital Stock After the Merger" and "The
Merger--Ancillary Agreements--Voting Agreement".) All of the Directors of
Continental have waived their appraisal rights with respect to shares of
Continental Voting Stock that they own.
PROVIDENCE JOURNAL. As of August 1, 1995, Directors and executive officers of
Providence Journal and their affiliates may be deemed to be the beneficial
owners of 6,610 shares of the outstanding Providence Journal Class A Common
Stock and 6,704 shares of the outstanding Providence Journal Class B Common
Stock, which constitute in the aggregate approximately 14.8% of the total votes
entitled to be cast by the holders of Providence Journal Common Stock at the
Providence Journal Special Meeting. It is anticipated that each of such
Directors, executive officers and their affiliates will vote their shares in
favor of the Providence Journal Proposals and the Cable Division Sale Bonus
Plan. (See "The Special Meetings--Ownership of Providence Journal Securities"
and "The Merger--Ancillary Agreements--Voting Agreement".)
THE CONTINENTAL RECAPITALIZATION AMENDMENT AND THE CONTINENTAL STOCK SPLIT
The Continental Recapitalization Amendment provides for an increase in the
number of authorized shares of capital stock of Continental from 17,700,000 to
825,000,000, including an increase in (i) the number of authorized shares of
Continental Common Stock from 15,000,000 to 625,000,000, of which 425,000,000
will be shares of Continental Class A Common Stock (with one vote per share)
and 200,000,000 will be shares of Continental Class B Common Stock (with ten
votes per share), and (ii) the number of authorized shares of Continental
Preferred Stock from 2,700,000 to 200,000,000, of which 1,142,858 are currently
designated Continental Series A Preferred Stock. If the Continental
Recapitalization Amendment is approved by the Continental stockholders prior to
the Effective Time, the Board of Directors of Continental will declare a stock
dividend in the form of (a) 24 shares of Continental Class A Common Stock for
each share of Continental Class A Common Stock outstanding on the record date
for such stock dividend and (b) 24 shares of Continental Class B Common Stock
for each share of Continental Class B Common Stock outstanding on the record
date for such stock dividend (the "Continental Stock Split"). The result of the
Continental Stock Split will be that each share of Continental Common Stock
currently outstanding will become 25 shares of
4
Continental Common Stock prior to the consummation of the Merger. No stock
dividend will be declared in respect of shares of Continental Series A
Preferred Stock, but in accordance with their terms, the number of votes per
share of Continental Series A Preferred Stock and the number of shares of
Continental Common Stock into which such shares may be converted will be
adjusted accordingly to reflect the Continental Stock Split. Except as noted
herein, the information in this Joint Proxy Statement-Prospectus regarding the
capital stock of Continental has been adjusted to reflect: (i) the Continental
Recapitalization Amendment and (ii) the Continental Stock Split.
THE PRE-MERGER TRANSACTIONS
GENERAL. Prior to and as a condition to the Merger, each of the following
transactions must be consummated. (See "Pre-Merger Transactions" for a more
complete description of these transactions.)
NEW INDEBTEDNESS. Prior to the PJC Spin-Off, Providence Journal or one or
more of the PJC Cable Subsidiaries will incur indebtedness in a principal
amount of $410,000,000 (the "New Cable Indebtedness"). Immediately prior to the
Contribution, Providence Journal will draw down the $410,000,000 of New Cable
Indebtedness which, together with $405,000,000 to be provided by Continental
for the King Cable Purchase, will be used (i) to consummate the Kelso Buyout
(as defined below), (ii) to purchase minority interests in certain PJC Cable
Subsidiaries not presently wholly owned by Providence Journal and pay costs
associated with the Merger and certain deferred compensation, which together
total approximately $122,000,000, (iii) to pay approximately $120,000,000 in
taxes due as a result of the King Cable Purchase, and (iv) to repay all
existing indebtedness of Providence Journal, KBC and the PJC Cable
Subsidiaries. (See "Description of Continental Indebtedness--1995 Credit
Facility" for a description of a credit facility to be extended to subsidiaries
of Continental, which will be used, in part, to provide the $410,000,000 of New
Cable Indebtedness to be incurred by Providence Journal and the $405,000,000
for the King Cable Purchase.) Additional indebtedness required to meet the
foregoing obligations, among others, will be incurred by New Providence Journal
in a principal amount of approximately $275,000,000 (the "NPJ Indebtedness").
Following the Merger, New Providence Journal will have no obligations or
liabilities with respect to the New Cable Indebtedness, and Continental will
have no obligations or liabilities with respect to the NPJ Indebtedness. (See
"Pre-Merger Transactions--New Indebtedness".)
KING CABLE PURCHASE. Immediately prior to the Kelso Buyout and the PJC Spin-
Off, pursuant to the terms of the Merger Agreement, Continental will purchase
from KBC the King Cable Business, which constitutes all of KBC's cable
television businesses, for a cash purchase price of $405,000,000. In connection
with and as part of the King Cable Purchase, New Providence Journal will assume
and agree to hold Continental harmless from all liabilities of KBC (including,
without limitation, federal and state income taxes payable as a result of the
King Cable Purchase). (See "The Merger".)
KELSO BUYOUT. Kelso Investment Associates IV, L.P., Kelso Partners IV, L.P.
and Kelso Equity Partners II, L.P., each a Delaware limited partnership (the
"Kelso Partnerships"), presently own, or hold a warrant providing the Kelso
Partnerships with a right to acquire, 50% of the capital stock of KHC, which in
turn owns and controls 100% of the capital stock of KBC. Providence Journal
will use a portion of the proceeds of the New Cable Indebtedness, together with
a portion of the proceeds from the NPJ Indebtedness, to acquire all shares of
capital stock of KHC and all warrants providing the Kelso Partnerships with a
right to acquire shares of capital stock of KHC owned or held by the Kelso
Partnerships for a purchase price of $265,000,000, including $5,000,000 in
transaction fees (the "Kelso Buyout"). Following the Kelso Buyout, KHC will be
a wholly owned subsidiary of Providence Journal. (See "Pre-Merger
Transactions--Kelso Buyout".)
The purchase price of the Kelso Partnerships' interest in KHC represents a
combined purchase price for both KHC's cable television and broadcast
television businesses, net of consolidated debt, expenses related to the Kelso
Buyout and a pro rata share of transaction costs for the Merger and the related
transactions. The
5
portion of the Kelso Buyout purchase price represented by the King Cable
Business is equal to the pro rata portion of the aggregate purchase price
Continental agreed to pay for the PJC Cable Business as a whole (including the
King Cable Business) attributable to such assets. The purchase price of the
Kelso Partnerships' interest in KHC also includes a negotiated value for the
KHC broadcast television business based on a multiple of cash flow appropriate
to that industry in the opinion of Providence Journal management.
PJC SPIN-OFF. Prior to the Merger, Providence Journal will contribute all of
the PJC Non-Cable Business (including, without limitation, all of the
outstanding capital stock of KHC) to New Providence Journal, its wholly owned
subsidiary, and New Providence Journal will assume all of the liabilities
related thereto. In exchange for such contribution, New Providence Journal will
issue to Providence Journal a number of shares of New Providence Journal Class
A Common Stock and New Providence Journal Class B Common Stock equal to the
number of outstanding shares of Providence Journal Class A Common Stock and
Providence Journal Class B Common Stock, respectively.
Providence Journal will distribute one share of New Providence Journal Class
A Common Stock to the holder of each share of Providence Journal Class A Common
Stock and one share of New Providence Journal Class B Common Stock to the
holder of each share of Providence Journal Class B Common Stock, each as
outstanding immediately prior to the Distribution. As a result, each holder of
Providence Journal Common Stock immediately prior to the PJC Spin-Off will own
the same number and class of shares in New Providence Journal as such holder
owned in Providence Journal.
The Contribution (and the assumption of liabilities by New Providence Journal
in connection with the Contribution) and the Distribution are hereinafter
collectively referred to as the "PJC Spin-Off". The terms of the PJC Spin-Off
are contained in the form of Contribution and Assumption Agreement, a copy of
which is attached as Exhibit C to the Merger Agreement (the "Contribution and
Assumption Agreement"). In connection with and as part of the PJC Spin-Off, New
Providence Journal will assume and agree to hold Providence Journal (and
Continental following the Merger) harmless from all liabilities of Providence
Journal (including, without limitation, substantially all tax liabilities which
arise in connection with the King Cable Purchase) other than the New Cable
Indebtedness and liabilities associated with the PJC Cable Business and
Providence Journal's obligations under the Contribution and Assumption
Agreement. Providence Journal will in turn agree to hold New Providence Journal
harmless from such unassumed liabilities, which will become liabilities of
Continental pursuant to the Merger.
Pursuant to the Contribution and Assumption Agreement, New Providence Journal
has agreed that for a period of four years from the Effective Time, it will not
(i) sell, transfer, assign or otherwise dispose of any material assets or (ii)
declare, set aside or pay any dividend or other distribution (with certain
exceptions) in respect of its capital stock, or redeem or otherwise acquire any
of its capital stock, if, as a result of any such transaction, New Providence
Journal would have a fair market value (determined on the basis of a sale on a
private market, going concern basis, free and clear of all liabilities) of less
than: (x) for the period to and including the first anniversary of the
Effective Time, $200,000,000, (y) for the period from such first anniversary to
and including the second anniversary of the Effective Time, $150,000,000 and
(z) for the period from such second anniversary to and including the fourth
anniversary of the Effective Time, $50,000,000, provided, however, that New
Providence Journal may proceed with any transaction which would otherwise be
prohibited by the foregoing if it provides security to Continental in form and
amount reasonably acceptable to Continental.
OWNERSHIP OF NEW PROVIDENCE JOURNAL AFTER THE PJC SPIN-OFF AND THE MERGER
Following the PJC Spin-Off and the Merger, holders of shares of Providence
Journal Common Stock immediately prior to the PJC Spin-Off who have not
exercised and perfected statutory dissenters' rights under the RIBCA will own
shares of New Providence Journal Common Stock constituting 100% of the equity
and voting power of New Providence Journal, in the same number (and of the same
class) as shares of Providence Journal Common Stock that such holders owned
immediately prior to the PJC Spin-Off. (See "Rights of
6
Dissenting Stockholders--Providence Journal" for a description of dissenters'
rights available to Providence Journal stockholders.)
THE MERGER
The Merger Agreement provides that, subject to the requisite adoption and
approval by Continental's stockholders of the Continental Recapitalization
Amendment and the Merger, the requisite adoption and approval by Providence
Journal stockholders of the PJC Spin-Off, the Merger and the Providence Journal
Charter Amendment, and the satisfaction or waiver of certain other conditions
at the Effective Time, Providence Journal (which, at the time of the Merger,
will own only the Providence Journal Cable Business) will be merged with and
into Continental, the separate existence of Providence Journal will cease, and
Continental will continue as the surviving corporation. As a result of the
Merger and the King Cable Purchase, Continental will acquire the PJC Cable
Business and will assume the New Cable Indebtedness and substantially all of
the liabilities of Providence Journal relating to the PJC Cable Business.
In the Merger, shares of Providence Journal Common Stock outstanding
immediately prior to the Merger shall be converted into shares of Continental
Class A Common Stock. Giving effect to the Continental Stock Split, the number
of shares of Continental Class A Common Stock to be issued in exchange for each
share of Providence Journal Common Stock will be determined by the following
formula:
Class A Common Stock Formula: Maximum Amount
---------------------------------------
$19.40 x PJC Outstanding Shares
"Maximum Amount"............... means $596,069,000, which amount will be reduced
by the amount set forth opposite each of the
following PJC Cable Subsidiaries (which are not
currently wholly owned by Providence Journal) if
Providence Journal does not, directly or
indirectly, wholly own such PJC Cable Subsidiary
at the Effective Time.
Subsidiary Reduction
---------- ---------
Copley/Colony, Inc. $42,610,000
Dynamic Cablevision of Florida, Ltd. $11,300,000
"PJC Outstanding Shares"....... means the shares of Providence Journal Common
Stock outstanding immediately prior to the
Merger (other than shares owned directly or
indirectly by Providence Journal as treasury
stock, by New Providence Journal or by any of
their respective subsidiaries).
As of the date of this Joint Proxy Statement-Prospectus, Providence Journal
owns, directly or indirectly, 50% of Copley/Colony, Inc., ("Copley/Colony") and
89.8% of Dynamic Cablevision of Florida, Ltd. (the "Dynamic Partnership").
Providence Journal anticipates that as of the Effective Time it will have
purchased the third-party interest in Copley/Colony at which time it will be
wholly owned by Providence Journal, although there can be no assurances in this
regard. Providence Journal has signed a purchase agreement for the 50% interest
in Copley/Colony and closed the purchase in escrow, pending receipt of
franchise authority approvals for the transfer. The limited partner in the
Dynamic Partnership and Providence Journal are currently in litigation
concerning the transactions contemplated by the Merger Agreement. Depending on
the outcome of this litigation, the amount of the New Cable Indebtedness may be
reduced. (See "Description of Providence Journal Cable Television Business--
Legal Proceedings".) The value derived from the Continental Merger Stock to be
7
received by the Providence Journal stockholders is the same as the values
assigned to the minority interests in the PJC Cable Subsidiaries discussed
above, based on a multiple of cash flow analysis. No affiliates of Providence
Journal or Continental owned or own minority interests in the above-discussed
PJC Cable Subsidiaries.
The Merger Agreement provides that no fractional shares of Continental Merger
Stock will be issued in connection with the Merger. In lieu of any such
fractional interests, each holder of Providence Journal Common Stock entitled
to receive Continental Merger Stock pursuant to the Merger will be entitled to
receive an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying $19.40 by the fractional interest in the share of
Continental Merger Stock, to which such holder would otherwise be entitled
(after taking into account all shares of Continental Merger Stock being issued
to such holder pursuant to the Merger Agreement).
After giving effect to the Continental Stock Split and assuming that no
adjustment is made to the Maximum Amount, holders of Providence Journal Common
Stock will receive an aggregate of 30,725,207 shares of Continental Class A
Common Stock pursuant to the Merger. (See "Description of Continental Capital
Stock".)
The number of shares of Continental Merger Stock to be issued shall be
accordingly adjusted if between November 18, 1994 and the Effective Time the
outstanding shares of Continental Class A Common Stock or Providence Journal
Common Stock shall have been further changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
RESTRICTIONS ON TRANSFER OF CONTINENTAL MERGER STOCK AND NEW PROVIDENCE JOURNAL
COMMON STOCK
In order to protect the tax-free nature of the PJC Spin-Off and the Merger,
for a period of one year following the Effective Time, the Continental Merger
Stock will be subject to restrictions on transfer (the "Transfer Restrictions")
set forth in the Continental Amended and Restated By-Laws (the "Continental By-
Laws"), which will prohibit all transfers, sales, assignments or other
dispositions of Continental Merger Stock by the former Providence Journal
stockholders except for transfers not for value, including but not limited to,
gifts, bequests, transfers pursuant to the terms of a trust or the laws of
descent and distribution, or transfers by operation of law upon bankruptcy,
liquidation, or dissolution of a stockholder, to certain "permitted
transferees" (defined in the Continental By-Laws). For a full description of
the Transfer Restrictions, see "The Merger--General Provisions--Restrictions on
Transfer of Continental Merger Stock". The shares of New Providence Journal
Common Stock received in the PJC Spin-Off will be subject to transfer
restrictions that are identical to the Transfer Restrictions (the "NPJ Transfer
Restrictions"). (See "The Merger--General Provisions--Restrictions on Transfer
of New Providence Journal Common Stock".)
PAYMENT FOR SHARES
For a description of the method of delivery of Continental Merger Stock and
shares of New Providence Journal Common Stock to be issued in the PJC Spin-Off,
see "Payments and Distributions to Stockholders". STOCKHOLDERS SHOULD NOT SEND
IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
WORKING CAPITAL AND CAPITAL EXPENDITURE ADJUSTMENTS
Immediately prior to the Effective Time and after giving effect to the PJC
Spin-Off, Providence Journal will deliver to Continental a schedule setting
forth Providence Journal's best estimate of the consolidated current assets
minus consolidated current liabilities, determined in accordance with generally
accepted accounting principles ("Working Capital"), of the PJC Cable
Subsidiaries as of the Effective Time. If such
8
schedule determines that Working Capital is greater than zero, Continental
shall pay the excess to New Providence Journal in immediately available funds;
if the schedule determines that Working Capital is less than zero, New
Providence Journal shall pay the difference to Continental in immediately
available funds. Within 90 days after the Effective Time, Continental shall
deliver to New Providence Journal its determination of the Working Capital as
of the Effective Time and after giving effect to the PJC Spin-Off. Within 10
days thereafter (or within 10 days of the resolution of any dispute regarding
such determination, which dispute, if not resolved by Continental and New
Providence Journal, will be resolved by an independent certified public
accounting firm mutually acceptable to Continental and New Providence Journal,
the decision of which shall be final and binding on Continental and New
Providence Journal), Continental shall pay to New Providence Journal, or New
Providence Journal shall pay to Continental, as the case may be, in immediately
available funds, any additional payment to which such party would have been
entitled at the Effective Time based on the final determination of Working
Capital. Based upon the financial statements of Providence Journal's cable
division as of June 30, 1995, the Working Capital deficit is estimated to be
approximately $16,000,000 as of such date. There can, however, be no assurances
that the actual Working Capital adjustment will equal or approximate this
amount. In addition to the Working Capital adjustment, the Merger Agreement
requires that Providence Journal and the PJC Cable Subsidiaries expend a stated
amount per month on capital improvements to the cable systems of Providence
Journal and the PJC Cable Subsidiaries. Failure to meet such capital
expenditure requirements will result in an adjustment at Closing in the amount
of any shortfall in capital expenditures (the "Capital Expenditure
Adjustment"), which will be paid by Providence Journal to Continental.
Providence Journal currently estimates that the Capital Expenditure Adjustment
will be approximately $12,000,000. There can, however, be no assurances that
the actual Capital Expenditure Adjustment will equal or approximate this
amount.
OWNERSHIP OF CONTINENTAL STOCK AFTER THE MERGER
Assuming that the Merger was consummated on the date hereof (and assuming
there are no adjustments to the Maximum Amount), holders of shares of
Providence Journal Common Stock would own Continental Class A Common Stock,
representing approximately 17.3% of the outstanding Continental Common Stock
(treating the Continental Series A Preferred Stock as if it were converted into
Continental Class B Common Stock) and approximately 2.2% of the voting power of
Continental. Continental has reserved the right to issue additional shares of
its capital stock between the date hereof and the consummation of the Merger,
including, without limitation, in connection with other acquisitions by
Continental.
RECOMMENDATION OF THE BOARDS OF DIRECTORS
CONTINENTAL. The Board of Directors of Continental, by unanimous vote, has
approved and adopted (i) the Merger Agreement and each of the transactions
contemplated thereby relating to Continental, including the Merger, and (ii)
the Continental Recapitalization Amendment, and believes that such actions are
in the best interests of and fair to Continental and its stockholders.
Accordingly, the Continental Board of Directors recommends that Continental
stockholders vote FOR each of the proposals, including the Continental
Proposals. (See "Background of the Transactions--Continental's Reasons for the
Merger; Recommendation of Continental Board of Directors".)
PROVIDENCE JOURNAL. The Board of Directors of Providence Journal, by
unanimous vote, has approved and adopted, and believes that such actions are in
the best interests of and fair to Providence Journal and its stockholders, (i)
the PJC Spin-Off, (ii) the Merger Agreement and each of the transactions
contemplated thereby relating to Providence Journal, including the Merger and
the King Cable Purchase, (iii) the Providence Journal Charter Amendment and
(iv) the Cable Division Sale Bonus Plan. Accordingly, the Providence Journal
Board of Directors recommends that Providence Journal stockholders vote FOR
each of the proposals, including the Providence Journal Proposals. (See
"Background of the Transactions--Providence Journal's Reasons for the PJC Spin-
Off and the Merger" and "Recommendation of Providence Journal Board of
Directors".)
9
OPINION OF FINANCIAL ADVISOR
Bear, Stearns & Co. Inc. ("Bear Stearns") has delivered to the Board of
Directors of Providence Journal its written opinion, dated , 1995 (the
"Opinion"), to the effect that, based upon and subject to the various
considerations set forth in the Opinion, as of such date, the King Cable
Purchase, the Kelso Buyout, the PJC Spin-Off, the Merger and certain related
transactions (collectively, the "Providence Journal Transactions") in the
aggregate are fair, from a financial point of view, to the stockholders of
Providence Journal. Bear Stearns previously had rendered its oral opinion
(which was subsequently confirmed in writing) to the Board of Directors of
Providence Journal to the effect that, as of November 15, 1994, the Kelso
Buyout, the PJC Spin-Off, the merger of Providence Journal with Continental
(the "Original Merger") and certain related transactions contemplated at that
time (collectively, the "Original Providence Journal Transactions") in the
aggregate were fair, from a financial point of view, to the stockholders of
Providence Journal. Providence Journal paid a fee of $400,000 to Bear Stearns
for rendering its opinion in connection with the Providence Journal
Transactions, which will be credited against the transaction fee payable upon
the consummation of the Merger. The full text of Bear Stearns' Opinion dated
1995, which sets forth assumptions made, matters considered and attendant
limitations, is attached hereto as Annex II to this Joint Proxy Statement-
Prospectus and is incorporated herein by reference. Providence Journal
stockholders are urged to, and should, read such opinion carefully in its
entirety. (See "Background of the Transactions--Opinion of Financial Advisor to
Providence Journal".)
EFFECTIVE TIME OF MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware and articles of merger
with the Secretary of State of the State of Rhode Island in accordance with
applicable law, or at such later date as the certificate of merger and articles
of merger may specify. It is anticipated that, if approved by the stockholders
of both Continental and Providence Journal, the Merger will become effective in
the fourth quarter of 1995; however, as the Merger and the related transactions
are conditioned upon regulatory approvals and third party consents, no
assurances can be given as to when the consummation of the Merger will actually
occur.
CONDITIONS TO THE MERGER
Consummation of the Merger and each of the transactions contemplated thereby
is conditioned on, among other things, (i) approval of the Continental
Proposals by the holders of Continental Voting Stock and the Providence Journal
Proposals by the holders of Providence Journal Common Stock, (ii) the
incurrence of the New Cable Indebtedness and the NPJ Indebtedness and the
consummation of the King Cable Purchase, the Kelso Buyout and the PJC Spin-Off,
(iii) the consents and/or waivers from the relevant governmental entities under
certain cable television franchises issued to Providence Journal and its
subsidiaries, (iv) no injunction or order of any governmental authority
remaining in effect which prohibits or makes illegal any of the transactions
contemplated by the Merger Agreement or which could have a material adverse
effect on the PJC Cable Business or Continental, (v) Providence Journal's
receipt from the Internal Revenue Service (the "Service") of a private letter
ruling and from its legal counsel of an opinion as to certain tax matters, and
(vi) the performance by each party to the Merger Agreement of its respective
obligations thereunder. (See "The Merger--Conditions Precedent".)
NASDAQ LISTING
CONTINENTAL. The Continental Merger Stock will not be listed on NASDAQ or any
securities exchange as of the Effective Time. However, Continental has agreed
to list the Continental Merger Stock on NASDAQ or a national securities
exchange on or prior to the first anniversary of the Effective Time.
NEW PROVIDENCE JOURNAL. The shares of New Providence Journal Class A Common
Stock and New Providence Journal Class B Common Stock to be distributed to
stockholders of Providence Journal will not be listed on NASDAQ or a national
securities exchange.
10
ACQUISITION PROPOSALS
The Merger Agreement prohibits Providence Journal, its subsidiaries and their
respective officers, Directors, representatives and agents from, directly or
indirectly, knowingly encouraging, soliciting, initiating or participating in
any way in discussions or negotiations with, or knowingly providing any
confidential information to, any person (other than Continental or any
affiliate or associate of Continental and their respective Directors, officers,
employees, representatives and agents) concerning any merger, consolidation,
share exchange or similar transaction involving Providence Journal or any of
the PJC Cable Subsidiaries or certain purchases of any portion of the operating
assets of, or any equity interests in, the PJC Cable Subsidiaries. However,
Providence Journal's Board of Directors may (i) take and disclose to Providence
Journal's stockholders a position with respect to a tender offer for Providence
Journal Common Stock by a third party pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act, (ii) make such disclosure to Providence
Journal's stockholders as, in the judgment of Providence Journal's Board of
Directors with the written advice of outside counsel, may be required under
applicable law, (iii) respond to any unsolicited proposal or inquiry by
advising the person making such proposal or inquiry of the terms of the
provision summarized in this paragraph, and (iv) participate in discussions or
negotiations resulting from an unsolicited proposal if Providence Journal's
Board of Directors determines, with the written advice of outside counsel, that
it is required to do so in the exercise of its fiduciary duties. Providence
Journal has agreed to notify Continental promptly if any such proposal or
inquiry is received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated with, Providence Journal
and to furnish Continental with a copy of any proposal that Providence
Journal's Board of Directors has determined is a "Superior Proposal" (as
defined below under the caption "The Merger--Certain Covenants--Acquisition
Proposals").
REGISTRATION RIGHTS
Continental and New Providence Journal have agreed that, on or prior to the
consummation of the Merger, they will enter into a registration rights
agreement relating to the Continental Class A Common Stock to be issued
pursuant to the Merger, in the form attached as Exhibit D to the Merger
Agreement. Such agreement will provide that (subject to the Transfer
Restrictions), commencing at the time the obligation of Continental to conduct
an Offering (as described in "Undertakings Regarding Public Offering" below)
has been satisfied or terminated, the Providence Journal stockholders receiving
Continental Merger Stock will be entitled to two demand registrations and
unlimited (subject to certain exceptions) "piggyback" registrations with
respect to primary public issuances by Continental of Continental Class A
Common Stock; provided, however, that such registration rights will not be
available to any former Providence Journal stockholder (collectively, the
"Registration Rights Holders") to the extent that shares of Continental Class A
Common Stock are then freely transferable by the Registration Rights Holder
requesting a registration in the manner contemplated by such request without
violation of the registration requirements of the Securities Act. Registration
Rights Holders will not be entitled to assign their rights under such
registration rights agreement.
UNDERTAKINGS REGARDING PUBLIC OFFERING
Continental has agreed in the Merger Agreement that it will use its best
efforts to consummate a registered public offering of shares of Continental
Class A Common Stock (which, at Continental's option, may be a primary offering
and/or a secondary offering) on or prior to the first anniversary of the
Effective Time for aggregate consideration (before underwriting discounts) of
not less than $150,000,000 (the "Offering"). Continental will not be required
to consummate the Offering if it has issued, on or before the first anniversary
of the Effective Time, shares of its capital stock for aggregate consideration
of at least $1,000,000,000. The Merger Agreement provides, however, that
Continental's obligation, if any, to consummate the Offering may be extended if
Continental's investment banker advises Continental in writing that because of
market conditions it is not advisable for Continental to conduct the Offering
at that time, in
11
which case Continental's obligation to use its best efforts to conduct the
Offering shall be extended until such time as Continental's investment banker
advises it in writing that market conditions no longer render it inadvisable to
conduct the Offering.
TERMINATION FEES AND EXPENSES; INDEMNIFICATION
The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Continental, Providence Journal and New
Providence Journal, or by either Continental or Providence Journal individually
under certain specified circumstances. If the Merger Agreement is terminated
under certain circumstances described under the caption "The Merger--
Termination--Termination Fees and Expenses; Option to Purchase Palm Springs
System", Providence Journal may be required to pay to Continental a termination
fee of $42,000,000 (the "Break-Up Fee") plus up to an additional $10,000,000 to
reimburse Continental for reasonable fees and expenses it has incurred in
connection with the Merger Agreement and each of the transactions contemplated
thereby. If the Merger Agreement is terminated under other circumstances,
either Continental or Providence Journal may be required to pay to the other an
amount of up to $10,000,000 as compensation for reasonable fees and expenses it
has incurred in connection with the Merger Agreement and each of the
transactions contemplated thereby. In addition, if the Merger Agreement is
terminated under circumstances in which Continental is entitled to the Break-Up
Fee, Providence Journal has granted to Continental the option to purchase the
cable television systems operated by Providence Journal and its subsidiaries in
Palm Springs, California and the surrounding communities (the "Palm Springs
System") at a purchase price of $68,500,000. (See "The Merger--Termination".)
The Merger Agreement provides for contractual indemnification by each of the
parties for various breaches of representations and warranties, misleading
statements or omissions, third party claims and stockholder suits. (See "The
Merger--Indemnification".)
CORPORATE GOVERNANCE
CONTINENTAL. All of the officers and Directors of Continental immediately
prior to the Effective Time will continue as officers and Directors after the
Effective Time. (See "Description of Continental--Directors, Executive Officers
and Other Officers of Continental".) Pursuant to the Merger Agreement, until
the Effective Time, Providence Journal will have the right to appoint two
persons who will be permitted to attend meetings of the Board of Directors of
Continental (the "Providence Journal Nominees"). The Merger Agreement further
provides that if, at any such meeting, (i) any resolution is approved by the
Continental Board of Directors by only one vote or, with respect to any
resolution pertaining to certain matters, two members of Continental's Board of
Directors vote against such resolution, and (ii) the Providence Journal
Nominees indicate that they would have voted against such resolution had they
been Directors of Continental, Continental has agreed to act upon such
resolution as though it had not been approved by the Continental Board of
Directors. At the Effective Time, the Providence Journal Nominees shall be
appointed to serve as Class C Directors for a three-year term. Following the
expiration of their term, the Continental Board of Directors has agreed to
exercise all authority under Delaware Law to nominate two persons designated by
New Providence Journal for one additional three-year term. (See "The Merger--
Certain Covenants--Certain Rights with Respect to Continental's Board of
Directors".)
NEW PROVIDENCE JOURNAL. All of the officers and Directors of Providence
Journal prior to the Merger are expected to serve as officers and Directors of
New Providence Journal immediately after the Effective Time. (See "Description
of Providence Journal and New Providence Journal--Executive Officers and
Directors of Providence Journal and New Providence Journal".)
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Board of Directors of Providence
Journal with respect to the Providence Journal Proposals and the Cable Division
Sale Bonus Plan, stockholders of Providence Journal
12
should be aware that certain members of Providence Journal management and its
Board of Directors have certain interests in the PJC Spin-Off and the Merger
that may present them with actual or potential conflicts of interest in
connection with the PJC Spin-Off and the Merger. As of the Effective Time, New
Providence Journal will assume the following stock incentive plans of
Providence Journal: (i) the 1994 Employee Stock Option Plan; (ii) the 1994 Non-
Employee Director Stock Option Plan; and (iii) the Restricted Stock Unit Plan.
Prior to the Effective Time, New Providence Journal will also assume the
following tax-qualified retirement plans maintained by Providence Journal: (i)
the Providence Journal Pension Plan; (ii) the Journal Guild 401(k) Plan; and
(iii) the Journal 401(k) Plan. In addition, the Cable Division Sale Bonus Plan,
designed to retain certain of Providence Journal's cable executives and provide
them with incentives to maximize the operating performance of the PJC Cable
Business pending consummation of the Merger, provides for bonuses which are
payable only if the Merger is consummated. As of August 1, 1995, the total pool
in which the 14 participants in the Cable Division Sale Bonus Plan are eligible
to share is an amount equal to $5.2 million, contingent upon the achievement of
the plan objectives. While not contingent upon the Merger, the Providence
Journal Incentive Stock Unit Plan will be terminated and liquidated upon the
next independent appraisal of Providence Journal Class A Common Stock, which is
anticipated to be prior to the consummation of the PJC Spin-Off and the Merger.
(See "Risk Factors--Interests of Certain Persons in the Transactions" and
"Description of Providence Journal and New Providence Journal--Executive
Compensation--Providence Journal Incentive Stock Unit Plan".)
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
CONSUMMATION OF THE PJC SPIN-OFF AND THE MERGER IS CONDITIONED ON THE RECEIPT
OF A FAVORABLE PRIVATE LETTER RULING FROM THE SERVICE THAT THE PJC SPIN-OFF
WILL QUALIFY AS A TAX-FREE REORGANIZATION UNDER THE CODE, AND UPON RECEIPT OF
AN OPINION OF EDWARDS & ANGELL, COUNSEL TO PROVIDENCE JOURNAL, THAT THE MERGER
WILL QUALIFY AS A TAX-FREE REORGANIZATION UNDER THE CODE. (SEE "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS".)
ACCOUNTING TREATMENT
The Merger and the King Cable Purchase will be accounted for using the
purchase method of accounting. Continental will be treated as the acquiror of
the PJC Cable Business and, as a result, the assets of the PJC Cable Business
will be recorded at their estimated fair values. (See "Description of
Continental--Unaudited Pro Forma Financial Statements" for a description of the
adjustments expected to be recorded to Providence Journal's financial
statements.)
The Contribution will be recorded at historical cost and will not result in a
step-up in basis in the financial statements of New Providence Journal.
RIGHTS OF DISSENTING STOCKHOLDERS
CONTINENTAL. Pursuant to Delaware General Corporation Law ("Delaware Law" or
"DGCL"), any holder of Continental Voting Stock (i) who files a demand for
appraisal in writing prior to the vote taken at the Continental Special Meeting
and (ii) whose shares are not voted in favor of the Merger, shall be entitled
to appraisal rights under Section 262 of the DGCL ("Section 262"). (See "Rights
of Dissenting Stockholders--Continental".) All of the Directors of Continental
have waived their appraisal rights with respect to shares of Continental Voting
Stock that they own.
PROVIDENCE JOURNAL. Pursuant to Rhode Island Law, any holder of Providence
Journal Common Stock (i) who files a written objection to the Merger prior to
or at the Providence Journal Special Meeting; (ii) who, within ten days after
the date on which the vote was taken, makes written demand on Continental for
payment of the fair value of the stockholder's shares; and (iii) whose shares
are not voted in favor of the Merger, shall be entitled to dissenting
stockholders' rights under Section 7-1.1-74 of RIBCA ("Section 74"). Holders of
Providence Journal Common Stock who exercise and perfect dissenters' rights
under Section 74 will be entitled to payment of the fair value of such
stockholders' shares of Providence Journal Common Stock. (See "Rights of
13
Dissenting Stockholders--Providence Journal" for a description of such rights,
including a summary of the steps which must be taken to comply withSection 74.)
VOTING AGREEMENT
In connection with the execution of the Merger Agreement, certain Directors
and executive officers of Providence Journal entitled to exercise voting power
with respect to an aggregate of 323 shares of Providence Journal Common Stock
(approximately 0.30% of the voting power of the outstanding Providence Journal
Common Stock), and Amos B. Hostetter, Jr. and Timothy P. Neher, as the trustees
of the Amos B. Hostetter, Jr. 1989 Trust (the "Trust") entitled to exercise
voting power with respect to an aggregate of 42,843,550 shares of Continental
Class B Common Stock (approximately 30.90% of the voting power (treating the
Continental Series A Preferred Stock as if it were converted into Continental
Class B Common Stock) of the Continental Voting Stock), entered into an
agreement (the "Voting Agreement") pursuant to which such stockholders agreed,
among other things, to vote all of their shares in the following manner. Such
Directors and executive officers of Providence Journal holding Providence
Journal Common Stock have agreed to vote (i) in favor of each of the Providence
Journal Proposals, (ii) against any proposal for any recapitalization, merger,
sale of assets or other business combination between Providence Journal or any
of the PJC Cable Subsidiaries and any person other than Continental, or any
other action which would result in the breach of any covenant, representation
or warranty in the Merger Agreement, or cause any conditions to the obligations
of Providence Journal under the Merger Agreement not to be fulfilled and
(iii) in favor of any other matter relating to the consummation of the
transactions contemplated by the Merger Agreement. The Trust agreed to vote (x)
in favor of each of the Continental Proposals, (y) against any action that
would result in a breach of any covenant, representation or warranty under the
Merger Agreement, or that would result in any of the conditions to the
obligations of Continental under the Merger Agreement not being fulfilled and
(z) in favor of any other matter relating to the consummation of the
transactions contemplated by the Merger Agreement. Execution of the Voting
Agreement was a condition to Continental and Providence Journal entering into
the Merger Agreement, and no compensation was paid to any person in
consideration for entering into such agreement. (See "The Merger--Ancillary
Agreements--Voting Agreement".)
NONCOMPETITION AGREEMENT
As a condition to the Merger, New Providence Journal must enter into an
agreement (the "Noncompetition Agreement") pursuant to which New Providence
Journal shall agree that, for a period of three years after the Effective Time,
neither it nor any of its subsidiaries will (or will attempt to), on its own
behalf or in the service or on behalf of others, (i) solicit for employment,
interfere with or entice away any of the Directors, officers, employees or
agents of Continental or any person who at any time on or after January 1, 1994
was an officer or employee of Providence Journal or the PJC Cable Subsidiaries
and who is employed by Continental following the Effective Time, (ii) subject
to certain exceptions, engage in any manner in the operation (in specified
geographical areas) of cable television systems providing the services provided
by Providence Journal and the PJC Cable Subsidiaries (the "Restricted
Business") at the Effective Time other than the business of developing or
creating programming or (iii) use or permit Providence Journal's or New
Providence Journal's name to be used in connection with any Restricted Business
in specified geographical locations. (See "The Merger--Ancillary Agreements--
Noncompetition Agreement".)
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of holders of Providence Journal Common Stock currently are
governed by Rhode Island Law, the Providence Journal Charter and Providence
Journal's By-Laws (the "Providence Journal By-Laws") and the Rights Agreement
between Providence Journal and The First National Bank of Boston, as Rights
14
Agent (the "Rights Agreement"). Upon the consummation of the PJC Spin-Off and
the Merger, Providence Journal stockholders who do not exercise and perfect
their statutory dissenters' rights will become Continental stockholders and New
Providence Journal stockholders, and their rights will be governed by the DGCL,
the Continental Amended and Restated Certificate of Incorporation (the
"Continental Restated Certificate"), the Continental By-Laws, the New
Providence Journal Certificate of Incorporation (the "New Providence Journal
Certificate"), the New Providence Journal By-Laws (the "New Providence Journal
By-Laws") and the New Providence Journal Rights Agreement between New
Providence Journal and the First National Bank of Boston, as Rights Agent,
dated as of February 1, 1995 (the "NPJ Rights Agreement"). (See "Description of
New Providence Journal Common Stock--NPJ Rights Agreement", "Comparison of
Rights of Stockholders of Providence Journal and New Providence Journal" and
"Comparison of Rights of Stockholders of Providence Journal and Continental".)
MARKET PRICES AND DIVIDEND DATA
CONTINENTAL. No established public trading market exists for the Continental
Class A Common Stock or Continental Class B Common Stock, and accordingly, no
high and low bid information or quotations are available with respect to the
Continental Common Stock. Continental has not paid cash dividends on the
Continental Common Stock and has no present intention of so doing after the
Merger. The payment of future dividends, if any, will be determined by the
Continental Board of Directors in light of conditions then existing, including
earnings, financial condition and requirements, restrictions in financing
agreements, business conditions and other factors. Certain agreements, pursuant
to which Continental has borrowed funds, contain provisions that limit the
amount of cash dividends and stock repurchases that Continental may make. (See
"Description of Continental Indebtedness".)
NEW PROVIDENCE JOURNAL. No established public trading market exists for the
Providence Journal Common Stock, and accordingly no high and low bid
information or quotations are available with respect to the Providence Journal
Common Stock.
The quarterly cash dividend per share paid on all Providence Journal Class A
Common Stock and Providence Journal Class B Common Stock in 1992, 1993 and 1994
was $23.65, $26.00 and $28.60, respectively. Following completion of the PJC
Spin-Off and the Merger, New Providence Journal expects to pay quarterly
dividends on the New Providence Journal Common Stock at a rate, that is
generally consistent with the rate currently paid with respect to the
Providence Journal Common Stock. New Providence Journal's dividend policy will
be subject to the exercise by the New Providence Journal Board of Directors of
its fiduciary obligations and the exercise of the Board's business judgment in
connection with, among other things, any and all requirements of Delaware or
other applicable law, any and all covenants, restrictions or limitations in
connection with any financing for New Providence Journal, New Providence
Journal's future earnings, capital requirements, financial condition and other
factors.
CABLE DIVISION SALE BONUS PLAN
The Board of Directors of Providence Journal is submitting to the
stockholders for their approval, the Cable Division Sale Bonus Plan. The Cable
Division Sale Bonus Plan is designed to retain certain of Providence Journal's
cable executives and to provide incentives to such executives to maximize
operating performance of the PJC Cable Business pending completion of the
Merger with bonuses payable only if the Merger is consummated. No beneficiary
of such plan is an officer of Providence Journal. New Providence Journal will
be responsible for all payments required to be made under the Cable Division
Sale Bonus Plan. The amount of the bonuses payable pursuant to the Cable
Division Sale Bonus Plan is $5,200,000, an amount that may be reduced by up to
20%, based upon a graduated scale, if the 1995 cash flow objective is not met.
15
PROVIDENCE JOURNAL SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data provided below is derived from, and
should be read in conjunction with, the Consolidated Financial Statements of
Providence Journal Company and Subsidiaries for the years ended December 31,
1992 through December 31, 1994 and the six months ended June 30, 1994 and 1995
contained elsewhere herein. The unaudited summary consolidated financial data
for the six months ended June 30, 1994 and 1995 reflect all adjustments of a
normal recurring nature that are in the opinion of management necessary for a
fair presentation of that information. The Statement of Operations Data for all
periods presented has been restated from previously issued financial statements
to reclassify the cable television operations and net assets held for sale to
discontinued operations. (See "Description of Providence Journal--Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Providence Journal--Discontinued Operations".)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ----------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Revenues............... $169,840 $167,008 $173,579 $180,473 $192,291 $ 92,730 $95,816
Operating Loss......... (16,437) (31,793) (9,773) (15,859) (10,696) (1,827) (4,865)
Other Income (Expense),
net................... (4,789) 28,862 27,654 (5,534) (9,357) (1,814) 1,512
Income (Loss) from
Continuing Operations
Before Income Taxes... (21,226) (2,931) 17,881 (21,393) (20,053) (3,641) (3,353)
Income (Loss) from
Continuing Operations. (12,923) (6,547) 6,044 (15,628) (22,420) (3,015) (1,682)
Income (Loss) Per
Common Share from
Continuing Operations. (129.02) (74.56) 70.26 (183.21) (264.13) (35.44) (19.86)
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------ --------------
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets(1)........ $784,063 $594,098 $793,433 $775,685 $724,713 $761,281
Net Assets of
Discontinued Cable
Operations............ 51,577 54,184 393,342 396,260 364,010 404,861
Long-term Debt......... 28,568 28,608 253,106 276,601 247,173 296,895
Stockholders' Equity... 460,321 399,938 391,967 359,575 285,887 278,364
--------
(1) Includes amounts for discontinued operations.
16
NEW PROVIDENCE JOURNAL SUMMARY PRO FORMA FINANCIAL DATA
The following information has been derived from the pro forma condensed
consolidated balance sheet and statement of operations of Providence Journal
and KHC, after giving effect to the PJC Spin-Off, the Merger and the
transactions contemplated thereby. The pro forma results are not necessarily
indicative of the results of operations that would have actually been obtained
had the transactions been consummated as of the dates indicated in the pro
forma balance sheet and statement of operations.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------- ----------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues............................... $309,350 $153,180
Operating Income (Loss)................ 10,465 5,352
Other Expense, Net..................... (26,901) (13,338)
Loss from Continuing Operations before
Income Taxes.......................... (16,436) (7,986)
Loss from Continuing Operations........ (20,496) (6,703)
Loss Per Share from Continuing
Operations............................ (241.46) (79.15)
AS OF
JUNE 30, 1995
-----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets........................... $686,062
Long-term Debt......................... 283,933
Stockholders' Equity................... 229,484
17
PROVIDENCE JOURNAL CABLE SUMMARY COMBINED FINANCIAL DATA
The following summary combined financial information for Providence Journal's
owned and partially owned cable businesses has been derived from the combined
financial statements of Providence Journal's cable division ("Providence
Journal Cable"), which consists of Colony Communications, Inc. ("Colony") (a
wholly owned subsidiary of Providence Journal), the Colony Cablevision division
("Colony Cablevision") (a division of Providence Journal), Copley/Colony (a 50%
owned joint venture of Colony), and King Videocable Company ("King Videocable")
(a 50% owned joint venture of Providence Journal that through its parent, KBC,
owns all of the King Cable Business). The combined statement of operations data
for the years ended December 31, 1992, 1993 and 1994 and the combined balance
sheet data as of December 31, 1992, 1993 and 1994 have been derived from the
audited combined financial statements of Providence Journal Cable contained
elsewhere herein. The combined statement of operations data for the six months
ended June 30, 1994 and 1995 and the combined balance sheet data as of June 30,
1995 have been derived from the unaudited financial statements of Providence
Journal Cable that, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial position and results of operations for such periods. Operating
results for the six months ended June 30, 1995 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1995.
(IN THOUSANDS, EXCEPT SUBSCRIBER DATA AND RATIOS)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------------- --------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues............... $199,684 $281,593 $284,993 $141,704 $145,380
Operating, Selling,
General and
Administrative
Expenses.............. 121,703 167,483 173,020 86,178 89,047
Depreciation and
Amortization.......... 58,750 99,554 85,783 45,610 42,314
Allocation of Corporate
Overhead(1)........... 6,513 9,651 11,034 3,703 3,818
-------- -------- -------- -------- --------
Operating Income....... 12,718 4,905 15,156 6,213 10,201
Allocated Interest
Expense from Parent
Companies(2).......... (16,516) (39,938) (41,318) (20,035) (20,880)
Other, Net............. 591 (1,841) 555 1,121 1,545
-------- -------- -------- -------- --------
Income (loss) before
Income Taxes and
Cumulative Effect of
Change in Accounting
Principle............. (3,207) (36,874) (25,607) (12,701) (9,134)
Provision for Income
Taxes................. 694 (11,219) (8,182) (3,994) (2,621)
-------- -------- -------- -------- --------
Income (loss) before
Change in Accounting
Principle............. (3,901) (25,655) (17,425) (8,707) (6,513)
Cumulative Effect of
Change in Accounting
Principle............. 4,831 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before
Minority Interests.... $ 930 $(25,655) $(17,425) $ (8,707) $ (6,513)
======== ======== ======== ======== ========
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- --------------
1992 1993 1994 1995
-------- -------- -------- --------------
COMBINED BALANCE SHEET
DATA:
Total Assets........... $867,150 $813,306 $777,102 $818,633
Total Debt(3).......... 611,885 593,073 574,821 611,567
Group Equity........... 89,334 70,403 57,142 52,915
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------------- --------
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(4).............. $77,981 $114,110 $111,973 $ 55,526 $ 56,333
EBITDA as a % of
Revenues.............. 39.1% 40.5% 39.3% 39.2% 38.7%
Net Cash Provided by
Operating Activities.. 53,753 69,940 68,288 34,508 40,707
Capital Expenditures... 27,391 49,094 47,766 23,142 25,631
18
SUBSCRIBER DATA FOR PROVIDENCE JOURNAL CABLE SYSTEMS(5)
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------- --------------
1992 1993 1994 1995
--------- --------- --------- --------------
Homes Passed by Cable(6).. 1,202,000 1,224,000 1,253,000 1,262,000
Number of Basic
Subscribers(7)........... 722,000 738,000 771,000 773,000
Basic Penetration(8)...... 60.0% 60.3% 61.5% 61.3%
Number of Premium
Subscriptions(9)......... 440,000 467,000 510,000 512,000
Premium Penetration(10)... 61.0% 63.3% 66.2% 66.2%
Monthly Revenue per
Average
Basic Subscriber(11)..... $30.78 $30.63 $29.44 $29.50
--------
(1) Parent companies provided certain services to Providence Journal Cable,
including cash management, human resources, accounting, legal, tax and
other corporate services. Corporate overhead relating to these services
has been allocated to Providence Journal Cable. In the opinion of
management these charges have been made on a reasonable basis (individual
revenue to total revenue); however, these charges are not necessarily
indicative of the level of expenses that might have been incurred by
Providence Journal Cable on a stand-alone basis.
(2) Includes allocation of interest expense on amounts due to parent
companies.
(3) Includes long-term debt and amounts due to parent companies.
(4) Operating income before depreciation, amortization and allocation of
corporate overhead (EBITDA). Based on its experience in the cable
television industry, Providence Journal Cable believes that EBITDA and
related measures of cash flow serve as important financial analysis tools
for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage. EBITDA should not
be considered by the reader as an alternative to operating or net income
(as determined in accordance with generally accepted accounting principles
("GAAP")) as an indicator of Providence Journal Cable's performance or as
an alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity.
(5) Subscriber data reflects 100% ownership of the PJC Cable Subsidiaries.
(6) Estimated dwelling units located sufficiently close to Providence Journal
Cable's cable plant to be practicably connected without any further
extension of principal transmission lines.
(7) A "basic subscriber" means a person who subscribes, at a minimum, to
Providence Journal Cable's basic tier, which consists of broadcast
television signals available locally off-air, local origination and
public, educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis, by dividing aggregate
bulk basic service revenues by the combination of the stated basic
service, the stated second tier of cable programming service and the
stated a la carte service. Bulk service revenues include charges for bulk
basic programming and bulk non-premium cable programming services.
Residential subscribers less courtesy accounts are then added to the bulk
equivalent to determine the total subscriber number. Due to the
seasonality inherent in certain of Providence Journal's cable systems in
Florida, the number of basic subscribers may fluctuate over the course of
the year.
(8) Basic subscribers as a percentage of Homes passed by cable.
(9) Equals the number of premium services subscribed to by basic subscribers.
Premium services include only single channel services offered for a
monthly fee per channel and do not include packages of channels offered
for a single monthly fee.
(10) Premium subscriptions as a percentage of basic subscribers. A basic
subscriber may purchase more than one premium service, each of which is
counted as a separate premium subscription. This ratio may be greater than
100% if the average customer subscribes to more than one premium service.
(11) Subscriber revenue divided by the average number of basic subscribers for
Providence Journal Cable's combined systems during the twelve month period
ended December 31 for each year presented and the six month period ended
June 30, 1995.
19
CONTINENTAL SUMMARY CONSOLIDATED HISTORICAL INFORMATION
The summary consolidated historical financial information provided below is
derived from, and should be read in conjunction with, the Consolidated
Financial Statements of Continental for the years ended December 31, 1992
through December 31, 1994 and the six months ended June 30, 1994 and 1995. The
unaudited summary historical financial information for the six months ended
June 30, 1994 and 1995 reflects all adjustments of a normal recurring nature
that are, in the opinion of management, necessary for a fair presentation of
that information. Results of operations for the six months ended June 30, 1994
and 1995 are not necessarily indicative for the results that may be expected
for any other interim period or the year as a whole.
(IN THOUSANDS, EXCEPT SUBSCRIBER DATA AND RATIOS)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ------ ------
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 1,113,475 $ 1,177,163 $ 1,197,977 $589,390 $650,048
Operating, Selling,
General and
Administrative
Expenses.............. 625,145 649,571 672,884 327,401 375,178
Depreciation and
Amortization.......... 272,851 279,009 283,183 135,523 148,412
Non-Cash Stock
Compensation(1)....... 9,683 11,004 11,316 5,675 5,905
Operating Income....... 205,796 237,579 230,594 120,791 120,553
Interest Expense (Net). 296,031 282,252 315,541 147,910 166,314
Loss before
Extraordinary Item and
Cumulative Effect of
Accounting Change..... (102,960) (25,774) (68,576) (23,621) (33,067)
Ratio of Earnings to
Combined Fixed Charges
and Preferred
Dividends(2).......... -- -- -- -- --
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------------- -----------
1992 1993 1994 1995
----------- ----------- ----------- ------
BALANCE SHEET DATA:
Cash................... $ 27,352 $ 122,640 $ 11,564 $ 15,342
Total Assets........... 2,003,196 2,091,853 2,483,639 2,693,894
Total Debt............. 3,011,669 3,177,178 3,449,907 3,728,101
Redeemable Common
Stock................. 223,716 213,548 232,399 242,721
Stockholders' Equity
(Deficiency).......... (1,486,231) (1,667,088) (1,688,334) (1,725,035)
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ------ ------
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(3).............. $ 488,330 $ 527,592 $ 525,093 $261,989 $274,870
EBITDA as a % of
Revenues.............. 43.9% 44.8% 43.8% 44.5% 42.3%
Total Debt less Cash to
EBITDA(3)............. 6.11 5.79 6.55 6.11 6.75
EBITDA to Total
Interest Expense...... 1.65 1.87 1.66 1.77 1.65
Net Cash Provided from
Operating Activities.. $ 215,045 $ 250,504 $ 236,304 $123,568 $ 77,526
Capital Expenditures... 145,189 185,691 300,511 109,984 231,021
20
SUBSCRIBER DATA FOR DOMESTIC CABLE SYSTEMS (4)
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------- --------------
1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------------
Homes Passed by
Cable(5).............. 4,761,000 4,880,000 4,981,000 5,192,000 5,372,000 5,437,000
Number of Basic
Subscribers(6)........ 2,690,000 2,784,000 2,856,000 2,895,000 3,081,000 3,133,000
Basic Penetration(7)... 56.5% 57.0% 57.3% 55.8% 57.4% 57.6%
Number of Premium
Subscriptions(8)...... 2,702,000 2,603,000 2,545,000 2,454,000 2,635,000 2,666,000
Premium Penetration(9). 100.4% 93.5% 89.1% 84.8% 85.5% 85.1%
Monthly Revenue per
Average Basic
Subscriber(10)........ $31.29 $32.98 $34.46 $35.76 $35.29 $35.65
--------
(1) This is the difference between the consideration paid by employees for
shares of Continental Common Stock under Continental's Restricted Stock
Purchase Program and the fair market value of such shares at the date of
issuance (as determined by Continental's Board of Directors), amortized
over such shares' vesting schedule. (See Note 11 to Continental's
Consolidated Financial Statements.)
(2) For purposes of this computation, earnings are defined to be income (loss)
from continuing operations before income taxes, minority interests and
fixed charges (excluding capitalized interest). Fixed charges are the sum
of (i) interest costs, (ii) interest component of rent expense and (iii)
amortization of deferred financing costs. The actual ratios of earnings to
combined fixed charges and preferred dividends are less than 1 to 1 for
each of the years presented. The actual deficiency of earnings to combined
fixed charges and preferred dividends was $107,425,000, $53,729,000 and
$120,899,000 respectively, for the years ended December 31, 1992, 1993 and
1994 and $42,705,000 and $41,812,000, respectively, for the six months
ended June 30, 1994 and 1995.
(3) Operating income before depreciation, amortization and non-cash stock
compensation. Based on its experience in the cable television industry,
Continental believes that EBITDA and related measures of cash flow serve
as important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA should not be considered by the reader as
an alternative to operating or net income (as determined in accordance
with GAAP) as an indicator of Continental's performance or as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. Substantially all of
Continental's financing agreements contain covenants in which EBITDA is
used as a measure of financial performance. (See "Description of
Continental--Management's Discussion and Analysis of Financial Condition
and Results of Operations of Continental".) For purposes of calculating
the ratio of Total Debt to EBITDA for the six months ended June 30, 1994
and 1995, EBITDA has been annualized.
(4) "Domestic Cable Systems" means Continental's systems owned and operated by
Continental in the United States. In reporting subscriber and other data
for Domestic Cable Systems not controlled or managed by Continental, only
that portion of data corresponding to Continental's percentage interest is
included.
(5) Estimated dwelling units located sufficiently close to Continental's cable
plant to be practicably connected without any further extension of
principal transmission lines.
(6) A "basic subscriber" means a person who subscribes, at a minimum, to
Continental's basic broadcast tier, which generally consists of broadcast
television signals available locally off-air, local origination and
public, educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis, by dividing aggregate
bulk-billed revenues by the stated basic broadcast tier rate. In reporting
subscriber and other data for systems not controlled or managed by
Continental, only that portion of data corresponding to Continental's
percentage ownership is included.
(7) Basic subscribers as a percentage of Homes passed by cable. Continental's
basic penetration for the years ended December 31, 1993 and 1994 and the
six months ended June 30, 1995, reflects the FCC's rate regulation rules
adopted on April 1, 1993, which for the first time provided a standardized
definition of "households".
(8) Equals the number of premium services subscribed to by basic subscribers.
Premium services include only single channel services offered for a
monthly fee per channel and do not include packages of channels offered
for a single monthly fee.
(9) Premium subscriptions as a percentage of basic subscribers. A basic
subscriber may purchase more than one premium service, each of which is
counted as a separate premium subscription. This ratio may be greater than
100% if the average customer subscribes to more than one premium service.
(10) Revenue divided by the weighted average number of basic subscribers for
Continental's consolidated subsidiaries during the twelve month period
ended December 31 for such period presented and the six month period ended
June 30, 1995.
21
CONTINENTAL SUMMARY PRO FORMA FINANCIAL DATA
The following information has been derived from the unaudited pro forma
condensed financial statements included elsewhere herein. The following
unaudited Summary Pro Forma Balance Sheet Data has been prepared based upon the
historical consolidated balance sheets of Continental and Providence Journal
Cable as of June 30, 1995 and gives effect to the Merger and certain related
transactions, including the assumption of the $410,000,000 in New Cable
Indebtedness, the incurrence of $405,000,000 of new indebtedness to fund the
King Cable Purchase and various other acquisitions of cable television systems
completed and pending, in each instance as though each of such events had
occurred as of June 30, 1995. The following unaudited Summary Pro Forma
Statement of Operations Data for the year ended December 31, 1994 and the six
months ended June 30, 1995 gives effect to each of the foregoing as though each
of such events had occurred at January 1, 1994 and January 1, 1995,
respectively. The pro forma results are not necessarily indicative of the
combined results of future operations and do not reflect any synergies and
other cost reductions that may result from the Merger.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995
------------ ----------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $1,586,829 $840,220
Operating Income................................ 280,828 145,156
Interest Expense................................ 391,246 211,058
Loss before Extraordinary Item.................. (84,151) (44,225)
AT JUNE 30,
1995
----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets.................................... $ 4,891,213
Total Debt...................................... 4,921,251
Stockholders' Equity (Deficiency)............... (1,128,966)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995
------------ ----------------
(IN THOUSANDS)
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(1)....................................... $675,908 $347,516
EBITDA to Total Interest Expense................ 1.73 1.65
Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends(2)......................... -- --
--------
(1) Operating income before depreciation, amortization and non-cash stock
compensation. Based on its experience in the cable television industry,
Continental believes that EBITDA and related measures of cash flow serve as
important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA should not be considered by the reader as
an alternative to operating or net income (as determined in accordance with
GAAP) as an indicator of Continental's performance or as an alternative to
cash flows from operating activities (as determined in accordance with
GAAP) as a measure of liquidity. Substantially all of Continental's
financing agreements contain covenants in which EBITDA is used as a measure
of financial performance. (See "Description of Continental--Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Continental".) For purposes of calculating the ratio of Total Debt to
EBITDA for the pro forma six months ended June 30, 1995, EBITDA has been
annualized.
(2) For purposes of this computation, earnings are defined to be income (loss)
from continuing operations before income taxes, minority interests and
fixed charges (excluding capitalized interest). Fixed charges are the sum
of (i) interest costs, (ii) interest component of rent expenses, and (iii)
amortization of deferred financing costs. The pro forma ratio of earnings
to combined fixed charges and preferred dividends is less than 1 to 1 for
each period presented. The pro forma deficiency of earnings to combined
fixed charges and preferred dividends would have been $143,712,000 and
$58,524,000 for the year ended December 31, 1994 and the six months ended
June 30, 1995, respectively. Such pro forma ratios reflect the consummation
of the Merger.
22
RISK FACTORS
RISK FACTORS RELATED TO THE CONTINENTAL MERGER STOCK
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; RESTRICTIONS ON
TRANSFER. The value ascribed under the terms of the Merger Agreement to the
Continental Merger Stock is $19.40 per share. The Continental Merger Stock
valuation was arrived at by Continental and Providence Journal as a result of
arm's length negotiations between the parties and does not necessarily reflect
the price at which a similar number of such shares would be sold to a third
party in a private transaction or the price at which such shares would trade
following the consummation of the Merger.
In order to protect the tax-free nature of the PJC Spin-Off and the Merger,
for a period of one year following the Effective Time, former Providence
Journal stockholders will not be able to transfer their Continental Merger
Stock except for transfers not for value to certain permitted transferees. (For
a full description of the Transfer Restrictions, see "The Merger--General
Provisions--Restrictions on Transfer of Continental Merger Stock".) As a
result, the Continental Merger Stock will be an illiquid security in the hands
of the former Providence Journal stockholders for at least one year following
the Merger.
Although Continental has agreed that by no later than one year from the
Effective Time the Continental Class A Common Stock will be listed on NASDAQ or
a national securities exchange, there can be no assurance that a significant
public market for the Continental Class A Common Stock will develop or be
sustained or that, if such market develops, the market price for the
Continental Class A Common Stock will equal or exceed the price at which such
shares were valued as of the date of the Merger Agreement, which value was
determined by arm's length negotiations. In addition, the stock market in
recent years has experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of a specific
company. These fluctuations could adversely affect the market price of the
Continental Class A Common Stock. (See "The Merger--Certain Covenants--
Registration Rights" and "Undertakings Regarding Public Offering".)
NO INTENTION TO PAY DIVIDENDS. Continental does not intend to pay cash
dividends on its common stock in the foreseeable future. In addition, under the
terms of certain of Continental's outstanding financing agreements, Continental
is subject to certain restrictions on paying cash dividends on its capital
stock. (See "Description of Continental Indebtedness" for a discussion of such
restrictions.)
REGULATION AND COMPETITION IN THE CABLE TELEVISION INDUSTRY. The cable
television industry is subject to extensive regulation on the federal, state
and local levels. Many aspects of such regulations are currently the subject of
judicial proceedings and administrative or legislative proposals. The 1992
Cable Act has significantly expanded the scope of cable television regulation.
The Federal Communications Commission ("FCC") was required to complete a number
of rule-making proceedings under the 1992 Cable Act, the majority of which,
including certain of those related to rate regulation, have been completed. In
particular, pursuant to the 1992 Cable Act, the FCC has adopted regulations
that permit franchising authorities to set rates for basic service and the
provision of cable-related equipment. To the extent that existing rates are
found to exceed those permitted by the FCC, franchising authorities will be
able to require cable television systems to reduce the rates and provide
refunds for up to a one-year period initially calculated from the effective
date of the FCC's regulations. The FCC will also, upon a complaint by a
customer or franchising authority, determine whether rates for regulated non-
basic service tiers (except for services offered on a per-channel or per-
program basis) are unreasonable and, if so found, reduce such rates and provide
refunds from the date of such complaint. In addition, the FCC's regulations, as
they now stand, limit a cable operator's ability to increase revenues by
increasing rates for regulated services. In addition, it is possible that,
pursuant to further review by the franchising authorities and the FCC, certain
additional rate reductions may be required. In order to resolve a variety of
significant regulatory issues and obtain more certainty in the regulatory
environment, Continental recently adopted a Social Contract with the FCC (the
"Social Contract"). The Social Contract extends through the year 2000 and
settles Continental's current rate cases. As part of the
23
resolution of these cases, Continental has agreed to (i) invest at least $1.35
billion in domestic system upgrades from 1995 through 2000 to expand channel
capacity and improve system reliability and picture quality and (ii) make in-
kind refunds to affected subscribers totaling approximately $9.5 million. (See
"Description of Continental--Regulatory Response" for a more detailed
description of the Social Contract.)
Various cable operators have initiated litigation challenging certain aspects
of the 1992 Cable Act. The constitutionality of the basic scheme of rate
regulation under the 1992 Cable Act has been upheld by a federal district
court, and the FCC's rate regulation rules were upheld by a federal appeals
court in June 1995. The outcome of the remainder of this litigation cannot be
predicted. Continental believes that the regulation of the cable television
industry, including the rates charged for regulated services under present FCC
rules and the cable industry's restructuring of rates and services in response
to the 1992 Cable Act, remains a matter of interest in Congress, the FCC and
other regulatory authorities. There can be no assurance as to what, if any,
future actions such legislative and regulatory authorities may take or the
effect thereof on Continental or the PJC Cable Business. (See "Description of
Continental--Management's Discussion and Analysis of Financial Condition and
Results of Operations of Continental", "Description of Providence Journal--
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Providence Journal" and "Legislation and Regulation".)
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
The 1992 Cable Act prohibits franchising authorities from granting exclusive
cable television franchises and from unreasonably refusing to award additional
competitive franchises; it also permits municipal authorities to operate cable
television systems in their communities without a franchise. Therefore, there
is a potential for competition with Continental's cable television systems from
these sources, as well as from other distribution systems capable of delivering
television programming to homes such as Multi-channel Multi-point Distribution
Service ("MMDS") and DBS services. Recent court and administrative decisions
have removed certain of the restrictions that have limited entry into the cable
television business by other potential competitors, such as telephone
companies, and proposals recently under consideration by Congress and cases
currently pending in the courts could result in the elimination of other such
restrictions. Continental cannot predict the extent to which competition will
materialize from other cable television operators, other distribution systems
for delivering television programming to the home or other potential
competitors, or the extent of its effect on Continental or the PJC Cable
Subsidiaries. (See "Description of Providence Journal Cable Television
Business--Competition", and "Description of Continental--Competition" and
"Legislation and Regulation".)
SUBSTANTIAL LEVERAGE AND HISTORY OF LOSSES. Continental is highly leveraged
due to the substantial indebtedness it has incurred over time primarily to
finance acquisitions and expand its operations and, to a lesser extent, to
repurchase shares of its capital stock. As of June 30, 1995, Continental's
aggregate debt was $3,728,101,000. After giving effect to the Merger and
certain other acquisitions described herein, as of June 30, 1995, Continental's
aggregate debt on a pro forma basis would have been $4,921,251,000. Continental
may incur additional indebtedness to make investments, acquisitions and capital
expenditures in the future and to satisfy its obligations in 1998 and 1999
under its stockholder liquidity program, among other things. (See "Description
of Continental--Management's Discussion and Analysis of Financial Condition and
Results of Operations of Continental--Liquidity and Capital Resources--Recent
Stock Repurchases and 1998-1999 Share Repurchase Program".) Continental
anticipates that, in light of the amount of its existing indebtedness, it will
continue to have substantial leverage for the foreseeable future.
Continental has a history of net losses, which have contributed to its
stockholders' deficiency of $1,725,035,000 as of June 30, 1995. Continental
reported net losses from continuing operations, before extraordinary items and
the cumulative effect of the change in accounting for income taxes, of
$25,774,000 and $68,576,000 for the years ended December 31, 1993 and 1994,
respectively, and $33,067,000 for the six months ended June 30, 1995. After
giving effect to the Merger and certain other acquisitions described herein,
Continental would have reported losses from continuing operations before
extraordinary item of
24
$84,151,000 and $44,225,000 for the year ended December 31, 1994 and the six
months ended June 30, 1995, respectively. (See "Description of Continental--
Unaudited Pro Forma Condensed Financial Statements".) The high level of
depreciation and amortization associated with Continental's acquisitions and
capital expenditures related to continued construction and rebuilding of
Continental's systems and interest costs related to its financing activities
will cause Continental to continue to report net losses for the foreseeable
future. Effective January 1, 1993, Continental implemented the provisions of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") and recognized an additional charge of $184,996,000 for deferred income
taxes for the year ended December 31, 1993. (See "Description of Continental--
Selected Consolidated Financial Information of Continental", "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Continental".)
Historically, cash generated from Continental's operating activities in
conjunction with borrowings and proceeds from private equity issuances has been
sufficient to meet its debt service requirements, stock repurchase obligations
and acquisition, investment and capital expenditure requirements. Continental
believes that cash generated from operating activities, together with
borrowings from existing and future credit facilities and proceeds from future
equity issuances, will be sufficient to meet its future debt service
requirements and stock repurchase obligations, and to make anticipated
acquisitions, investments and capital expenditures. However, there can be no
assurances in this regard. Continental anticipates that it will offer shares of
its capital stock in a private or public offering in the future. (See "The
Merger--Certain Covenants--Undertakings Regarding Public Offering".) There can
be no assurances in this regard or that any such future equity issuance would
be at a price per share equal to or greater than the price per share ascribed
to the Continental Class A Common Stock under the terms of the Merger
Agreement. Furthermore, there can be no assurances that the terms available for
any future debt financing would be favorable to Continental. (See "Description
of Continental--Management's Discussion and Analysis of Financial Condition and
Results of Operations of Continental--Liquidity and Capital Resources".)
POTENTIAL FOR EARLY REDEMPTION OF CERTAIN SECURITIES. Continental is required
to repurchase in late 1998 or early 1999 a maximum of 16,684,150 shares of the
Continental Common Stock from certain stockholders at a purchase price
determined in accordance with a formula based upon the then current fair market
value of the Continental Common Stock. (See "Description of Continental--
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Continental--Liquidity and Capital Resources--Recent Stock
Repurchases and 1998-1999 Share Repurchase Program".) In the event Continental
is unable to repurchase such shares, it is obligated at the request of certain
of such stockholders to use its best efforts (subject to compliance with
applicable laws and regulations) to cause the sale of all or substantially all
of the assets of Continental and, following the consummation of such sale, to
liquidate Continental. In addition, holders of certain of Continental's
outstanding debt securities may, under certain circumstances, require
Continental to redeem such securities as a result of any such share repurchase.
All shares of Continental Common Stock would share equally in the proceeds of
liquidation, after all payments are made or set aside for holders of
indebtedness and Continental Preferred Stock; provided, however, there can be
no assurance that any such liquidation proceeds would remain following payments
to holders of indebtedness and Continental Preferred Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Upon the consummation of the Merger, giving
effect to the Continental Recapitalization Amendment and the Continental Stock
Split, there will be 39,411,107 shares of Continental Class A Common Stock,
109,196,050 shares of Continental Class B Common Stock and 1,142,858 shares of
Continental Series A Preferred Stock outstanding. Of such shares, the
30,725,207 shares of Continental Class A Common Stock to be issued to
Providence Journal stockholders pursuant to the Merger, will be freely
tradeable after the expiration of the Transfer Restrictions, without
restriction or registration under the Securities Act, except for shares issued
to current "affiliates" of Providence Journal, who are subject to the
limitations imposed by Rule 145 under the Securities Act. The remaining shares
of Continental Class A Common Stock, all of the shares of Continental Class B
Common Stock and all of the shares of Continental Series A Preferred Stock
currently outstanding are "restricted securities" as they have not been
registered under the Securities Act.
25
Only the Continental Class A Common Stock will be listed and traded in the
public market. Treating the Continental Class B Common Stock and the
Continental Series A Preferred Stock as if all outstanding shares thereof were
converted into Continental Class A Common Stock, (i) there would be
approximately 143,397,450 shares of restricted Continental Class A Common Stock
outstanding (excluding any unvested shares granted as part of incentive
compensation to officers of Continental and its subsidiaries) and, (ii) of such
shares, (x) immediately following the effective date (the "Registration
Effective Date") of the Registration Statement for the Continental Merger
Stock, of which this Joint Proxy Statement-Prospectus forms a part (the
"Continental Registration Statement"), approximately 44,746,525 shares would be
eligible for sale without regard to volume or certain other limitations under
Rule 144 of the Securities Act and (y) beginning 90 days after the Registration
Effective Date, approximately 94,499,900 shares would be eligible for sale,
subject to compliance with volume and other limitations under Rule 144. The
remaining shares of currently outstanding Continental Class A Common Stock or
shares of Continental Class A Common Stock issuable upon conversion of
currently outstanding convertible securities (including the outstanding shares
of Continental Class B Common Stock) would become eligible for sale at various
times thereafter. In addition, certain Continental stockholders have demand or
"piggyback" registration rights with respect to certain of their shares. (See
"Continental Shares Eligible for Future Sale--Outstanding Registration
Rights".)
No predictions can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price for
the Continental Class A Common Stock prevailing from time to time. Sales of
substantial numbers of shares of Continental Class A Common Stock in the public
market could adversely affect the market price of the Continental Class A
Common Stock.
VOTING CONTROL OF CONTINENTAL; DILUTION. The Continental Class A Common Stock
entitles its holders to one vote per share on all matters submitted generally
to a vote of Continental's stockholders, while the Continental Class B Common
Stock entitles its holders to 10 votes per share. Accordingly, the holders of
the Continental Class B Common Stock, including the holders of the Continental
Series A Preferred Stock, which vote as if they had converted into Continental
Class B Common Stock, will have sufficient voting power to determine the
outcome of most matters submitted to the stockholders for approval. After
giving effect to the Continental Stock Split, the holders of Continental Series
A Preferred Stock will vote as if they had converted each of their shares into
25 shares of Continental Class B Common Stock (i.e., 250 votes per share of
Continental Series A Preferred Stock). If the holders of the Continental Series
A Preferred Stock transfer their shares to persons other than certain permitted
transferees, the new holders will vote as if each of their shares of
Continental Series A Preferred Stock had been converted into 25 shares of
Continental Class A Common Stock (i.e., 25 votes per share of Continental
Series A Preferred Stock). (See "Description of Continental Capital Stock".)
Assuming that the Merger and the related transactions were consummated as of
the date hereof and all PJC Cable Subsidiaries were wholly owned by Providence
Journal, the holders of Providence Journal Common Stock would own shares,
representing approximately 17.3% of the Continental Common Stock (treating the
Continental Series A Preferred Stock as if it were converted into Continental
Class B Common Stock) and approximately 2.2% of the voting power of
Continental. As a result of the Merger, the existing holders of Continental
Common Stock and Continental Series A Preferred Stock will incur dilution in
their ownership of Continental and in their voting power. However, management
of Continental believes that this dilution in equity ownership is offset by the
benefits of expanded operating scale and system clusters and the resultant
efficiencies generating therefrom. Nevertheless, there can be no assurances in
this regard.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF CONTINENTAL'S RESTATED
CERTIFICATE AND BY-LAWS. Certain provisions of the Continental Restated
Certificate and the Continental By-Laws could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding capital stock of Continental and could
make it more difficult to consummate certain types of transactions involving an
actual or potential change in control of Continental, such as a merger, tender
offer or proxy contest. (See "Description of Continental Capital Stock--DGCL
and Certain Provisions of the Continental Restated Certificate and the
Continental By-Laws".) The most significant of these is the disparate voting
rights of the Continental Class B Common Stock and the Continental Series A
Preferred
26
Stock described above. The Continental Restated Certificate also provides for
three classes of Directors to be elected on a staggered basis--one class each
year--which enables existing management to exercise significant control over
Continental's affairs. Certain institutional investors have the right, under
certain circumstances, to designate nominees to stand for election to
Continental's Board of Directors. (See "Description of Continental--Directors,
Executive Officers and Other Officers of Continental".) Pursuant to the
Continental Restated Certificate, shares of Continental Preferred Stock may be
issued in the future without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine.
RELIANCE ON KEY PERSONNEL. Continental's success is partially dependent upon
the continued availability of the services of certain key individuals,
including Amos B. Hostetter, Jr., Chairman of the Board of Directors and Chief
Executive Officer of Continental. Continental does not have employment
contracts with, nor does it maintain key man insurance on, any of its executive
officers.
RISKS ASSOCIATED WITH INTERNATIONAL INVESTMENTS. Continental has made
investments in foreign cable companies and intends to continue to consider
investments in companies located outside the United States. (See "Description
of Continental--International Operations".) Such investments are subject to
risks and uncertainties relating to the indigenous political, social and
economic structures of those countries. Risks specifically related to
investments in foreign companies may include risks of fluctuations in currency
valuation, expropriation, confiscatory taxation and nationalization, increased
regulation and approval requirements and governmental policies limiting returns
to foreign investors.
RISK FACTORS ASSOCIATED WITH THE PJC SPIN-OFF AND THE MERGER
Consummation of the PJC Spin-Off, the Merger and related transactions is
conditioned upon the receipt of a favorable ruling from the Service and an
opinion of counsel to Providence Journal as to certain of the federal income
tax consequences of the transactions. (See "Certain Federal Income Tax
Considerations".)
RISK FACTORS RELATED TO THE NEW PROVIDENCE JOURNAL COMMON STOCK
STAND-ALONE COMPANY. New Providence Journal was recently incorporated in
Delaware for the purpose of effecting the PJC Spin-Off and the Merger and does
not have any operating history. However, the PJC Publishing Business and the
PJC Broadcasting Business have substantial operating histories. (See
"Description of Providence Journal Publishing Business" and "Description of
Providence Journal Broadcast Television Business".)
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE NEW PROVIDENCE JOURNAL
CERTIFICATE AND BY-LAWS AND THE NPJ RIGHTS AGREEMENT. Certain provisions of the
New Providence Journal Certificate and the New Providence Journal By-Laws could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding capital stock of New Providence Journal. These
provisions include the disparate voting rights of New Providence Journal Class
A Common Stock and New Providence Journal Class B Common Stock, and the
division of the New Providence Journal Board of Directors into three classes to
be elected on a staggered basis, one class each year. In addition, the NPJ
Rights Agreement provides stockholders of New Providence Journal with certain
rights which would substantially increase the cost of acquiring New Providence
Journal in a transaction not approved by the New Providence Journal Board of
Directors. (See "Description of New Providence Journal Common Stock".)
INDEMNIFICATION FOR TAX LIABILITIES AND TAX MATTERS. The Merger Agreement
provides that New Providence Journal will retain responsibility for all federal
and state income tax liabilities of Providence Journal and its subsidiaries for
periods ending on or before the closing of the transactions contemplated by the
Merger Agreement ( the "Closing Date"), including income tax liabilities
resulting from any failure of the PJC Spin-Off and the Merger to qualify as
tax-free reorganizations under the Code, unless such failure to qualify is the
result of certain actions by Continental. New Providence Journal will indemnify
Continental for all such tax liabilities including, without limitation,
approximately $120 million in tax liabilities due as a result of the King Cable
Purchase. (See "Certain Federal Income Tax Considerations".)
27
DEPENDENCE ON CERTAIN EXTERNAL FACTORS. The operating results of both the PJC
Publishing Business and the PJC Broadcasting Business are primarily dependent
on advertising revenues which, in turn, depend on national and local economic
conditions, the relative popularity of Providence Journal's publications and
programming, the demographic characteristics of Providence Journal's markets,
the activities of competitors and other factors which are outside of New
Providence Journal's control.
RELIANCE ON KEY PERSONNEL. New Providence Journal's success will be partially
dependent upon the continued availability of the services of certain key
individuals, including Stephen Hamblett, Chairman of the Board and Chief
Executive Officer of Providence Journal. Providence Journal does not have
employment contracts with, nor does it maintain key man insurance on any of its
executive officers.
SUBSTANTIAL LEVERAGE. After completion of the PJC Spin-Off and the Merger,
New Providence Journal will have consolidated indebtedness of approximately
$285,000,000, an amount that represents a significant portion of New Providence
Journal's overall borrowing capacity. The degree to which New Providence
Journal is leveraged could have important consequences to holders of the New
Providence Journal Common Stock including, but not limited to, the following:
(i) New Providence Journal's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate or other purposes may be limited; (ii) a significant portion of New
Providence Journal's cash flow from operations will be dedicated to the payment
of the principal of, and interest on, its debt; (iii) the agreements governing
New Providence Journal's long-term debt may contain certain restrictive
financial and operating covenants that could limit New Providence Journal's
ability to compete and its ability to expand; (iv) as compared to a less
leveraged entity, New Providence Journal may be more vulnerable to economic
downturns, unable to withstand competitive pressures and less flexible in
responding to changing business and economic conditions. The ability of New
Providence Journal to satisfy its debt obligations will be dependent on the
future operating performance of New Providence Journal, which could be affected
by changes in economic conditions and other factors, including factors beyond
the control of New Providence Journal. If stockholders seek increases in
dividends, share repurchases or other actions to provide stockholder liquidity,
such actions would further adversely affect New Providence Journal's operations
and growth. New Providence Journal anticipates that it will have substantial
leverage for the foreseeable future.
NO PRIOR OR EXPECTED PUBLIC MARKET FOR COMMON STOCK. Prior to the
consummation of the Merger, there has been no public market for the New
Providence Journal Common Stock. In order to protect the tax-free nature of the
Merger, for a period of one year following the Effective Time, former
Providence Journal stockholders will not be able to transfer the shares of New
Providence Journal Common Stock received in the PJC Spin-Off, except for
transfers not for value to certain permitted transferees. (For a full
description of the NPJ Transfer Restrictions, see "The Merger--General
Provisions--Restrictions on Transfer of Continental Merger Stock" and
"Restrictions on Transfer of New Providence Journal Common Stock".) The New
Providence Journal Common Stock will not be listed on any securities exchange.
It is not anticipated that an active trading market will develop for the New
Providence Journal Common Stock after expiration of the NPJ Transfer
Restrictions. If any market develops, prices for the New Providence Journal
Common Stock will be determined in the marketplace and may be influenced by
many factors, including the operating performance of New Providence Journal,
the depth and liquidity of the market for the New Providence Journal Common
Stock, investor perception of New Providence Journal and general economic and
market conditions.
DECLINING NEWSPAPER CIRCULATION. Providence Journal's principal newspaper,
The Providence Journal-Bulletin, has experienced declining circulation since
1990. Providence Journal believes that this decline is attributable to a number
of factors, including growing reliance upon television and other electronic
media for news and other current information and an influx of non-English
speaking residents into the newspaper's geographic market. There can be no
assurance that this decline in circulation will not continue at the same or at
an accelerated pace in the future. If this decline continues, the operations
and financial condition of New Providence Journal could be materially adversely
affected.
28
INCREASING NEWSPRINT COSTS. Newsprint costs have historically accounted for
between 16% and 24% of the total operating expenses of Providence Journal's
newspapers. Newsprint prices move in cycles associated with the capacity of
paper mills and newspaper industry demand. Currently newsprint prices are
increasing significantly, and industry analysts expect this trend to continue
at least through 1995. There can be no assurance as to when or at what level
such increases will cease. If such increases continue for a substantial period
of time at sufficiently high levels, the operations and financial condition of
New Providence Journal could be materially adversely affected.
NETWORK AFFILIATION; RELIANCE ON NETWORK PROGRAMMING. Four of Providence
Journal's nine owned or partially owned television stations are currently
affiliated with the National Broadcasting Company Incorporated ("NBC")
television network, three are affiliated with the Fox Broadcasting Company
("Fox"), one is affiliated with the American Broadcasting Company ("ABC")
television network and one is affiliated with the CBS, Inc. ("CBS") television
network. Providence Journal's television viewership levels are materially
dependent upon programming provided by these major networks. There can be no
assurance that such programming will achieve or maintain satisfactory
viewership levels in the future. Each of Providence Journal's stations is a
party to an affiliation agreement with one of the networks giving the station
the right to rebroadcast programs transmitted by the network. Under the
affiliation agreements, the networks possess, in the event of a material breach
by the station and in certain other similar circumstances, the right to
terminate the agreement on prior written notice. Although New Providence
Journal expects that it will be able to renew its network affiliation
agreements, no assurance can be given that such renewals will be obtained. The
non-renewal or termination of one or more of the network affiliation agreements
could have a material adverse effect on New Providence Journal's operations.
COMPETITION IN THE TELEVISION INDUSTRY; IMPROVEMENTS AND INNOVATIONS IN
TECHNOLOGY. The television broadcasting industry has become increasingly
competitive in recent years with the growth of cable television, new broadcast
networks, satellite dishes, MMDS, pay-per-view programs and the proliferation
of video cassette recorders ("VCRs") and VCR movie rentals. These changes have
fractionalized television viewing audiences, and this trend is likely to
continue in the future. In addition, technological developments such as DBS,
"high definition" and "interactive" television may impose additional costs and
competitive pressures on New Providence Journal. In addition to competing with
other media outlets for audience share, Providence Journal's stations also
compete for advertising revenues, which will comprise the primary source of
revenues for New Providence Journal. Providence Journal's stations compete for
such advertising revenues with other television stations in their respective
markets, as well as with other advertising media, such as newspapers, radio
stations, magazines, outdoor advertising, transit advertising, yellow page
directories, direct mail and local cable television systems. Providence
Journal's television stations are located in highly competitive markets.
Accordingly, New Providence Journal's results of operations will be dependent
upon the ability of each station to compete successfully in its market, and
there can be no assurance that any one of New Providence Journal's stations
will be able to maintain or increase its current audience share or advertising
revenue share. To the extent that certain of its competitors have or may, in
the future, obtain greater resources than New Providence Journal, New
Providence Journal's ability to compete successfully in its broadcasting
markets may be impeded.
GOVERNMENT REGULATIONS. Providence Journal's television operations are
subject to significant regulation by the FCC under the Communications Act of
1934, as amended (the "Communications Act"). A television station may not
operate without the authorization of the FCC. Approval of the FCC is required
for the issuance, renewal and transfer of station operating licenses. In
particular, New Providence Journal's business will be dependent upon its
continuing to hold television broadcasting licenses from the FCC, which are
issued for terms of five years. While in the vast majority of cases such
licenses are renewed by the FCC, there can be no assurance that New Providence
Journal's licenses will be renewed at their expiration dates, or, if renewed,
that the renewal terms will be for five years. The non-renewal or revocation of
one or more of New Providence Journal's FCC licenses could have a material
adverse effect on New Providence Journal's operations. Congress and the FCC
currently have under consideration and may in the future adopt new laws,
29
regulations and policies regarding a wide variety of matters which could,
directly or indirectly, affect the operations and ownership of New Providence
Journal's broadcast properties. New Providence Journal is unable to predict the
impact which any such laws or regulations may have on its operations.
RISKS ASSOCIATED WITH NEW BUSINESSES. Providence Journal has invested amounts
which are significant in the aggregate in various start-up businesses,
including Television Food Network, G.P. (a cable television network ("TVFN"))
and Linkatel Pacific, L.P. (an alternate access telephone company
("Linkatel")), and intends to make more of such investments in the future. The
prospects of such businesses, which will be held by New Providence Journal,
must be considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business in an emerging and evolving
industry characterized by new market entrants, intense competition and new and
rapidly evolving technology.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
TREATMENT OF CERTAIN EMPLOYEE STOCK OPTION AND INCENTIVE COMPENSATION
ARRANGEMENTS. As of the Effective Time, New Providence Journal will assume the
following stock incentive plans of Providence Journal: (i) the 1994 Employee
Stock Option Plan; (ii) the 1994 Non-Employee Director Stock Option Plan; and
(iii) the Restricted Stock Unit Plan (collectively, the "Providence Journal
Stock Incentive Plans"). For a description of certain aspects of the Providence
Journal Stock Incentive Plans, see "Description of Providence Journal and New
Providence Journal--Stock Incentive Plans of Providence Journal Assumed by New
Providence Journal".
TREATMENT OF OUTSTANDING STOCK OPTIONS. In connection with the PJC Spin-Off,
New Providence Journal will assume the 1994 Employee Stock Option Plan and the
1994 Non-Employee Director Stock Option Plan (the "Providence Journal Option
Plans"). In addition, as of the Effective Time, each stock option outstanding
under either of the Providence Journal Option Plans that is not exercised prior
to the Effective Time will be assumed by New Providence Journal (the "Assumed
Options"). The vesting schedule of Assumed Options will not be affected by the
PJC Spin-Off and the Merger. All references in the Assumed Options to
Providence Journal and Providence Journal Class A Common Stock will be deemed
to refer to New Providence Journal and New Providence Journal Class A Common
Stock, respectively.
Pursuant to the adjustment provisions of the Providence Journal Option Plans,
the aggregate number and class of shares that may be issued under the
Providence Journal Option Plans and the number and class of and/or price of
shares subject to the Assumed Options will be adjusted, as deemed appropriate
in the discretion of the Executive Committee, to prevent the dilution or
enlargement of rights of any participant under the Providence Journal Option
Plans as a result of the assumption thereof by New Providence Journal.
TREATMENT OF OUTSTANDING RESTRICTED STOCK. In connection with the PJC Spin-
Off, New Providence Journal will assume the Providence Journal Restricted Stock
Unit Plan and will assume each restricted stock unit award that is subject to
vesting conditions under the Providence Journal Restricted Stock Unit Plan (the
"Assumed Awards"). All references in the Assumed Awards to Providence Journal
and Providence Journal Class A Common Stock will be deemed to refer to New
Providence Journal and New Providence Journal Class A Common Stock,
respectively. The vesting schedule of Assumed Awards will not be affected by
the PJC Spin-Off and the Merger. Pursuant to certain provisions of the
Providence Journal Restricted Stock Unit Plan, participants will be entitled to
adjustments in the number of units in order to make the awards for New
Providence Journal participants comparable to the awards for current
participants, given the structure and size of New Providence Journal.
TREATMENT OF PROVIDENCE JOURNAL RETIREMENT PLANS. Prior to the Merger, New
Providence Journal will assume the following tax-qualified retirement plans
maintained by Providence Journal: (i) the Providence Journal Retirement Plan;
(ii) the Journal Guild 401(k) Plan, a qualified profit-sharing plan providing
supplementary pension benefits for members of the Providence Journal Newspaper
Guild; and (iii) the Journal 401(k) Plan (collectively, the "Providence Journal
Retirement Plans"). The foregoing plans cover the
30
employees of most of Providence Journal's operating units. Participants in the
Providence Journal Retirement Plans who become employees of New Providence
Journal will continue as participants following the PJC Spin-Off and the
Merger, and their service and salary, if applicable, with Providence Journal
prior to the Effective Time will be counted in determining eligibility,
benefits and vesting under the Providence Journal Retirement Plans when assumed
by New Providence Journal.
PROVIDENCE JOURNAL INCENTIVE STOCK UNIT PLAN. While not contingent upon the
PJC Spin-Off or the Merger, the Providence Journal Incentive Stock Unit Plan
will be terminated and liquidated upon the next independent appraisal of
Providence Journal Class A Common Stock, which is anticipated to be prior to
the consummation of the Merger. (See "Description of Providence Journal and New
Providence Journal--Executive Compensation--Providence Journal Incentive Stock
Unit Plan".)
TREATMENT OF PROVIDENCE JOURNAL CABLE DIVISION EMPLOYEES. The Cable Division
Sale Bonus Plan is designed to retain certain of Providence Journal's cable
executives and to provide incentives to such executives to maximize the
operating performance of the cable business pending completion of the Merger
with bonuses payable only if the Merger is consummated. Those eligible to
receive awards under the Cable Division Sale Bonus Plan are certain key
officers of the PJC Cable Business. Subject to certain conditions, the
participants are eligible to receive a share of a bonus pool in the following
amount: (i) $2.1 million if the 1994 cash flow objective of $123.6 million for
the PJC Cable Business is achieved, and (ii) 50% of any 1994 cash flow in
excess of the 1994 cash flow objective. As of the date hereof, eligible
employees would receive $5.2 million, subject to downward adjustment by a
maximum of 20%, based upon a graduated scale, if the 1995 cash flow objective
of $123.6 million is not met (pro rated for the portion of 1995 which has
elapsed at the time of the Closing of the Merger). Any significant unforeseen
changes that might positively or negatively affect the cash flow of the PJC
Cable Business, such as new statutes or regulations, will be excluded from the
performance measurement. Bonus payments will be pro-rated for actual
performance with respect to the 1995 objective. The Cable Division Sale Bonus
Plan supersedes any other award that the participant may be eligible for
pursuant to any other long-term incentive plan of Providence Journal or the PJC
Cable Business. New Providence Journal shall be responsible for all payments
made under the Cable Division Sale Bonus Plan.
31
BACKGROUND OF THE TRANSACTIONS
CONTINENTAL'S REASONS FOR THE MERGER; RECOMMENDATION OF CONTINENTAL BOARD OF
DIRECTORS
At the meeting of the Board of Directors of Continental held on November 17,
1994, the Continental Board received a presentation by members of Continental
management and its legal advisors regarding, and reviewed the terms of, the
Merger Agreement and the transactions contemplated thereby. By unanimous vote
of Directors, the Continental Board determined that the Merger is fair to, and
in the best interests of, Continental and its stockholders, approved the Merger
and the Continental Recapitalization Amendment, and resolved to recommend that
stockholders of Continental vote FOR approval and adoption of the Merger
Agreement and each of the transactions contemplated thereby and FOR approval
and adoption of the Continental Recapitalization Amendment.
In reaching its determination, the members of the Continental Board
considered the following factors: (i) the Continental Board's familiarity with
and review of Continental's business, operations, financial condition, earnings
and prospects; (ii) the business, operations, financial condition and earnings
of the PJC Cable Business; (iii) the enhanced prospects and opportunities for
growth that the Merger makes possible, including increases in Continental's
operating scale, system clustering, and operating income; (iv) the anticipated
cost savings and efficiencies arising from the Merger; and (v) the terms of the
Merger Agreement.
Continental was assisted in its deliberations and negotiations with respect
to the Merger and the related transactions by its investment advisor, Lazard
Freres & Co. LLC ("Lazard"). Lazard advised Continental as to valuation matters
concerning both the PJC Cable Business and the Continental Merger Stock. In
considering the value of $19.40 per share ascribed to the Continental Merger
Stock, members of the Continental Board considered that the Continental Class A
Common Stock had most recently sold in privately negotiated transactions,
including issuances by Continental, at $19.40 per share, giving effect to the
Continental Stock Split.
In reaching its determination, the Continental Board of Directors did not
find it practicable to quantify any specific factor such as anticipated cost
savings and efficiencies or assign relative weights to the specific factors
considered in making its determination. Instead, the Continental Board
considered these factors as a whole in reaching its determination that the
Merger is fair to, and in the best interests of, Continental and its
stockholders.
On August 3, 1995, the Executive Committee of the Board of Directors of
Continental approved certain amendments to the Merger Agreement resulting from
the notification by the Service that a tax ruling that would have rendered the
transactions completely tax-free to Providence Journal would not be issued.
(See "Providence Journal's Reasons for the PJC Spin-Off and the Merger".) Such
amendments are immaterial to Continental and its stockholders and do not affect
the Board's determination that the Merger is fair to, and in the best interests
of, Continental and its stockholders.
THE BOARD OF DIRECTORS OF CONTINENTAL UNANIMOUSLY RECOMMENDS THAT CONTINENTAL
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR
APPROVAL AND ADOPTION OF THE CONTINENTAL RECAPITALIZATION AMENDMENT.
PROVIDENCE JOURNAL'S REASONS FOR THE PJC SPIN-OFF AND THE MERGER
BACKGROUND. Commencing in July 1991, Providence Journal undertook a
comprehensive strategic planning process that focused on its corporate
structure and the proper positioning of its business units. Goldman, Sachs &
Co. ("Goldman Sachs") was retained to assist management and the Board of
Directors in this process. By August 1993, the Board of Directors of Providence
Journal had determined that the creation of a stand-alone company to house the
PJC Cable Business, which would probably be widely owned following an initial
public offering, was in the best long-term strategic interest of Providence
Journal. This approach was deemed advisable for a number of business, financial
and operating reasons, including the following:
32
. The PJC Cable Business would require expansion on a relatively near-term
basis and would have enhanced operating flexibility.
. Both debt and equity capital would be more easily raised at the lowest
possible cost in a stand-alone cable television company.
. Taking the cable television company public would open up the cable
television company to the public capital markets.
. A separate cable television company would be more likely to attract
strategic investors and would be in a better position to merge with other
companies whose operations are compatible.
. Even if the cable television company were to go public, the newspaper
business could remain in private hands and maintain its traditional
independence.
. A public cable television company would provide a marketable security for
approximately 60% of the value of Providence Journal.
An important ingredient in the anticipated success of the separate cable
television company was an enhanced ability to attract a strategic investor,
particularly a telecommunications company, which would provide capital and
expertise in telephony, digital switching and the handling of a continuous
stream of rapidly-occurring electronic transactions. In this connection,
Providence Journal retained Bear Stearns to concentrate its efforts on finding
such a strategic investor for the new cable television company.
In the fall of 1993, the proposed merger of Bell Atlantic Corporation ("Bell
Atlantic") and Tele-Communications, Inc. ("TCI"), as well as a number of other
announced cable television industry transactions, confirmed Providence
Journal's view that a repositioning of the PJC Cable Business was necessary in
order to remain competitive. The cable television industry was undergoing
significant change due to factors such as technological advances and increased
consumer demand for services. The deployment of fiber-optic cable, advances in
the digitization of information and the expected deployment of new
technologies, such as "on-demand" programming, video games, home shopping and
interactive programming, as well as the opening of telecommunications services
to competition from the cable television industry, required new technical
expertise and substantial capital to build or upgrade physical plant. At the
same time, the adoption of the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the regulations subsequently
promulgated thereunder, adversely affected the financial characteristics of the
industry. In response to these factors, Providence Journal's objective was to
position the new cable television company to develop the necessary resources to
grow in the rapidly evolving cable television industry environment.
The effort to find an appropriate partner for the stand-alone cable
television company continued throughout late 1993 and the first several months
of 1994. The break-up of the Bell Atlantic/TCI deal and the promulgation of
increasingly stringent rate regulation by the FCC in early 1994, however,
resulted in a dampening of interest by telecommunications companies in cable
television investments. In addition, the relatively small size of the PJC Cable
Business made it difficult to arrange a suitable transaction with a large
telecommunications company. In an effort to address this problem, Providence
Journal embarked on a series of negotiations with other medium-sized cable
television companies with a view to forming joint ventures controlling enough
cable television subscribers to meet the operating scale requirements of the
telecommunications companies. These negotiations ultimately were not
successful, as the mutual valuations of the respective cable television
companies involved proved problematic.
THE MERGER. In June 1994, the management of Providence Journal decided that
any effort to effect an initial public offering of the cable television company
was not appropriate, and it was decided that a combination of the PJC Cable
Business with a strategic partner should be pursued. Apart from the relatively
adverse public market conditions that existed at the time, the concept of an
initial public offering by a separate company holding the PJC Cable Business
was not pursued because management determined that the PJC Cable Business
standing alone, whether privately or publicly owned, was not large enough to
develop and
33
grow successfully in the newly emerging environment surrounding the cable
television industry. Instead, by June 1994, a combination with a larger cable
television operator had emerged as the best strategic course of action. With
the approval of the Board of Directors, Bear Stearns was retained as financial
advisor, and a detailed Confidential Information Memorandum with respect to the
PJC Cable Business was prepared by Bear Stearns and Providence Journal's
management in June and July, 1994. This Confidential Information Memorandum
included a description of various aspects of the PJC Cable Business including
operating strategy, systems and technology, sales and marketing, facilities,
management, financial statements, franchise information and clustering data. At
the same time, Bear Stearns and Providence Journal initiated discussions with
the Kelso Partnerships regarding the purchase by Providence Journal of their
interest in KHC. Providence Journal wanted to acquire 100% ownership of KHC in
order to include the cable television properties owned by KHC within the PJC
Cable Business for combination with potential merger partners. The Confidential
Information Memorandum was distributed in August 1994 to interested parties. In
September 1994, business, financial and legal due diligence was conducted by
potential merger partners and a letter was distributed by Bear Stearns setting
forth the procedures and timetable for submission by potential merger partners
of written indications of interest. Written indications of interest were
received from three cable television companies on October 3, 1994, one of which
was Continental.
With the assistance of Bear Stearns, Providence Journal conducted a detailed
review of the advantages and disadvantages of each of the three proposals. A
special meeting of Providence Journal's Board of Directors was held on Friday,
October 7, 1994, attended by a substantial majority of the Board, senior
executive officers of Providence Journal, representatives of Bear Stearns and
outside counsel for Providence Journal. At the meeting, Providence Journal's
management and Bear Stearns' representatives compared the indications of
interest from the standpoint of their nominal value, likelihood of closing,
certainty that the indicated nominal value would be the actual value received
by stockholders, long-term prospects of the potential merger partner and
relative marketability of the stock of the potential merger partner. One
indication of interest was judged to be inadequate on price and was not
discussed in detail. After review of all facets of the remaining two
indications of interest, the Board of Directors authorized management to
continue its discussions and to select one of the potential merger partners to
negotiate with on an exclusive basis over the weekend. Management determined
that the Continental proposal, which included the highest price, best met the
criteria Providence Journal sought to fulfill: nominal value and certainty that
such nominal value would represent actual value to be received, likelihood of
closing, long-term strength and prospects of the merger partner and
marketability of the securities to be received. Management thereafter
negotiated with Continental throughout the weekend and obtained an increase in
Continental's original indication of interest from $1.37 billion to $1.4
billion. Thereafter, the parties reached agreement on a letter of intent, which
was signed on October 12, 1994. From that point onward, until the failure to
obtain the tax ruling on the Original Providence Journal Transactions, as
discussed below, there was no further negotiation of the overall price to be
paid by Continental. Based on the estimated trading price of Continental Common
Stock at $19.40 per share and the various factors noted below under
"Recommendation of Providence Journal Board of Directors," Providence Journal's
management determined that the transaction should be pursued as agreed on
October 12th. A special meeting of the Board of Directors was held on October
12th at which all Directors were present along with the senior executive
officers of Providence Journal, the head of the PJC Cable Business and his
financial team and representatives of Bear Stearns. Bear Stearns presented a
detailed summary of the proposed transaction and presented various valuation
and financial analyses, as detailed under "Opinion of Financial Advisor to
Providence Journal" below. The Board of Directors then approved in principle
the proposed transaction and, pursuant to the letter of intent, authorized
management to negotiate with Continental exclusively for a thirty-day period on
a definitive merger agreement.
As a result of the parallel discussions conducted with the Kelso Partnerships
commencing in the summer of 1994, on October 25, 1994, Providence Journal
entered into a letter of intent with the Kelso Partnerships to purchase their
interest in KHC for $265 million, including $5 million in transaction fees,
contingent upon closing the proposed transaction with Continental, and this
letter of intent was approved by the Board of Directors at a meeting on October
26, 1994.
34
The purchase price of the Kelso Partnerships' interest in KHC represented a
combined purchase price for both KHC's cable television and broadcast
television businesses, net of consolidated debt, expenses related to the Kelso
Buyout and a pro rata share of transaction costs for the Merger and the related
transactions. The portion of the Kelso Buyout purchase price represented by the
King Cable Business was set at an amount equal to the pro rata portion of the
aggregate purchase price Continental agreed to pay for the PJC Cable Business
as a whole (including the King Cable Business) attributable to such assets. The
purchase price of the Kelso Partnerships' interest in KHC also included a
negotiated value for the KHC broadcast television business based on a multiple
of cash flow appropriate to that industry in the opinion of Providence Journal
management. Since both Providence Journal and the Kelso Partnerships had been
closely associated with KHC's cable television and broadcasting businesses for
several years, a relatively simple stock purchase agreement was executed by the
parties on January 18, 1995 after certain regulatory issues with respect to a
transaction not involving Providence Journal had been addressed by the Kelso
Partnerships.
On October 20, 1994 the legal advisors and certain members of management, not
including senior management, of Continental and Providence Journal met in
Providence, Rhode Island to negotiate the more technical aspects of the
proposed merger agreement. Among the matters addressed were the scope of the
representations and warranties, covenants, closing conditions and other terms
and conditions which are customary in such agreements. In addition, a number of
substantive business issues were identified for resolution by senior
management.
On October 26, 1994 the senior management of each company, including Amos B.
Hostetter, Jr., Chairman and Chief Executive Officer of Continental, and
Stephen Hamblett and Trygve Myhren, Chairman and Chief Executive Officer and
President and Chief Operating Officer, respectively, of Providence Journal, met
in Boston, Massachusetts, accompanied by their internal and external financial
and legal advisors. At this meeting, Continental and Providence Journal
discussed a number of issues, including the techniques for structuring the
transaction on a tax-free basis, the rights of the parties to terminate a
merger agreement once executed, the terms of the break-up fee and related
provisions that would be applicable in certain circumstances in the event that
a definitive merger agreement were signed but no merger were consummated,
representation of Providence Journal's stockholders on the Board of Directors
of Continental, ways of ensuring that Continental's stock would provide
Providence Journal's shareholders with a liquid investment, the terms of a
noncompetition agreement applicable to New Providence Journal and the sharing
of certain costs related to the transaction.
On November 9, 1994 the same individuals again met in Boston to continue
their discussions on the above issues. They also devoted substantial attention
to the SEC filings which would be required in order to consummate the
transaction, as well as certain requirements applicable to Providence Journal
concerning the working capital and capital expenditures of the PJC Cable
Business.
By mid-November, negotiation of a merger agreement with Continental was
nearly complete. On November 15, 1994, at a special meeting of the Board of
Directors attended by all members of the Board, Bear Stearns again presented to
the Board of Directors a thorough review of the business and financial aspects
of the proposed transaction with Continental and analysis of the fairness of
the transaction from a financial point of view, as detailed under "Opinion of
Financial Advisor to Providence Journal" below. Bear Stearns gave its oral
opinion (which was subsequently confirmed in writing) that the Original
Providence Journal Transactions in the aggregate were fair, from a financial
point of view, to the stockholders of Providence Journal. Pursuant to the
Board's authorization, Providence Journal entered into a definitive merger
agreement with Continental on November 18, 1994.
REORGANIZATION. Both Continental and Providence Journal desired to
restructure ownership of Providence Journal so that all of the cable television
properties owned by Providence Journal, including the King Cable Business,
would be included in the Merger. Providence Journal and Continental, working
35
together with their legal advisors, determined that a complex internal
corporate restructuring, as well as the Kelso Buyout and the incurrence of $755
million in indebtedness, had to be effectuated to accomplish this objective in
a completely tax-free manner.
This restructuring, which was provided for in the Original Providence Journal
Transactions, contemplated the liquidation of KHC into KBC and then the
liquidation of Providence Journal into KBC, such that KBC would remain as the
entity owning all of the PJC Cable Business and would be merged into
Continental. A ruling request was submitted to the Service on January 25, 1995
with respect to this restructuring and was pursued in numerous meetings and
telephone conversations between the legal advisors for Providence Journal and
Continental and the Service until July, 1995 when the Service notified
Providence Journal that the ruling would not be issued. The Service explained
that a Treasury Department study group had initiated review of a broad area of
tax law, which included transactions such as Providence Journal's proposed
restructuring, and that a moratorium had been imposed upon any further Service
rulings in that area until the study group had completed its work.
As a result, the more complex aspects of the Original Providence Journal
Transactions were discarded and replaced with the reorganization now
contemplated, which is limited to the PJC Spin-Off. The Merger and the related
transactions will now be partly taxable, because a tax of approximately $120
million will result from the sale of the King Cable Business to Continental. A
ruling request will be submitted to the Service with respect to the PJC Spin-
Off, receipt of which is a condition to the consummation of the PJC Spin-Off,
the Merger and the related transactions. It is anticipated that this ruling
will be issued, and, if so, the PJC Spin-Off would be tax-free. (See "Certain
Federal Income Tax Considerations" for a description of the requested rulings
and the nature of such rulings.)
In order to address the issues relating to the refusal of the Service to
issue the ruling originally requested and the resulting tax burden,
representatives of Providence Journal and Continental met on July 24, 1995. In
this meeting, Providence Journal and Continental agreed that the amount of
Continental Class A Common Stock to be received by Providence Journal
stockholders would be reduced from $645,000,000, as had been previously agreed,
to $595,000,000 and that Continental would assume New Cable Indebtedness in an
amount of $410,000,000 and pay $405,000,000 to acquire the King Cable Business,
which in the aggregate equaled $815 million, rather than the previously agreed
$755,000,000. In addition, at this meeting, Continental agreed to increase the
amount of Continental Class A Common Stock by $1,069,000 in exchange for
certain additional assets to be acquired by Continental in the Merger. As a
result, the aggregate consideration offered by Continental in connection with
the Merger and the related transactions equals an estimated $1,411,069,000.
RECOMMENDATION OF PROVIDENCE JOURNAL BOARD OF DIRECTORS
At the meeting of the Board of Directors of Providence Journal held on
November 15, 1994, by unanimous vote of Directors, the Providence Journal Board
determined that the Original Merger is fair to, and in the best interests of,
Providence Journal and its stockholders, approved the Original Merger and
resolved to recommend that stockholders of Providence Journal vote FOR approval
and adoption of the Original Merger Agreement and each of the transactions
contemplated thereby.
In reaching its determination, the Providence Journal Board considered the
following factors:
. THE PROVIDENCE JOURNAL BOARD'S FAMILIARITY WITH AND REVIEW OF PROVIDENCE
JOURNAL'S BUSINESS, OPERATIONS, FINANCIAL CONDITION, EARNINGS AND
PROSPECTS. The Providence Journal Board considered the growing capital
requirements of continued participation in the cable television business
in relation to the financial condition and current and probable future
earnings of its various businesses. The Providence Journal Board also
took account of the long-standing conservatism of Providence Journal's
stockholders with regard to the incurrence of large amounts of debt and
their reluctance to support the issuance of shares of capital stock to
the public. In light of these factors, the Providence Journal Board
determined that its cable operations could best be developed by a large
cable television company with greater access to capital.
36
. THE PROVIDENCE JOURNAL BOARD'S REVIEW OF THE BUSINESS, OPERATIONS,
FINANCIAL CONDITION, EARNINGS AND PROSPECTS OF CONTINENTAL, AND THE
ENHANCED OPPORTUNITIES FOR GROWTH THAT THE ORIGINAL MERGER MADE
POSSIBLE. In choosing Continental as its merger partner, the Providence
Journal Board considered and viewed favorably the excellent quality and
reputation of Continental's management, the strategic opportunities
resulting from the close clustering of Providence Journal's and
Continental's cable television systems, Continental's solid growth over
an extended period of time, the potential of Continental's developing
foreign operations and Continental's size and related access to capital.
The Providence Journal Board also determined that the PJC Cable
Business, after combining with Continental's cable operations, would be
in a better position to attract strategic telecommunications partners.
In addition, the Providence Journal Board noted the opportunities for
increased profitability of the PJC Cable Business resulting from larger
programming discounts and management staffing efficiencies obtained
through the Original Merger.
. THE VALUE OF THE CONTINENTAL SECURITIES THAT WERE TO BE RECEIVED BY THE
STOCKHOLDERS OF PROVIDENCE JOURNAL IN THE ORIGINAL MERGER. An integral
part of the determination by the Board of Directors that the Original
Merger was in the best interests of, and fair to, Providence Journal's
stockholders was a determination of the value of Continental's shares.
During calendar years 1993 and 1994, all of the limited trading in
shares of Continental Common Stock in which Continental participated as
a buyer or seller was at $19.40 per share, the nominal value offered by
Continental and on which negotiations were based. This was an important
factor considered by the Board in making its determination. Also, as
detailed under "Providence Journal's Reasons for the PJC Spin-Off and
the Merger" above and under "Opinion of Financial Advisor to Providence
Journal" below, the Providence Journal Board received detailed
presentations at several special Board meetings with respect to the
value of the Continental Merger Stock to be received by the stockholders
of Providence Journal. Bear Stearns concluded that the Original
Providence Journal Transactions in the aggregate were fair, from a
financial point of view, to the stockholders of Providence Journal.
During these presentations, members of the Providence Journal Board
posed various questions to the Bear Stearns representatives, and the
ensuing responses and discussions enhanced the Board's understanding of
the Original Merger and related transactions. These presentations were
of critical importance in assisting the Providence Journal Board to
assess such value, since the valuation of the securities of Continental
and Providence Journal, both of which are privately held, required
specialized financial expertise. The Board of Directors was also
provided with certain estimated financial results for Continental
prepared by Continental's management, described under "Opinion of
Financial Advisor to Providence Journal", below.
. OTHER POSSIBLE TRANSACTIONS AVAILABLE TO PROVIDENCE JOURNAL. As
discussed above under "Providence Journal's Reasons for the PJC Spin-Off
and the Merger", the Providence Journal Board carefully reviewed
proposals submitted by three potential merger partners. The Providence
Journal Board concluded that the Continental proposal offered the
highest price and was superior to the second highest proposal with
respect to the likelihood of closing and the long-term prospects of the
potential merger partner.
. THE TERMS OF THE ORIGINAL MERGER. The Providence Journal Board reviewed
with its counsel and with Bear Stearns the provisions of the agreement
setting forth the terms of the Original Merger and determined that its
terms permitted Providence Journal to achieve the tax-free disposition
of the PJC Cable Business for marketable securities in a manner that is
fair to Providence Journal.
The Providence Journal Board of Directors has again reviewed all of the
factors considered with respect to the Original Providence Journal Transactions
and has considered carefully the Opinion rendered by Bear Stearns, as well as
Bear Stearns' presentation to the Board of Directors on November 15, 1994
regarding the Original Providence Journal Transactions, as described below. The
Providence Journal Board has concluded that its favorable recommendation of the
Original Providence Journal Transactions also applies to the Providence Journal
Transactions.
In view of the wide variety of factors considered by the Providence Journal
Board of Directors, the Providence Journal Board did not find it practicable to
quantify or otherwise attempt to assign relative
37
weights to the specific factors considered in making its determinations.
Consequently, the Providence Journal Board did not quantify the assumptions and
results of its analyses in reaching its determination that the Original Merger
was, and the Merger is, fair to, and in the best interests of, Providence
Journal and its stockholders. However, as a general matter, the Providence
Journal Board believed that all of the factors set forth above supported its
determinations.
THE BOARD OF DIRECTORS OF PROVIDENCE JOURNAL UNANIMOUSLY RECOMMENDS THAT
PROVIDENCE JOURNAL STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE
PJC SPIN-OFF, FOR THE PROPOSAL TO APPROVE AND ADOPT THE PROVIDENCE JOURNAL
CHARTER AMENDMENT, FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT
AND FOR THE PROPOSAL TO APPROVE AND ADOPT THE CABLE DIVISION SALE BONUS PLAN.
OPINION OF FINANCIAL ADVISOR TO PROVIDENCE JOURNAL
Providence Journal selected Bear Stearns as its financial advisor in
connection with the Providence Journal Transactions and asked Bear Stearns to
render its opinion in connection with the Providence Journal Transactions based
on Bear Stearns' qualifications, expertise and reputation in providing advice
to companies in the media and communications industries as well as its
familiarity with Providence Journal. Bear Stearns is an internationally
recognized investment banking firm and is continually engaged in the valuation
of businesses and their securities and in rendering opinions in connection with
mergers and acquisitions and other purposes.
Bear Stearns has delivered to the Board of Directors of Providence Journal
its Opinion to the effect that, based upon and subject to the various
considerations set forth in such Opinion, as of , 1995, the Providence
Journal Transactions in the aggregate were fair, from a financial point of
view, to the stockholders of Providence Journal. Bear Stearns previously had
rendered its oral opinion (which was subsequently confirmed in writing) to the
Board of Directors of Providence Journal to the effect that, as of November 15,
1994, the Original Providence Journal Transactions in the aggregate were fair,
from a financial point of view, to the stockholders of Providence Journal. The
full text of Bear Stearns' Opinion, is attached as Annex II to this Joint Proxy
Statement-Prospectus. Providence Journal stockholders are urged to, and should,
read such opinion carefully in its entirety in conjunction with this Joint
Proxy Statement-Prospectus for assumptions made, matters considered and limits
of the review by Bear Stearns. Bear Stearns' Opinion addresses only the
fairness of the Providence Journal Transactions from a financial point of view
and does not constitute a recommendation to any stockholder of Providence
Journal as to how such stockholder should vote on the Providence Journal
Proposals. The summary of Bear Stearns' Opinion set forth in this Joint Proxy
Statement-Prospectus is qualified in its entirety by reference to the full text
of such Opinion.
In rendering its Opinion, Bear Stearns, among other things: (i) reviewed this
Joint Proxy Statement-Prospectus in substantially the final form to be sent to
the stockholders of Providence Journal; (ii) reviewed the Merger Agreement
(including the terms of the Continental Merger Stock), the Contribution and
Assumption Agreement, the Registration Rights Agreement, the stock purchase
agreement with the Kelso Partnerships, the letters of intent or stock purchase
agreements with the holders of the minority interests in the PJC Cable
Subsidiaries, and the related schedules to such agreements; (iii) reviewed
certain audited and unaudited financial statements of Providence Journal,
Colony, Copley/Colony, Colony Cablevision and KHC and certain pro forma
financial information for the PJC Cable Business and New Providence Journal;
(iv) reviewed certain operating and financial information of Providence
Journal, the PJC Cable Business and KHC, including projections for the PJC
Cable Business and KBC, provided to Bear Stearns by the managements of
Providence Journal, the PJC Cable Business and KBC; (v) reviewed Continental's
audited financial statements for the years ended December 31, 1991 through 1994
and its unaudited financial statements for the six months ended June 30, 1995;
(vi) reviewed certain estimated year end financial results for fiscal years
1994 and 1995 for Continental (excluding the effects of the Merger and other
pending acquisitions upon such estimated financial results) provided to Bear
Stearns by Continental's management, and, based on such estimated financial
results and discussions with Continental's management, extrapolated financial
results beyond 1995, which were reviewed by Continental's management; (vii) met
with certain
38
members of the senior managements of Providence Journal, the PJC Cable
Business, KBC and Continental to discuss each company's or division's
respective operations, historical financial statements and prospects, recent
actions taken by the FCC and the impact thereof on the PJC Cable Business and
Continental, and the amount and timing of potential synergies and/or cost
savings to Continental realizable as a result of the Merger; (viii) reviewed
the historical prices and trading volume of Continental's privately-held common
stock issued or traded in negotiated transactions, as furnished to Bear Stearns
by Continental; (ix) reviewed publicly available financial data and stock
market performance of publicly traded companies engaged in businesses that Bear
Stearns deemed generally comparable to the PJC Cable Business, Continental and
KBC, respectively; (x) reviewed the financial terms of recent acquisitions of
companies Bear Stearns deemed generally comparable to the PJC Cable Business
and KBC; and (xi) conducted such other studies, analyses, inquiries and
investigations as Bear Stearns deemed appropriate.
In rendering its Opinion, Bear Stearns relied upon and assumed the accuracy
and completeness of the financial and other information provided to Bear
Stearns by Providence Journal, the PJC Cable Business and Continental, among
others, and the reasonableness of the assumptions made with respect to their
respective projected or estimated financial results. Bear Stearns did not
assume any responsibility for such information and Bear Stearns relied upon the
assurances of the managements of Providence Journal, the PJC Cable Business and
Continental that they are unaware of any facts that would make the information
provided to Bear Stearns incomplete or misleading. With respect to the
projected financial results or estimates of the PJC Cable Business, KBC and
Continental that were furnished to Bear Stearns, Bear Stearns assumed that such
financial projections or estimates, as the case may be, had been reasonably
prepared by Providence Journal, the PJC Cable Business and Continental,
respectively, on bases reflecting the best currently available estimates and
good faith judgments of the future competitive, operating and regulatory
environments and related financial performance. Bear Stearns also relied,
without independent verification, upon the assessment of the senior managements
of Providence Journal, the PJC Cable Business and Continental regarding the
impact on the PJC Cable Business and Continental, respectively, of recent
actions taken by the FCC and the amount and timing of potential synergies
and/or cost savings to Continental realizable as a result of the Merger. Bear
Stearns, with Providence Journal's approval, assumed that the PJC Spin-Off and
the Merger will qualify as tax-free reorganizations as contemplated by the
Merger Agreement. Bear Stearns also assumed the incurrence of taxes by
Providence Journal in connection with the sale of the King Cable Business to
Continental. In arriving at its Opinion, Bear Stearns did not perform, and was
not furnished with, any independent appraisal of the assets of Providence
Journal, the PJC Cable Business or Continental. Bear Stearns did not express
any opinion as to the price or range of prices at which the shares of
Continental Merger Stock will trade subsequent to the consummation of the
Merger. Bear Stearns' Opinion is necessarily based on economic, market and
other conditions, and the information made available to it, as of the date of
the Opinion.
As part of its engagement, Bear Stearns assisted Providence Journal in
identifying and contacting various knowledgeable and qualified buyers which
were given the opportunity to make a thorough evaluation of the PJC Cable
Business in preparation for the submission of a proposal to acquire the PJC
Cable Business. As a result of these efforts, Providence Journal received
various indications of interest regarding possible business transactions
involving the PJC Cable Business, which Bear Stearns assessed and reviewed with
the senior management and the Board of Directors of Providence Journal.
In connection with its Opinion, Bear Stearns confirmed the appropriateness of
its reliance on the financial and valuation analyses used to render its opinion
dated November 15, 1994 by performing procedures to update certain of such
financial and valuation analyses. In addition, Bear Stearns reviewed the
assumptions on which such analyses were based and considered the revised terms
of the Providence Journal Transactions. Under the terms of the original merger
agreement dated November 18, 1994 (the "Original Merger Agreement"),
Continental was to issue to the stockholders of Providence Journal, at
Continental's option, either (i) 28,260,309 shares of Continental Class A
Common Stock having a nominal value of $548,250,000 and 4,987,113 shares of
Continental Series B Preferred Stock having a nominal value of $96,750,000 or
(ii) 33,247,422 shares of Continental Class A Common Stock having a nominal
value of $645,000,000 (such stock consideration is referred to in the following
analyses as the "Original Continental Merger Stock"), and, under
39
either option, assume $755,000,000 of indebtedness (the "Original Cable
Indebtedness"). In addition, the Original Providence Journal Transactions
contemplated an internal corporate restructuring which would have, among other
things, transferred the King Cable Business as part of the PJC Cable Business
to Continental through the merger of a subsidiary of Providence Journal with
and into Continental. Under the Merger Agreement, Continental will not have the
option to issue any Continental Series B Preferred Stock and will issue to
stockholders of Providence Journal 30,725,207 shares of Continental Class A
Common Stock having a nominal value of $596,069,000, purchase the King Cable
Business from KBC for $405,000,000 and assume $410,000,000 of New Cable
Indebtedness. Bear Stearns also considered the taxes that will be incurred by
Providence Journal in connection with the sale of the King Cable Business to
Continental.
The following is a summary of certain of the financial and valuation analyses
presented by Bear Stearns to the Board of Directors of Providence Journal on
November 15, 1994, in connection with Bear Stearns' opinion as of such date.
Bear Stearns analyzed the Original Merger based on the consideration to be
received by Providence Journal stockholders (taking into account both the
Original Continental Merger Stock and the Original Cable Indebtedness to be
assumed by Continental), using various methodologies, and the PJC Spin-Off
based on the pro forma financial statements of New Providence Journal, giving
effect to the Original Providence Journal Transactions.
VALUATION OF CONTINENTAL PROPOSAL. The transactions contemplated by the
Original Merger Agreement included, among other things, (i) the merger of a
subsidiary of Providence Journal, which would have owned all the PJC Cable
Business, with and into Continental in a tax-free reorganization, (ii)
Continental's assumption of the Original Cable Indebtedness, and (iii) the
issuance of the Original Continental Merger Stock. in exchange for all of the
outstanding shares of Providence Journal Common Stock. For purposes of this
summary of Bear Stearns' analyses, the foregoing is referred to as the
"Continental Proposed Transaction" and the combination of Continental and the
PJC Cable Business pursuant to the Merger Agreement is referred to as the
"Combined Company." In connection with its review and analysis of the
Continental Proposed Transaction, Bear Stearns estimated the enterprise value
of the PJC Cable Business under the Continental Proposed Transaction by adding
the estimated public market value of the Original Continental Merger Stock
(i.e., the Continental Class A Common Stock and Continental Series B Preferred
Stock) to be issued to Providence Journal stockholders and the Original Cable
Indebtedness to be assumed by the Combined Company and subtracting the cash
payment expected to be made by New Providence Journal to Continental to account
for the negative Working Capital of the PJC Cable Business. Bear Stearns was
required to estimate the public market value of the Original Continental Merger
Stock on a fully distributed public market trading basis as Continental did not
have any publicly traded equity securities. In performing its valuation
analyses, Bear Stearns estimated the public market value of the Combined
Company's core domestic cable television systems (including both Continental's
existing systems as well as the PJC Cable Business) using a range of enterprise
value to EBITDA multiples of 9.0x to 9.5x based on estimated EBITDA for 1994,
as adjusted for certain expected effects of the Merger, and estimated the value
of Continental's programming investments, international investments, other
telecommunications assets and other assets using a variety of methodologies,
including multiples of EBITDA and subscribers, other publicly available
independent valuations and/or discounted cash flow analyses, as deemed
appropriate by Bear Stearns. As a result of these analyses, Bear Stearns
estimated that the Continental Class A Common Stock had a fully distributed
public market trading value which ranged from $16.50 to $19.40 per share and
the Continental Series B Preferred Stock had a fully distributed public market
trading value of $19.40 per share. Bear Stearns noted that this analysis was
specific to a given point in time and expressed no opinion as to the price or
range of prices at which the shares of Original Continental Merger Stock would
trade subsequent to the consummation of the Merger. Based on Bear Stearns'
estimated public market valuation of the Original Continental Merger Stock
(i.e., the Continental Class A Common Stock and Continental Series B Preferred
Stock), and taking into account the Original Cable Indebtedness to be assumed
by the Combined Company in the Merger and the cash payment expected to be made
by New Providence Journal to Continental to account for the negative Working
Capital of the PJC Cable Business, Bear Stearns estimated that the enterprise
value of the PJC Cable Business under the Continental Proposed Transaction
ranged from $1,306 million to $1,388 million (or $1,291 million to $1,388
million if no shares of Continental Series B Preferred
40
Stock were issued). Bear Stearns estimated that the aggregate market value, on
a fully distributed public market trading basis, of the Continental Series B
Preferred Stock to be received by Providence Journal stockholders, if issued,
was approximately $97 million, or $1,142 per share of Providence Journal Common
Stock. Bear Stearns estimated that the aggregate market value, on a fully
distributed public market trading basis, of the Continental Class A Common
Stock to be received by Providence Journal stockholders ranged from $466
million to $548 million (or $548 million to $645 million if no shares of
Continental Series B Preferred Stock were issued), or $5,503 to $6,474 (or
$6,474 to $7,616 if no shares of Continental Series B Preferred Stock were
issued) per share of Providence Journal Common Stock. Bear Stearns noted that
due to the relatively fixed nature of the valuation of the Continental Series B
Preferred Stock versus the wider range of valuation of the Continental Class A
Common Stock, the valuation of the Continental Proposed Transaction varied
based on the form of consideration (i.e., depending on whether or not any
shares of Continental Series B Preferred Stock were issued).
ANALYSIS OF SELECTED PRECEDENT CABLE TELEVISION TRANSACTIONS. Bear Stearns
reviewed and analyzed the publicly available financial terms of five selected
recent merger and acquisition transactions in the cable television industry
which, in Bear Stearns' judgment, were reasonably comparable to the Original
Merger, and compared the financial terms of such transactions to those of the
Original Merger for purposes of this analysis. The five transactions that were
then pending were (i) the acquisition of the cable television assets of The
Times Mirror Company by Cox Cable Communications, Inc. ("Cox"); (ii) the
acquisition of domestic cable television assets of Maclean Hunter Limited from
Rogers Communications by Comcast Corporation ("Comcast"); (iii) the acquisition
of the Wisconsin and Alabama cable television assets of the Crown Media
subsidiary of Hallmark Cards, Inc. by Marcus Cable Co.; (iv) the acquisition of
Wometco Cable (excluding Georgia Cable) by US WEST Inc.; and (v) the
acquisition of TeleCable Corporation by TCI (collectively, the "Precedent CATV
Transactions"). Bear Stearns reviewed the prices to be paid in the Precedent
CATV Transactions and analyzed various operating and financial information and
implied valuation multiples and ratios. Bear Stearns noted that none of the
Precedent CATV Transactions was identical to the Original Merger and that,
accordingly, any analysis of the Precedent CATV Transactions necessarily
involved complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that would
necessarily affect the acquisition value of the PJC Cable Business versus the
acquisition values of the companies to which the PJC Cable Business was being
compared. Bear Stearns advised the Board of Directors of Providence Journal
that, in considering and analyzing the Precedent CATV Transactions, the Board
of Directors of Providence Journal should consider the size, demographic and
economic characteristics of the markets of each cable company and the
competitive environment in which it operates. Bear Stearns' analysis of the
Precedent CATV Transactions indicated that the range of enterprise value to
EBITDA multiples was 9.1x to 12.1x with a harmonic mean (the reciprocal of the
arithmetic mean of reciprocals) of 11.0x, as compared to a range of imputed
enterprise value to EBITDA multiples for the PJC Cable Business of 12.1x to
13.0x based on Bear Stearns' estimate of the enterprise value of the PJC Cable
Business under the Continental Proposed Transaction, as described above, and
estimated EBITDA for 1994 for the PJC Cable Business. Bear Stearns noted that
the Continental Proposed Transaction was valued at a more favorable EBITDA
multiple range when compared to the Precedent CATV Transactions' valuation
parameters, and this was one of the primary factors in assessing the fairness,
from a financial point of view, of the Original Providence Journal
Transactions.
ANALYSIS OF SELECTED PUBLICLY TRADED CABLE TELEVISION COMPANIES. Bear Stearns
compared certain operating and financial information for each of the PJC Cable
Business and Continental to certain publicly available operating, financial,
trading and valuation information of seven selected cable television companies,
which, in Bear Stearns' judgment, were comparable to the PJC Cable Business and
Continental for purposes of this analysis. These companies included Adelphia
Communications Corporation, Cablevision Systems Corporation, Century
Communications Corporation, Comcast, Falcon Cable Systems Company, TCA Cable
TV, Inc., and TCI (collectively, the "Comparable Cable Companies"). Bear
Stearns' analysis of the Comparable Cable Companies indicated that (i) the
Comparable Cable Companies were trading in a range of adjusted enterprise value
(enterprise value less the value of non-consolidated cable investments and non-
cable assets) to EBITDA multiples for 1994, as estimated from publicly
available information, of 8.1x to 9.8x with a harmonic mean of 8.6x and (ii)
certain of the Comparable Cable Companies, which, in Bear Stearns'
41
judgment, were more comparable to the PJC Cable Business and Continental based
on size, asset quality and markets served (i.e., Comcast and TCI), were trading
in a range of adjusted enterprise value to EBITDA multiples for 1994, as
estimated from publicly available information, of 9.1x to 9.8x with a harmonic
mean of 9.4x. This compared to a range of imputed enterprise value to EBITDA
multiples for the PJC Cable Business of 12.1x to 13.0x based on Bear Stearns'
estimate of the enterprise value of the PJC Cable Business under the
Continental Proposed Transaction, as described above, and estimated EBITDA for
1994 for the PJC Cable Business. Bear Stearns noted that the Continental
Proposed Transaction was valued at a significant premium, in terms of its
imputed EBITDA multiple range, when compared to the Comparable Cable Companies'
trading parameters, and this was one of the primary factors in assessing the
fairness, from a financial point of view, of the Original Providence Journal
Transactions. Bear Stearns further stated that the Comparable Cable Companies'
trading parameters (particularly those of Comcast and TCI) provided an
important benchmark for estimating the public market value of the Original
Continental Merger Stock on a fully distributed basis.
DISCOUNTED CASH FLOW CALCULATIONS. Bear Stearns performed theoretical
discounted cash flow calculations based on the projections provided by the
management of the PJC Cable Business. In performing the discounted cash flow
calculations, Bear Stearns utilized discount rates reflecting the estimated
weighted average cost of capital of the PJC Cable Business (ranging from 10% to
12%) and blended terminal value multiples of EBITDA ranging from 10.2x to
11.7x. Based on these calculations, Bear Stearns derived a theoretical
enterprise value for the PJC Cable Business ranging from $1,000 million to
$1,200 million, as compared to Bear Stearns' estimate of the enterprise value
of the PJC Cable Business under the Continental Proposed Transaction of $1,291
million to $1,388 million. Bear Stearns noted that the aforementioned
discounted cash flow calculations were highly dependent on the projections
provided by the management of the PJC Cable Business and the assumptions made
with regard to terminal value and may be less relevant than other valuation
analyses for purposes of valuing the PJC Cable Business.
RELATIVE CONTRIBUTION ANALYSIS. Bear Stearns reviewed and analyzed the
relative contributions of each of the PJC Cable Business and Continental to the
Combined Company based on certain historical and projected operating and
financial information (based on projections for the PJC Cable Business and
estimated year end financial results for fiscal years 1994 and 1995 for
Continental prepared by their respective managements) including, among other
things, revenue, EBITDA and basic subscribers. Such analysis did not take into
account any potential synergies and/or cost savings that might be realized as a
result of the Merger. Such analysis indicated that the PJC Cable Business would
contribute approximately 19.1%, 17.0% and 21.4% to the Combined Company's
revenue, EBITDA and basic subscribers, respectively, for 1994 on a pro forma
basis. Bear Stearns noted that the PJC Cable Business's percentage of the
Combined Company's estimated enterprise value (i.e., 18.9%) and the fully
diluted percentage of the Combined Company's equity securities to be owned by
Providence Journal stockholders after the Merger (i.e., 18.9%) compared
reasonably and is in line with the aforementioned contribution percentages.
OTHER ANALYSES. Bear Stearns conducted such other financial and valuation
analyses as it deemed necessary with respect to Providence Journal, the PJC
Cable Business, New Providence Journal, Continental and the Combined Company.
In addition, Bear Stearns reviewed, analyzed and compared certain operating and
financial information and valuation multiples and ratios of selected precedent
television broadcasting transactions and selected comparable publicly traded
television broadcasting companies to similar data for KBC for purposes of
reviewing and analyzing the Kelso Buyout.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Bear Stearns' opinion. In arriving at its Opinion, Bear Stearns
considered the results of all such reviews, calculations and analyses. The
analyses were prepared solely for purposes of providing its Opinion as to the
fairness of the Providence Journal Transactions in the aggregate, from a
financial point of view, to the stockholders of Providence Journal and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily
42
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. The foregoing summary does not
purport to be a complete description of the analysis performed by Bear Stearns.
As described above, Bear Stearns' opinion and presentation to the Board of
Directors of Providence Journal was one of many factors taken into
consideration by the Board of Directors of Providence Journal in making its
determination to approve the Merger Agreement.
Pursuant to a letter agreement, dated May 20, 1993, and a subsequent
amendment to such letter, dated August 2, 1994, Providence Journal agreed to
pay Bear Stearns (i) an initial cash fee of $100,000; (ii) a quarterly retainer
fee of $75,000; (iii) a fee of $400,000 for rendering its opinion in connection
with the Providence Journal Transactions; and (iv) a transaction fee of
approximately $7,000,000, payable upon the consummation of the Merger, which
will be reduced by the fees paid to date. Providence Journal also has agreed to
reimburse Bear Stearns for its reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel, and to indemnify Bear Stearns and
certain related persons against certain liabilities in connection with the
engagement of Bear Stearns, including certain liabilities under the federal
securities laws.
OTHER INFORMATION PROVIDED
Continental provided to Providence Journal and Bear Stearns certain estimated
year end financial results for fiscal years 1994 and 1995 for Continental
(excluding the effects of the Merger and other pending acquisitions upon such
estimated financial results). Continental's management believes that estimated
year end financial results for fiscal year 1994 were in line with the actual
operating results for such year, and for fiscal year 1995 are in line with
recent historical operating results. No assurances can be made that the
estimated results for fiscal year 1995 will actually be realized. (See
"Recommendation of Providence Journal Board of Directors" and "Opinion of
Financial Advisor to Providence Journal".)
43
THE SPECIAL MEETINGS
MATTERS TO BE DISCUSSED AT THE SPECIAL MEETINGS
GENERAL. This Joint Proxy Statement-Prospectus is being furnished by
Providence Journal to holders of shares of Providence Journal Common Stock and
by Continental to holders of shares of Continental Voting Stock in connection
with the solicitation of proxies from such stockholders for use at the
Providence Journal Special Meeting and the Continental Special Meeting,
respectively.
CONTINENTAL. At the Continental Special Meeting or any adjournments or
postponements thereof, holders of shares of Continental Voting Stock will be
asked to approve and adopt the following proposals: (i) the approval and
adoption of the Merger Agreement and each of the transactions contemplated
thereby relating to Continental, including the Merger of Providence Journal
with and into Continental; (ii) the approval and adoption of the Continental
Recapitalization Amendment to increase the number of authorized shares of
capital stock of Continental from 17,700,000 to 825,000,000, including an
increase in the number of authorized shares of Continental Common Stock from
15,000,000 to 625,000,000, of which 425,000,000 will be shares of Continental
Class A Common Stock (with one vote per share) and 200,000,000 will be shares
of Continental Class B Common Stock (with ten votes per share), and an increase
in the number of authorized shares of Continental Preferred Stock from
2,700,000 to 200,000,000, of which 1,142,858 are currently designated
Continental Series A Preferred Stock; (iii) the election of two Class C
Directors to serve a three-year term; and (iv) the ratification of the
appointment by the Board of Directors of Deloitte & Touche LLP as Continental's
independent public accountants for the current fiscal year ending December 31,
1995. The holders of the Continental Series A Preferred Stock currently vote as
if they had converted their shares into Continental Class B Common Stock
(currently, ten votes per share; after giving effect to the Continental
Recapitalization Amendment and the Continental Stock Split, 250 votes per
share). Such stockholders will also consider and vote upon such other matters
as may properly be brought before the Continental Special Meeting.
THE BOARD OF DIRECTORS OF CONTINENTAL HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE CONTINENTAL RECAPITALIZATION AMENDMENT AND RECOMMENDS A VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, FOR APPROVAL AND ADOPTION OF
THE CONTINENTAL RECAPITALIZATION AMENDMENT AND FOR APPROVAL AND ADOPTION OF
EACH OF THE OTHER PROPOSALS BEING SUBMITTED AT THE CONTINENTAL SPECIAL MEETING.
PROVIDENCE JOURNAL. At the Providence Journal Special Meeting or any
adjournments or postponements thereof, holders of Providence Journal Common
Stock will be asked to approve and adopt the following proposals: (i) the PJC
Spin-Off, (ii) the Merger Agreement, (iii) the Providence Journal Charter
Amendment and (iv) the Cable Division Sale Bonus Plan. Such stockholders will
also consider and vote upon such other matters as may properly be brought
before the Providence Journal Special Meeting.
THE BOARD OF DIRECTORS OF PROVIDENCE JOURNAL HAS UNANIMOUSLY APPROVED THE PJC
SPIN-OFF, THE PROVIDENCE JOURNAL CHARTER AMENDMENT, THE MERGER AGREEMENT AND
THE CABLE DIVISION SALE BONUS PLAN AND RECOMMENDS THAT PROVIDENCE JOURNAL
STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE PJC SPIN-OFF, FOR
THE PROPOSAL TO APPROVE THE PROVIDENCE JOURNAL CHARTER AMENDMENT, FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND FOR THE PROPOSAL TO
APPROVE AND ADOPT THE CABLE DIVISION SALE BONUS PLAN.
44
RECORD DATES; STOCK ENTITLED TO VOTE; QUORUM
CONTINENTAL. The Continental Record Date for the determination of shares of
those holders of Continental Voting Stock entitled to notice of, and to vote
at, the Continental Special Meeting is August 15, 1995. Only holders of record
of shares of Continental Voting Stock at the close of business on the
Continental Record Date will be entitled to notice of, and to vote at, the
Continental Special Meeting or any adjournments or postponements thereof. As of
the Continental Record Date (adjusting for the Continental Stock Split), there
were 8,685,900 shares of Continental Class A Common Stock, 109,196,050 shares
of Continental Class B Common Stock, and 1,142,858 shares of Continental Series
A Preferred Stock outstanding, entitled to vote and held by 423 holders of
record.
The presence in person or by proxy of shares representing a majority of votes
(693,180,451 votes) entitled to be cast by holders of Continental Voting Stock
issued and outstanding and entitled to vote as of the Continental Record Date
is required to constitute a quorum for the transaction of business at any
meeting of stockholders. Abstentions and broker non-votes are included in the
determination of the number of shares of Continental Voting Stock present and
voting.
PROVIDENCE JOURNAL. The Providence Journal Record Date for the determination
of shares of those holders of Providence Journal Common Stock entitled to
notice of, and to vote at, the Providence Journal Special Meeting is August 25,
1995. Only holders of record of shares of Providence Journal Common Stock at
the close of business on the Providence Journal Record Date will be entitled to
notice of, and to vote at, the Providence Journal Special Meeting or any
adjournments or postponements thereof. As of the Providence Journal Record
Date, there were 37,864 shares of Providence Journal Class A Common Stock (with
one vote per share) and 46,825 shares of Providence Journal Class B Common
Stock (with four votes per share) outstanding, entitled to vote and held by
approximately 470 holders of record.
The presence in person or by proxy of shares representing a majority of votes
(112,583 votes) entitled to be cast by holders of Providence Journal Common
Stock issued and outstanding and entitled to vote as of the Providence Journal
Record Date is required to constitute a quorum for the transaction of business
at any meeting of stockholders.
REQUIRED VOTES
CONTINENTAL. The affirmative vote of a majority of the votes (693,180,451
votes, adjusting for the Continental Stock Split) of holders of the outstanding
shares of the Continental Voting Stock, voting together as a class, are the
only votes of Continental stockholders required to approve the Merger under the
DGCL, the Continental Restated Certificate and the Continental By-Laws. The
affirmative vote or action by written consent of 66 2/3% of the votes
(924,240,591 votes, adjusting for the Continental Stock Split) of holders of
the outstanding shares of the Continental Voting Stock, voting together as a
class, and a separate vote or action by written consent of a majority of the
votes (142,857,251 votes, adjusting for the Continental Stock Split) of holders
of the outstanding shares of the Continental Series A Preferred Stock are the
only votes of Continental stockholders required to approve the Continental
Recapitalization Amendment. All of the holders of the Continental Series A
Preferred Stock have executed irrevocable proxies in connection with such
separate class vote on the Continental Recapitalization Amendment; however,
such irrevocable proxies are not sufficient to adopt the vote required to be
taken by all holders of the Continental Voting Stock, voting as a single class.
The affirmative vote or action by written consent of a plurality of the votes
cast by holders of Continental Voting Stock at the Continental Special Meeting,
voting together as a class, is required to elect Directors. Abstentions and
broker non-votes are considered present for purposes of determining a quorum.
Abstentions and broker non-votes do not affect the election of the Directors.
Abstentions and broker non-votes will have the same effect as a vote against
the Merger and the Continental Recapitalization Amendment.
Each proposal shall be voted upon separately by the Continental stockholders
entitled to vote at the Continental Special Meeting; however, failure of either
the Merger Agreement or the Continental Recapitalization Amendment to be
approved by the Continental stockholders will result in the abandonment by
Continental of the Merger.
45
PROVIDENCE JOURNAL. The affirmative vote of the holders of a majority of the
outstanding shares of both the Providence Journal Class A Common Stock and the
Providence Journal Class B Common Stock, with each class voting separately, is
required for approval of the Providence Journal Charter Amendment. The
affirmative vote of a majority of the votes of holders of the outstanding
shares of the Providence Journal Common Stock, voting together as a single
class, is required to approve the Merger and the PJC Spin-Off. No vote of the
stockholders of Providence Journal is required to approve and adopt the Cable
Division Sale Bonus Plan; however, Providence Journal is seeking the approval
of 75% of such votes because failure to obtain such 75% approval could result
in some or all of the payments under the Cable Division Sale Bonus Plan being
non-deductible for federal income tax purposes to Providence Journal and in the
imposition of an excise tax on the recipients of such payments. Abstentions and
broker non-votes are both counted as shares represented in person or by proxy
and entitled to vote for purposes of a quorum. While abstentions are counted in
the universe of shares represented in person or by proxy and entitled to vote
on the Providence Journal Proposals and the other proposals, broker non-votes
are not so counted.
Each proposal shall be voted upon separately by the Providence Journal
stockholders entitled to vote at the Providence Journal Special Meeting;
however, failure of the Providence Journal stockholders to approve any of the
Providence Journal Proposals will result in the abandonment by Providence
Journal of the PJC Spin-Off, the Merger and the related transactions.
SOLICITATION AND VOTING OF PROXIES
CONTINENTAL. Stockholders of record on the Continental Record Date are
entitled to cast their votes, in person or by properly executed proxy, at the
Continental Special Meeting. All shares represented at the Continental Special
Meeting by properly executed proxies received prior to or at the Continental
Special Meeting and not properly revoked will be voted at the Continental
Special Meeting in accordance with the instructions indicated in such proxies.
If no instructions are indicated, such proxies will be voted FOR approval of
the Continental Proposals and the other proposals. The Board of Directors of
Continental does not know of any matters, other than the matters described in
the Continental Notice of Special Meeting attached to this Joint Proxy
Statement-Prospectus, that will come before the Continental Special Meeting.
If a quorum is not present at the time the Continental Special Meeting is
convened, or if for any other reason Continental believes that additional time
should be allowed for the solicitation of proxies or for the satisfaction of
conditions to the Merger or the transactions contemplated thereby, Continental
may adjourn the Continental Special Meeting with a vote of the holders of a
majority of the voting power represented by the Continental Voting Stock
present at such meeting. If Continental proposes to adjourn the Continental
Special Meeting, the persons named in the enclosed proxy card will vote all
shares for which they have voting authority in favor of such adjournment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted in the following manner. Proxies may
be revoked by (i) filing with the Secretary of Continental, at or before the
Continental Special Meeting, a written notice of revocation bearing a date
later than the date of the proxy, (ii) duly executing a subsequent proxy
relating to the same shares and delivering it to the Secretary of Continental
at or before the Continental Special Meeting or (iii) attending the Continental
Special Meeting and voting in person (although attendance at the Continental
Special Meeting will not in and of itself constitute revocation of a proxy).
Any written notice revoking a proxy should be sent to Continental Cablevision,
Inc., The Pilot House, Lewis Wharf, Boston, Massachusetts 02110, Attention: P.
Eric Krauss, Vice President and Treasurer.
Proxies are being solicited by and on behalf of the Continental Board of
Directors. All expenses of this solicitation, including the cost of preparing
and mailing this Joint Proxy Statement-Prospectus (except for printing costs,
which will be shared with Providence Journal), will be borne by Continental. In
addition to solicitation by use of the mails, proxies may be solicited by
Directors, officers and employees of Continental in person or by telephone,
telegram or other means of communication. Such Directors, officers and
employees
46
will not be additionally compensated, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Arrangements will be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of Continental Voting Stock held of record by
such persons, and Continental may reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
PROVIDENCE JOURNAL. Stockholders of record on the Providence Journal Record
Date are entitled to cast their votes, in person or by properly executed proxy,
at the Providence Journal Special Meeting. All shares represented at the
Providence Journal Special Meeting by properly executed proxies received prior
to or at the Providence Journal Special Meeting and not properly revoked will
be voted at the Providence Journal Special Meeting in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR approval of the Providence Journal Proposals and FOR
approval of the Cable Division Sale Bonus Plan. The Board of Directors of
Providence Journal does not know of any matters, other than the matters
described in the Providence Journal Notice of Special Meeting attached to this
Joint Proxy Statement-Prospectus, that will come before the Providence Journal
Special Meeting.
If a quorum is not present at the time the Providence Journal Special Meeting
is convened, or if for any other reason Providence Journal believes that
additional time should be allowed for the solicitation of proxies or for the
satisfaction of conditions to the Merger or the transactions contemplated
thereby, Providence Journal may adjourn the Providence Journal Special Meeting
with a vote of the holders of a majority of the voting power represented by the
Providence Journal Common Stock present at such meeting. If Providence Journal
proposes to adjourn the Providence Journal Special Meeting, the persons named
in the enclosed proxy card will vote all shares for which they have voting
authority in favor of such adjournment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted in the following manner. Proxies may
be revoked by (i) filing with the Secretary of Providence Journal, at or before
the Providence Journal Special Meeting, a written notice of revocation bearing
a date later than the date of the proxy, (ii) duly executing a subsequent proxy
relating to the same shares and delivering it to the Secretary of Providence
Journal at or before the Providence Journal Special Meeting or (iii) attending
the Providence Journal Special Meeting and voting in person (although
attendance at the Providence Journal Special Meeting will not in and of itself
constitute revocation of a proxy). Any written notice revoking a proxy should
be sent to Providence Journal Company, 75 Fountain Street, Providence, Rhode
Island 02902, Attention: Harry Dyson, Secretary.
Proxies are being solicited by and on behalf of the Providence Journal Board
of Directors. All expenses of this solicitation, including the cost of
preparing and mailing this Joint Proxy Statement-Prospectus (except for
printing costs, which will be shared with Continental), will be borne by
Providence Journal. In addition to solicitation by use of the mails, proxies
may be solicited by Directors, officers and employees of Providence Journal in
person or by telephone, telegram or other means of communication. Such
Directors, officers and employees will not be additionally compensated but may
by reimbursed for out-of-pocket expenses in connection with such solicitation.
Arrangements will be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of Providence
Journal Common Stock held of record by such persons, and Providence Journal may
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
OWNERSHIP OF CONTINENTAL SECURITIES
The following table provides information as of August 1, 1995 (giving effect
to the Continental Recapitalization Amendment and the Continental Stock Split),
with respect to the shares of Continental Common Stock and the Continental
Series A Preferred Stock beneficially owned by (i) each person known by
Continental to own more than 5% of the outstanding Continental Common Stock or
Continental Series A Preferred Stock, (ii) each Director of Continental, (iii)
each executive officer required to be identified in the Summary Compensation
Table of Continental and (iv) by all Directors and executive officers of
47
Continental as a group. The number of shares beneficially owned by each
Director or executive officer is determined according to rules of the
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power and also any shares which the individual or
entity has the right to acquire within 60 days of August 1, 1995 through the
exercise of an option, conversion feature or similar right. Except as noted
below, each holder has sole voting and investment power with respect to all
shares of Continental Common Stock or Continental Series A Preferred Stock
listed as owned by such person or entity.
NUMBER OF
NUMBER OF PERCENTAGE OF SHARES OF PERCENTAGE
SHARES OF OUTSTANDING CONTINENTAL OF OUTSTANDING
CONTINENTAL SHARES OF PREFERRED SHARES OF
COMMON STOCK(1) CONTINENTAL STOCK(2) CONTINENTAL AGGREGATE
BENEFICIALLY COMMON BENEFICIALLY PREFERRED VOTING
NAME OWNED STOCK OWNED STOCK POWER
---- --------------- ------------- ------------ -------------- ---------
Amos B. Hostetter, Jr.(3). 45,272,425 38.40% -- -- 32.66%
Timothy P. Neher(4)....... 1,671,725 1.42 -- -- 1.21
Michael J. Ritter......... 589,900 * -- -- *
Roy F. Coppedge, III(5)..... 7,514,075 6.37 -- -- 5.12
Jonathan H. Kagan(6)...... 28,571,450 19.51 1,142,858 100.00% 20.61
Robert B. Luick(7)........ 229,575 * -- -- *
Henry F. McCance(8)....... 258,125 * -- -- *
Lester Pollack(6)......... 28,571,450 19.51 1,142,858 100.00 20.61
Vincent J. Ryan(9)........ 5,719,825 4.85 -- -- 4.13
William T. Schleyer....... 766,200 * -- -- *
Jeffrey T. Delorme........ 391,525 * -- -- *
Nancy Hawthorne........... 209,325 * -- -- *
Directors and Executive
Officers as a Group
(13 persons)(6).......... 91,373,425 62.39 1,142,858 100.00 65.61
H. Irving Grousbeck(10)... 10,033,000 8.51 -- -- 7.24
Boston Ventures Company
Limited
Partnership III
Boston Ventures Limited
Partnership III(11)..... 3,034,525 2.57 -- -- 2.19
Boston Ventures Limited
Partnership IIIA(11).... 799,825 * -- -- *
Boston Ventures Company
Limited
Partnership IV
Boston Ventures Limited
Partnership IV(11)...... 2,381,725 2.02 -- -- 1.42
Boston Ventures Limited
Partnership IVA(11)..... 1,298,000 1.10 -- -- *
---------- ----- -----
Total as a group....... 7,514,075 6.37 -- -- 5.12
LFCP Corp. and Corporate
Advisors, L.P.(12)
Corporate Partners,
L.P.(12)................ 18,223,825 13.39 728,953 63.78 13.15
Mellon Bank, N.A., as
Trustee for
First Plaza Group
Trust(12)(13).......... 4,285,725 3.51 171,429 15.00 3.09
The State Board of
Administration of
Florida(12)............. 1,902,100 1.59 76,084 6.66 1.37
Vencap Holdings (1992)
Pte Ltd(12)............. 1,785,700 1.49 71,428 6.25 1.29
Corporate Offshore
Partners, L.P.(12)...... 1,302,675 1.09 52,107 4.56 *
ContCable Co-Investors,
L.P.(12)................ 1,071,425 * 42,857 3.75 *
---------- ----- --------- ------ -----
Total as a group....... 28,571,450 19.51%(14) 1,142,858 100.00% 20.61%
--------
*Less than 1% of class.
48
(1) The number of shares of Continental Common Stock beneficially owned by
each listed holder reflects the number of such shares held giving effect
to the Continental Recapitalization Amendment and the Continental Stock
Split. The number of shares of Continental Common Stock currently
beneficially owned by a person identified in the table as of August 1,
1995 (before giving effect to the Continental Recapitalization Amendment
and the Continental Stock Split) can be obtained by dividing the number
of shares of Continental Common Stock listed in the table as being owned
by such person by 25. The Continental Stock Split will not affect the
percentage of outstanding shares of Continental Common Stock, the voting
power or the number or percentage of outstanding shares of Continental
Series A Preferred Stock. The Continental Common Stock includes
Continental Class A Common Stock, which has one vote per share, and
Continental Class B Common Stock, which has ten votes per share. As the
number of shares of Continental Class A Common Stock represents 7.37% of
the Continental Common Stock and less than 1% of the voting power of the
Continental Common Stock, the Continental Class A Common Stock has not
been shown as a separate class of stock, but rather Continental Common
Stock has been treated as one class. Every greater than 5% beneficial
owner of Continental Class B Common Stock would be a greater than 5%
beneficial owner of Continental Class A Common Stock.
(2) Under the rules for determining beneficial ownership promulgated by the
Commission, each holder of Continental Series A Preferred Stock is deemed
to own currently that number of shares of Continental Common Stock into
which the Continental Series A Preferred Stock is convertible. The
Continental Series A Preferred Stock is presently convertible into
Continental Common Stock on a one-for-one basis and will be convertible
into Continental Common Stock on a 25-for-one basis following the
Continental Stock Split. The table therefore shows the number of shares
of Continental Series A Preferred Stock owned by each holder in the
column for the Continental Series A Preferred Stock and includes that
number of shares in the column for Continental Common Stock into which
the Continental Series A Preferred Stock would be convertible after
giving effect to the Continental Recapitalization Amendment and the
Continental Stock Split.
(3) Mr. Hostetter has shared voting and investment power as to 42,843,550
shares of Continental Common Stock held by the Trust of which Messrs.
Hostetter and Neher are the sole trustees. Mr. Hostetter has shared
voting and investment power as to a further 446,400 shares of Continental
Common Stock; as to 223,200 of such shares, he disclaims beneficial
ownership. Additionally, Mr. Hostetter disclaims beneficial ownership of
550,000 shares of Continental Common Stock with respect to which his wife
acts as a trustee with Mr. Neher and 38,950 shares of Continental Common
Stock held by him as custodian for four minor children. The shares listed
in the table as being beneficially owned by Mr. Hostetter include those
as to which Mr. Hostetter has shared voting and/or investment power and
those as to which Mr. Hostetter disclaims beneficial ownership. Mr.
Hostetter's address is The Pilot House, Lewis Wharf, Boston,
Massachusetts 02110.
(4) Mr. Neher has shared voting and investment power as to 550,000 shares of
Continental Common Stock with respect to which he acts as a trustee with
Mrs. Hostetter, and as to 42,843,550 shares of Continental Common Stock
with respect to which he acts as a trustee with Mr. Hostetter. Mr. Neher
disclaims beneficial ownership as to such shares, and the table does not
indicate such shares as being beneficially owned by Mr. Neher. (See
footnote (3) above.) Additionally, Mr. Neher disclaims beneficial
ownership as to 165,000 shares with respect to which he acts as trustee
and 55,000 shares held by his wife as custodian for their children, which
are included in the table as being beneficially owned by Mr. Neher.
(5) All the shares listed in the table as beneficially owned by Mr. Coppedge
are held by the four limited partnerships described in footnote (11)
below. Mr. Coppedge, a partner of each of the general partners of the
limited partnerships and a Director of Boston Ventures Management, Inc.,
which manages the investments of the four limited partnerships, has
shared voting and investment power as to these shares. Mr. Coppedge is
entitled to beneficial ownership of an indeterminate number of these
shares and disclaims beneficial ownership as to the balance. Mr.
Coppedge's address is c/o Boston Ventures Management, Inc., 21 Custom
House Street, Boston, Massachusetts 02110.
(6) All shares listed in the table as being beneficially owned by Mr. Pollack
and Mr. Kagan are beneficially owned by Corporate Advisors, L.P.
("Corporate Advisors"). (See footnote (12) below.) Mr. Pollack may be
deemed to have shared voting and investment power over such shares as the
Chairman and Treasurer and as a Director of LFCP Corp., and Mr. Kagan may
be deemed to have shared voting and investment power over such shares as
the President of LFCP Corp. LFCP Corp. is the sole general partner of
Corporate Advisors and a wholly owned subsidiary of Lazard. Mr. Pollack
and Mr. Kagan are both Managing Directors of Lazard. Mr. Pollack's and
Mr. Kagan's address is c/o Corporate Advisors, L.P., One Rockefeller
Plaza, New York, New York 10020. Mr. Pollack and Mr. Kagan disclaim
beneficial ownership of all such shares.
(7) The shares listed in the table as being beneficially owned by Mr. Luick
include 73,800 shares owned by Mr. Luick's daughter and 37,500 shares
with respect to which she acts as trustee for Mr. Luick's grandchildren.
Mr. Luick disclaims beneficial ownership of these shares.
(8) The shares listed in the table as being beneficially owned by Mr. McCance
include 225,000 shares held by Greylock Limited Partnership, of which Mr.
McCance is a general partner. Mr. McCance has shared voting and
investment power as to these shares, is entitled to beneficial ownership
of an indeterminate number of these shares and disclaims beneficial
ownership as to the balance. Of the remaining shares, Mr. McCance
disclaims beneficial ownership as to 12,500 shares with respect to which
his wife acts as trustee for his daughter and 12,500 shares held by his
daughter.
(9) Mr. Ryan holds 136,250 shares of Continental Common Stock. The remaining
shares of Continental Common Stock listed in the table as being
beneficially owned by Mr. Ryan are held by Schooner Capital Corporation
(and its subsidiaries), over which Mr. Ryan has shared voting and
investment power as the Chairman and principal stockholder.
(10) All of these shares are subject to the Stock Liquidation Agreement
pursuant to which Mr. Grousbeck must sell such shares to Continental in
either 1998 or 1999. (See "Description of Continental--Management's
Discussion and Analysis of Financial
49
Condition and Results of Operations of Continental--Liquidity and Capital
Resources--Recent Stock Repurchases and 1998-1999 Share Repurchase
Program".) Mr. Grousbeck's address is Room 382, Graduate School of
Business, Stanford University, Stanford, California 94305.
(11) These four limited partnerships may be deemed to be a "group" of persons
acting together for the purpose of acquiring, holding, voting or
disposing of shares of Continental Common Stock. Boston Ventures Company
Limited Partnership III ("BV Co. III"), as the sole general partner of
each of Boston Ventures Limited Partnership III and Boston Ventures
Limited Partnership IIIA, is deemed to be the beneficial owner of the
shares held by such limited partnerships and to have shared voting and
investment power with respect to such shares. Boston Ventures Company
Limited Partnership IV ("BV Co. IV"), as the sole general partner of each
of Boston Ventures Limited Partnership IV and Boston Ventures Limited
Partnership IVA, is deemed to be the beneficial owner of the shares held
by such limited partnerships and to have shared voting and investment
power with respect to such shares. BV Co. III disclaims beneficial
ownership of the shares beneficially owned by BV Co. IV; and BV Co. IV
disclaims beneficial ownership of the shares beneficially owned by BV Co.
III. Mr. Coppedge may be deemed to beneficially own all such shares. (See
footnote (5).)
(12) These stockholders may be deemed to be a "group" of persons acting
together for the purpose of acquiring, holding, voting or disposing of
shares of Continental Series A Preferred Stock. Corporate Advisors is the
general partner of Corporate Partners, L.P. ("Corporate Partners") and
Corporate Offshore Partners, L.P. ("Corporate Offshore Partners") and has
sole voting and investment power as to the shares held by them. Corporate
Advisors serves as investment manager over a certain investment
management account for The State Board of Administration of Florida
("SBA") and has sole voting and dispositive power with respect to the
shares of Continental Series A Preferred Stock held by SBA. Pursuant to a
Co-Investment Agreement dated as of April 27, 1992 (the "Co-Investment
Agreement") by and among Corporate Advisors, Corporate Partners,
Corporate Offshore Partners, First Plaza Group Trust ("FPGT"), Vencap
Holdings (1992) Pte. Ltd. ("Vencap") and ContCable Co-Investors, L.P.
("ContCable"), Corporate Advisors has sole voting and dispositive power
with respect to the shares held by Vencap and ContCable. The address of
Corporate Advisors, Corporate Partners, Corporate Offshore Partners,
FPGT, SBA, ContCable and Vencap is: c/o Corporate Advisors, L.P., One
Rockefeller Plaza, New York, New York 10020. (See footnote (6) above.)
(13) Mellon Bank, N.A. acts as the trustee for FPGT, a trust under and for the
benefit of certain employee benefit plans of General Motors Corporation
and its subsidiaries. The shares listed in the table may be deemed to be
beneficially owned by General Motors Investment Management Corporation
("GMIMC"), a wholly owned subsidiary of General Motors Corporation.
GMIMC's principal business is providing investment advice and investment
management services with respect to the assets of certain employee
benefit plans of General Motors Corporation and its subsidiaries and with
respect to the assets of certain direct and indirect subsidiaries of
General Motors Corporation and associated entities. GMIMC is serving as
FPGT's investment manager with respect to these shares, and, in that
capacity, it has the sole power to direct Mellon Bank, N.A. as to the
voting and disposition of these shares. Because of its limited role as
trustee, Mellon Bank, N.A. disclaims beneficial ownership of these
shares. Pursuant to the Co-Investment Agreement, FPGT is obligated,
subject to its fiduciary duties under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (i) to transfer shares held
by it only in a transaction in which the other parties to the Co-
Investment Agreement participate on a pro rata basis and (ii) to exercise
all voting and other rights with respect to such shares in the same
manner as is done by Corporate Advisors on behalf of Corporate Partners
and Corporate Offshore Partners.
(14) The percentage ownership for the group assumes the conversion of shares
of Continental Series A Preferred Stock into Continental Common Stock by
all members of the group. The percentage ownership for each individual
member of the group assumes conversion by only that stockholder.
OWNERSHIP OF PROVIDENCE JOURNAL SECURITIES
The following table sets forth information as of August 1, 1995 with respect
to the shares of Providence Journal Class A Common Stock and Providence
Journal Class B Common Stock beneficially owned by (i) each person known by
Providence Journal to own beneficially more than 5% of either class of
Providence Journal Common Stock; (ii) each Director of Providence Journal;
(iii) each executive officer required to be identified in the Summary
Compensation Table of Providence Journal and (iv) all Directors and executive
officers of Providence Journal as a group. The number of shares beneficially
owned by each Director or executive officer is determined according to rules
of the Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power. As a consequence, several persons may
be deemed to be the "beneficial owners" of the same shares. Except as noted
below, each holder has sole voting and investment power with respect to shares
of Providence Journal Class A Common Stock and/or Providence Journal Class B
Common Stock listed as owned by such person or entity. When a person is a "co-
trustee" or one of a number of Directors of a corporation that owns shares of
Providence Journal Common Stock he or she has shared voting and investment
power. Each share of Providence Journal Class A Common Stock carries one vote,
and each share of Providence Journal Class B Common Stock carries four votes.
50
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES OF OUTSTANDING SHARES OF OUTSTANDING
PROVIDENCE PROVIDENCE PROVIDENCE PROVIDENCE
JOURNAL JOURNAL JOURNAL JOURNAL
NAME AND ADDRESS CLASS A CLASS A CLASS B CLASS B AGGREGATE
OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK VOTING POWER
------------------- ------------ ------------- ------------ ------------- ------------
Rhode Island Hospital
Trust National
Bank(1)............... 9,392 24.8% 12,886 27.5% 27.1%
One Hospital Trust
Tower
Providence, RI 02903
Fiduciary Trust Company
International (2)..... 2,494 6.6% 3,124 6.7% 6.7%
Two World Trade Center
New York, NY 10048
Southland
Communications, Inc... 2,416 6.4% 2,092 4.5% 4.8%
127 Dorrance Street
Providence, RI 02903
Helen D. Buchanan (3).. 2,380 6.3% 2,248 4.8% 5.1%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
Murray S. Danforth, III
(4)................... 2,428 6.4% 2,308 4.9% 5.2%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
Esther E. M. Mauran
(5)................... 2,660 7.0% 2,402 5.1% 5.4%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
Frank Mauran (6)....... 4,414 11.7% 4,700 10.0% 10.3%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
Pauline C. Metcalf (7). 3,020 8.0% 2,839 6.0% 6.4%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
Jane P. Watkins (8).... 2,353 6.2% 2,476 5.3% 5.4%
c/o Manasett
Corporation
127 Dorrance Street
Providence, RI 02903
NAME OF DIRECTOR/
EXECUTIVE OFFICER (9)
---------------------
Stephen Hamblett....... 156 0.4% 148 0.3% 0.3%
Trygve E. Myhren....... 3 0% -- -- 0%
F. Remington Ballou.... 24 0.1% 24 0.1% 0.1%
Henry P. Becton........ 1 0% -- -- 0%
Fanchon M. Burnham
(10).................. 358 0.9% 376 0.8% 0.8%
Peter B. Freeman....... 300 0.8% 400 0.9% 0.8%
Benjamin P. Harris,
III................... 30 0.1% 48 0.1% 0.1%
John W. Rosenblum...... 1 0% -- -- 0%
Henry D. Sharpe, Jr.
(11).................. 4 0% -- -- 0%
W. Nicholas Thorndike
(12).................. 5,016 13.2% 5,400 11.5% 11.8%
John W. Wall........... 38 0.1% 72 0.2% 0.1%
Patrick R. Wilmerding.. 550 1.5% 300 0.6% 0.8%
James F. Stack......... 2 0% -- -- 0%
John A. Bowers......... 1 0% -- -- --
Jack C. Clifford....... -- -- -- -- --
Directors and Executive
Officers as a Group
(21 Persons).......... 6,610 17.5% 6,704 14.3% 14.8%
51
--------
(1) Rhode Island Hospital Trust National Bank ("Hospital Trust"), as a
fiduciary, possesses shared or sole voting and investment power under a
number of wills, trusts and agency arrangements. A substantial majority
of the shares so held are reflected elsewhere in this table, and include
some of the shares reported as beneficially owned by Helen D. Buchanan,
Frank Mauran, Esther E. M. Mauran, Pauline C. Metcalf and Jane P.
Watkins. Also, Hospital Trust is a co-trustee of several trusts for the
benefit of the family of the late Michael P. Metcalf holding 1,325 shares
of Providence Journal Class A Common Stock and 1,616 shares of Providence
Journal Class B Common Stock.
(2) Fiduciary Trust Company International holds shares and acts as trustee
under trusts created by Henry D. Sharpe, Jr. (a Director of Providence
Journal) and his wife, Peggy Boyd Sharpe, for the benefit of members of
the Sharpe family and, in certain cases, designated charitable
organizations. Fiduciary Trust Company International shares voting and
investment power with Mr. Sharpe's children as to 300 shares of
Providence Journal Class A Common Stock; as to all other shares,
Fiduciary Trust Company International possesses sole voting and
investment power.
(3) Helen D. Buchanan is co-trustee with Hospital Trust and her daughter,
Jane P. Watkins, of the Helen M. Danforth 1935 Trust, which holds 2,216
shares of Providence Journal Class A Common Stock and 2,216 shares of
Providence Journal Class B Common Stock; is co-trustee with Hospital
Trust of the Helen M. Danforth 1941 Trust, which holds 27 shares of
Providence Journal Class B Common Stock; is one of the directors of two
corporations holding 156 shares of Providence Journal Class A Common
Stock and 5 shares of Providence Journal Class B Common Stock; and holds
8 shares of Providence Journal Class A Common Stock through a revocable
trust.
(4) Murray S. Danforth, III owns 1,118 shares of Providence Journal Class A
Common Stock and 1,050 shares of Providence Journal Class B Common Stock;
is sole trustee of a trust for the benefit of his sister, which holds
1,130 shares of Providence Journal Class A Common Stock and 1,062 shares
of Providence Journal Class B Common Stock; is co-trustee of a trust for
the benefit of his sister which holds 164 shares of Providence Journal
Class B Common Stock; is one of four co-trustees of the Murray S.
Danforth, Jr. Grantor Trust No. 2 which holds 180 shares of Providence
Journal Class A Common Stock and 12 shares of Providence Journal Class B
Common Stock; and is co-trustee of the Manasett Corporation Retirement
Plan, which holds 20 shares of Providence Journal Class B Common Stock.
(5) Esther E. M. Mauran is one of the Directors of Southland Communications,
Inc., which owns the shares indicated in the foregoing table. In
addition, Mrs. Mauran owns 244 shares of Providence Journal Class A
Common Stock and 310 shares of Providence Journal Class B Common Stock.
(6) Frank Mauran, the husband of Esther E. M. Mauran, owns 40 shares of
Providence Journal Class B Common Stock; is co-trustee with Hospital
Trust (and another individual in one case) of several trusts created by
Mrs. Mauran's father, George P. Metcalf, for the benefit of Mrs. Mauran
and her sister, Pauline C. Metcalf, which trusts hold 3,484 shares of
Providence Journal Class A Common Stock and 3,732 shares of Providence
Journal Class B Common Stock; and is co-trustee of the Esther E. M.
Mauran Family Trust, which holds 930 shares of Providence Journal Class A
Common Stock and 928 shares of Providence Journal Class B Common Stock.
(7) Pauline C. Metcalf is one of the Directors of Southland Communications,
Inc., which owns the shares indicated in the foregoing table. In
addition, through a revocable trust, Ms. Metcalf owns 604 shares of
Providence Journal Class A Common Stock and 747 shares of Providence
Journal Class B Common Stock.
(8) Jane P. Watkins owns 117 shares of Providence Journal Class A Common
Stock and 260 shares of Providence Journal Class B Common Stock; is a co-
trustee with Hospital Trust and her mother, Helen D. Buchanan, of the
Helen M. Danforth 1935 Trust, which holds 2,216 shares of Providence
Journal Class A Common Stock and 2,216 shares of Providence Journal Class
B Common Stock; and is co-trustee of a trust created by Mrs. Buchanan
which holds 20 shares of Providence Journal Class A Common Stock.
(9) None of the executive officers or Directors of Providence Journal
presently has options or other rights according them power to acquire
shares within 60 days; however, see "Description of Providence Journal--
Executive Compensation" with respect to plans for the termination of
Providence Journal's Incentive Stock Unit Plan and rights to acquire
shares under Providence Journal's Restricted Stock Unit Plan.
(10) Fanchon M. Burnham owns 109 shares of Providence Journal Class A Common
Stock and 147 shares of Providence Journal Class B Common Stock. She
serves as a co-trustee of trusts for her brother, which hold 211 shares
of Providence Journal Class A Common Stock and 189 shares of Providence
Journal Class B Common Stock. In addition, Mrs. Burnham's children own a
total of 38 shares of Providence Journal Class A Common Stock and 40
shares of Providence Journal Class B Common Stock.
(11) In addition to the shares shown in the table, the shares indicated as
beneficially owned by Fiduciary Trust Company International are held by
trusts for the benefit of Mr. Sharpe and members of his family.
(12) W. Nicholas Thorndike owns 134 shares of Providence Journal Class A
Common Stock and 108 shares of Providence Journal Class B Common Stock.
He holds 29 shares of Providence Journal Class A Common Stock and 44
shares of Providence Journal Class B Common Stock as sole custodian for a
member of another family. He is a co-trustee of several trusts for the
benefit of members of another family holding 2,482 shares of Providence
Journal Class A Common Stock and 3,156 shares of Providence Journal Class
B Common Stock. Mr. Thorndike is one of the Directors of Southland
Communications, Inc., which owns the shares indicated in the foregoing
table.
52
PRE-MERGER TRANSACTIONS
Prior to and as a condition to the Merger, certain transactions must be
consummated.
NEW INDEBTEDNESS
Prior to the PJC Spin-Off, Providence Journal or one or more of the PJC Cable
Subsidiaries will incur the New Cable Indebtedness in a minimum principal
amount of $410 million. (See "Description of Continental Indebtedness--1995
Credit Facility" for a description of a credit facility to be extended to
subsidiaries of Continental, which will be used, in part, to provide the $410
million of New Cable Indebtedness to be incurred by Providence Journal and the
$405 million for the King Cable Purchase.) Providence Journal anticipates that
the proceeds of the New Cable Indebtedness, together with the $405 million to
be provided by Continental for the King Cable Purchase, will be used as
follows: approximately $301 million will be applied to discharge all existing
indebtedness of Providence Journal, approximately $282 million will be applied
to discharge all existing indebtedness of KBC, approximately $265 million
(including $5 million in transaction fees) will be used to consummate the Kelso
Buyout, approximately $120 million will be used to pay taxes resulting from the
King Cable Purchase, and approximately $122 million will be used to purchase
minority interests in certain PJC Cable Subsidiaries not presently wholly owned
by Providence Journal and to pay costs associated with the Merger and certain
deferred compensation. (See "The Merger--General Provisions--Share Exchange".)
In addition, New Providence Journal will incur the NPJ Indebtedness in the
amount of approximately $275 million in order to meet the foregoing
obligations, among others. New Providence Journal will have no obligations or
liabilities with respect to the New Cable Indebtedness. Continental will have
no obligations or liabilities with respect to the NPJ Indebtedness.
KING CABLE PURCHASE
Immediately prior to the Kelso Buyout and the PJC Spin-Off, pursuant to the
terms of the Merger Agreement, Continental will purchase from KBC the King
Cable Business for a cash purchase price of $405 million. In connection with
and as part of the King Cable Purchase, New Providence Journal will assume and
agree to hold Continental harmless from all liabilities of KBC (including,
without limitation, federal and state income taxes payable as a result of the
King Cable Purchase). (See "The PJC Spin-Off" for a description of the
liabilities to be assumed by New Providence Journal in connection with the King
Cable Purchase.)
KELSO BUYOUT
The Kelso Partnerships presently own, or hold a warrant providing the Kelso
Partnerships with a right to acquire, 50% of the capital stock of KHC, which in
turn owns and controls 100% of the capital stock of KBC. Providence Journal
will use $265 million ($260 million of which is for the purchase price and $5
million of which is to cover transaction fees) of the proceeds of the New Cable
Indebtedness and the NPJ Indebtedness to consummate the Kelso Buyout. Following
the Kelso Buyout, KHC will be a wholly owned subsidiary of Providence Journal.
The purchase price of the Kelso Partnerships' interest in KHC represents a
combined purchase price for both KHC's cable television and broadcast
television businesses, net of consolidated debt, expenses related to the Kelso
Buyout and a pro rata share of transaction costs for the Merger and the related
transactions. The portion of the Kelso Buyout purchase price represented by the
King Cable Business is equal to the pro rata portion of the aggregate purchase
price Continental agreed to pay for the PJC Cable Business as a whole
(including the King Cable Business) attributable to such assets. The purchase
price of the Kelso Partnerships' interest in KHC also includes a negotiated
value for the KHC broadcast television business based on a multiple of cash
flow appropriate to that industry in the opinion of Providence Journal
management.
PJC SPIN-OFF
New Providence Journal, which currently is a wholly owned subsidiary of
Providence Journal, was recently organized for purposes of the transactions
contemplated by the Merger Agreement. Before the PJC
53
Spin-Off, New Providence Journal will own no assets and will not conduct any
business activities other than in connection with the transactions contemplated
by the Merger Agreement. Immediately after the King Cable Purchase and the
Kelso Buyout and prior to the Merger (pursuant to the Contribution), Providence
Journal will transfer to New Providence Journal as a capital contribution all
of Providence Journal's right, title and interest in the PJC Non-Cable Business
and all other assets of Providence Journal, but excluding (i) the Providence
Journal Cable Business, (ii) sufficient cash to pay Providence Journal's
expenses relating to the transactions contemplated by the Merger Agreement and
(iii) Providence Journal's rights under the Contribution and Assumption
Agreement. In exchange, New Providence Journal will issue to Providence Journal
(a) a number of shares of New Providence Journal Class A Common Stock equal to
the number of shares of Providence Journal Class A Common Stock then
outstanding and (b) a number of shares of New Providence Journal Class B Common
Stock equal to the number of shares of Providence Journal Class B Common Stock
then outstanding.
New Providence Journal will assume and hold Providence Journal and its
subsidiaries (and Continental following the Merger), officers and Directors
harmless from all debts, liabilities and all other obligations of Providence
Journal, excluding the New Cable Indebtedness, substantially all of the
liabilities associated with the PJC Cable Business and Providence Journal's
obligations under the Contribution and Assumption Agreement. Pursuant to the
Contribution and Assumption Agreement, New Providence Journal has agreed that,
for a period of four years from the Effective Time, it will not (i) sell,
transfer, assign or otherwise dispose of any material assets or (ii) declare,
set aside or pay any dividend or other distribution (with certain exceptions)
in respect of its capital stock, or redeem or otherwise acquire any of its
capital stock, if, as a result of any such transaction, New Providence Journal
would have a fair market value (determined on the basis of a sale on a private
market, going concern basis, free and clear of all liabilities) of less than:
(x) for the period to and including the first anniversary of the Effective
Time, $200,000,000, (y) for the period from the first anniversary of the
Effective Time to and including the second anniversary of the Effective Time,
$150,000,000 and (z) for the period from the second anniversary of the
Effective Time to and including the fourth anniversary of the Effective Time,
$50,000,000, provided, however, that New Providence Journal may proceed with
any transaction that would otherwise be prohibited by the foregoing if it
provides security to Continental in form and amount reasonably acceptable to
Continental.
As part of the Contribution, Providence Journal will agree to hold New
Providence Journal and its subsidiaries, officers and Directors harmless from
substantially all debts, liabilities or obligations of Providence Journal, to
the extent they arise out of, or are based upon or otherwise relate to, the PJC
Cable Business or its assets or the New Cable Indebtedness.
Notwithstanding the foregoing, New Providence Journal will be responsible for
all federal and state income tax liabilities of Providence Journal and its
subsidiaries for periods ending on or before the Closing Date (including,
without limitation, substantially all tax liabilities which arise in connection
with the King Cable Purchase), and Continental will be responsible for all such
liabilities pertaining to the PJC Cable Business for periods ending thereafter.
(See "The Merger--Tax Matters".) In addition, New Providence Journal will be
responsible for certain liabilities associated with the PJC Cable Business
relating to employee benefits and the liabilities under the Cable Division Sale
Bonus Plan. (See "The Merger--Certain Employee Matters".)
Immediately after the Contribution, Providence Journal will distribute one
share of New Providence Journal Class A Common Stock to the holder of each
share of Providence Journal Class A Common Stock and one share of New
Providence Journal Class B Common Stock to the holder of each share of
Providence Journal Class B Common Stock, each as outstanding immediately prior
to the Distribution. As a result, each holder of Providence Journal Common
Stock immediately prior to the PJC Spin-Off will own the same number and class
of shares in New Providence Journal as such holder owned in Providence Journal.
The Contribution, the Distribution and the assumption of liabilities by New
Providence Journal and Providence Journal in connection with the Contribution
collectively constitute the PJC Spin-Off. The terms of the PJC
54
Spin-Off are set forth in the Merger Agreement and, in addition, are to be
governed by the Contribution and Assumption Agreement, a copy of which is
attached as Exhibit C to the Merger Agreement. For a description of the method
of delivery of shares of New Providence Journal Common Stock as a result of the
PJC Spin-Off, see "Payments and Distributions to Stockholders".
CERTAIN INTERCOMPANY TRANSACTIONS
Providence Journal has agreed to cause one of two alternative intercompany
transactions to occur prior to the Effective Time. The determination as to
which alternative transaction will be consummated by Providence Journal is
dependent upon the scope and substance of the private letter ruling from the
Service, which Providence Journal has requested and which ruling is a condition
to the obligations of the parties to consummate the Merger. The first
alternative consists of the following transactions: (i) the assets of Colony
Cablevision shall be contributed to Colony, a wholly owned subsidiary of
Providence Journal, and (ii) Westerly Cable Television, Inc., a wholly owned
subsidiary of Colony ("Westerly"), shall be merged with and into Colony. In the
second alternative, (i) the assets of Colony Cablevision will be retained by
Providence Journal, (ii) Westerly shall be merged with and into Colony, and
(iii) either the cable assets of Westerly shall be distributed to Providence
Journal, or Colony will be merged with and into Providence Journal. Each of
these intercompany transactions is intended to be tax-free to Providence
Journal and its stockholders, and consummation of one of these alternatives is
necessary for the PJC Spin-Off to be tax-free. (See "Certain Federal Income Tax
Considerations" for a description of the ruling requested from the Service
relating to the first alternative.) Neither of these internal intercompany
transactions will adversely affect Providence Journal or its stockholders.
THE MERGER
The following description of certain provisions of the Merger Agreement and
the exhibits and schedules thereto is only a summary and does not purport to be
complete. This description is qualified in its entirety by reference to the
complete text of the Merger Agreement, a conformed copy of which is attached
hereto as Annex I and incorporated herein by reference.
GENERAL PROVISIONS
SHARE EXCHANGE. The Merger Agreement provides that, subject to the requisite
adoption and approval by Continental's stockholders of the Merger and the
Continental Recapitalization Amendment,the requisite adoption and approval by
Providence Journal's stockholders of the PJC Spin-Off, the Providence Journal
Charter Amendment, the Merger and the King Cable Purchase and the satisfaction
or waiver of certain other conditions, at the Effective Time, Providence
Journal (which, at the time of the Merger, will own only the Providence Journal
Cable Business) will be merged with and into Continental, the separate
existence of Providence Journal will cease, and Continental will continue as
the surviving corporation. As a result of the Merger and the King Cable
Purchase, Continental will acquire the PJC Cable Business and will assume the
New Cable Indebtedness and substantially all of the liabilities of Providence
Journal relating to the PJC Cable Business, and shares of Providence Journal
Common Stock outstanding immediately prior to the Merger shall be converted
into shares of Continental Merger Stock.
Pursuant to the Merger Agreement and after giving effect to the Continental
Stock Split, by virtue of the Merger and without any action on the part of the
holder of any shares of capital stock:
(i) Each share of the capital stock of Providence Journal issued and
outstanding immediately prior to the Merger and owned directly or
indirectly by Providence Journal as treasury stock, by New Providence
Journal or by any of their respective subsidiaries shall be cancelled, and
no consideration shall be delivered in exchange therefor;
(ii) Each share of the capital stock of Continental issued and
outstanding immediately prior to the Merger shall remain outstanding; and
55
(iii) Each share of Providence Journal Common Stock outstanding
immediately prior to the Merger shall be converted into and shall become
the number of fully paid and nonassessable shares of Continental Class A
Common Stock determined in accordance with the following formula:
Class A Common Stock
Formula: Maximum Amount
------------------------------------
$19.40 x PJC Outstanding Shares
"Maximum Amount"........ means $596,069,000, which amount will be reduced
by the amount set forth opposite each of the
following PJC Cable Subsidiaries (which are not
currently wholly owned by Providence Journal) if
Providence Journal does not, directly or
indirectly, wholly own such PJC Cable Subsidiary
at the Effective Time:
SUBSIDIARY REDUCTION
---------- -----------
Copley/Colony, Inc. $42,610,000
Dynamic Partnership $11,300,000
"PJC Outstanding means the shares of Providence Journal Common
Shares"................ Stock outstanding immediately prior to the Merger
(other than shares owned directly or indirectly by
Providence Journal as treasury stock, by New
Providence Journal or by any of their respective
subsidiaries).
As of the date of this Joint Proxy Statement-Prospectus, Providence Journal
owns, directly or indirectly, 50% of Copley/Colony and 89.8% of the Dynamic
Partnership. Providence Journal anticipates that, as of the Effective Time, it
will have purchased the third-party interest in Copley/Colony at which time it
will be wholly owned by Providence Journal, although there can be no
assurances in this regard. Providence Journal has signed a purchase agreement
for the 50% interest in Copley/Colony and closed the purchase in escrow,
pending receipt of franchise authority approvals for the transfer. The limited
partner in the Dynamic Partnership and Providence Journal are currently in
litigation concerning the transactions contemplated by the Merger Agreement.
Depending on the outcome of this litigation, the amount of the New Cable
Indebtedness may be reduced. (See "Description of Providence Journal Cable
Television Business--Legal Proceedings".) The value derived from the
Continental Merger Stock to be received by the Providence Journal stockholders
is the same as the values assigned to the minority interests in the PJC Cable
Subsidiaries discussed above, based on a multiple of cash flow analysis. No
affiliates of Providence Journal or Continental owned or own minority
interests in the above-discussed PJC Cable Subsidiaries.
The holder of any shares of Providence Journal Common Stock outstanding
immediately prior to the Merger that has validly exercised such holder's
dissenters' rights under applicable Rhode Island Law shall not be entitled to
receive, in respect of the shares of Providence Journal Common Stock as to
which such holder has validly exercised dissenters' rights, shares of
Continental Merger Stock and New Providence Journal Common Stock unless and
until such holder shall have failed to perfect, or shall have effectively
withdrawn or lost, such holder's right to payment for such holder's shares of
Providence Journal Common Stock under such Rhode Island Law. In such event,
such holder shall be entitled to receive the Continental Merger Stock and the
New Providence Journal Common Stock such holder would have been entitled to
had such holder not exercised dissenters' rights. Providence Journal,
Continental and New Providence Journal have reached certain agreements
relating to any such exercise of dissenters' rights, including Continental's
agreement, as the surviving corporation of the Merger, to pay any amount
payable to any such stockholder who becomes entitled under Rhode Island Law to
payment for such holder's shares of Providence Journal Common Stock and New
Providence Journal's agreement to reimburse Continental for
56
all such payments. After New Providence Journal has so reimbursed Continental,
any Continental Merger Stock that would have been issued to the stockholder
receiving payment from Continental shall be issued to New Providence Journal.
(See "Rights of Dissenting Stockholders--Providence Journal" for further
information concerning Providence Journal's stockholders' rights to dissent,
including a discussion of the mechanics of perfecting such rights.)
The Merger Agreement provides that no fractional shares of Continental Merger
Stock will be issued in connection with the Merger. In lieu of any such
fractional interests, each holder of Providence Journal Common Stock entitled
to receive Continental Merger Stock pursuant to the Merger will be entitled to
receive an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying $19.40 by the fractional interest in the share of
Continental Merger Stock, to which such holder would otherwise be entitled
(after taking into account all shares of Continental Merger Stock being issued
to such holder pursuant to the Merger Agreement).
After giving effect to the Continental Stock Split and assuming that no
adjustment is made to the Maximum Amount, holders of Providence Journal Common
Stock will receive an aggregate of 30,725,207 shares of Continental Class A
Common Stock. (See "Description of Continental Capital Stock".)
The number of shares of Continental Merger Stock to be issued shall be
further adjusted if between November 18, 1994 and the Effective Time the
outstanding shares of Continental Class A Common Stock or Providence Journal
Common Stock shall have been further changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
RESTRICTIONS ON TRANSFER OF CONTINENTAL MERGER STOCK. As more fully described
below, in order to protect the tax-free nature of the PJC Spin-Off and the
Merger, the Continental Merger Stock, until the first anniversary of the
Effective Time, will be subject to the Transfer Restrictions, which will
prohibit all "Transfers" (defined below) of Continental Merger Stock by former
Providence Journal stockholders receiving such Continental Merger Stock in the
Merger, except for "Permitted Transfers" to "Permitted Transferees" (both of
which terms are defined below) of the economic owner of such shares of
Continental Merger Stock (each a "Restricted Holder"). Any purported transfer
of the economic, record or beneficial ownership of shares of Continental Merger
Stock not permitted by the Continental By-Laws will be void and have no legal
effect. The following description of the Transfer Restrictions is only a
summary and does not purport to be complete. This description is qualified in
its entirety by reference to the complete text of Article XIII of the
Continental By-Laws (in which the Transfer Restrictions are set forth), a copy
of which is attached as Exhibit A to the Merger Agreement attached hereto as
Annex I and incorporated herein by reference.
A "Transfer" includes, but is not limited to, any indirect or direct
transfer, offer to sell, sale, assignment, grant of an option to acquire,
pledge, or other disposition.
A "Permitted Transfer" is a transfer not for any value or consideration,
including but not limited to, a transfer by gift, bequest, pursuant to the
terms of a trust or the laws of descent and distribution, or by operation of
law.
A "Permitted Transferee" of a Restricted Holder who is an individual is
generally defined in the By-Laws as:
(i) such Restricted Holder's spouse or former spouse, any lineal
descendant of a grandparent of such Restricted Holder or a grandparent of
the spouse or former spouse of such Restricted Holder, including in both
cases, adopted children, and any spouse or former spouse of such lineal
descendants (said descendants and their spouses and former spouses,
together with the spouse and former spouses of such Restricted Holder and
the children of such spouse or former spouse being referred to as such
Restricted Holder's "family members");
57
(ii) a voting trust where the minimum number of the trustees whose
approval is necessary to direct the voting or disposition of shares of
capital stock held by such entity consists of such Restricted Holder, his
family members, or executive officers of Continental or its wholly owned
subsidiaries;
(iii) a trust (other than a voting trust) solely for the benefit of such
Restricted Holder, his family members or the corporations or partnerships
described below;
(iv) a partnership or corporation, a majority of the beneficial ownership
of which, is held by such Restricted Holder or one or more of his Permitted
Transferees;
(v) the estate of such deceased, bankrupt or insolvent Restricted Holder;
and
(vi) a corporation, trust, partnership or financial institution which
shall hold any shares of Continental Merger Stock in a custodial or nominee
arrangement.
Shares of Continental Merger Stock transferred after the Effective Time to a
partnership or corporation by a Restricted Holder may be transferred to the
person who transferred such shares to such partnership or corporation or to
Permitted Transferees of such transferor. Shares of Continental Merger Stock
transferred after the Effective Time to a voting trust or any other trust other
than an irrevocable trust may be transferred to the person who transferred
shares to such trust and such Restricted Holder's Permitted Transferees. Shares
of the Continental Merger Stock transferred after the Effective Time to an
irrevocable trust (other than a voting trust) may be transferred to the
beneficiaries of the principal of such trust.
Shares of Continental Merger Stock owned by a corporation or a limited
liability company as a Restricted Holder may be transferred only to any person
with economic ownership of any of the outstanding shares of such corporation or
limited liability company entitled to vote generally for the election of
directors of such corporation or limited liability company or any entity which
is more than 90% owned by such corporation or limited liability company. Shares
of Continental Merger Stock owned by a partnership as a Restricted Holder may
be transferred only to the partners of such partnership at the Effective Time
and Permitted Transferees of such partners. Shares of Continental Merger Stock
owned by a revocable trust as a Restricted Holder may be transferred to the
settlor of such trust, the Permitted Transferees of such settlor, the
beneficiaries of such trust at the Effective Time and the Permitted Transferees
of such beneficiaries. Shares of Continental Merger Stock owned by an
irrevocable trust (other than a voting trust) as a Restricted Holder may be
transferred to the beneficiaries of the principal of such trust. In the case of
an entity holding shares of Continental Merger Stock as a nominee, the shares
may be transferred to the Permitted Transferees of the beneficial owner of such
shares.
It will be permissible to pledge shares of Continental Merger Stock to secure
loans that are recourse to the Restricted Holder, provided that such shares are
not transferred into or registered in the name of the pledgee and that upon
foreclosure of the pledge, the pledgee may transfer the shares of Continental
Merger Stock only to a Permitted Transferee of the pledgor.
The Transfer Restrictions, by their own terms, automatically expire on the
first anniversary of the Effective Time. Each certificate representing shares
of Continental Merger Stock must bear a legend indicating that the shares
represented by such certificates are subject to the Transfer Restrictions.
RESTRICTIONS ON TRANSFER OF NEW PROVIDENCE JOURNAL COMMON STOCK. The shares
of New Providence Journal Common Stock received by Providence Journal
stockholders pursuant to the PJC Spin-Off, until the first anniversary of the
Effective Time, will be subject to the NPJ Transfer Restrictions that are
identical to those imposed on the Continental Merger Stock described above. A
copy of Section 11.03(b) of the New Providence Journal By-Laws (in which the
NPJ Transfer Restrictions are set forth) is attached as Exhibit B to the Merger
Agreement attached hereto as Annex I and is incorporated herein by reference.
58
For a description of the method of delivery of Continental Merger Stock and
shares of New Providence Journal Common Stock to be issued in the PJC Spin-Off,
see "Payments and Distributions to Stockholders". PROVIDENCE JOURNAL
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER
OF TRANSMITTAL.
WORKING CAPITAL AND CAPITAL EXPENDITURE ADJUSTMENTS. Immediately prior to the
Effective Time and after giving effect to the PJC Spin-Off, Providence Journal
will deliver to Continental a schedule setting forth Providence Journal's best
estimate of the Working Capital of the PJC Cable Subsidiaries as of the
Effective Time. If such schedule indicates that such Working Capital is greater
than zero, Continental shall pay the excess to New Providence Journal in
immediately available funds; if the schedule indicates that such Working
Capital is less than zero, New Providence Journal shall pay the difference to
Continental in immediately available funds. Within 90 days after the Effective
Time, Continental shall deliver to New Providence Journal its determination of
the Working Capital as of the Effective Time and after giving effect to the PJC
Spin-Off. Within 10 days thereafter (or within 10 days of the resolution of any
dispute regarding such determination, which dispute, if not resolved by
Continental and New Providence Journal, will be resolved by an independent
certified public accounting firm mutually acceptable to Continental and New
Providence Journal, the decision of which shall be final and binding on
Continental and New Providence Journal), Continental shall pay to New
Providence Journal, or New Providence Journal shall pay to Continental, as the
case may be, in immediately available funds, any additional payment to which
such party would have been entitled at the Effective Time based on the final
determination of Working Capital. Based upon the financial statements of
Providence Journal Cable as of June 30, 1995, the Working Capital deficit is
estimated to be approximately $16,000,000 as of such date. There can be no
assurances that the actual Working Capital adjustment will equal or approximate
this amount. In addition to the Working Capital adjustment, the Merger
Agreement requires that Providence Journal and the PJC Cable Subsidiaries
expend a stated amount per month on capital improvements to the cable systems
of Providence Journal and the PJC Cable Subsidiaries. Failure to meet such
capital expenditure requirements will result in a Capital Expenditure
Adjustment at Closing, which will be paid by Providence Journal to Continental.
Providence Journal currently estimates that the Capital Expenditure Adjustment
will be approximately $12,000,000. There can, however, be no assurances that
the actual Capital Expenditure Adjustment will equal or approximate this
amount.
CERTIFICATE OF INCORPORATION AND BY-LAWS; DIRECTORS. The Merger Agreement
provides that the Continental Restated Certificate and the Continental By-Laws,
each as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation and By-Laws of the surviving corporation. In
addition, the Directors of Continental immediately prior to the Effective Time
and Messrs. Stephen Hamblett and Trygve Myhren (or such replacement nominees
reasonably acceptable to Continental that Providence Journal may designate)
will be the Directors of the surviving corporation and the officers of
Continental immediately prior to the Effective Time will be the officers of the
surviving corporation. From and after the Effective Time, the Merger will have
all the effects provided by applicable law. (See "Certain Covenants--Certain
Rights with Respect to Continental's Board of Directors".)
EFFECTIVE TIME OF MERGER. The Merger will become effective upon the filing of
a certificate of merger with the Secretary of State of the State of Delaware
and articles of merger with the Secretary of State of the State of Rhode Island
in accordance with applicable law, or at such later date as the certificate of
merger and articles of merger may specify.
CONDITIONS PRECEDENT
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES. The respective obligations of
Providence Journal, New Providence Journal and KBC, on the one hand, and
Continental, on the other hand, to consummate the transactions contemplated by
the Merger Agreement are subject to the requirements that:
(i) the Providence Journal Proposals shall have been approved and adopted
by the stockholders of Providence Journal;
59
(ii) the Continental Proposals shall have been approved and adopted by
the stockholders of Continental;
(iii) the New Cable Indebtedness shall have been incurred; the NPJ
Indebtedness shall have been incurred in a minimum amount of $250,000,000;
the PJC Spin-Off and the King Cable Purchase shall have been consummated in
accordance with the terms of the Merger Agreement, and the Kelso Buyout
shall have been consummated in accordance with the terms of the agreement
between Providence Journal and the Kelso Partnerships;
(iv) all notices to, or permits, consents, waivers, approvals,
authorizations and orders of, third parties that are material to the
conduct of the business of the surviving corporation and its subsidiaries
after the Effective Time and governmental authorizations and approvals
required with respect to the transactions contemplated by the Merger
Agreement shall have been filed or obtained and be in full force and
effect; provided, however, that this condition shall not apply with respect
to any authorization, consent, waiver, order or approval necessary for the
transfer of control of any cable television franchise if the condition
described in subparagraph (vi) set forth below under the caption
"Conditions to Obligations of Continental" shall have been satisfied or
waived by Continental;
(v) no federal, state or foreign governmental authority or other agency
or commission or court of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
injunction or other order (whether temporary, preliminary or permanent)
that remains in effect and has the effect of making the transactions
contemplated by the Merger Agreement illegal or otherwise prohibiting such
transactions or questions the validity or the legality of the transactions
contemplated by the Merger Agreement and could reasonably be expected to
materially and adversely affect the value of the PJC Cable Business or
Continental taken as a whole;
(vi) the Continental Registration Statement and New Providence Journal's
Registration Statement (of which this Joint Proxy Statement-Prospectus
forms a part) shall have been declared effective under the Securities Act,
and no stop orders with respect thereto shall have been issued;
(vii) Providence Journal shall have received (a) from the Service a
private letter ruling that the PJC Spin-Off will qualify as a tax-free
reorganization under Sections 368(a)(1)(D) and 355 of the Code and (b) an
opinion of Edwards & Angell, counsel to Providence Journal, that the Merger
will qualify as a tax-free reorganization under Section 368 of the Code;
and
(viii) no nationwide moratorium on commercial banking activities and no
general suspension of trading for more than one business day in securities
on any United States national securities exchange or over-the-counter
market shall have occurred and be continuing.
CONDITIONS TO OBLIGATIONS OF PROVIDENCE JOURNAL, NEW PROVIDENCE JOURNAL AND
KBC. The obligations of Providence Journal, New Providence Journal and KBC to
effect the transactions contemplated by the Merger Agreement are subject to the
satisfaction, on or prior to the date upon which the closing (the "Closing") of
the transactions contemplated by the Merger Agreement shall occur, of the
following additional conditions:
(i) the representations and warranties of Continental in the Merger
Agreement or in any other document delivered pursuant thereto shall be true
and correct in all material respects on and as of the Closing Date with the
same effect as if made on and as of the Closing Date, and at the Closing,
Continental shall have delivered to New Providence Journal a certificate to
that effect;
(ii) each of the obligations of Continental to be performed on or before
the Closing Date pursuant to the terms of the Merger Agreement shall have
been duly performed in all material respects on or before the Closing Date,
and at the Closing, Continental shall have delivered to New Providence
Journal a certificate to that effect; and
(iii) Providence Journal and New Providence Journal shall have received
an opinion from Sullivan & Worcester, counsel to Continental, dated the
Closing Date, in form and substance reasonably satisfactory to Providence
Journal, New Providence Journal and their counsel.
60
Notwithstanding the foregoing, any failure of any representation or warranty
of Continental to be true and correct as of the Closing Date will not excuse
Providence Journal, New Providence Journal, and KBC from their obligations
under the Merger Agreement (a) if (i) the aggregate amount of all damages,
liabilities, obligations, losses, deficiencies, demands, claims, penalties,
assessments, judgments, actions, proceedings and suits of whatever kind and
nature (including reasonable attorneys' fees and expenses, "Losses and
Expenses") that could reasonably be expected to arise as a result of the
failure of such representations and warranties to be true and correct as of the
Closing Date would not exceed $10 million or (ii) in the event such Losses and
Expenses exceed $10 million but are less than $100 million, Continental
indemnifies New Providence Journal against all such Losses and Expenses in
excess of $10 million on terms and conditions reasonably satisfactory to New
Providence Journal, and (b) if such failure relates to any subsidiary or any
system acquired by Continental after November 18, 1994, unless such failure,
individually or in the aggregate, would have a material adverse effect on
Continental and its subsidiaries taken as a whole.
CONDITIONS TO OBLIGATIONS OF CONTINENTAL. The obligations of Continental to
effect the transactions contemplated by the Merger Agreement are subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
(i) the representations and warranties of Providence Journal and New
Providence Journal contained in the Merger Agreement or in any other
document delivered pursuant thereto shall be true and correct in all
material respects on and as of the Closing Date with the same effect as if
made on and as of the Closing Date, and at the Closing, New Providence
Journal shall have delivered to Continental a certificate to that effect;
(ii) each of the obligations of Providence Journal, New Providence
Journal, KHC and KBC to be performed on or before the Closing Date pursuant
to the terms of the Merger Agreement shall have been duly performed in all
material respects on or before the Closing Date, and at the Closing, New
Providence Journal shall have delivered to Continental a certificate to
that effect;
(iii) Immediately prior to the Effective Time, Providence Journal shall
have no assets except (a) all of the capital stock of the PJC Cable
Subsidiaries (other than the capital stock of the subsidiaries that
comprise the King Cable Business, which shall have been sold to Continental
as part of the King Cable Purchase), (b) the contractual rights created
under the Contribution and Assumption Agreement, (c) cash sufficient to pay
Providence Journal's, expenses related to the transactions contemplated by
the Merger Agreement, (d) the assets of Colony Cablevision and Westerly or
Colony to the extent that the second alternative under "Pre-Merger
Transactions--Certain Intercompany Transactions" is consummated, and (e)
other immaterial assets related to the PJC Cable Business;
(iv) Immediately prior to the Effective Time, Providence Journal shall
have no liabilities except (a) liabilities associated with the operations
of the PJC Cable Subsidiaries or the cable operations of Providence
Journal, (b) the New Cable Indebtedness and (c) the contractual obligations
created under the Contribution and Assumption Agreement;
(v) Continental shall have received an opinion of Edwards & Angell, dated
as of the Closing Date, in form and substance reasonably satisfactory to
Continental and its counsel;
(vi) Providence Journal shall have obtained the consent, waiver or other
approval of governmental authorities having authority over at least 95% of
Providence Journal's and the PJC Cable Subsidiaries' basic subscribers;
provided, however, that basic subscribers served under franchises that do
not require any such consent, waiver or other approval are to be included
in such percentage, and provided, further, that such condition shall not be
deemed to be satisfied until the earlier to occur of (a) 30 days following
the date such percentage is obtained, (b) the date on which the condition
would be satisfied if the required percentage were 100% or (c) December 31,
1995;
(vii) Providence Journal and New Providence Journal shall have entered
into the Noncompetition Agreement with Continental;
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(viii) Providence Journal shall have delivered to Continental a
certificate signed by the Chief Executive Officer and the Chief Financial
Officer of New Providence Journal certifying that there are no outstanding
options to acquire any capital stock of New Providence Journal, and, as to
the number of PJC Outstanding Shares, indicating the class and series of
such shares; and
(ix) Continental shall not be required to assume or otherwise be liable
for any obligation or duty of Providence Journal under the Rights Agreement
and the holders of the rights thereunder shall not have any rights to
acquire any shares of Continental Merger Stock pursuant thereto. The Rights
Agreement is identical in substance to the NPJ Rights Agreement. For a
description of the NPJ Rights Agreement, see "Description of New Providence
Journal Common Stock--NPJ Rights Agreement".
Notwithstanding the foregoing, any failure of any representation or warranty
of Providence Journal or New Providence Journal to be true and correct as of
the Closing Date (other than a representation or warranty as to capitalization)
will not excuse Continental from its obligations under the Merger Agreement if
(i) the aggregate amount of all Losses and Expenses that could reasonably be
expected to arise as a result of the failure of such representations and
warranties to be true and correct would not exceed $5 million or (ii) in the
event such Losses and Expenses exceed $5 million but are less than $50 million,
New Providence Journal indemnifies Continental against all such Losses and
Expenses in excess of $5 million on terms and conditions reasonably
satisfactory to Continental.
CERTAIN COVENANTS
INTERIM OPERATIONS OF PROVIDENCE JOURNAL. Pursuant to the Merger Agreement,
Providence Journal has agreed, among other things, that from November 18, 1994
to the Effective Time (except as contemplated by the Merger Agreement and
except for Providence Journal's operation of Colony Cablevision, which is
governed by the provisions relating to the operation of the PJC Cable
Subsidiaries described below) Providence Journal will not, without the prior
written consent of Continental:
(i) amend the Providence Journal Charter, the Providence Journal By-Laws
or the Rights Agreement (other than as contemplated by the Merger
Agreement);
(ii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of its capital stock, or redeem or otherwise acquire any of its capital
stock, except for dividends declared and paid, or redemptions or other
acquisitions made, consistent with the terms described in a schedule to the
Merger Agreement, or in connection with certain stock and option plans of
Providence Journal;
(iii) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution of any shares of its capital stock;
(iv) except to the extent transferred to or assumed by New Providence
Journal pursuant to the PJC Spin-Off, make any acquisition of the assets of
third parties, except through a subsidiary other than a PJC Cable
Subsidiary;
(v) except to the extent any of the following are transferred to or
assumed by New Providence Journal pursuant to the PJC Spin-Off, (a) create,
incur or assume any long-term debt not currently outstanding (including
obligations in respect of capital leases), (b) assume, guarantee, endorse
or otherwise become liable or responsible for the obligations of any other
person or entity, (c) enter into any material agreement, commitment or
understanding, (d) make any acquisition of the stock or other equity
interests, by means of merger, consolidation or otherwise, of any person or
entity or (e) make any loans, advances or capital contributions to, or
investments in, any person or entity other than a subsidiary;
(vi) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of
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any class or any other equity securities or amend any of the terms of any
such securities or agreements outstanding on November 18, 1994; provided
that up to 9,000 shares of Providence Journal Common Stock may be issued in
connection with certain stock and option plans of Providence Journal;
(vii) terminate, amend, modify or waive compliance with any of the
provisions, terms or conditions of the Contribution and Assumption
Agreement directly or indirectly in respect of the assets or the
liabilities retained by Providence Journal or affecting the rights or
obligations of Providence Journal from and after the Effective Time; or
(viii) take or agree to take any of the foregoing actions or any actions
that would (a) make any representation or warranty of Providence Journal or
New Providence Journal contained in the Merger Agreement untrue or
incorrect as of the date made or as of the Closing Date, (b) result in any
of the conditions to Closing in the Merger Agreement not being satisfied or
(c) be inconsistent with the terms of the Merger Agreement or the
transactions contemplated thereby.
In addition, Providence Journal has agreed in the Merger Agreement that it
will use its best efforts to cause all of the PJC Cable Subsidiaries to be
wholly owned by Providence Journal and its subsidiaries as of the Closing Date.
INTERIM OPERATIONS OF PJC CABLE SUBSIDIARIES. Pursuant to the Merger
Agreement, Providence Journal has agreed that, except as contemplated by the
Merger Agreement, from November 18, 1994 to the Effective Time, it will conduct
its operation of Colony Cablevision and will cause each of the PJC Cable
Subsidiaries to conduct its operations, according to the ordinary and usual
course of business and consistent with past practices. Providence Journal has
also agreed that (without the prior written consent of Continental) it shall
not (with respect to its systems) and it shall not permit any of the PJC Cable
Subsidiaries to:
(i) amend its charter or bylaws or alter through merger, liquidation,
dissolution, reorganization, restructuring or in any other fashion the
ownership of any PJC Cable Subsidiary, except as permitted by the Merger
Agreement;
(ii) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of
any class or any other equity securities or amend any of the terms of any
securities or agreements outstanding on November 18, 1994;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of its capital stock, or redeem or otherwise acquire any of its securities;
provided, however, that (a) any such subsidiary may declare and pay
dividends that are payable to any other such subsidiary and (b) any such
subsidiary may declare and pay dividends to Providence Journal in an
aggregate amount not to exceed the consolidated adjusted net income of the
PJC Cable Subsidiaries for the period from November 18, 1994 to the Closing
Date (for purposes of this covenant, the PJC Cable Subsidiaries'
consolidated adjusted net income for such period means their consolidated
net income determined in accordance with GAAP and (a) increased by the sum
of (1) the amount of depreciation and amortization deductions taken during
such period and (2) the amount of accrued but unpaid consolidated income
taxes deducted in calculating such consolidated net income to the extent
not otherwise paid pursuant to tax sharing arrangements, and (b) decreased
by the sum of (1) the greater of (X) the amount of capital expenditures to
be made during such period in accordance with the capital expenditure
budget attached as a schedule to the Merger Agreement or (Y) the amount of
capital expenditures actually made by the PJC Cable Subsidiaries during
such period);
(iv) (a) create, incur or assume any long-term debt not currently
outstanding (including obligations in respect of capital leases), (b)
assume, guarantee, endorse or otherwise become liable or responsible for
the obligations of any other person or entity, or (c) make any loans,
advances or capital contributions to, or investments in, any person or
entity other than a PJC Cable Subsidiary;
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(v) acquire, sell, lease or dispose of any assets material to such PJC
Cable Subsidiary, other than sales of inventory and equipment in the
ordinary and usual course of business consistent with past practice;
(vi) mortgage, pledge or subject to any lien, lease, security interest or
other charge or encumbrance any of its properties or assets, tangible or
intangible, material to such PJC Cable Subsidiary;
(vii) subject to certain exceptions, fail to make expenditures in an
aggregate of at least $4,583,334 per month (of which no less than
$3,160,667 per month shall be expended on PJC Cable Subsidiaries other than
King Videocable and its subsidiaries) on capital improvements to the
systems owned and operated by the PJC Cable Subsidiaries in accordance with
Providence Journal's past practices;
(viii) without the prior consent of Continental, which is not to be
withheld or delayed unreasonably, (a) except as required by applicable law
or as disclosed to Continental in writing prior to November 18, 1994,
implement any rate change, retiering or repackaging of cable television
programming offered by any such subsidiary, (b) except as disclosed to
Continental in writing prior to November 18, 1994, make any cost-of-service
or hardship election under the rules and regulations adopted under the 1992
Cable Act or (c) amend any franchise or agree to make any payments or
commitments, including commitments to make future capital improvements or
provide future services, in connection with obtaining any authorization,
consent, order or approval or any governmental authority necessary for the
transfer of control of any franchise;
(ix) (a) grant any material increases in the compensation of any of its
Directors, officers or key employees, except in the ordinary course of
business consistent with past practice, (b) pay or agree to pay any
pension, retirement allowance or other material employee benefit not
required or contemplated by any of the benefit, severance, pension or
employment plans in existence on November 18, 1994, agreements or
arrangements as in effect on November 18, 1994 to any such Director,
officer or key employee, whether past or present, (c) enter into any new or
materially amend any employment agreement in existence on November 18, 1994
with any such Director, officer or key employee, except for employment
agreements with new employees entered into in the ordinary course of
business consistent with past practice, (d) enter into any new or
materially amend any severance agreement with any such Director, officer or
key employee in existence on November 18, 1994 or (e) except as may be
required to comply with applicable law, become obligated under any new
pension plan or arrangement, welfare plan or arrangement, multi-employer
plan or arrangement, employee benefit plan or arrangement, severance plan
or arrangement, benefit plan or arrangement, or similar plan or
arrangement, which was not in existence on November 18, 1994, or amend any
such plan or arrangement in existence on November 18, 1994, if such
amendment would have the effect of enhancing or accelerating any benefits
thereunder; provided, however, that Providence Journal shall not be deemed
to have breached subparagraphs (b), (c) or (d) of this provision if any
such payment, agreement or amendment prohibited thereby is, in the case of
a prohibited payment, paid in its entirety by Providence Journal prior to
the Closing Date or, in the case of a prohibited amendment or agreement,
such amendment or agreement will not impose continuing obligations on
Continental or any of its subsidiaries after the effectiveness of the
Merger;
(x) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services for the expenditure
of greater than $1 million per year, which is not cancellable without
penalty on 30 days' or less notice;
(xi) enter into any collective bargaining agreement or any successor
collective bargaining agreement to any existing collective bargaining
agreement; or
(xii) take or agree to take any of the foregoing actions or any actions
that would (a) make any representation or warranty of Providence Journal or
New Providence Journal contained in the Merger Agreement untrue or
incorrect as of the date when made or as of the Closing Date, (b) result in
any of
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the conditions in the Merger Agreement not being satisfied or (c) be
inconsistent with the terms of the Merger Agreement or the transactions
contemplated thereby.
INTERIM OPERATIONS OF CONTINENTAL. Except as contemplated by the Merger
Agreement, during the period from November 18, 1994 to the Effective Time,
Continental has agreed to conduct its operations according to its ordinary and
usual course of business and consistent with past practices, keep available the
services of its current officers and employees and preserve its relationships
with customers, franchising authorities, suppliers and others having business
dealings with it with the objective that the goodwill and on-going business of
Continental shall not be impaired in any material respect at the Effective
Time. Without limiting the generality of the foregoing, except as otherwise
contemplated by the Merger Agreement, Continental has agreed it will not,
without the prior written consent of Providence Journal:
(i) amend the Continental Restated Certificate or the Continental By-
Laws;
(ii) declare, set aside or pay any dividend or other distribution (except
(a) in the form of shares of capital stock of Continental or (b) any
dividend required to be paid by the terms of any preferred stock of
Continental which was not outstanding on November 18, 1994) in respect of
its capital stock, or redeem or otherwise acquire any of its equity
securities other than (I) repurchases of up to 16,684,150 shares of
Continental Common Stock which are subject to Continental's 1998-1999 Share
Repurchase Program or (II) other repurchases of shares of Continental
capital stock for an aggregate amount not to exceed $50,000,000; or
(iii) take or agree to take any of the foregoing actions or any actions
that would (a) except as otherwise permitted under the Merger Agreement,
make any representation or warranty of Continental contained in the Merger
Agreement untrue or incorrect as of the date when made or as of the Closing
Date, (b) result in any of the conditions to Closing in the Merger
Agreement not being satisfied or (c) be inconsistent with the terms of the
Merger Agreement or the transactions contemplated thereby.
CERTAIN RIGHTS WITH RESPECT TO CONTINENTAL'S BOARD OF DIRECTORS. The Merger
Agreement provides that at the Effective Time, Continental's Board of Directors
will be expanded by two persons and the Providence Journal Nominees will be
designated as Directors of Continental with a term of approximately three
years. Providence Journal has designated Stephen Hamblett and Trygve Myhren as
the Providence Journal Nominees; however, the Merger Agreement permits
Providence Journal to change the Providence Journal Nominees from time to time
prior to the Merger. In addition, Continental has agreed that, at the
expiration of the initial term of such nominees, Continental's Board of
Directors will exercise all authority under applicable law to nominate for
membership on such Board for an additional three year term two persons
designated by New Providence Journal who are reasonably acceptable to
Continental and its Board of Directors. New Providence Journal also has the
right to designate a successor reasonably satisfactory to Continental and its
Board of Directors to fill any vacancy resulting from the inability of any of
its designees to serve on such Board for any reason.
The Merger Agreement provides that, until the Effective Time (at which time
the Providence Journal Nominees will become Continental Directors), the
Providence Journal Nominees shall be entitled to notice of and to attend all
meetings of Continental's Board of Directors and shall be given copies of all
materials prepared for and distributed at or prior to such meetings. The Merger
Agreement further provides that prior to the Effective Time (i) if any
resolution is approved by the Continental Board by only one vote or (ii) if any
resolution pertaining to an Extraordinary Transaction (as defined below) is
approved by the Continental Board and at least two members of such Board vote
against such resolution, then, if the Providence Journal Nominees state in
writing that they would have voted against such resolution if they had been
members of Continental's Board of Directors, Continental will act upon such
resolution as though it had not been approved by its Board of Directors. An
"Extraordinary Transaction" is defined in the Merger Agreement to mean (x) any
proposed issuance by Continental of Continental Class A Common Stock (other
than certain issuances to Continental's employees) at a price per share less
than $485.00 (or, after giving effect to the Continental Stock Split, $19.40)
or (y) any proposed acquisition or disposition by Continental or any of its
65
subsidiaries of assets having a fair market value of more than $500,000,000
that, in the reasonable judgment of the Providence Journal Nominees and
Providence Journal's investment banker, is reasonably likely to cause the per
share value of the Continental Class A Common Stock to be less than $485.00
(or, after giving effect to the Continental Stock Split, $19.40).
COMMISSION FILINGS. The Merger Agreement provides that Providence Journal,
New Providence Journal and Continental shall promptly prepare and file any
filings required to be filed by each under the Securities Act, the Exchange
Act or any other federal or state laws relating to the transactions
contemplated by the Merger Agreement and will use their best efforts to
respond to any comments of the Commission or any other appropriate government
official with respect thereto. In addition, Providence Journal, New Providence
Journal and Continental have agreed to cooperate with each other and provide
to each other all information necessary in order to prepare such filings,
including this Joint Proxy Statement-Prospectus, Continental's and New
Providence Journal's Registration Statements, as to which this Joint Proxy
Statement-Prospectus forms a part, and any other registration statement of
Continental under the Securities Act and the Exchange Act in connection with
any other registered public offering by Continental.
REGISTRATION RIGHTS. Continental and New Providence Journal have agreed
that, on or prior to the consummation of the Merger, they will enter into a
registration rights agreement relating to the Continental Class A Common Stock
to be issued pursuant to the Merger, the form of which is attached as Exhibit
D to the Merger Agreement. Such agreement will provide that (subject to the
Transfer Restrictions), commencing at the time the obligation of Continental
to conduct an Offering under the Merger Agreement has been satisfied or
terminated, the Providence Journal stockholders receiving Continental Merger
Stock will be entitled to two demand registrations and unlimited (subject to
certain exceptions) "piggyback" registrations with respect to primary public
issuances by Continental of Continental Class A Common Stock; provided,
however, that such registration rights will not be available to any
Registration Rights Holder to the extent that shares of Continental Class A
Common Stock are then freely transferable by the Registration Rights Holder
requesting a registration in the manner contemplated by such request without
violation of the registration requirements of the Securities Act. Registration
Rights Holders will not be entitled to assign their rights under such
registration rights agreement. (See "Continental Shares Eligible for Future
Sale".)
UNDERTAKINGS REGARDING PUBLIC OFFERING. Continental has agreed in the Merger
Agreement that, except as described in the immediately following sentence, it
will use its best efforts to consummate an Offering of shares of Continental
Class A Common Stock (which, at Continental's option, may be a primary
offering and/or a secondary offering) prior to the first anniversary of the
Effective Time for aggregate consideration (before underwriting discounts) of
not less than $150,000,000. Continental will not be required to consummate the
Offering if it has issued, on or before the first anniversary of the Effective
Time, shares of its capital stock for aggregate consideration of at least
$1,000,000,000. The Merger Agreement provides, however, that Continental's
obligation, if any, to consummate the Offering may be extended if
Continental's investment banker advises Continental in writing that because of
market conditions it is not advisable for Continental to conduct the Offering
at that time, in which case Continental's obligation to use its best efforts
to conduct the Offering shall be extended until such time as Continental's
investment banker advises it in writing that market conditions no longer
render it inadvisable to conduct the Offering.
AMENDMENT TO PROVIDENCE JOURNAL'S RIGHTS AGREEMENT. Providence Journal's
Rights Agreement provides that if at any time after a Stock Acquisition Date
(as such term is defined in the Rights Agreement), Providence Journal is
acquired in a merger, each holder of a right under the Rights Agreement shall
have the right to receive stock in the acquiring company, based on an
allocation set forth in the Rights Agreement. Every holder of Providence
Journal Common Stock holds rights in a proportionate amount equal to his, her
or its ownership of Providence Journal Common Stock.
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In accordance with the Merger Agreement, Providence Journal entered into an
amendment to the Rights Agreement to provide that (i) the Merger Agreement and
the consummation of the transactions contemplated thereby (including, without
limitation, the King Cable Purchase, the PJC Spin-Off and the Merger) are not
events that would (a) permit the Rights Holders to exercise the rights to
acquire shares of Providence Journal Common Stock or (b) require Providence
Journal to exchange any or all of the outstanding rights for shares of
Providence Journal Common Stock; (ii) certain sections of the Rights Agreement
will not apply to the Merger or the transactions contemplated thereby and (iii)
effective upon the Merger, the Rights Agreement will be terminated and will
have no further force and effect. Providence Journal has further agreed not to
take any action resulting in the application of the provisions of the Rights
Agreement to the Merger and the transactions contemplated thereby. (See
"Description of New Providence Journal Common Stock--NPJ Rights Agreement" for
a description of the NPJ Rights Agreement, which is identical in substance to
the Rights Agreement.)
ACQUISITION PROPOSALS. The Merger Agreement prohibits Providence Journal, its
subsidiaries and their respective officers, Directors, representatives and
agents from, directly or indirectly, knowingly encouraging, soliciting,
initiating or participating in any way in discussions or negotiations with, or
knowingly providing any confidential information to, any person (other than
Continental or any affiliate or associate of Continental and their respective
Directors, officers, employees, representatives and agents) concerning any
merger, consolidation, share exchange or similar transaction involving
Providence Journal or any of the PJC Cable Subsidiaries or any purchase (other
than in the ordinary course of business) of any portion of the operating assets
of, or any equity interests in, the PJC Cable Subsidiaries. However, Providence
Journal's Board of Directors may (i) take and disclose to Providence Journal's
stockholders a position with respect to a tender offer for Providence Journal
Common Stock by a third party pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act, (ii) make such disclosure to Providence Journal's
stockholders as, in the judgment of Providence Journal's Board of Directors
with the written advice of outside counsel, may be required under applicable
law, (iii) respond to any unsolicited proposal or inquiry by advising the
person making such proposal or inquiry of the terms of the provision summarized
in this paragraph, and (iv) participate in discussions or negotiations
resulting from an unsolicited proposal if Providence Journal's Board of
Directors determines, with the written advice of outside counsel, that it is
required to do so in the exercise of its fiduciary duties.
Providence Journal has agreed to notify Continental promptly if any such
proposal or inquiry is received by, any such information is requested from, or
any such negotiations or discussions are sought to be initiated with,
Providence Journal and to furnish Continental with a copy of any proposal that
Providence Journal's Board of Directors has determined is a "Superior Proposal"
(as defined below). Providence Journal's Board of Directors may respond to any
Superior Proposal and may provide information to, and negotiate with, any
person in connection therewith if Providence Journal's Board of Directors
determines, with the advice of outside counsel, that it is required to do so in
the exercise of its fiduciary duties. A "Superior Proposal" is defined in the
Merger Agreement to mean a bona fide, written, unsolicited proposal relating to
a possible transaction described in the preceding paragraph by any person other
than Continental that, in the reasonable good faith judgment of Providence
Journal's Board of Directors, with the advice of outside financial advisers, is
reasonably likely to be consummated and is financially more favorable to the
stockholders of Providence Journal than the terms of the transactions
contemplated by the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Providence Journal, New Providence Journal and Continental. The representations
and warranties of the parties shall not survive beyond the Closing Date, except
that the representations and warranties made by Providence Journal and New
Providence Journal with respect to capitalization and certain tax
representations shall survive indefinitely.
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The representations of Providence Journal and New Providence Journal are made
with respect to those companies, KHC, KBC and the PJC Cable Subsidiaries and
relate generally to: due organization, qualification and authority; absence of
violations of, among other things, their respective charter documents, by-laws,
certain contracts, and law; required consents and approvals of governmental
authorities; approval by the Boards of Directors of Providence Journal, New
Providence Journal, KHC and KBC of the Merger Agreement and the transactions
contemplated thereby and, in the case of Providence Journal, receipt of the
opinion of Bear Stearns as to the fairness of the PJC Spin-Off, the King Cable
Purchase and the Merger; the capital structure of Providence Journal, New
Providence Journal, KHC and KBC; the accuracy of information, including
financial statements, contained in the Merger Agreement; the absence of certain
material changes or undisclosed liabilities; compliance with applicable laws,
franchises and material agreements; taxes; litigation; employee benefits; labor
matters; title to properties; and brokers and finders.
The representations of Continental are made with respect to itself and its
subsidiaries and relate generally to: due organization, qualification and
authority; absence of violations of, among other things, their respective
charter documents, by-laws, certain contracts and law; required consents and
approvals of governmental authorities; approval by the Board of Directors of
Continental of the Merger Agreement and the transactions contemplated thereby;
the capital structure of Continental; the accuracy of information, including
financial statements, contained in the Merger Agreement; the absence of certain
material changes or undisclosed liabilities; compliance with applicable laws,
franchises and material agreements; taxes; litigation; title to properties;
employee benefits; labor matters; and brokers and finders.
INDEMNIFICATION
Pursuant to the Merger Agreement:
(a) Continental will indemnify, defend and hold harmless New Providence
Journal, each of its subsidiaries, and their respective successors-in-
interest, and each of their respective past and present officers and
Directors against Losses and Expenses to the extent they are based upon
or arise out of any untrue or inaccurate representation made by
Continental in the Merger Agreement relating to its capitalization, or
any untrue or allegedly untrue statement of material fact contained, or
any omission or alleged omission to state a material fact required to
be stated, or necessary to make any such statements, in the light in
which they were made, not misleading, in any document filed with the
Commission in connection with the Merger Agreement or any of the
transactions contemplated thereby, provided that Continental was
responsible for such statement or omission;
(b) Providence Journal (and from and after the Effective Time, New
Providence Journal) will indemnify, defend and hold harmless
Continental, each of its subsidiaries, and their respective successors-
in-interest, and each of their respective past and present officers and
Directors against Losses or Expenses to the extent they (i) arise out
of or relate to any of the assets received or liabilities assumed by
New Providence Journal in connection with the PJC Spin-Off or the
operations of any of the PJC Non-Cable Businesses contributed to New
Providence Journal pursuant to the PJC Spin-Off, (ii) are based upon
any untrue or inaccurate representation made by Providence Journal and
New Providence Journal in the Merger Agreement relating to certain tax
representations, the capitalization of Providence Journal, New
Providence Journal, KHC, KBC, or any of the PJC Cable Subsidiaries,
(iii) are based upon inaccurate information in the officers'
certificates relating to capitalization to be delivered by Providence
Journal, (iv) arise from the failure of Providence Journal to comply
with its covenant relating to capital expenditures described under
paragraph (vii) of "Certain Covenants--Interim Operations of the PJC
Cable Subsidiaries" or to comply with certain other covenants in the
Merger Agreement regarding its stock and option plans or (v) are based
upon or arise out of any untrue or allegedly untrue statement of
material fact contained, or any omission or alleged omission to state a
material fact required to be stated, or necessary to make any such
statements, in the light in which they were made, not misleading, in
any document filed with the Commission in connection with the Merger
Agreement or any of the transactions contemplated thereby, or any other
registration statement filed on behalf of
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Continental, provided that New Providence Journal or Providence Journal
was responsible for such statement or omission;
(c) Providence Journal will indemnify, defend and hold harmless New
Providence Journal, each of its subsidiaries and their respective
successors-in-interest and each of their respective past and present
officers and Directors against Losses and Expenses arising out of or in
connection with the business operations of the PJC Cable Subsidiaries
and the assets and liabilities retained by Providence Journal pursuant
to the PJC Spin-Off;
(d) except in certain circumstances, Providence Journal (and from and after
the Effective Time, New Providence Journal) and Continental have each
agreed to indemnify and hold harmless the other against all Losses and
Expenses to the extent they are based upon or arise out of any suit,
action or proceeding by the holders of the indemnifying party's debt or
equity securities (and, when New Providence Journal is the indemnifying
party, holders of Providence Journal's, KBC's and KHC's debt and equity
securities) as a result of, or in connection with, the Merger Agreement
and the transactions contemplated thereby; and
(e) Providence Journal (and from and after the Effective Time, New
Providence Journal) has agreed to indemnify and hold harmless
Continental against any and all Losses or Expenses to the extent they
are based upon or arise out of any action or claim of any nature
whatsoever asserted by any holder of any of the equity securities of
the PJC Cable Subsidiaries, including, without limitation, any action
or claim asserted in connection with or relating to the purchase by
Providence Journal or the PJC Cable Subsidiaries of the equity
securities of any such holder.
(f) New Providence Journal has agreed to indemnify and hold harmless
Continental against any and all Losses and Expenses to the extent they
are based upon certain litigation pertaining to the Dynamic
Partnership. (See "Description of Providence Journal Cable Television
Business--Legal Proceedings").
TAX MATTERS
New Providence Journal will be responsible for all federal and state income
tax liabilities of Providence Journal and its subsidiaries for periods ending
on or before the Closing Date including, generally, such income tax liabilities
resulting from the King Cable Purchase and the failure of various components of
the PJC Spin-Off and the Merger to qualify as tax-free reorganizations under
the Code, unless such failure to qualify is the result of certain actions by
Continental. Continental will be responsible for all federal and state income
tax liabilities of Continental and its subsidiaries for periods ending both
before and after the Closing Date. (See "Certain Federal Income Tax
Considerations".)
CERTAIN EMPLOYEE MATTERS
Providence Journal or New Providence Journal, as applicable, has agreed to
continue coverage of employees thereof under existing group health plans
through the Effective Time and to reimburse covered employees thereof for
eligible health care expenses and services incurred through the Effective Time
in accordance with the terms of any such plan.
As a result of the transactions contemplated by the Merger Agreement, as of
the Effective Time, Continental will become the employer of all employees of
the PJC Cable Subsidiaries as of the Effective Time (other than any corporate,
regional or divisional employee that Continental has informed Providence
Journal not less than 30 days prior to the Effective Time it does not wish to
employ following the Effective Time), including any such employee who is on an
approved leave of absence or short-term disability leave as of the Effective
Time ("Cable Employees") and will continue current benefits to their covered
dependents. As such, Continental shall be responsible for:
(i) payments under the so-called "Employee Continuation Plans" adopted by
the PJC Cable Subsidiaries to the extent such payments are owed to
system level employees formerly employed by any PJC Cable Subsidiary
(and New Providence Journal will be responsible for (a) any benefits
payable under any such Employee Continuation Plan to any corporate,
regional and divisional
69
personnel, or to any other person not described in this clause (i) and
(b) all other severance benefits and payments which may be owed to any
Cable Employee);
(ii) establishing, to the extent it does not already maintain, a defined
contribution plan that is intended to meet the qualification
requirements of Code Section 401(a), to provide for elective deferrals
under the rules of Section 401(k) ("a 401(k) Plan"), and that covers the
Cable Employees, subject to minimum eligibility service requirements
permitted under the Code (and New Providence Journal shall cause each
Cable Employee to be able to choose between a distribution to such
employee of such employee's account balance as of the Effective Time in
any 401(k) Plan or the direct transfer of such account balance to the
Continental 401(k) Plan, and the Continental 401(k) Plan shall accept
all such direct transfers, including any such direct transfer subject to
any loan to the Cable Employee who is a participant, which loan shall
thereafter be treated under Continental's 401(k) Plan, except to the
extent the terms of such loan are not compatible with applicable law,
including ERISA);
(iii) subject to reasonable eligibility requirements, providing coverage
under a comprehensive group health care plan (which plan, subject to
certain conditions, shall provide benefits that are comparable to
those provided to such Cable Employees under an existing group health
plan prior to the Effective Time or comparable to Continental's
existing plans), which health plan shall give credit to Cable
Employees for deductibles, co-payments and similar amounts which any
such Cable Employee had paid or satisfied for the fiscal year in
which the Effective Time occurs; and
(iv) subject to reasonable eligibility requirements, providing coverage under
retirement plans qualified under Code Section 401(a) and welfare benefit
plans, within the meaning of ERISA, providing other than health
benefits, including life insurance, vacation, accidental death and
dismemberment insurance and short and long-term disability benefits, to
all Cable Employees, taking into account for eligibility and vesting
purposes under such plans the service accrued by any such Cable Employee
while an employee of Providence Journal or any of its affiliates as
determined under ERISA ("ERISA Affiliates"), in each case providing
benefits that are comparable to those provided to Cable Employees prior
to the Effective Time or comparable to Continental's existing plans.
Except as otherwise assumed by Continental as described above, effective as
of the Effective Time, New Providence Journal will accept all past, present and
future liabilities and responsibilities as plan sponsor, within the meaning of
ERISA, of any Company Employee Plan (as defined in the Merger Agreement), and
as employer under any other benefit arrangement, including employment and
consulting agreements, arrangements providing for insurance coverage and
workers' compensation benefits, incentive bonus and deferred bonus arrangements
(including, without limitation, the Cable Division Sales Bonus Plan),
arrangements providing for termination allowance, severance, and similar
benefits, equity compensation plans, deferred compensation plans, and
compensation policies and practices maintained by Providence Journal or any of
its ERISA Affiliates covering employees of Providence Journal and their
beneficiaries as of the Effective Time. In addition, New Providence Journal
shall assume and be solely responsible for:
(i) payment of all retiree medical benefits to Cable Employees who, as of
the Effective Time, are receiving or who are entitled to receive
retiree medical or life insurance benefits;
(ii) the provision of benefits required under the provisions of COBRA to any
Cable Employees or other qualified beneficiaries, within the meaning of
Section 4980B(g) of the Code, with respect to whom a qualifying event
within the meaning of Section 4980B(f)(3) of such Code has occurred
prior to the Effective Time;
(iii) payment of all long-term disability income benefits to all Cable
Employees who, as of the Effective Time, are receiving long-term
disability benefits or are disabled as of the Effective Time and as a
result of such disability become eligible for long-term disability
income benefits as determined in accordance with long-term disability
coverage provisions that on or prior to the Effective Time are
applicable to the Cable Employees; and
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(iv) the provision and payment of the following benefits for any Cable
Employee who is on a leave of absence or short-term disability leave
as of the Effective Time until such Cable Employee returns to active
employment from such leave: (A) medical and dental benefits for the
period after the Effective Time until such benefits are no longer
required to be made available under COBRA; (B) life and accidental
death benefits for a period of not more than six months following the
Effective Time; and (C) short and long-term disability benefits for a
period of not more than three months following the Effective Time;
provided, that Continental shall from time to time, within 30 days of
receipt by Continental of invoices and other documentation reasonably
satisfactory to Continental, reimburse New Providence Journal for the
reasonable, direct costs incurred in providing the benefits referred
to in this clause (iv).
Continental and New Providence Journal have agreed to cooperate, and to cause
their respective subsidiaries to cooperate, in a complete, diligent and timely
manner to provide each other with such compensation, service and other
pertinent census data as may be required by either of them for purposes of
calculating or effecting the distribution of benefits to which any Cable
Employee may be entitled under any employee benefit plan established,
maintained or contributed to by either of them.
TERMINATION
GENERAL. The Merger Agreement may be terminated and the transactions
contemplated thereby, including the Merger, abandoned at any time prior to the
Closing Date (i) by mutual written consent duly authorized by the Boards of
Directors of Providence Journal, New Providence Journal and Continental, (ii)
by either Continental or Providence Journal if the stockholders of Continental
fail to approve the Continental Proposals or if the stockholders of Providence
Journal fail to approve the Providence Journal Proposals, (iii) by either
Providence Journal or Continental, provided the terminating party has not
breached its obligations under the Merger Agreement, if the Merger is not
consummated by December 31, 1995 (the "Termination Date"), (iv) by Providence
Journal, provided it has not breached any of its obligations under the Merger
Agreement, if Continental fails to perform any covenant in the Merger Agreement
and fails to cure such failure within 20 business days after written notice by
Providence Journal of such failure, or if any condition to the obligations of
Providence Journal and New Providence Journal has not been satisfied prior to
the Termination Date, (v) by Continental, provided it has not breached any of
its obligations under the Merger Agreement, if (1) Providence Journal or New
Providence Journal fails to perform any covenant in the Merger Agreement and
fails to cure such failure within 20 business days after written notice by
Continental of such failure, (2) any condition to the obligations of
Continental has not been satisfied prior to the Termination Date, or (3) the
Providence Journal Board of Directors materially modifies or withdraws its
approval of the Providence Journal Proposals or its recommendation of the
Providence Journal Proposals to the stockholders of Providence Journal and (vi)
by Providence Journal, whether or not the conditions to its obligations under
the Merger Agreement have been satisfied, if its Board of Directors determines,
with the written advice of counsel provided to Continental, that it may be
required to do so in the exercise of its fiduciary duties.
If the Merger Agreement is terminated for any reason set forth above, the
Merger Agreement will become null and void and there will be no liability on
the part of any party thereto, or the Directors, officers or stockholders of
any such party, except that (a) the parties' indemnification obligations with
respect to misstatements or omissions in filings or in any other registration
filed with the Commission on behalf of Continental, (b) certain provisions with
respect to the reimbursement of expenses and (c) the payment by Providence
Journal of a termination fee and Continental's option to acquire the Palm
Springs System under certain circumstances, as described below, shall survive.
TERMINATION FEES AND EXPENSES; OPTION TO PURCHASE PALM SPRINGS SYSTEM. If the
Merger Agreement is terminated (a) by Continental after the Board of Directors
of Providence Journal has either materially modified or withdrawn its approval
and recommendation of the Providence Journal Proposals, (b) by Providence
Journal after its Board of Directors has determined with the written advice of
counsel, that it may be required to terminate the Merger Agreement in the
exercise of its fiduciary duties or (c) by
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Continental or Providence Journal if the Providence Journal Proposals are not
approved by the stockholders of Providence Journal after the Board of Directors
of Providence Journal has materially modified or withdrawn its approval and
recommendation of any of such transactions, then Providence Journal will pay to
Continental the Break-up Fee plus up to an additional $10,000,000 to reimburse
Continental for reasonable fees and expenses it has incurred in connection with
the Merger Agreement and each of the transactions contemplated thereby. In
addition, if the Merger Agreement is terminated by Continental (provided it has
not breached any of its obligations under the Merger Agreement) (i) if
Providence Journal or New Providence Journal fails to perform any of its
covenants thereunder and such failure remains uncured for 20 business days
after written notice thereof from Continental or (ii) as a result of the
failure of any condition to its obligations under the Merger Agreement (other
than as a result of the failure of a condition to all parties' obligations to
proceed with the Merger or (except in certain circumstances) the failure of the
condition requiring certain governmental consents to the transfer to
Continental of the franchises held by Providence Journal or its subsidiaries),
then Providence Journal will pay Continental an amount (not to exceed
$10,000,000) equal to the actual reasonable fees and expenses paid or payable
by or on behalf of Continental in connection with the Merger or any of the
transactions contemplated thereby.
If the Merger Agreement is terminated (a) by Providence Journal (provided it
has not breached any of its obligations under the Merger Agreement) (i) if
Continental fails to perform any of its covenants thereunder and such failure
remains uncured for 20 business days after written notice by Providence Journal
thereof or (ii) as a result of the failure of any condition to the obligations
of Providence Journal or New Providence Journal to be satisfied prior to the
Termination Date (other than as a result of the failure of a condition to all
parties' obligations to proceed with the Merger) or (b) by Continental as a
result of the refusal of one or more governmental authorities to consent to the
transfer of control of one or more franchises of Providence Journal or its
subsidiaries to Continental for reasons relating to the qualifications or
fitness of Continental, Continental will pay Providence Journal an amount (not
to exceed $10,000,000) equal to the actual reasonable fees and expenses paid or
payable by or on behalf of Providence Journal and New Providence Journal in
connection with the PJC Spin-Off, the Merger and the transactions contemplated
thereby.
In the event that Continental becomes entitled to the Break-Up Fee,
Providence Journal has granted to Continental or any nominee of Continental an
option to purchase all of the right, title and interest of Providence Journal
and its subsidiaries in and to the Palm Springs System, together with all
associated assets, free and clear of all liabilities and obligations of
Providence Journal and its subsidiaries. The purchase price payable by
Continental for the Palm Springs System shall be $68,500,000, and the option
must be exercised by Continental no later than 45 days following the date on
which Continental becomes entitled to a Break-Up Fee. In connection with any
such exercise, Providence Journal has agreed to (i) indemnify Continental or
its nominee for breaches of representations and warranties made by Providence
Journal pertaining to title to the Palm Springs System (which indemnification
obligation shall survive indefinitely) and (ii) use its best efforts to obtain
all authorizations, consents, orders, waivers or approvals necessary or
desirable for the transfer of the Palm Springs System to Continental or such
nominee and to make any filings required by any governmental authority or
applicable law.
REGULATORY AND OTHER THIRD PARTY APPROVALS
Consummation of the Merger requires (a) consents and/or waivers from the
relevant governmental authorities under certain franchises issued to Providence
Journal and its subsidiaries and (b) consent of the FCC to the transfer of
control of certain licenses issued by the FCC to Providence Journal or its
subsidiaries.
AMENDMENT; WAIVER
Subject to applicable law, (a) the Merger Agreement may be amended at any
time (including after the approval of the Providence Journal Proposals and
after the approval of the Continental Proposals) by an instrument in writing
signed on behalf of all of the parties thereto and (b) the parties may extend
the time for performance of any of the obligations of the other parties to the
Merger Agreement and may waive
72
inaccuracies in the representations and warranties or compliance with any of
the agreements or conditions for their respective benefit therein.
ANCILLARY AGREEMENTS
In accordance with the terms of the Merger Agreement, the following ancillary
agreements have been or will be entered into.
NONCOMPETITION AGREEMENT. As a condition to the Merger, New Providence
Journal must enter into the Noncompetition Agreement, pursuant to which New
Providence Journal will agree that, for a period of three years after the
Effective Time, neither it nor any of its subsidiaries will (or will attempt
to), on its own behalf or in the service or on behalf of others, (i) solicit
for employment, interfere with or endeavor to entice away any of the Directors,
officers, employees or agents of Continental or any person who at any time on
or after January 1, 1994 was an officer or employee of Providence Journal or
the PJC Cable Subsidiaries and who is employed by Continental following the
Effective Time, (ii) subject to certain exceptions, engage in any manner
(including as a stockholder, partner, principal, agent, consultant or
otherwise) in the operation of any Restricted Business in the franchise areas
served by Continental or Providence Journal and the PJC Cable Subsidiaries at
the Effective Time (provided, however, that New Providence Journal or any
subsidiary thereof may hold 5% or less of any class of securities registered
pursuant to the Exchange Act of any corporation which is engaged in the
Restricted Business, or passive investments in partnerships or joint ventures
representing 5% or less of any class of any equity interests therein), or (iii)
use or permit Providence Journal's or New Providence Journal's name to be used
in connection with any Restricted Business in such franchise areas.
VOTING AGREEMENT. In connection with the execution of the Merger Agreement,
Directors and executive officers of Providence Journal entitled to exercise
voting power with respect to an aggregate of 323 shares of Providence Journal
Common Stock (approximately 0.3% of the voting power of the outstanding
Providence Journal Common Stock), and Amos B. Hostetter, Jr. and Timothy P.
Neher, as the trustees of the Trust entitled to exercise voting power with
respect to an aggregate of 42,843,550 shares of Continental Class B Common
Stock (approximately 30.89% of the voting power of the Continental Voting
Stock), entered into the Voting Agreement pursuant to which such stockholders
agreed, among other things, to vote all of their shares in the following
manner: Certain of the Directors and executive officers holding Providence
Journal Common Stock agreed to vote (i) in favor of each of the Providence
Journal Proposals, (ii) against any proposal for any recapitalization, merger,
sale of assets or other business combination between Providence Journal or any
of the PJC Cable Subsidiaries and any person other than Continental, or any
other action which would result in the breach of any covenant, representation
or warranty in the Merger Agreement, or cause any conditions to the obligations
of Providence Journal under the Merger Agreement not to be fulfilled and (iii)
in favor of any other matter relating to the consummation of the transactions
contemplated by the Merger Agreement. The Trust agreed to vote (x) in favor of
each of the Continental Proposals, (y) against any action that would result in
a breach of any covenant, representation or warranty under the Merger
Agreement, or that would result in any of the conditions to the obligations of
Continental under the Merger Agreement not being fulfilled and (z) in favor of
any other matter relating to the consummation of the transactions contemplated
by the Merger Agreement. In addition, such Providence Journal stockholders and
the Trust each agreed not to enter into any voting agreement or grant a proxy
or power of attorney that is inconsistent with the Voting Agreement, and each
such Providence Journal stockholder has agreed not to transfer ownership of any
of its Providence Journal Common Stock unless the transferee agrees in writing
to be bound by the terms and conditions of the Voting Agreement. The Trust
agreed not to transfer ownership of more than 10% of its Continental Class B
Common Stock unless the transferee agrees in writing to be bound by the terms
and conditions of the Voting Agreement. In addition, if, at any time prior to
the Effective Time, the holders of at least 50.1% of the combined voting power
of the Continental Voting Stock have become parties to the Voting Agreement, no
Continental stockholder party thereto may transfer ownership of its shares of
Continental Voting Stock if, after giving effect to such transfer, such
percentage of stockholders of Continental would no longer be bound by the terms
of the Voting Agreement.
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Execution of the Voting Agreement was a condition to Continental and
Providence Journal entering into the Merger Agreement, and no compensation was
paid to any person in consideration for entering into such agreement.
OWNERSHIP OF CONTINENTAL STOCK AFTER THE MERGER
Assuming that the Merger was consummated on the date hereof (and assuming
there are no adjustments to the Maximum Amount), holders of shares of
Providence Journal Common Stock would own Continental Class A Common Stock,
representing approximately 17.3% of the outstanding Continental Common Stock
and approximately 2.2% of the voting power of Continental. Continental has
reserved the right to issue additional shares of its capital stock between the
date hereof and the consummation of the Merger, including, without limitation,
in connection with other acquisitions by Continental.
OWNERSHIP OF NEW PROVIDENCE JOURNAL STOCK AFTER THE PJC SPIN-OFF AND THE MERGER
Following the Merger, holders of shares of Providence Journal Common Stock
immediately prior to the Merger who have not exercised and perfected statutory
dissenters' rights under the RIBCA will own shares of New Providence Journal
Common Stock constituting 100% of the equity and voting power of New Providence
Journal, in the same proportion (and of the same class) as shares of Providence
Journal Common Stock held as of such date. (See "Rights of Dissenting
Stockholders--Providence Journal" for a description of dissenters' rights
available to Providence Journal's stockholders.)
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material federal income tax consequences
of the PJC Spin-Off, the Merger and the transactions contemplated thereby. The
tax treatment of a stockholder may vary depending upon his particular
situation, and certain stockholders (including individuals who hold restricted
stock of Providence Journal, individuals who hold options in respect of
Providence Journal Common Stock, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
and persons who are neither citizens nor residents of the United States, or who
are foreign corporations, foreign partnerships or foreign estates or trusts as
to the United States) may be subject to special rules not discussed below.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTIONS DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES OF CERTAIN TRANSACTIONS
Consummation of the PJC Spin-Off, the Merger and the transactions
contemplated thereby are conditioned upon the receipt of a favorable ruling
from the Service as to certain of the federal income tax consequences of
certain transactions in connection with the PJC Spin-Off and the receipt of an
opinion of Edwards & Angell, counsel to Providence Journal, as to the
qualification of the Merger as a tax-free reorganization under Section
368(a)(1)(A). Specifically, Providence Journal has requested rulings to the
following effect (and related rulings as to the tax basis of assets) from the
Service (the "Requested Rulings"):
(1) The transfer of Colony Cablevision, which represents the systems that
were acquired by Providence Journal in 1992 from Palmer Communications,
Inc. ("Palmer") serving the areas in and around Naples, Florida and
Palm Springs, California (the "Palmer Systems") to Colony will be a
transaction described in Code Section 351.
(2) The PJC Spin-Off will be a reorganization described in Code Sections
368(a)(1)(D) and 355.
(3) Stockholders of Providence Journal will recognize no gain or loss (and
will not have to include any amounts in income) in the transactions
described above. They will apportion the basis of their
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Providence Journal shares between the New Providence Journal shares
received and Providence Journal shares retained (which will then be
exchanged for Continental Merger Stock) in proportion to their relative
fair market values. The holding period for New Providence Journal shares
received in exchange for or with respect to Providence Journal shares
will include the holding period for the Providence Journal shares,
provided the Providence Journal shares were held as a capital asset.
(4) No gain or loss will be recognized by Providence Journal, Westerly, New
Providence Journal or Colony in the transactions described above or by
Westerly or Colony as a result of the liquidation of Westerly into
Colony.
It is a condition to the parties' obligations to consummate the transaction
contemplated by the Merger Agreement that Providence Journal receive the
Requested Rulings from the Service (except with respect to the Requested Ruling
set forth in Clause (1) above). A ruling from the Service, while generally
binding on the Service, may under certain circumstances be revoked or modified
by the Service retroactively. Providence Journal is currently not aware of any
facts or circumstances that would cause the Service, in the event that it gives
the Requested Rulings, to revoke or modify the Requested Rulings received by
Providence Journal from the Service as to the federal income tax consequences
of the transactions described above.
The Requested Rulings received from the Service are based on the assumption
that the Merger will qualify as a tax-free reorganization under Section
368(a)(1)(A) of the Code. The Service takes the position that the consequences
of a transaction such as the Merger are adequately established in the tax law,
and it therefore will not issue a "comfort" ruling as to whether such a
transaction qualifies as a reorganization under Section 368(a)(1)(A).
Therefore, Providence Journal has not requested a ruling that the Merger will
qualify as a tax-free reorganization under Section 368(a)(1)(A). Instead,
consummation of the PJC Spin-Off, the Merger and the transactions contemplated
thereby is conditioned upon the receipt of the opinion of Edwards & Angell,
counsel to Providence Journal, to the effect that:
(i) The Merger will qualify as a reorganization under Section 368
(a)(1)(A) of the Code.
(ii) Except for any cash received in lieu of fractional shares, a
stockholder will not recognize any income, gain or loss as a result of the
receipt of Continental Merger Stock.
(iii) A stockholder's tax basis for shares of Continental Merger Stock,
including any fractional share interest for which cash is received, will
equal the allocable portion of such stockholder's basis in the Providence
Journal Common Stock held immediately before the Merger.
(iv) A stockholder's holding period for the Continental Merger Stock,
including any fractional share interest for which cash is received, will
include the period during which the shares of Providence Journal Common
Stock were held, provided such shares were held as capital assets.
An opinion of counsel is not binding on the Service or the courts. Further,
the opinion of Edwards & Angell will be based on, among other things, current
law and certain representations as to factual matters made by, among others,
Providence Journal, New Providence Journal and Continental which, if incorrect
in certain material respects, would jeopardize the conclusions reached by
counsel in its opinion. Neither Providence Journal, New Providence Journal nor
Continental is currently aware of any facts and circumstances which would cause
any such representations made by it to Edwards & Angell to be untrue or
incorrect in any material respect. In addition, Continental has agreed to
certain restrictions on its future actions to provide further assurances that
the PJC Spin-Off and the Merger will be tax-free.
If the Merger were not to qualify under Section 368(a)(1)(A) of the Code, or
if the PJC Spin-Off were not to qualify under Sections 368(a)(1)(D) and 355 of
the Code, Providence Journal would recognize gain equal to the excess of the
fair market value of the New Providence Journal Common Stock distributed to its
stockholders over Providence Journal's basis in the assets transferred to New
Providence Journal in the Contribution. Any resulting corporate income tax on
such gain would be payable by Continental, as the successor to Providence
Journal. New Providence Journal has agreed to indemnify Continental for such
tax liability unless the failure of the PJC Spin-Off and the Merger to qualify
under those sections of the Code is
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the result of Continental's breach of the covenants referred to in the
preceding paragraph. In addition, if the PJC Spin-Off and the Merger fail to
qualify under those sections of the Code, each Providence Journal stockholder
who received shares of New Providence Journal Common Stock would be generally
treated as if it had received a taxable distribution in an amount equal to the
fair market value on the date of distribution of the New Providence Journal
Common Stock it received. Further, if the Merger fails to qualify as a tax-free
reorganization, each Providence Journal stockholder who receives shares of
Continental Merger Stock would recognize gain or loss equal to the difference
between the fair market value of the Continental Merger Stock received and its
basis in the shares of Providence Journal Common Stock surrendered.
The sale of the King Cable Business by KBC for $405 million will result in a
federal and state income tax liability of approximately $120 million for KBC
and the corporate affiliated group of which it is a member. New Providence
Journal has agreed to hold Continental harmless from this income tax liability.
BACKUP WITHHOLDING
Under the backup withholding rules, a holder of New Providence Journal Common
Stock and Continental Merger Stock may be subject to backup withholding at the
rate of 31% with respect to dividends and proceeds of redemption, unless such
stockholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a correct
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. Any amount withheld under these rules will be
credited against the stockholder's federal income tax liability. New Providence
Journal or Continental may require holders of New Providence Journal Common
Stock or Continental Merger Stock to establish an exemption from backup
withholding or to make arrangements satisfactory to New Providence Journal or
Continental with respect to the payment of backup withholding. A stockholder
who does not provide New Providence Journal or Continental with his or her
current taxpayer identification number may be subject to penalties imposed by
the Service.
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PROPOSAL TO APPROVE AND ADOPT THE CONTINENTAL
RECAPITALIZATION AMENDMENT, ELECTION OF CONTINENTAL DIRECTORS
AND RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
One of the purposes of the Continental Special Meeting is the approval of the
Continental Recapitalization Amendment. The Board of Directors of Continental
approved the Continental Recapitalization Amendment at a meeting held on
November 17, 1994 and found that it was in the best interests of Continental
and its stockholders. The Continental Recapitalization Amendment provides for
an increase in the total number of authorized shares of capital stock of
Continental from 17,700,000 to 825,000,000, including an increase in the number
of authorized shares of Continental Common Stock from 15,000,000 to
625,000,000, of which 425,000,000 will be shares of Continental Class A Common
Stock (with one vote per share) and 200,000,000 will be shares of Continental
Class B Common Stock (with ten votes per share), and an increase in the number
of authorized shares of Continental Preferred Stock from 2,700,000 to
200,000,000, of which 1,142,858 are currently designated Continental Series A
Preferred Stock. Approval of the Continental Recapitalization Amendment by the
Continental stockholders is a condition to the Merger and required by the
Merger Agreement. If the Continental Recapitalization Amendment is approved by
the Continental stockholders, the Board of Directors of Continental will
declare a stock dividend of 24 shares of Continental Class A Common Stock for
each outstanding share of Continental Class A Common Stock outstanding on the
record date for such stock dividend and 24 shares of Continental Class B Common
Stock for each outstanding share of Continental Class B Common Stock
outstanding on the record date for such stock dividend, resulting in every
share of Continental Common Stock currently outstanding becoming 25 shares of
Continental Common Stock prior to the consummation of the Merger. Shares of
Continental Series A Preferred Stock will not receive any stock dividend, but
their conversion feature and voting rights will be adjusted to reflect the
Continental Stock Split.
Another purpose of the Continental Special Meeting is the election of two
persons to serve a three-year term as Class C Directors in accordance with the
Continental Restated Certificate and the Continental By-Laws. It is proposed
that proxies for the Continental Special Meeting not limited to the contrary
will be voted to elect Amos B. Hostetter, Jr. and Lester Pollack as the Class C
Directors. Messrs. Hostetter and Pollack are presently Class C Directors. If
some unexpected occurrence should make necessary, in the judgment of the Board
of Directors, the substitution of some other person for any of the nominees, it
is the intention of the persons named in the proxy for the Continental Special
Meeting to vote for the election of such other person as may be designated by
the Board of Directors. Each of the Class C Directors elected at the
Continental Special Meeting shall serve until the 1998 Annual Meeting and until
his successor is elected and qualified.
Finally, at the Continental Special Meeting, the Continental stockholders
will be asked to ratify the selection by the Board of Directors of Deloitte &
Touche LLP as Continental's independent auditors for the current fiscal year
ending December 31, 1995. The firm has been the accountants for Continental
since 1974. Although Continental is not required to submit the ratification and
approval of the selection of its accountants to a vote of stockholders, the
Board of Directors believes it is a sound policy and in the best interests of
the stockholders to do so.
The 1996 Annual Meeting of Continental is expected to be held on or about May
16, 1996. Stockholder proposals must be received by Continental on or before
January 17, 1996 to be considered for inclusion in the proxy statement and
presented at the 1996 Annual Meeting of Continental.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF THE
CONTINENTAL RECAPITALIZATION AMENDMENT, THE ELECTION OF DIRECTORS AND THE
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS.
77
PROPOSAL TO APPROVE AND ADOPT
THE PROVIDENCE JOURNAL CHARTER AMENDMENT AND
THE CABLE DIVISION SALE BONUS PLAN
PROVIDENCE JOURNAL CHARTER AMENDMENT
The Board of Directors of Providence Journal has approved and is submitting
to the stockholders for their approval, the Providence Journal Charter
Amendment. The Providence Journal Charter Amendment permits Providence Journal
to distribute one share of New Providence Journal Class A Common Stock to the
holder of each share of Providence Journal Class A Common Stock and one share
of New Providence Journal Class B Common Stock to the holder of each share of
Providence Journal Class B Common Stock. The Providence Journal Charter
Amendment is required in connection with the PJC Spin-Off. This description is
qualified in its entirety by reference to the complete text of the Providence
Journal Charter Amendment, a copy of which is attached as Exhibit G to the
Merger Agreement attached hereto as Annex I and incorporated herein by
reference.
The Board of Directors of Providence Journal is submitting to the
stockholders for their approval, the Cable Division Sale Bonus Plan. The Cable
Division Sale Bonus Plan was designed to retain certain of Providence Journal's
cable executives and to provide incentives to such executives to maintain the
operating performance of the PJC Cable Business pending completion of the
Merger with bonuses payable only if the Merger is consummated. No beneficiary
of the Cable Division Sale Bonus Plan is an officer of Providence Journal. The
text of the Cable Division Sale Bonus Plan is annexed hereto as Annex V, and
the following summary is qualified in its entirety by the actual provisions of
the Cable Division Sale Bonus Plan. New Providence Journal will be responsible
for all payments required to be made under the Cable Division Sale Bonus Plan.
ADMINISTRATION
The Cable Division Sale Bonus Plan will be administered by the Vice President
of Human Resources of Providence Journal, who shall not be a participant in
such plan. The administrator shall have authority to interpret the provisions
of the Cable Division Sale Bonus Plan and to decide all questions of fact
arising in its application, to provide all necessary information to the
Executive Committee of the Board of Directors of Providence Journal, and to
communicate to plan participants concerning the administration of the Cable
Division Sale Bonus Plan. The administrator, with the concurrence of the Chief
Executive Officer, shall make recommendations for awards under the Cable
Division Sale Bonus Plan to the Executive Committee of the Providence Journal
Board.
REVIEW AND AUTHORIZATION
All recommendations for awards to be made by the administrator pursuant to
the provisions of the Cable Division Sale Bonus Plan are subject to review and
approval by the Executive Committee of the Providence Journal Board.
ELIGIBILITY TO RECEIVE AWARDS
Participants in the Cable Division Sale Bonus Plan shall be limited to those
officers and other key executive employees of the PJC Cable Business who
continue to be employed by the PJC Cable Business through the Merger and are in
positions in which their decisions, actions and counsel significantly affect
the operation of the PJC Cable Business. Subject to achieving certain
objectives and meeting certain conditions, participants will share in a "bonus
pool" based upon a weighing of salary and years of service. As of August 1,
1995, 14 persons were eligible to receive awards under the Cable Division Sale
Bonus Plan.
78
BONUS POOL
Subject to certain conditions described below, the participants are eligible
to receive a share of a bonus pool in the following amount: (i) $2.1 million if
the 1994 cash flow objective of $123.6 million for the PJC Cable Business is
achieved, and (ii) 50% of any 1994 cash flow in excess of the 1994 cash flow
objective. The amount of the bonus pool is currently $5,200,000. The bonus pool
may be reduced by a maximum of 20%, based upon a graduated scale, if the 1995
cash flow objective of $123.6 million is not met (pro rated for the portion of
1995 which has elapsed at the time of the Closing).
CONDITIONS
Any bonus awards earned out of the bonus pool will be distributed to the
participants only upon satisfaction of the following additional conditions:
(i) The closing of a sale, merger or other disposition of the PJC Cable
Business; and
(ii) The participant remaining in the employment of the PJC Cable
Business through the date of the closing of such sale, merger or other
disposition.
GENERAL RESTRICTIONS
(a) Individuals receiving awards pursuant to the Cable Division Sale Bonus
Plan may not receive any other awards pursuant to any other long-term incentive
plan of Providence Journal or the PJC Cable Business.
(b) Significant unforeseen changes, such as new statutes or regulations that
positively or negatively affect the cash flow of the PJC Cable Business, will
be excluded from the performance measurements used in determining achievement
of the 1995 objective.
(c) Nothing in the Cable Division Sale Bonus Plan shall confer upon any
person the right to continue in the employment of the PJC Cable Business nor
shall any right that Providence Journal or the PJC Cable Business may have to
terminate the employment of such person be affected.
AMENDMENT
The Board may terminate or amend the Cable Division Sale Bonus Plan at any
time. The termination or amendment of the Cable Division Sale Bonus Plan shall
not, without the consent of a participant, adversely affect the participant's
rights under an award previously granted.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND THE ADOPTION OF
THE PROVIDENCE JOURNAL CHARTER AMENDMENT AND THE CABLE DIVISION SALE BONUS
PLAN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY TO THE CONTRARY IN THEIR PROXIES.
79
DESCRIPTION OF PROVIDENCE JOURNAL PUBLISHING BUSINESS
In the event the Providence Journal Proposals described in this Joint Proxy
Statement-Prospectus receive the requisite vote of stockholders of Providence
Journal, the PJC Non-Cable Business, including the PJC Publishing Business,
will be transferred to New Providence Journal. Accordingly, the discussion set
forth below of the PJC Publishing Business also serves as a discussion of the
publishing business of New Providence Journal in the event the PJC Spin-Off,
the Merger and the transactions contemplated thereby are consummated.
GENERAL
Providence Journal publishes (i) Monday through Saturday the Providence
Journal-Bulletin, and (ii) The Providence Sunday Journal (collectively the
"Journal") in Providence, Rhode Island. The Journal is primarily distributed by
home delivery throughout Rhode Island and Southeastern Massachusetts. Founded
in 1820, the Providence Journal is the oldest continuously published daily
newspaper in the United States. The largest newspaper in the Rhode Island and
Southeastern Massachusetts market, the Journal maintains its market position
through effective reporting, dedication to public service, quality printing and
efficient distribution. The Journal has received numerous awards over the years
for its coverage of both local and national issues, including a Pulitzer Prize
in 1994, its fourth.
On June 5, 1995, Providence Journal consolidated the morning Providence
Journal and The Evening Bulletin as the Providence Journal-Bulletin, a morning
newspaper. Initially, a substantial portion of the anticipated $6 million in
savings from this consolidation will be reinvested to improve local news
coverage. Management believes that circulation will drop temporarily but
recover once readers become aware of the expanded local news, although there
can be no assurances in this regard.
CIRCULATION AND PRICING
The following table shows the average net paid daily, Saturday and Sunday
circulation of the Journal for the twelve-month periods ended March 31 in each
of the years 1990 through 1994, as reported by the Audit Bureau of Circulation
(the "Audit Bureau"), an independent agency that audits the circulation of most
U.S. newspapers and magazines on an annual basis. The figures for the twelve-
month period ended March 31, 1995 are unaudited figures internally generated by
the Journal.
AVERAGE NET PAID CIRCULATION
------------------------------
DAILY SATURDAY SUNDAY
--------- --------------------
1990.................. 203,600 189,600 264,700
1991.................. 202,200 188,900 265,000
1992.................. 197,100 186,400 268,100
1993.................. 192,500 182,700 269,100
1994.................. 188,200 179,600 268,800
1995.................. 184,700 177,000 266,400
Approximately 75% of the Monday through Saturday circulation was home-delivered
in calendar year 1994. Approximately 68% of the Sunday circulation was home-
delivered in calendar year 1994. (See "Risk Factors--Risk Factors Related to
New Providence Journal Common Stock".)
The suggested newsstand price of the Journal is $.50 on Monday through
Saturday and $1.75 on Sunday. The suggested rate charged to subscribers for
home delivery of the daily and Sunday newspapers is $3.60 per week.
80
ADVERTISING
Approximately three-quarters of the revenue of the Journal is derived from
the sale of advertising (historically between 70% and 80% of the Journal's
revenues).
The following table sets forth the Journal's advertising linage for fiscal
years 1990 through 1994.
RETAIL CLASSIFIED NATIONAL
----------------- --------------- --------------
WEEKDAY SUNDAY WEEKDAY SUNDAY WEEKDAY SUNDAY TOTAL
--------- ------- ------- ------- ------- ------ ---------
1990................ 1,200,900 389,300 463,900 233,600 50,300 38,100 2,376,100
1991................ 997,400 296,000 403,300 173,500 41,300 34,100 1,945,600
1992................ 1,082,100 364,500 366,700 168,500 34,200 31,000 2,047,000
1993................ 1,113,700 381,100 371,600 168,900 37,000 32,600 2,104,900
1994................ 1,069,500 331,100 310,000 209,800 47,600 31,800 1,999,800
Historically, retail advertising has accounted for approximately 60%,
classified advertising approximately 30%, and national advertising
approximately 10% of the total advertising revenue for the Journal. Retail
advertising appears throughout the Journal and is comprised of display
advertising from local merchants, such as grocery and department stores, and
national retail advertisers that have local outlets. Classified advertising is
comprised of display and agate line advertisements which are listed together in
sequence by the nature of the advertisement, such as automobile, employment and
real estate and appear in the classified section of the Journal. National
advertising is comprised of advertisements from national distributors and
manufacturers that appear throughout the Journal. The Journal also contains
preprint advertisements which are advertising inserts that are provided to the
Journal for distribution both in the Journal and through the mail. Preprint
advertising revenue is derived primarily from retail and national advertisers
and accounted for approximately 20% of the total Journal advertising revenue in
calendar year 1994.
The Journal increased advertising rates for most major categories of retail
and classified advertising by at least 3% in 1993 and 3% in 1994.
PRODUCTION AND RAW MATERIALS
In 1987, Providence Journal opened a new newspaper flexographic printing and
distribution plant in Providence, Rhode Island. The use of flexography, a
water-based printing process, improves printing quality and prevents newspaper
ink from rubbing off onto the reader's hands. The facility is also equipped
with computer control-driven systems, which shut down presses within five
copies of the specified production number, thereby significantly reducing the
number of unusable copies.
Direct expenses, which consist primarily of newsprint costs, have
historically accounted for between 16% to 24% of the Journal's total operating
expenses. In 1994, the Journal used approximately 34,000 metric tons of
newsprint. Management reduced the number of newsprint suppliers to five from
eight in 1992 and has entered into contracts with these suppliers resulting in
favorable pricing and continuity of supply. The Journal currently receives
discounts of up to 10% off list price for newsprint supplies. Additional cost
savings have been achieved by the implementation of quality controls,
reductions in inventory and the positioning of Providence Journal as a just-in-
time inventory customer.
Newsprint expenses are considered variable to the extent that usage varies
depending on advertising linage. Newsprint prices move in cycles associated
with the capacity of paper mills and newspaper demand. When national
advertising linage levels declined beginning in 1988, suppliers began offering
substantial discounts of between 10% and 18% from list price, which grew over
time to 40% discounts. Newsprint prices are now once again increasing
significantly because of increased demand and constricted supply. Industry
analysts expect newsprint pricing increases to continue through 1996. (See
"Risk Factors--Risk Factors Relating to the New Providence Journal Common
Stock".)
81
OTHER PUBLISHING ACTIVITIES
TOWN CRIER. In 1993, Providence Journal launched the Town Crier, a weekly
newspaper referred to in the industry as a "shopper," containing coupons and
advertisements directed at consumers, in two suburban communities adjacent to
Providence, Rhode Island. In connection with this project, Providence Journal
entered into a multi-year management contract with Shopper Enterprises, Inc.,
a firm based in Minnesota which specializes in operating shoppers, to develop,
operate and manage the Town Crier and other shoppers for Providence Journal in
and near the Rhode Island market.
LOWELL SUN. In 1990, Providence Journal provided financing to Lowell Sun
Publishing Company (the publisher of the Sun, a daily newspaper serving the
Lowell, Massachusetts area) and Lowell Sun Realty Company (collectively, the
"Lowell Sun Companies") in the amount of approximately $26 million, and agreed
to provide a $6.5 million revolving credit facility to the Lowell Sun
Companies, secured by a lien on the assets of Lowell Sun Companies, plus a
pledge of a controlling interest in their stock. In connection with this
financing, Providence Journal received a warrant to acquire up to a 41.67%
interest in the Lowell Sun Companies. Providence Journal's management has
notified the Lowell Sun Companies that it will not exercise this warrant.
ELECTRONIC PUBLISHING. During 1994, Providence Journal entered into a two
year agreement with Prodigy Services Company providing for the creation of a
local on-line service owned by Providence Journal to be offered in conjunction
with the national Prodigy service. The local on-line service will include, on
an exclusive basis for Rhode Island and certain areas in Massachusetts, news,
features and advertising similar to that appearing in the Journal. The new
service began operations in the second quarter of 1995.
The Journal has also developed a number of fax-on-demand services providing
material ranging from old Journal newspaper articles to current information on
sports, weather and other subjects of general interest. The Journal has also
developed and expanded Journal Line, a voice information service, the New
England Wire Service, which electronically provides editorial content to area
newspapers, and Journal Telemarketing, a telemarketing sales division
providing services to a range of customers.
ACQUISITIONS
The PJC Publishing Business plans to pursue attractive acquisition
opportunities as they become available. In addition to expansion into
electronic publishing, referred to above, the PJC Publishing Business is
interested in, and actively reviews, potential acquisitions of daily and
weekly newspapers and shoppers.
82
COMPETITION
The Journal has five daily newspaper competitors in the state, whose names,
circulation levels and headquarter locations are provided below. None of these
competitors has a market share (based on circulation) greater than 6% of the
Rhode Island market.
The following table shows the net paid circulation in Rhode Island of the
Journal and its five competitors for 1994 and the percentage such Rhode Island
circulation represents of each newspaper's total circulation. The table is
derived from information supplied by the Audit Bureau except for the entries
relating to the Kent County Daily Times which are unaudited and derived from
sources other than the Audit Bureau.
RHODE ISLAND NEWSPAPERS
1994 NET PAID CIRCULATION STATISTICS
---------------------------------------------------
DAILY SUNDAY
------------------------- -------------------------
RHODE ISLAND RHODE ISLAND
AS A AS A
NET PAID % OF TOTAL NET PAID % OF TOTAL
NEWSPAPER RHODE ISLAND DAILY RHODE ISLAND SUNDAY
AND LOCATION CIRCULATION CIRCULATION CIRCULATION CIRCULATION
------------ ------------ ------------ ------------ ------------
The Journal ............ 172,500 92% 242,500 90%
Providence, RI
The Times............... 20,700 92% N/A
Pawtucket, RI
Woonsocket Call......... 20,000 78% 19,800 78%
Woonsocket, RI
Daily News.............. 15,000 99% N/A
Newport, RI
Westerly Sun............ 8,900 73% 9,100 74%
Westerly, RI
Kent County Daily Times. 9,000 100% N/A
W. Warwick, RI
The Journal also encounters competition in varying degrees from Boston and
other Massachusetts newspapers, nationally circulated newspapers, television,
radio, magazines and other advertising media, including direct mail advertising
and yellow pages.
EMPLOYEES
As of June 30, 1995, the PJC Publishing Business employs 859 persons on a
full time basis and 653 on a part-time and/or temporary basis, the equivalent
of 1,269 full time persons. Approximately 40% of such employees are represented
by labor unions under collective bargaining agreements. A new collective
bargaining agreement with one of these unions, the Providence Newspaper Guild,
was recently executed after protracted negotiations. This agreement is
effective retroactively to January 1, 1994 and will expire on December 31,
1996. The Newspaper Printing Pressman's Union is in the fourth year of a ten-
year contract. The Communications Workers of America, Local 33, is in the ninth
year of a ten-year contract. Providence Journal contributes to and maintains
various employee benefit or retirement plans for employees of its publishing
business and contributes to some union plans pursuant to its collective
bargaining agreements.
83
PROPERTIES
The Journal owns and occupies the following buildings in Providence, Rhode
Island:
LOCATION AND USE SQUARE FOOTAGE
---------------- --------------
75 Fountain Street--Corporate Headquarters................... 205,635
210 Kinsley Avenue--Production/Printing....................... 168,000
119 Harris Avenue--Printing & Storage......................... 119,700
135 Harris Avenue--Storage.................................... 81,000
196 Kinsley Avenue--Paper Warehouse........................... 32,558
280 Kinsley Avenue--Inserting................................. 25,440
288 Kinsley Avenue--Circulation............................... 22,573
The Corporate Headquarters at 75 Fountain Street also provides general and
administrative support and serves as headquarters for Providence Journal's
broadcast television division. The Journal also leases various regional
distribution centers and news and advertising offices. The Journal considers
its owned and leased properties suitable and adequate for its current
activities.
DESCRIPTION OF PROVIDENCE JOURNAL BROADCAST TELEVISION BUSINESS
In the event the Providence Journal Proposals described in this Joint Proxy
Statement-Prospectus receive the requisite vote of stockholders of Providence
Journal, the PJC Non-Cable Business, including the PJC Broadcasting Business,
will be transferred to New Providence Journal. Accordingly, the discussion set
forth below of the PJC Broadcasting Business also serves as a discussion of the
broadcast television business of New Providence Journal in the event the
Reorganization, the Merger and the transactions contemplated thereby are
consummated.
GENERAL
Providence Journal owns or partially owns and operates nine network-
affiliated television stations (the "Stations") in geographically diverse
markets, including five in the fifty largest domestic television markets, as
measured by the number of television households. On a pro forma basis, for the
year ended December 31, 1994, Providence Journal had net revenues from its
broadcast operations of $171 million. Providence Journal has been involved in
the PJC Broadcasting Business since 1978 when it acquired an independent
station in Philadelphia, Pennsylvania.
INDUSTRY BACKGROUND
There are a limited number of channels available for broadcasting in any one
geographic area, and the license to operate a television station is granted by
the FCC. Television stations can be distinguished by the frequency over which
they broadcast. Television stations that broadcast over the very high frequency
("VHF") band (channels 2-13) of the radio spectrum generally have some
competitive advantage over television stations that broadcast over the ultra-
high frequency ("UHF") band (channels above 13) of the spectrum because VHF
stations usually have better signal coverage and lower transmission costs.
However, the improvement of UHF transmitters and receivers, the complete
elimination from the marketplace of VHF-only receivers and the expansion of
cable television systems have reduced the VHF signal advantage.
Television station revenues are primarily derived from local, regional and
national advertising and, to a lesser extent, from network compensation and
revenues from studio rental and commercial production activities. Advertising
rates are set based upon a variety of factors, including a program's popularity
among the demographic groups that an advertiser wishes to attract, the number
of advertisers competing for the available time, the size and demographic make-
up of the market served by the station and the availability of alternative
advertising media in the market area. Because broadcast television stations
rely on advertising
84
revenues, they are sensitive to cyclical changes in the economy. The size of
advertisers' budgets, which are affected by broad economic trends, affect the
broadcast industry in general and the revenues of individual broadcast
television stations.
All television stations in the country are grouped into approximately 204
generally recognized television markets that are ranked in size according to
various formulae based upon actual or potential audience. Each market is
designated as an exclusive geographic area consisting of all counties in which
the home-market commercial stations receive the greatest percentage of total
viewing hours. The National Association of Broadcasters (the "NAB"),
periodically publishes data on estimated audiences for television stations in
various markets throughout the country. The estimates are expressed in terms of
the percentage of the total potential audience in the market viewing a
particular station (referred to in the industry as the station's "rating") and
of the percentage of households using television, that are actually viewing the
particular station (referred to in the industry as the station's "share"). The
NAB provides such data on the basis of total television households and selected
demographic groupings in the market. Each specific geographic market is called
a designated market area ("DMA") by the NAB.
Until recently, three major broadcast networks, CBS, ABC, and NBC, dominated
broadcast television. Fox has established a "network" of independent stations
whose operating characteristics are similar to those of the major network-
affiliated stations, although the hours of network programming produced by Fox
for its affiliates are less than those produced by CBS, ABC and NBC. In recent
years, Fox has effectively evolved into the fourth major broadcast network.
Warner Brothers and Paramount have each launched new television networks.
The affiliation by a television station with one of the four major networks
has a significant impact on the composition of the station's programming,
revenues, expenses and operations. A typical network affiliate receives the
majority of each day's programming from the network. This programming, along
with cash payments (referred to in the industry as "network compensation"), is
provided to the affiliate by the network in exchange for a substantial majority
of the advertising time sold during the airing of network programs. The network
then sells this advertising time for its own account. The affiliate retains the
revenues from advertising time sold adjoining network programs and during
programs produced by the affiliate or purchased from non-network sources. In
acquiring programming to supplement programming supplied by the affiliated
network, network affiliates compete primarily with other affiliates and
independent stations in their markets. Cable systems generally do not compete
with local stations for programming, although various national cable networks
from time to time have acquired programs that would have otherwise been offered
to local television stations.
In contrast to a station affiliated with one of the major networks, an
independent station purchases or produces all of the programming that it
broadcasts, resulting in generally higher programming costs. The independent
station may, however, retain its entire inventory of advertising time and all
of the revenues obtained therefrom. However, under barter arrangements, which
are becoming increasingly popular with network affiliates and independents
alike, a national program distributor may receive advertising time in exchange
for the programming it supplies, with the station paying a reduced fee for such
programming.
In May 1994, New World Communications Group announced plans to switch up to
twelve of its current or planned network-affiliated stations to the Fox
network. Eight of such stations were affiliated with CBS, representing
approximately 10% of the CBS viewing audience. A great deal of switching
activity then ensued among the networks to regain lost markets. Scripps-Howard
Broadcasting Co. entered into a ten-year affiliation agreement with ABC for
five of its stations, including two of its UHF stations in markets that were
lost by ABC to Fox. Meredith Corp. switched two of its stations, one an
independent and one an NBC affiliate, to CBS as part of CBS's effort to replace
lost markets. In July 1994, CBS entered into ten-year affiliation agreements
with three stations owned by Westinghouse Electric Corp.'s Group W broadcasting
unit in the cities of Boston, Philadelphia and Baltimore, replacing two NBC
affiliates and one ABC affiliate, respectively, in those markets. These
developments are part of a continuing trend of affiliation realignments
85
and long-term strategic relationships occurring in various markets around the
country. Providence Journal believes that these developments have increased the
willingness of certain networks to extend the term of, or provide other
benefits in connection with, affiliation agreements. Providence Journal has
recently reached agreement with NBC to extend its affiliation agreements
(covering five of the Stations) for seven years. This realignment has had no
direct effect on any of the Stations.
THE STATIONS
The following table sets forth general information for each of the Stations
and the markets they serve, based on the NAB 1994 "Television Market Analysis"
and the NAB 1995 "Market By Market Review". The Stations are listed in order of
their 1993 market revenues.
NUMBER OF 1993
COMMERCIAL TV STATION MARKET
CHANNEL/ DMA STATIONS IN RANK IN STATION REVENUE(5)
STATION/MARKET AREA AFFILIATION FREQUENCY RANK(1) MARKET(2) MARKET(3) SHARE(4) (IN THOUSANDS)
------------------- ----------- --------- ------- ------------- --------- -------- --------------
KING*................... NBC 5/VHF 12 10 1 23 $213,831
Seattle, WA
KGW*.................... NBC 8/VHF 25 8 3 24 117,020
Portland, OR
WCNC.................... NBC 36/UHF 28 7 4 13 92,267
Charlotte, NC
WHAS.................... ABC 11/VHF 50 5 1 29 66,829
Louisville, KY
KHNL*................... Fox 13/VHF 69 9 3 16 56,912
Honolulu, HI
KASA.................... Fox 2/VHF 49 10 4 15 56,246
Albuquerque, NM
KMSB.................... Fox 11/VHF 81 6 3 15 39,975
Tucson, AZ
KREM*................... CBS 2/VHF 75 4 1 29 36,930
Spokane, WA
KTVB*................... NBC 7/VHF 125 5 1 39 $ 19,762
Boise, ID
--------
* These Stations are 50% owned by the Kelso Partnerships, the interest of
which will be purchased by Providence Journal in the Kelso Buyout. (See
"Pre-Merger Transactions--Kelso Buyout".)
(1) Ranking of DMA served by the Station among all DMAs, measured by the number
of television households.
(2) Represents the number of television stations broadcasting in the DMA,
excluding public stations. Does not include national cable channels.
(3) Ranking of the Stations among all commercial television broadcast stations
in its DMA, measured by the NAB.
(4) Represents the number of television sets tuned to the Station as a
percentage of the number of television sets in use for Sunday-Saturday 6:00
a.m.-2:00 a.m.
(5) Represents gross national, local, regional and political revenues,
excluding network and barter revenues, for all commercial television
stations in the DMA, based on actual local market reporting, as compiled by
independent public accounting firms and reported by the NAB.
KING-SEATTLE, WA. KING operates in the Seattle/Tacoma market, the twelfth
largest television market in the United States, with approximately 1.48 million
television households and a population of approximately
86
3.8 million. In 1993, the Seattle/Tacoma market totaled approximately $32
billion in retail sales. There are ten licensed commercial television stations
in Seattle/Tacoma (six VHF stations and four UHF stations) and two public
stations. All four network affiliates are VHF (including KING), two
independents are VHF and the other four independents are UHF. KING has been an
NBC affiliate since 1959, and its current affiliation agreement expires in
2001.
KING maintains a strong community focus, which is demonstrated through an
unusually high level of locally-produced programming, editorials and public
affairs programs and campaigns. The quality of these programs has earned KING
numerous national and local awards in the areas of entertainment, news,
education and public service. In 1992, KING was recognized as "Station of the
Year" by the Broadcast Pioneers, an organization of broadcasters.
Seattle is experiencing steady growth. The greater Seattle area continues to
attract a healthy and diverse mix of economic entities that employ an equally
diverse workforce in all trades, professions and positions. The headquarters of
numerous major companies, including the Boeing Company, Microsoft Corporation
and the Weyerhaeuser Company, are located in Seattle.
KGW-PORTLAND, OR. KGW operates in the Portland market, the twenty-fifth
largest television market in the United States, with approximately 923,000
television households and a population of approximately 2.4 million. In 1993,
the Portland market totaled approximately $21 billion in retail sales. There
are eight licensed commercial television stations in the Portland market (four
VHF stations and four UHF stations) and one public station. Three network
affiliates are VHF (including KGW), the Fox station is UHF, one independent
station is VHF and the other three independent stations are UHF. KGW has been
an NBC affiliate since 1959, and its current affiliation agreement expires in
2001.
KGW's news, public affairs, documentaries and special campaigns are well
recognized. The Station's tradition of community service has resulted in the
receipt of numerous awards. In 1994, KGW won five regional Associated Press
awards, including being named as having the Best News Program in the Portland
area.
Portland's strategic location, growing and diversified economy, superior
transportation services and abundant low-cost land zoned for business all
contribute to the growing number of businesses moving to the area. More than
3,000 manufacturing firms and 400 high technology companies are located in the
Portland area. The Port of Portland is also a leading international trade port,
importing and exporting a wide range of goods.
WCNC-CHARLOTTE, NC. WCNC operates in the Charlotte market, the twenty-eighth
largest television market in the United States, with approximately 789,000
television households and a population of approximately 2.1 million. In 1993,
the Charlotte market totaled approximately $16 billion in retail sales. There
are seven licensed commercial television stations in Charlotte (two VHF and
five UHF stations) and one public station. Two network affiliates are VHF
stations, two network affiliates are UHF stations (including WCNC), and three
independent stations are UHF stations. WCNC has been an NBC affiliate since
1967, and its current affiliation agreement expires in 2001.
WCNC has received numerous awards for service to its community, including the
Salvation Army Media Award, the Leukemia Society Excellence Award and the
Mothers Against Drunk Driving Community Education and Information Award.
Charlotte is a regional banking and insurance center, with NationsBank and
First Union Bank headquartered there. The Carolina Panthers, a new National
Football League franchise team, will be in Charlotte starting in August of
1995. A new stadium for the team will be opened in August, 1996 in downtown
Charlotte. The Station may carry a limited number of the Panther games.
87
WHAS-LOUISVILLE, KY. WHAS operates in the Louisville market, the fiftieth
largest television market in the United States, with approximately 540,000
television households and a population of approximately 1.4 million. In 1993,
the Louisville market totaled approximately $11 billion in retail sales. There
are seven licensed commercial television stations in Louisville (two VHF and
five UHF stations) and one public station. Two network stations are VHF
(including WHAS), three network stations are UHF and the two independent
stations are UHF. WHAS has been an ABC affiliate since 1990, and its current
affiliation agreement expires in September 1995.
WHAS is a market leader in community service as well as in news ratings and
programming success. The WHAS Crusade for Children, the Station's fund-raiser
for agencies which help special needs children, raised a record $3.7 million in
1994. The Station's news department won nearly every first place Associated
Press award in 1994, including Best Overall News Operation for the third year
in a row.
The Louisville economy continues its rapid growth, rising steadily since
1991. Louisville continues to attract service industry headquarters to enhance
its traditional manufacturing base.
KHNL-HONOLULU, HI. KHNL operates in the Honolulu market, the sixty-ninth
largest market in the United States, with approximately 384,000 television
households and a population of approximately 1.2 million. In 1993, the Honolulu
market totaled approximately $13.2 billion in retail sales. There are nine
licensed commercial television stations in Honolulu (five VHF stations and four
UHF stations) and one public station. All four network stations are VHF. One
independent station is VHF (KFVE) and four independent stations are UHF. KHNL
has been a Fox affiliate since 1987 but expects to become an NBC affiliate in
1995, and its affiliation agreement with NBC will expire in 2002.
KHNL began to carry local news in April 1995 and serves the Hawaiian market
with regular specials and documentaries, programs and campaigns directed toward
youth and a strong focus on the cultural heritage of the Hawaiian Islands.
Honolulu's economy is supported principally by tourism, sugar refining,
pineapple plantations and defense. The climate and natural environment make the
Hawaiian Islands a premier vacation destination. The tourist industry is
Hawaii's primary source of external income.
For a description of the local marketing agreement relating to KHNL, see
"Local Marketing Agreements".
KASA-ALBUQUERQUE/SANTA FE, NM. KASA operates in the Albuquerque/Santa Fe
market, the forty-ninth largest television market in the United States, with
approximately 550,000 television households and a population of 1.5 million. In
1993, the Albuquerque/Santa Fe market totaled approximately $11.7 billion in
retail sales. There are nine licensed commercial television stations in
Albuquerque/Santa Fe (five VHF stations and four UHF stations) and three public
stations. All four network affiliates are VHF stations (including KASA), one
independent is a VHF station and four independents are UHF stations. KASA has
been a Fox affiliate since 1986, and its current affiliation agreement expires
in 1998.
KASA is the Fox affiliate for New Mexico and Southern Colorado. KASA provides
entertainment, sports and information programming for the greater Albuquerque
television market.
The Albuquerque economy is growing at a solid pace, with retail sales up
significantly. Major employers include Sandia National Laboratory and Los
Alamos National Laboratory. In addition, Intel Corporation has a microchip
plant in the area. Tourism is also important to the economy, particularly in
Santa Fe.
KMSB-TUCSON, AZ. KMSB operates in the Tucson market, the eighty-first largest
television market in the United States, with approximately 333,000 television
households and a population of approximately 860,000. In 1993, the Tucson
market totaled approximately $7 billion in retail sales. There are six licensed
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commercial television stations in Tucson (four VHF stations and two UHF
stations) and two public stations. All four network affiliates are VHF stations
(including KMSB), and two independent stations are UHF stations. KMSB has been
a Fox affiliate since 1986, and its current affiliation agreement expires in
1998.
KMSB is the FOX affiliate with programming targeted toward adults 18-49 and
children/teens. The Station's sports commitment includes the NFC Conference of
the NFL, Arizona Cardinals pre-season, and selected NHL games. The Station's
community commitment includes the GoalGetters program which rewards student
performance with free product or prize-drawings supplied by advertisers and a
Let's Make a Difference campaign which encourages volunteerism. The Station was
honored for producing and airing a telethon which raised 650,000 hours in
pledges from companies and individuals for volunteer activities which would
strengthen families and the community.
The Tucson economy is enjoying strong growth, spurred by the relocation of
more than three thousand employees of the Hughes Missile Division to the Tucson
market, but also supported by growth in the health/biochemical, optics,
computer software and environmental technology industries.
For a description of the local marketing agreement relating to KMSB, see
"Local Marketing Agreements".
KREM-SPOKANE, WA. KREM operates in the Spokane market, the seventy-fifth
largest television market in the United States, with approximately 357,000
television households and a population of approximately 925,000. In 1993, the
Spokane market totaled approximately $7 billion in retail sales. There are four
licensed commercial television stations in Spokane (three VHF stations and one
UHF station) and three public stations. Three network affiliates are VHF
stations (including KREM) and the Fox affiliate is a UHF station. KREM has been
a CBS affiliate since 1977, and its current affiliation agreement expires in
1996.
KREM has a strong tradition of service to the Spokane market and the vast
additional area that it serves, known as the Inland Northwest. KREM is
Spokane's news leader and presents the market's only noon newscast.
Spokane is the largest city in the United States between Seattle and
Minneapolis and north of Salt Lake City. Since its founding, Spokane has been
the economic and civic capital of the geographic region known as the Inland
Northwest Empire. Spokane has long been a leading presence in agriculture. In
1989, an International Ag-Trade Center opened focusing the international
marketplace's attention on Spokane and Inland Empire commodities. The Spokane
economy is also dependent on service industries, wholesale and retail trade.
KTVB-BOISE, ID. KTVB operates in the Boise market, the one hundred twenty-
fifth largest television market in the United States, with approximately
176,000 television households and a population of 475,000. In 1993, the Boise
market totaled approximately $3.6 billion in retail sales. There are five
licensed commercial television stations in Boise (all VHF stations) and one
public station. KTVB has been an NBC affiliate since 1953, and its current
affiliation agreement expires in 2001. KTVB's programming is simulcast through
its low power television station, KTFT-LP, located in Twin Falls, Idaho.
KTVB is the market leader in Boise, with news ratings and audience shares
which are nearly double those of its nearest competitor as reported by the NAB.
The Station also has an ambitious public affairs schedule with weekly viewpoint
programs and quarterly town hall live telecasts. KTVB's accomplishments in news
and public service are regularly recognized with local and regional awards by
the United Press, the Idaho Press Club and the Idaho State Broadcasters
Association.
Located in Southwest Idaho, Boise offers a unique balance of business,
government, cultural, and recreational opportunities. Several major national
and international corporations have chosen Boise for their headquarters. These
companies represent approximately $20.0 billion in annual sales and employ over
8,000
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people. The city also has many other supporting and related businesses. The
Boise economy is dependent on agriculture, mining, timber products, services,
government, and corporate headquarters of various companies.
COMPETITION IN THE TELEVISION INDUSTRY
Competition in the television industry takes place on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency. The broadcasting industry is continually faced with technological
change and innovation, the possible rise in popularity of competing
entertainment and communications media, and governmental restrictions or
actions of federal regulatory bodies, including the FCC and the Federal Trade
Commission, any of which could have a material effect on the PJC Broadcasting
Business.
AUDIENCE. Stations compete for audience on the basis of program popularity,
which has a direct effect on advertising rates. A majority of the daily
programming on the Stations is supplied by the network with which each Station
is affiliated. In those time periods, the Stations are totally dependent upon
the performance of the network programs in attracting viewers. There can be no
assurance that such programming will achieve or maintain satisfactory
viewership levels in the future. Non-network time periods are programmed by the
Station with a combination of self-produced news, public affairs and other
entertainment programming, including news and syndicated programs purchased for
cash, cash and barter, or barter only.
Independent stations, whose number has increased significantly over the past
decade, have also emerged as viable competitors for television viewership. Each
of Warner Brothers and Paramount has launched a new television network.
Providence Journal is unable to predict the effect, if any, that either network
will have on the future operating results of the PJC Broadcasting Business.
In addition, the development of methods of television transmission of video
programming other than over-the-air broadcasting, and in particular the growth
of cable television, has significantly altered competition for audience in the
television industry. These other transmission methods can increase competition
for a broadcasting station by bringing into its market distant broadcasting
signals not otherwise available to the station's audience and also by serving
as a distribution system for non-broadcast programming originated on the cable
system. Through the 1970s, television broadcasting enjoyed virtual dominance in
viewership and television advertising revenues because network-affiliated
stations competed only with each other in most local markets. Although cable
television systems were initially used to retransmit broadcast television
programming to paid subscribers in areas with poor broadcast signal reception,
significant increases in cable television penetration occurred throughout the
1970s and 1980s in areas that did not have signal reception problems. As the
technology of satellite program delivery to cable systems advanced in the late
1970s, development of programming for cable television accelerated
dramatically, resulting in the emergence of multiple, national-scale program
alternatives and the rapid expansion of cable television and higher subscriber
growth rates. Historically, cable operators have not sought to compete with
broadcast stations for a share of the local news audience. Recently, however,
certain cable operators have elected to compete for such audiences, and the
increased competition could have an adverse effect on the advertising revenues
of the PJC Broadcasting Business.
Other sources of competition include home entertainment systems (including
VCR's and playback systems, videodiscs and television game devices), "wireless
cable" services, satellite master antenna television systems, low power
television stations, television translator stations and low-powered DBS video
distribution services. The stations also face competition from medium and high-
powered DBS services, which transmit programming directly to homes equipped
with special receiving antennas.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now under development
for use with current cable channels and high-powered DBS (which commenced
operations in 1994), are expected to reduce the bandwidth required for
television
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signal transmission. These compression techniques, as well as other
technological developments, are applicable to all video delivery systems,
including over-the-air broadcasting, and have the potential to provide vastly
expanded programming to highly targeted audiences. Reduction in the cost of
creating additional channel capacity could lower entry barriers for new
channels and encourage the development of increasingly specialized "niche"
programming. This ability to reach very narrowly defined audiences is expected
to alter the competitive dynamics for advertising expenditures. Providence
Journal is unable to predict the effect that these or other technological
changes will have on the broadcast television industry or the future results of
Providence Journal's operations.
PROGRAMMING. Competition for programming involves negotiating with national
program distributors or syndicators which sell first-run and rerun packages of
programming. The Stations compete against in-market broadcast station
competitors for exclusive access to off-network reruns (such as Roseanne) and
first-run product (such as Oprah) in their respective markets. Cable systems
generally do not compete with local stations for programming, although various
cable networks from time to time have acquired programs that might have
otherwise been purchased by local television stations. Competition for
exclusive news stories and features is also endemic to the television industry.
ADVERTISING. Advertising rates are based upon the size of the market in which
the Station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic makeup of the market served by the Station, the
availability of alternative advertising media in the market area, aggressive
and knowledgeable sales forces, and development of projects, features and
programs that tie advertiser messages to programming. In addition to competing
with other media outlets for audience share, the Stations also compete for
advertising revenues, which comprise their primary source of revenues. The
Stations compete for such advertising revenues with other television stations
in their respective markets, as well as with other advertising media, such as
newspapers, radio stations, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems.
Competition for advertising dollars in the broadcasting industry occurs
primarily within individual markets. The Stations are located in competitive
markets.
PROGRAMMING INVESTMENTS
Due in part to its position as a large commercial television group
broadcaster, Providence Journal has been provided with opportunities to invest
in programming joint ventures that it believes are not widely available.
Providence Journal has invested, and in the future intends to continue
selectively to invest, in programming joint ventures with the goal of gaining
greater control over sources of non-network programming, generating additional
profits and, in certain situations, obtaining successful non-network
programming on more attractive terms than would otherwise be available.
Providence Journal is a limited partner with four other television group
broadcasters in Partners Stations Network, L.P. ("PSN"), a limited partnership
formed in 1994 to develop and produce television programming for broadcast on
their own stations and for potential national distribution to other television
broadcast stations. The four other limited partners are Malrite Communications
Group Inc., Pappas Telecasting Companies, LIN Television Corporation and River
City Broadcasting, L.P. Each limited partner has a 16% interest, and the
general partner, Lambert Television Management, Inc., has a 20% interest in
PSN. The stations owned by PSN's five limited partners serve markets accounting
for approximately 20% of the television households in the United States. Each
of PSN's limited partners has a right of first access in its respective
television markets to the programs produced by PSN. Providence Journal believes
PSN to be a cost-effective testing ground for new programs and a launch vehicle
for successful syndicated programming. Before making a full-season commitment
to production, PSN will conduct short trials on its partners' stations.
Promising shows can then be introduced to a broader national audience. PSN has
produced and is currently testing several programs. As of June 30, 1995,
Providence Journal's total commitment, consisting of amounts paid to date and
current obligations, with respect to PSN, was approximately $1.4 million. While
the amount of its investments in programming joint ventures has not been
significant to date, Providence
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Journal anticipates that its overall commitment to the production of television
programming will increase in the future.
Although Providence Journal's partners in PSN include experienced and
successful television program producers, Providence Journal has little
experience in selecting, developing, producing or investing in television
programs outside of local news and purchasing established syndicated
programming. The competition to produce successful television programming is
fierce, and many competitors in this area have substantially greater experience
and financial, creative and marketing resources than Providence Journal. Often
television programs created do not survive the pilot and testing phases and,
even among those that do, many do not attract sufficient audience share to be
successfully syndicated. There is no assurance that Providence Journal's
investment in PSN or future programming joint ventures will be profitable or
will result in lower overall programming costs. To the extent Providence
Journal commits broadcasting resources to air programming produced by such
joint ventures, Providence Journal may attract a lower audience share compared
to programming that would otherwise have been broadcast, which could adversely
affect Providence Journal's revenues attributable to the PJC Broadcasting
Business.
LOCAL MARKETING AGREEMENTS
Independent stations sometimes do not have the management expertise or
operating efficiencies available to Providence Journal as a multiple-station
group broadcaster. Accordingly, these stand-alone stations often operate at
minimal profit or at a loss. In two of its markets, Providence Journal has
entered into local marketing agreements ("LMA's") with the owners of such
stand-alone stations pursuant to which Providence Journal provides operational
and marketing services and programming to such stations for its own account
(subject to certain FCC requirements regarding licensee control of the station)
and pays the station owner an agreed upon fee. In addition to providing
Providence Journal with an additional revenue stream, Providence Journal's LMA
strategy is intended to permit stations that otherwise might "go dark" or
operate marginally to add programming and public affairs coverage and
contribute to diversity in their respective markets.
Providence Journal entered into 10-year LMA's, pursuant to which it provides
marketing services and programming with KFVE-TV in Honolulu, Hawaii and KTTU-TV
in Tucson, Arizona in 1993 and 1991, respectively. Under its LMA in Tucson,
Providence Journal is required to pay a fixed periodic fee and incur
programming and operating costs relating to the LMA station, but retains all
advertising revenues. Under its LMA in Honolulu, Providence Journal incurs
programming and most operating costs and is required to pay a percentage of
revenue to KFVE. KFVE has a strong sports orientation and averages over one
hundred live telecasts, many of which are satellite-fed to the mainland and
presented on Prime Ticket or Sports Channel. The Station has an exclusive
contract for the presentation of University of Hawaii sports events. Providence
Journal believes that it can significantly increase the likelihood of financial
viability of the stations served pursuant to an LMA by using Providence
Journal's negotiating expertise, operating efficiencies, including shared
employees, and an experienced and skilled management team, which will provide
programming and marketing support to the LMA stations. Providence Journal may
also benefit from the cross-marketing of programming, or the ability to time-
shift certain programming, for example, to rebroadcast a local news program at
an earlier or later time to appeal to additional viewers. In consultation with
the LMA station owners, Providence Journal in 1994 arranged for these stations
to become affiliates of the new Paramount network.
OPERATING STRATEGY
Providence Journal's operating strategy for the PJC Broadcasting Business
focuses on increasing the operating income of the Stations through advertising
revenue growth and strict control of programming and operating costs. The
components of this strategy include the following:
TARGETED MARKETING. Providence Journal seeks to increase its advertising
revenues and broadcast operating income by expanding relationships with local
and national advertisers and attracting new
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advertisers through targeted marketing techniques and carefully tailored
programming. Providence Journal works closely with advertisers to develop
campaigns that match specifically targeted audience segments with the
advertisers' overall marketing strategies. With this information, Providence
Journal regularly refines its programming mix among network, syndicated and
locally-produced shows in a focused effort to attract audiences with
demographic characteristics desirable to advertisers.
STRONG LOCAL PRESENCE. Each Station seeks to achieve a distinct local
identity principally through the quality of its local news programming (except
for its three Fox affiliates, which do not provide news programming) and by
targeting specific audience groups with special programs and marketing events.
Each Station's local news franchise is the foundation of Providence Journal's
strategy to strengthen audience loyalty and increase revenue and broadcast
operating income for each Station. Strong local news generates high viewership
and results in higher ratings both for programs preceding and following the
news. In addition to local news, each Station utilizes special programming and
marketing events, such as prime time programming of local interest or sponsored
community events, to strengthen community relations and increase advertising
revenues. Providence Journal places a special emphasis on developing and
training its local sales staff to promote involvement in community affairs and
stimulate growth of local advertising sales.
PROGRAMMING. Providence Journal continually reviews its existing programming
inventory and seeks to purchase the most profitable and cost-effective
syndicated programs available for each time period. In developing its selection
of syndicated programming, management balances the cost of available syndicated
programs, their potential to increase advertising revenue and the risk of
reduced popularity during the term of the program contract. Providence Journal
seeks to purchase only those programs with contractual periods that permit
programming flexibility and which complement a Station's overall programming
strategy and counter competitive programming. Programs that can perform
successfully in more than one time period are more attractive due to the long
lead time and multi-year commitments inherent in program purchasing.
COST CONTROLS. Each Station emphasizes strict control of its programming and
operating costs as an essential factor in increasing broadcast operating
income. Providence Journal relies primarily on its in-house capabilities and
seeks to minimize its use of outside firms and consultants. Providence
Journal's size benefits each Station in negotiating favorable terms with
programming suppliers and other vendors. In addition, each Station reduces its
corporate overhead costs by utilizing the group benefits provided by Providence
Journal for all of the Stations, such as insurance and other employee group
benefit plans. Through strategic planning and annual budget processes,
Providence Journal continually seeks to identify and implement cost saving
opportunities at each of the Stations. Providence Journal closely monitors the
expenses incurred by each of the Stations and continually reviews the
performance and productivity of station personnel. Providence Journal has been
successful in reducing its costs without sacrificing revenues through efficient
use of its available resources.
ACQUISITION STRATEGY
Providence Journal believes that its ability to manage costs effectively
while enhancing the quality demanded by station viewers gives Providence
Journal an important advantage in acquiring and operating new stations. In
assessing acquisitions, Providence Journal targets stations for which it has
identified line item expense reductions that can be implemented upon
acquisition. Providence Journal emphasizes strict controls over operating
expenses as it expands a Station's revenue base with the goal of improving a
Station's broadcast operating income. Typical cost savings arise from reducing
staffing levels, substituting employee benefit programs, reducing dependence on
outside consultants and research firms and reducing travel and other non-
essential expenses. Providence Journal also develops specific proposals for
revenue enhancement utilizing management's significant experience in local and
national advertising.
Providence Journal plans to pursue favorable acquisition opportunities as
they become available. At such time that Providence Journal has acquired the
full number of stations it is permitted to own pursuant to FCC regulations,
Providence Journal's continued growth will be a function of its development of
its existing
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Stations, the substitution of stations in larger markets for Providence
Journal's smaller market Stations as a result of acquisitions and divestitures,
and additional acquisitions that may occur if the FCC expands the number of
stations that an operator may own. (See "Licensing and Regulation".) There can
be no assurances that further acquisitions will be consummated.
LICENSING AND REGULATION
The following is a brief discussion of certain provisions of the
Communications Act and of FCC regulations and policies that affect the PJC
Broadcasting Business. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC, on which this discussion
is based, for further information concerning the nature and extent of FCC
regulation of television broadcasting stations.
LICENSE RENEWAL, ASSIGNMENTS AND TRANSFERS. Television broadcasting licenses
are granted for a maximum of five years and are subject to renewal upon
application to the FCC. The FCC prohibits the assignment of a license or the
transfer of control of a broadcasting license without prior FCC approval. In
determining whether to grant or renew a broadcasting license, the FCC considers
a number of factors pertaining to the applicant, including compliance with
limitations on alien ownership, common ownership of broadcasting, cable and
newspaper properties, and compliance with character and technical standards.
During certain limited periods when a renewal application is pending, competing
applicants may file applications with the FCC for authorization to broadcast on
the television frequency being used by the renewal applicant. During the same
periods, petitions to deny license renewal may be filed by interested parties,
including members of the public. Such petitions may raise various issues before
the FCC. The FCC is required to hold evidentiary, trial-type hearings on
renewal applications if a competing application is filed against a renewal
application, or if a petition to deny renewal of such license raises a
"substantial and material question of fact" as to whether the grant of the
renewal application would be inconsistent with the public interest, convenience
and necessity.
MULTIPLE OWNERSHIP RULES AND CROSS OWNERSHIP RESTRICTIONS. On a national
level, the FCC rules generally prevent an entity or individual from having an
attributable interest in more than 12 regular television stations. On a local
level, the "duopoly" rules prohibit such interests in two or more television
stations with overlapping service areas. Additional cross-ownership
restrictions generally prohibit new television/radio, broadcast/daily newspaper
or television/cable combinations in the same market. The FCC generally applies
its ownership limits to "attributable" interests held by an individual,
corporation, partnership or other association. In the case of corporations
holding broadcast licenses, the interests of officers, directors and those who,
directly or indirectly, have the right to vote 5% or more of the corporation's
voting stock (or 10% or more of such stock in the case of insurance companies,
mutual funds, bank trust departments and certain other passive investors that
are holding stock for investment purposes only) are generally deemed to be
attributable, as are positions as an officer or director of a corporate parent
of a broadcast licensee.
Because of these multiple ownership rules and cross-ownership restrictions, a
purchaser of Providence Journal Common Stock who acquires an attributable
interest in Providence Journal may violate the FCC's rules if that purchaser
also has an attributable interest in other television or radio stations, or in
daily newspapers, depending on the number and location of those radio or
television stations or daily newspapers. Such a purchaser also may be
restricted in the companies in which it may invest to the extent that those
investments give rise to an attributable interest. If an attributable
stockholder of Providence Journal violates any of these ownership rules or if a
proposed acquisition by Providence Journal would cause such a violation,
Providence Journal may be unable to obtain from the FCC one or more
authorizations needed to conduct the PJC Broadcasting Business and may be
unable to obtain FCC consents for certain future acquisitions. These multiple
ownership rules and cross-ownership restrictions will impose the same
restrictions on holders of New Providence Journal Common Stock as those imposed
on holders of Providence Journal Common Stock.
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The FCC has initiated rule-making proceedings to consider proposals to relax
its television ownership restrictions, including ones that would permit the
ownership in some circumstances of two television stations with overlapping
services areas. The FCC may also consider in these proceedings whether to adopt
new restrictions on television LMAs. If the FCC were to decide that the
provider of services under an LMA should be treated as the owner of the station
and if it did not relax the duopoly rules, or if the FCC were to announce new
restrictions on LMAs, Providence Journal would be required to modify or
terminate its LMAs. Further, if the FCC were to find that one of Providence
Journal's LMA stations failed to maintain control over its operations, the
licensee of the LMA station and/or Providence Journal could be subject to
sanctions. Providence Journal is unable to predict the ultimate outcome of
possible changes to these FCC rules and the impact such changes may have on its
broadcasting operations.
ALIEN OWNERSHIP. Under the Communications Act, broadcast licenses may not be
granted to or held by any corporation having more than one-fifth of its capital
stock owned of record or voted by non-U.S. citizens (including a non-U.S.
corporation), foreign governments or their representatives (collectively,
"Aliens") or having an Alien as an officer or director. The Communications Act
also prohibits a corporation, without an FCC public interest finding, from
holding a broadcast license if that corporation is controlled, directly or
indirectly, by another corporation, any officer of which is an Alien, or more
than one-fourth of the directors of which are Alien, or more than one-fourth of
the capital stock of which is owned of record or voted by Aliens. The FCC has
issued interpretations of existing law under which these restrictions in
modified form apply to other forms of business organizations, including general
and limited partnerships. As a result of these provisions, Providence Journal,
which serves as a holding company for its various television station licensee
subsidiaries, cannot have more than 25% of its capital stock owned of record or
voted by Aliens, cannot have an officer who is an Alien and cannot have more
than one-fourth of the Providence Journal Board consisting of Aliens.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually relaxed or
eliminated many of the more formalized procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. Broadcast station licensees continued, however,
to be required to present programming that is responsive to community problems,
needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming may
be considered by the FCC when it evaluates license renewal applications,
although such complaints may be filed, and generally may be considered by the
FCC, at any time. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, children's television
programming, political advertising, sponsorship identifications, contest and
lottery advertising, obscene and indecent broadcasts, and technical operations,
including limits on radio frequency radiation. In addition, broadcast licensees
must develop and implement affirmative action programs designed to promote
equal employment opportunities, and must submit reports to the FCC with respect
to these matters on an annual basis and in connection with a license renewal
application.
SYNDICATED EXCLUSIVITY/TERRITORIAL EXCLUSIVITY. Effective January 1, 1990,
the FCC reimposed syndicated exclusivity rules and expanded the existing
network non-duplication rules. The syndicated exclusivity rules allow local
broadcast stations to require that cable operators black out certain
syndicated, non-network programming carried on "distant signals" (i.e., signals
of broadcast stations, including so-called superstations, that serve areas
substantially removed from the local community). The network non-duplication
rules allow local broadcast network affiliates to demand that cable television
operators black out duplicative network broadcast programming carried on more
distant signals.
PRIME TIME ACCESS RULE. The FCC's prime time access rule (the "PTAR") also
places programming restrictions on affiliates of "networks". The PTAR restricts
affiliates of "networks" in the 50 largest television markets (as defined by
the PTAR) from broadcasting more than three hours of network programming during
the four hours of prime time. Five of the Stations are located in the nation's
50 largest television markets.
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In a Report and Order released on July 31, 1995, the FCC decided to repeal the
PTAR effective August 30, 1996. Petitions for Reconsideration and a court
appeal are still possible. Providence Journal cannot predict whether these
attempts will be successful or the effect any modification or elimination of
the PTAR would have on Providence Journal's programming or operations.
RESTRICTIONS ON BROADCAST ADVERTISING. The advertising of cigarettes on
broadcast stations has been banned for many years. The broadcast advertising of
smokeless tobacco products has more recently been banned by Congress. Certain
Congressional committees have examined legislative proposals to eliminate or
severely restrict the advertising of beer and wine. Providence Journal cannot
predict whether any or all of the present proposals will be enacted into law
and, if so, what the final form of such law might be. The elimination of all
beer and wine advertising would have an adverse effect on the Stations'
revenues and operating income as well as the revenues and operating income of
other stations that carry beer and wine advertising.
OTHER PROGRAMMING RESTRICTIONS. Bills which have been passed by the House and
Senate propose to regulate or limit television programming involving the
depiction of violence. Such proposals would regulate such programming by, for
example, restricting the hours within which it can be broadcast, penalizing
broadcasters for excessive broadcasting of violence, or requiring the insertion
of a "chip" in television receivers that would permit television viewers to
block the reception of any program containing a required code indicating
violent content. Providence Journal cannot predict whether any such legislation
will become law or whether the passage of such laws would have any significant
effect on the operations of the PJC Broadcasting Business.
CABLE "MUST-CARRY" OR "RETRANSMISSION CONSENT" RIGHTS. The 1992 Cable Act
requires television broadcasters to make an election to exercise either certain
"must-carry" or "retransmission consent" rights in connection with their
carriage by cable television systems in the station's local market. If a
broadcaster chooses to exercise its must-carry rights, it may demand carriage
on a specified channel on cable systems within its DMA. Must-carry rights are
not absolute, and their exercise is dependent on variables such as the number
of activated channels on and the location and size of the cable system and the
amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline to carry a given station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement.
On April 8, 1993, a three-judge panel of the United States District Court for
the District of Columbia upheld the constitutionality of the must-carry
provisions of the 1992 Cable Act. In 1994, the Supreme Court ruled that the
must-carry provisions were "content neutral" and thus not subject to strict
scrutiny and that Congress' stated interests in preserving the benefits of
free, over-the-air local broadcast television, promoting the widespread
dissemination of information from a multiplicity of sources and promoting fair
competition in the market for television programming all qualify as important
governmental interests. However, the Court remanded the case to a lower federal
court with instructions to hold further proceedings with respect to evidence
that lack of the must-carry requirements would harm local broadcasting. These
proceedings are now underway.
Failure to observe FCC rules and policies, including, but not limited to,
those discussed above, can result in the imposition of various sanctions,
including monetary forfeitures, the grant of short (i.e., less than the full
five-year) license renewal terms or, for particularly egregious violations, the
denial of a license renewal application or the revocation of a license.
PROPOSED LEGISLATION AND REGULATIONS. The FCC has proposed the adoption of
rules for implementing Advanced Television ("ATV") in the United States.
Implementation of ATV will improve the technical quality of over-the-air
broadcast television. Under certain circumstances, however, conversion to ATV
operations may reduce a station's geographical coverage area. The FCC is
considering the implementation of a proposal that would allot a second
broadcast channel to each regular commercial television station for ATV
96
operation. Stations would be required to phase in their ATV operations on the
second channel, with a three-year period to build necessary ATV facilities and
a consecutive three-year period in which to begin operations. Such stations
would be required to surrender their non-ATV channel 15 years after the
commencement of the first three-year period. Implementation of ATV will impose
additional costs on television stations providing the new service due to
increased equipment costs. Providence Journal estimates that the adoption of
ATV would require average capital expenditures of approximately $2 million per
Station to provide facilities necessary to broadcast an ATV signal. The
conversion of a Station's equipment enabling it to produce and transmit ATV
programming would be substantially more expensive. The introduction of this new
technology will require that consumers purchase new receivers (television sets)
for ATV signals or, if available by that time, adapters for their existing
receivers. While Providence Journal believes that the FCC will authorize ATV in
the United States, Providence Journal cannot predict when such authorization
might be given or the effect such authorization might have on the PJC
Broadcasting Business.
In addition, the FCC is conducting an inquiry to consider proposals to
increase broadcasters' obligations under its rules implementing the Children's
Television Act of 1990, which requires television stations to present
programming specifically directed to the "educational and informational" needs
of children. The FCC also is conducting a rule-making proceeding to consider
the adoption of more restrictive standards for the exposure of the public and
workers to potentially harmful radio frequency radiation emitted by broadcast
station transmitting facilities. Other matters that could affect the Stations
include technological innovations affecting the mass communications industry
such as technical allocation matters, including assignment by the FCC of
channels for additional broadcast stations, low-power television stations and
wireless cable systems and their relationship to and competition with full-
power television broadcasting service.
The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction can
be made at this time as to whether the FCC will impose any commercial limits at
the conclusion of its deliberations. Providence Journal is unable to determine
what effect, if any, the imposition of limits on the commercial matter
broadcast by television stations would have on the operations of the PJC
Broadcasting Business.
Congress and the FCC also have under consideration, or may in the future
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect the operation, ownership
and profitability of the PJC Broadcasting Business and the Stations, result in
the loss of audience share and advertising revenues of the Stations, and affect
Providence Journal's ability to acquire additional broadcast stations or
finance such acquisitions. Such matters include, for example, (i) changes to
the license renewal process; (ii) imposition of spectrum use or other
governmentally imposed fees upon a licensee; (iii) proposals to expand the
FCC's equal employment opportunity rules and other matters relating to minority
and female involvement in broadcasting; (iv) proposals to increase the
benchmarks or thresholds for attributing ownership interest in broadcast media;
(v) proposals to change rules or policies relating to political broadcasting;
(vi) technical and frequency allocation matters, including those relative to
the implementation of ATV; (vii) proposals to restrict or prohibit the
advertising of beer, wine and other alcoholic beverages on broadcast stations;
(viii) changes in the FCC's cross-interest, multiple ownership, alien ownership
and cross-ownership policies; (ix) changes to broadcast technical requirements;
(x) proposals to allow telephone companies to deliver video programming to the
home; and (xi) proposals to limit the tax deductibility of advertising expenses
by advertisers.
Providence Journal cannot predict what other matters might be considered in
the future, nor can it judge in advance what impact, if any, the implementation
of any of these proposals or changes might have on the PJC Broadcasting
Business.
The foregoing does not purport to be a complete discussion of all of the
provisions of the Communications Act or other Congressional Acts or the
regulations and policies promulgated by the FCC thereunder. Reference is made
to the Communications Act, other Congressional Acts, such regulations, and
97
the public notices promulgated by the FCC, on which the foregoing discussion is
based, for further information. There are additional FCC regulations and
policies, and regulations and policies of other federal agencies, that govern
political broadcasts, public affairs programming, equal employment
opportunities and other areas affecting the Station's businesses and
operations. Pending in Congress are H.R. 1555 and S. 652, which have been
passed by the House and Senate, respectively. These bills would enact
comprehensive changes in telecommunications policy. Providence Journal cannot
predict the ultimate outcome of legislation in this Session of Congress.
EMPLOYEES
As of June 30, 1995, the operations of the PJC Broadcasting Business had
approximately 966 full-time employees and 116 part-time employees, of which 12
were employed as corporate headquarters staff members and the balance were
employed at the operating subsidiary level in connection with the operation and
management of the Stations. Two hundred eighty six of such employees are
represented by labor unions. Providence Journal considers its relations with
the employees of the PJC Broadcasting Business to be good.
PROPERTIES
Providence Journal maintains its corporate headquarters in Providence, Rhode
Island. Each of the Stations has facilities consisting of offices, studios,
sales offices and transmitter and tower sites. Transmitter and tower sites are
located to provide coverage of each Station's market. Providence Journal owns
the offices where its Stations are located and owns the property where its
towers and primary transmitters are located. Providence Journal leases the
remaining properties, consisting primarily of sales office locations and
microwave transmitter sites. While none of the properties owned or leased by
Providence Journal is individually material to the operations of the PJC
Broadcasting Business, if Providence Journal were required to relocate any of
its towers the cost could be significant because the number of sites in any
geographic area that permit a tower of reasonable height to provide good
coverage of the market is limited, and zoning and other land use restrictions,
as well as Federal Aviation Administration regulations, limit the number of
alternative sites or increase the cost of acquiring such properties for tower
sites.
Providence Journal believes that its properties are generally in good
condition and adequate and suitable for the operations of the Stations and the
PJC Broadcasting Business. Providence Journal has not received any notice that
it is in default under any of its property leases.
98
DESCRIPTION OF PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL
If the Providence Journal Proposals described in this Joint Proxy Statement-
Prospectus receive the requisite vote of stockholders of Providence Journal
and the other conditions to the PJC Spin-Off and the Merger are satisfied or
waived, the PJC Non-Cable Business (including both the PJC Publishing Business
and the PJC Broadcasting Business) will be transferred to New Providence
Journal, and the shares of New Providence Journal will be transferred to the
present stockholders of Providence Journal in the PJC Spin-Off. The discussion
set forth below regarding Providence Journal also serves as a discussion of
New Providence Journal in the event the PJC Spin-Off, the Merger and the
transactions contemplated thereby are consummated.
OTHER INVESTMENTS AND ASSETS
THE FOOD CHANNEL. On August 16, 1993, Providence Journal, through various
subsidiaries, successfully organized TVFN. TVFN is a Delaware general
partnership consisting of eight cable television operators and programmers and
one broadcast television partner. As of June 30, 1995, Providence Journal had
a 20.4% interest in TVFN and is a general partner in the managing general
partner of TVFN. TVFN owns and operates The Food Channel, a 24-hour cable
programming channel devoted to food, its preparation and related topics. As of
June 30, 1995, The Food Channel was available to approximately 12.4 million
cable subscribers throughout the United States.
LINKATEL. Providence Journal, through a subsidiary, owns a 42% interest in
Linkatel, a California partnership formed in 1993 to build, own and operate a
fiber-optic telecommunications alternate access network in the Los Angeles
basin. The construction of the Linkatel network has commenced and the first
segment of this network is expected to be operational in the first half of
1995.
STARSIGHT. In 1993 Providence Journal purchased a 4.85% interest in
StarSight Telecast, Inc., ("StarSight") a company engaged in developing and
marketing an on-screen interactive television program guide designed to
facilitate the identification, selection and recording of television
programming. Jack C. Clifford, Vice President--Broadcasting and Cable
Television of Providence Journal, is a member of the Board of Directors of
StarSight. StarSight's shares are listed on NASDAQ.
VIDEO PROGRAMMING. Providence Journal is actively reviewing opportunities to
participate in the creation and development of new cable television
programming services. In general, New Providence Journal will seek to enter
into partnerships and other relationships with companies or individuals having
specialized expertise with regard to the content of the programming. On April
5, 1995, Providence Journal entered into an agreement to purchase an interest
of up to 37% in America's Health Network ("AHN"), a planned new cable
television programming service providing health information and products. In
connection with the transaction, warrants were issued to Providence Journal
which, if exercised, would increase Providence Journal's interests to
approximately 52%. Through June 30, 1995, Providence Journal has invested
approximately $4.3 million in AHN, representing an ownership interest of
approximately 46%.
PEAPOD. On July 27, 1995, Providence Journal purchased for approximately
$5.1 million a 17.1% interest in Peapod LP, which currently provides an
interactive computer online grocery ordering, shopping and delivery service in
Chicago and San Francisco.
BILTMORE HOTEL. Providence Journal has for some years owned the Omni
Biltmore Hotel and the adjoining Washington Street Garage, two operating
properties located in Providence, Rhode Island. On July 18, 1995, Providence
Journal sold the Omni Biltmore Hotel for approximately $7 million to the Grand
Heritage Hotels organization.
LEGAL PROCEEDINGS
Providence Journal currently and from time to time is involved in litigation
incidental to the conduct of its businesses. Providence Journal is not a party
to any lawsuit or proceeding that, in management's opinion, is likely to have
a material adverse effect on the financial condition or results of operations
of Providence Journal taken as a whole.
99
CAPITALIZATION OF PROVIDENCE JOURNAL AND PRO FORMA CAPITALIZATION OF NEW
PROVIDENCE JOURNAL
The following table sets forth the capitalization of Providence Journal and
the pro forma capitalization of New Providence Journal at June 30, 1995 after
giving effect to the PJC Spin-Off, the Merger and the transactions contemplated
thereby described in the Notes to the Pro Forma Condensed Consolidated Balance
Sheet and Statement of Operations included elsewhere in this Joint Proxy
Statement-Prospectus. This table should be read in conjunction with the Notes
referred to above and Providence Journal's historical consolidated financial
statements and related notes thereto in this Joint Proxy Statement-Prospectus.
JUNE 30, 1995
---------------------------------
NEW PROVIDENCE
PROVIDENCE JOURNAL JOURNAL
HISTORICAL PRO FORMA
------------------ --------------
(IN THOUSANDS)
Debt, including current installments......... $310,462 $285,000
Stockholders' Equity:
Providence Journal Common Stock:
Class A Common Stock, par value $2.50 per
share; authorized 600,000 shares; issued
38,505 shares............................. 96
Class B Common Stock, par value $2.50 per
share; authorized 300,000 shares; issued
47,145 shares............................. 118
Treasury Stock, at cost, 961 shares........ (7,448)
New Providence Journal Common Stock:
Pro Forma:
Class A Common Stock, par value $1.00 per
share; authorized 600,000 shares; issued
and outstanding 38,825 shares............. 38
Class B Common Stock, par value $1.00 per
share; authorized 300,000 shares; issued
and outstanding 46,825.................... 47
Additional Capital.......................... 1,225 7,354
Retained Earnings........................... 285,265 222,937
Unrealized Loss on Securities held for sale,
net........................................ (892) (892)
-------- --------
Total Stockholders' Equity............... 278,364 229,484
-------- --------
Total Capitalization................... $588,826 $514,484
======== ========
100
SELECTED CONSOLIDATED FINANCIAL DATA OF PROVIDENCE JOURNAL
The following selected consolidated financial data has been derived from the
consolidated financial statements of Providence Journal. The data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Providence Journal" and the consolidated
financial statements and notes thereto. The Statement of Operations for the
years ended December 31, 1990, 1991, 1992, 1993 and 1994 and the Balance Sheet
Data as of the same dates have been derived from the audited consolidated
financial statements of Providence Journal. The Statement of Operations for the
six months ended June 30, 1994 and 1995 and the balance sheet data as of June
30, 1995 have been derived from the unaudited consolidated financial statements
of Providence Journal, which, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations for such periods.
Operating results for the six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1995.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
------------------------------------------------ -----------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Revenues............... $169,840 $167,008 $173,579 $180,473 $192,291 $92,730 $95,816
Operating Loss......... (16,437) (31,793) (9,773) (15,859) (10,696) (1,827) (4,865)
Interest, Fees and
Other Income.......... 11,900 38,964 46,751 4,832 5,223 2,825 2,928
Interest Expense....... (15,701) (10,102) (6,455) (2,578) (2,426) (1,366) (1,176)
Equity in Loss of
Affiliates............ (988) -- (12,642) (7,788) (12,154) (3,273) (240)
Income (Loss) from
Continuing Operations
before Income Taxes... (21,226) (2,931) 17,881 (21,393) (20,053) (3,641) (3,353)
Income (Loss) from
Continuing Operations. (12,923) (6,547) 6,044 (15,628) (22,420) (3,015) (1,682)
Income (Loss) Per
Common Share From
Continuing Operations. (129.02) (74.56) 70.26 (183.21) (264.13) (35.44) (19.86)
Cash Dividends Paid Per
Common Share.......... 39.00 86.00 94.60 104.00 114.40 52.00 57.20
DECEMBER 31
------------------------------------------------ JUNE 30,
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets........... $784,063 $594,098 $793,433 $775,685 $724,713 $761,281
Net Assets of
Discontinued Cable
Television Operations
included in Total
Assets................ 51,577 54,184 393,342 396,260 364,010 404,861
Long-term Debt......... 28,568 28,608 253,106 276,601 247,173 296,895
Stockholders' Equity... 460,321 399,938 391,967 359,575 285,887 278,364
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PROVIDENCE JOURNAL
GENERAL. Providence Journal's continuing operations consist primarily of two
business segments--the PJC Publishing Business and the PJC Broadcasting
Business. The PJC Publishing Business publishes a seven-day metropolitan
newspaper with an average daily and Sunday circulation of 182,400 and 261,200,
respectively. The newspaper serves Rhode Island and Southeastern Massachusetts.
The PJC Broadcasting Business owns or partially owns the nine Stations, which
are in nine different markets. Four of the Stations are wholly owned, and five
are partially owned through the Providence Journal's 50% interest in KHC, which
owns KBC. (See "Description of Providence Journal Broadcast Television
Business--The Stations".)
In November 1994, Providence Journal announced a definitive agreement,
pursuant to which it agreed to consummate the Merger with Continental in a
transaction valued at approximately $1.4 billion. The
101
Merger and the King Cable Purchase, which requires various regulatory
approvals, are expected to be completed in the fourth quarter of 1995.
Accordingly, the PJC Cable Business has been classified as a discontinued
operation for all periods presented.
In order to complete the Merger, Providence Journal will purchase the 50%
interest in KHC owned by the Kelso Partnerships for $265 million (including
transaction costs), thus resulting in KHC being wholly owned by Providence
Journal. (See "Pre-Merger Transactions--Kelso Buyout".) Following the PJC Spin-
Off, KHC's broadcast stations will be owned entirely by New Providence Journal.
The unaudited pro forma condensed consolidated statement of operations for New
Providence Journal contained herein has been prepared assuming these
transactions occurred on January 1, 1994 and, accordingly, reflect the combined
results of Providence Journal and KHC's broadcast stations for all pro forma
periods presented.
Other investments in affiliated companies include a 21% interest in TVFN,
which develops cable television programming related to food, its preparation
and related topics; a 42% interest in Linkatel, formed to pursue the
development of alternative access networks; and a 46% interest, as of June 30,
1995, in AHN, a development stage company, intending to develop a health-
related cable programming network. These and other smaller investments have
been accounted for using the equity method and, combined with Providence
Journal's 50% interest in KHC, represented a combined investment of $92.3
million as of June 30, 1995.
The following table summarizes the equity in income (loss) of affiliated
companies on a disaggregated basis:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ----------------
% % %
OWNERSHIP 1992 OWNERSHIP 1993 OWNERSHIP 1994 1994 1995
--------- -------- --------- ------- --------- -------- ------- -------
(IN THOUSANDS)
KHC..................... 50 $(12,602) 50 $(7,245) 50 $ (8,326) $(1,630) $ 1,960
AHN..................... -- (515)
TVFN.................... 20 (1,391) 21 (3,848) (2,032) (2,024)
Linkatel................ 33 (128) 42 (509) (242) (386)
Other................... (40) 976 529 631 725
-------- ------- -------- ------- -------
Total................. $(12,642) $(7,788) $(12,154) $(3,273) $ (240)
======== ======= ======== ======= =======
DISCONTINUED OPERATIONS. As noted above, the PJC Cable Business is expected
to be acquired by Continental. Income (loss) from the PJC Cable Business, along
with allocated interest expense and income taxes, but excluding equity in loss
of KHC's cable business, is therefore reported as a discontinued operation for
all periods presented. No corporate overhead has been allocated to discontinued
operations. Additionally, Providence Journal sold its remaining investments in
its cellular system and its paging subsidiary in April 1994 for $10.7 million,
recording a gain of $1.4 million net of taxes. Income (loss) from these
businesses is reported as a discontinued operation.
Operating results of these discontinued operations were as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1992 1993 1994
-------- -------- --------
(IN THOUSANDS)
Revenues........................................ $112,334 $177,417 $177,953
Income (Loss) Before Income Taxes............... 5,824 (8,143) (1,452)
Income Taxes (Benefits)......................... 2,955 (1,087) 1,155
Income (Loss) from Discontinued Operations...... 2,869 (7,056) (2,607)
102
OTHER ASSETS. In September 1990, Providence Journal loaned the Lowell Sun
Companies approximately $26 million and agreed to provide a $6.5 million
revolving credit facility. The loan and revolving credit facility are available
through March 1996 and bear interest at a floating rate of prime plus 1.25%.
The loan is secured by all the assets of the Lowell Sun Companies and a pledge
of the Lowell Sun Companies' stock. Providence Journal does not manage the
Lowell Sun Companies. As additional consideration for making the loan, the
Lowell Sun Companies granted Providence Journal a warrant to acquire a 41.67%
interest in the Lowell Sun Companies. The warrant is exercisable through
September 1995. Providence Journal's management has notified the Lowell Sun
Companies that it will not exercise this warrant.
Providence Journal has, for some years owned the Omni Biltmore Hotel and the
adjoining Washington Street Garage, two operating properties located in
Providence, Rhode Island. The carrying amount of these properties totaled $17.2
million at December 31, 1994. On July 18, 1995, the Omni Biltmore Hotel was
sold to Grand Heritage Hotels for approximately $7 million.
CONSOLIDATED RESULTS OF OPERATIONS. The following table summarizes Providence
Journal's financial results.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
---------------------------- ----------------
1992 1993 1994 1994 1995
-------- -------- -------- ------- -------
(IN THOUSANDS)
Revenues:
Publishing............... $120,516 $124,914 $127,893 $62,383 $62,687
Broadcast Television (1)
........................ 43,281 45,506 54,024 25,197 28,707
Other.................... 9,782 10,053 10,374 5,150 4,422
-------- -------- -------- ------- -------
173,579 180,473 192,291 92,730 95,816
-------- -------- -------- ------- -------
Operating Income (Loss):
Publishing............... 10,590 9,891 9,233 3,938 (1,715)
Broadcast Television (1)
........................ (5,276) (2,213) 5,576 1,338 4,937
Other.................... (646) (2,651) 881 486 (113)
Corporate................ (14,441) (20,886) (26,386) (7,589) (7,974)
-------- -------- -------- ------- -------
(9,773) (15,859) (10,696) (1,827) (4,865)
Other Income (Expense):
Interest, Fees and Other
Income.................. 46,751 4,832 5,223 2,825 2,928
Interest Expense......... (6,455) (2,578) (2,426) (1,366) (1,176)
Equity in Loss of
Affiliates.............. (12,642) (7,788) (12,154) (3,273) (240)
-------- -------- -------- ------- -------
27,654 (5,534) (9,357) (1,814) 1,512
Income (Loss) from
Continuing Operations
Before Income Taxes..... 17,881 (21,393) (20,053) (3,641) (3,353)
Income Taxes (Benefits).. 11,837 (5,765) 2,367 (626) (1,671)
-------- -------- -------- ------- -------
Income (Loss) from
Continuing Operations... 6,044 (15,628) (22,420) (3,015) (1,682)
Income (Loss) from
Discontinued Operations,
Net of Tax.............. 2,869 (7,056) (2,607) (1,934) --
Loss on disposal of
segments, net of tax.... -- -- (34,764) -- --
-------- -------- -------- ------- -------
Income (Loss) Before
Extraordinary Item and
Changes in Accounting
Methods................. 8,913 (22,684) (59,791) (4,949) (1,682)
Extraordinary Item, Net
of Tax ................. -- 1,551 -- -- --
Cumulative Effect of
Changes in Accounting
Methods, Net of Tax..... 1,257 -- -- -- --
-------- -------- -------- ------- -------
Net Income (Loss)........ $ 10,170 $(21,133) $(59,791) $(4,949) $(1,682)
======== ======== ======== ======= =======
--------
103
(1) Includes only those subsidiaries which are wholly owned.
The PJC Publishing Business and the PJC Broadcasting Business experience both
seasonal and cyclical fluctuations in their respective quarterly and annual
operating results. Net revenues are generally highest in the fourth quarter of
each year because of increased expenditures by advertisers in anticipation of
holiday retail spending. Expenses are generally spread evenly throughout the
year. On a year-to-year basis, political revenues are cyclical, with the
highest revenues generally occurring during major election years. In addition,
special events such as the summer or winter Olympics may benefit the PJC
Broadcasting Business through an increased amount of advertising during or
adjacent to such events at increased rates. The impact of such events will
depend on which network carries them and which of the Stations are affiliated
with that network. In general, the PJC Broadcasting Business benefits from
geographic diversity while the PJC Publishing Business is dependent upon the
Southeastern New England region.
First Six Months 1994 Compared with First Six Months 1995. Revenues increased
3.3% for the first six months of 1995, while operating loss increased 166.3% to
$(4.9) million. Significant improvements in the PJC Broadcasting Business were
more than offset by a decrease in operating profit for the PJC Publishing
Business. Corporate expenses were 5.1% higher for the first six months of 1995.
For the first six months, loss from continuing operations decreased from
$(3.0) million in 1994 to $(1.7) million in 1995, reflecting primarily an
improvement in the performance of KHC's broadcasting business. Providence
Journal's equity in income (loss) of this affiliate was $2.0 million equity
income in 1995 as compared to $(1.6) million equity loss in 1994, or a $3.6
million improvement. Accounting for KHC's discontinued cable operations in 1994
also impacted the equity in loss fluctuation of this affiliate since a
provision for KHC's loss in its cable operations during the phase out period
had been provided for in the fourth quarter of 1994 as a cost of business
disposal.
1994 Compared with 1993. Revenues increased 6.5% during 1994 showing modest
growth in the PJC Publishing Business and significant growth in the PJC
Broadcasting Business. Operating loss decreased 32.6% from $(15.9) million to
$(10.7) million. The PJC Broadcasting Business showed an operating profit of
$5.6 million in 1994, as compared with an operating loss of $(2.2) million in
1993, while the PJC Publishing Business showed a $0.7 million, or 6.7% decline
in operating profit during the comparable period.
Corporate overhead increased from $20.9 million to $26.4 million, primarily
because of increases associated with executive compensation programs. During
the fourth quarter of 1994, a charge to corporate overhead of $13 million for
executive compensation related stock and incentive unit plans was recorded.
Additional deferred compensation expense was accrued with respect to the
Incentive Stock Unit Plan for senior executives. The increased accrual resulted
from an increase in the amount reflected for the value of the Providence
Journal Class A Common Stock and the Providence Journal Class B Common Stock
from $8,700 per share (based on a November 1993 appraisal) to $12,000 per share
in November 1994 (an estimated value for accounting purposes without specific
appraisal support). (See "Executive Compensation--Providence Journal Incentive
Stock Unit Plan" and "--Aggregated SAR Exercises in Last Fiscal Year and Year-
End SAR Values" table, footnote (1)).
Other expense, net increased from $(5.5) million in 1993 to $(9.4) million in
1994, resulting primarily from a $(4.4) million increase in equity in loss of
affiliates. During 1994, equity in loss of affiliates of $(12.2) million
included $(4.4) million in losses from two development operations--TVFN and
Linkatel--as compared to $(1.5) million in losses from these affiliates in
1993. These start-up businesses are expected to be unprofitable for the
foreseeable future. (See the table under "General".)
Interest expense charged to continuing operations was $2.4 million, net of
allocation to discontinued operations of $20.7 in 1994. Interest allocated to
discontinued operations was limited to the associated interest on debt to be
repaid in connection with the Merger.
104
Loss from continuing operations was $(22.4) million in 1994 compared to
$(15.6) million in 1993, reflecting the fluctuations discussed above and an
increase in income taxes of $8.1 million. During the fourth quarter of 1994,
Providence Journal agreed to a final settlement with the Service relating to
examinations of its income tax returns for the years 1984 through 1986. In
connection with this settlement, Providence Journal provided for an additional
income tax expense of $6 million, relating primarily to interest on settlements
and various contingencies on income tax exposures identified during on-going
examinations.
Income (loss) from discontinued operations consists primarily of the
operating results of the majority owned cable businesses, which are expected to
be acquired by Continental in the Merger. The decrease from a loss of $(7.1)
million in 1993 to $(2.6) million in 1994 reflects improved operating results,
mainly due to lower depreciation and amortization charged on recently acquired
cable television businesses. Loss on disposal of segments of $(34.8) million
net of tax includes severance, transaction costs and a provision for loss
during the phase-out period, including allocated interest.
1993 Compared with 1992. Revenues grew 4.0% between years showing modest
growth in both the PJC Publishing Business and the PJC Broadcasting Business.
Operating loss increased 62.2% from $(9.8) to $(15.9) million. The PJC
Broadcasting Business showed a substantial decrease in operating loss, from
$(5.3) million in 1992 to $(2.2) million in 1993, while the PJC Publishing
Business showed a $0.7 million or 6.6% decline in operating profit during the
comparable period. Also in 1992 and 1993, valuation adjustments based upon
appraised property values and discounted cash flow analyses were recorded
totaling $(.6) million and $(2.7) million respectively, which related to the
Omni Biltmore Hotel and adjoining Washington Street Garage.
Also contributing to the increase in operating loss was a $6.4 million or
44.6% increase in corporate overhead associated primarily with executive
compensation programs. During the fourth quarter of 1993, a charge to corporate
overhead of $4.8 million for executive compensation related stock and
retirement plans was recorded. Providence Journal established a Restricted
Stock Unit Plan for key executives in the fourth quarter of 1993. Also,
additional deferred compensation was accrued in connection with the Incentive
Stock Unit Plan for senior executives because the appraised value of Providence
Journal Class A Common Stock and Providence Journal Class B Common Stock
increased from $7,200 per share in November 1992 to $8,700 per share in
November 1993.
Interest, fees and other income decreased $41.9 million from 1992 to 1993. In
1992, Providence Journal earned $31.5 million in interest income on a six-year
term loan of $205.5 million advanced to Palmer. This note was settled in full
in connection with the acquisition of the Palmer Systems in December 1992.
(Operations from this acquisition have been classified as discontinued
operations in the accompanying financial statements from the date of purchase
forward.) In addition, other income decreased $5.8 million in 1993 as compared
to 1992 primarily as a result of decreased management and transaction fees paid
to Providence Journal by KHC.
Equity in loss of affiliates decreased from $(12.6) million in 1992 to $(7.8)
million in 1993, primarily reflecting the improvement in KHC's financial
results.
Interest expense charged to continuing operations decreased from $6.5 million
in 1992 to $2.6 million in 1993. Interest expense totaled $17.5 million and
$24.4 million for 1992 and 1993, respectively, of which $11 million and $21.8
million has been reclassified to discontinued operations in 1992 and 1993,
respectively. Interest expense has been allocated to discontinued operations
based upon amounts borrowed to fund the PJC Cable Subsidiaries' acquisitions.
Such debt is intended to be repaid as part of the transactions contemplated
herein.
Loss from continuing operations was $(15.6) million in 1993 as compared to
income of $6.0 million in 1992. This significant change in net income (loss)
between years reflects the fluctuations discussed above, but primarily the
reduction in interest income on the Palmer note receivable. Effective income
tax rates fluctuated
105
from a tax rate of 66.2% in 1992 compared to a benefit rate of 26.9% in 1993.
Effective rates fluctuated from 34% primarily because of state income taxes and
equity in loss of KHC which is not deductible for tax purposes.
Income (loss) from discontinued operations decreased from income of $2.9
million in 1992 to a loss of $(7.1) million in 1993 because of the acquisition
of the Palmer Systems in December 1992.
In 1992, net income of $10.2 million includes the net cumulative effect of
changes in accounting for post-retirement benefits ($2.1 million charge) and
accounting for income taxes ($3.4 million benefit). Net loss in 1993 of $(21.1)
million includes the extraordinary gain of $1.6 million on early extinguishment
of debt.
ANALYSIS BY SEGMENT
Publishing Segment. The following table sets forth certain operating and
other data for the years ended December 31, 1992, 1993 and 1994 and for the six
months ended June 30, 1994 and 1995.
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
-------------------------- ---------------
1992 1993 1994 1994 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT CIRCULATION)
Revenues:
Advertising...................... $ 87,879 $ 93,149 $ 95,078 $46,367 $45,387
Circulation...................... 32,263 31,028 30,887 15,167 15,919
Other............................ 374 737 1,928 849 1,381
-------- -------- -------- ------- -------
120,516 124,914 127,893 62,383 62,687
Operating Expense.................. 99,539 103,597 107,462 52,771 58,892
Depreciation....................... 10,387 11,426 11,198 5,674 5,510
-------- -------- -------- ------- -------
Operating Income (loss)............ $ 10,590 $ 9,891 $ 9,233 $ 3,938 $(1,715)
======== ======== ======== ======= =======
Average Net Paid Circulation(1)
Daily............................ 197,100 192,500 188,200 184,700
Sunday........................... 268,100 269,100 268,800 266,400
--------
(1) For the twelve-month periods ended March 31 in each of the years presented,
as reported by the Audit Bureau. (See "Description of Providence Journal
Publishing Business--Circulation and Pricing".)
The PJC Publishing Business publishes seven days a week: the Providence
Journal-Bulletin Monday through Saturday; and The Providence Sunday Journal on
Sunday. Prior to June 5, 1995, Providence Journal also published The Evening
Bulletin, an afternoon newspaper, Monday through Friday. Advertising revenue
represents 72% to 75% of total revenue for the PJC Publishing Business,
including retail and classified advertising. Advertising revenues have
increased a compound average growth rate of 4% annually over the last two
years, mostly due to price increases.
Average net paid daily circulation has declined 4.5% since 1992. This decline
has primarily been in The Evening Bulletin. Average net paid Sunday circulation
has remained relatively flat. The modest increases in advertising revenue and
declines in circulation revenue have, in part, been a function of the local
Rhode Island economy, particularly impacted in 1991 by the nationwide recession
and the Rhode Island credit union crises.
The PJC Publishing Business has taken steps to address the declining
readership of its newspapers by improving customer service and continued
improvement in content, especially local news coverage. New on-line services
and advertising media services are also continually being designed and
developed. During 1994, a development effort was started to offer a local on-
line news service in conjunction with Prodigy Services Company. The new service
began operations in the second quarter of 1995. Additionally, the PJC
Publishing Business launched the Town Crier in 1993, a weekly newspaper for
shoppers composed entirely of advertising. Other user-fee based services
include Journal library research services, fax information services and
106
telemarketing. Revenue from these new development efforts has increased to $1.9
million for 1994 as compared to $.7 million in the prior year.
Operating expenses increased 3.7% in 1994 as compared with 1993, primarily as
a result of the development efforts discussed above. Operating expenses in 1993
compared to 1992 increased 4.1% and were impacted by a 10% increase in
newsprint and ink (which represents approximately 13% of total operating
expenses). Newsprint prices are expected to increase significantly in 1995. The
Journal implemented newsprint conservation programs to help offset price
increases.
Depreciation and amortization increased in 1993 compared with 1992,
reflecting a capital improvement program targeted toward cost reduction
improvements; e.g., energy efficiency, automation, additional press capacity.
Additionally, several of the Journal's operating facilities were renovated
during these years.
Publishing Outlook. Publishing results in 1995 are expected to be impacted by
two critical factors: the Rhode Island economy and the sharp increases in
newsprint prices anticipated throughout the industry. Newsprint expense, which
is the largest single expense item for the PJC Publishing Business, currently
represents approximately 13% of operating costs. The average newsprint price
per ton is expected to rise more than 27% in 1995.
The PJC Publishing Business faces many industry changes, including growth of
electronic media. In addition, advertising revenue growth over the long term
may be limited by structural shifts in the retail marketplace both nationally
and locally, including retailer consolidations, changing consumer buying habits
and growth in discount stores which use little newspaper advertising.
First Six Months 1994 compared with First Six Months 1995. Revenues for the
PJC Publishing Business remained relatively flat for the first six months of
1995 compared with 1994 while operating expenses increased from $52.8 million
to $58.9 million, or 11.6%. The primary reasons for the increase in operating
expenses were newsprint price increases, increased postage costs, labor
increases and one-time costs associated with the consolidation of the
Providence Journal morning paper and The Evening Bulletin which include
termination benefits associated with a recently announced early retirement
program discussed below. Flat revenues combined with increasing operating
expenses led to an operating loss of $(1.7) million in the first six months of
1995 as compared to profit of $3.9 million in the comparable prior period.
On March 22, 1995, Providence Journal announced that the morning Providence
Journal and The Evening Bulletin will be consolidated as the Providence
Journal-Bulletin, a morning newspaper. The consolidated newspaper first
appeared on June 5, 1995. Initially, a substantial portion of the anticipated
$6 million in savings from this consolidation will be reinvested to improve
local news coverage. Circulation is expected to drop temporarily but recover
once readers become aware of the expanded local news, although there can be no
assurances in this regard. Providence Journal has announced an early retirement
program associated with this newspaper consolidation which is expected to cost
the PJC Publishing Business $4.3 million to $6.7 million to implement. Such
costs will be accrued as early retirement offers are accepted by employees
(expected to be during the second and third quarters of 1995.) Approximately
$1.5 million in termination benefits was accrued in the first six months of
1995.
Broadcast Television Segment. The PJC Broadcasting Business operating results
are primarily dependent on advertising revenues. The Stations record revenues
primarily in two categories: local/regional revenues and national revenues,
less agency commissions. The Stations also earn barter, network compensation
and various other revenues.
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) is
considered a good indicator in evaluating performance. It represents operating
income or loss plus depreciation and amortization. EBITDA should not be
considered by the reader as an alternative to operating or net income computed
in accordance with GAAP as an indicator of the PJC Broadcasting Business
performance or as an alternative to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity.
107
The following table sets forth certain operating and other data for the years
ended December 31, 1992, 1993 and 1994 and for the six months ended June 30,
1994 and 1995. The actual results for all periods presented represent the
operating data for the four wholly owned Stations. Pro forma results for the
six months ended June 30, 1994 and 1995 and for the year ended December 31,
1994 also include the operating results of the five Stations jointly owned with
the Kelso Partnerships as if these Stations had been wholly owned and
consolidated as of January 1, 1994.
SIX MONTHS ENDED JUNE 30,
-------------------------------------
PRO FORMA PRO FORMA
1994 1995 1994 1995
------- ------- --------- ---------
(AMOUNTS IN THOUSANDS)
OPERATING DATA:
Revenues:
National Revenues..................... $11,396 $13,565 $39,676 $ 42,074
Local and Regional Revenues........... 15,222 17,195 44,231 51,779
Other Revenue......................... 2,419 2,403 6,189 5,571
Agency Commissions.................... (3,840) (4,456) (11,941) (13,353)
------- ------- ------- --------
Net Revenues.......................... 25,197 28,707 78,155 86,071
Operating and Administrative Expenses. 19,825 20,654 56,791 60,078
Depreciation and Amortization......... 4,034 3,116 10,102 9,033
------- ------- ------- --------
Total Operating Expenses.............. 23,859 23,770 66,893 69,111
------- ------- ------- --------
Operating Income (Loss)............... $ 1,338 $ 4,937 $11,262 $ 16,960
======= ======= ======= ========
OTHER DATA:
Earnings before Interest, Taxes,
Depreciation and Amortization........ $ 5,372 $ 8,053 $21,364 $ 25,993
======= ======= ======= ========
YEAR ENDED DECEMBER 31,
------------------------------------
1994
1992 1993 1994 PRO FORMA
------- ------- ------- ---------
(AMOUNTS IN THOUSANDS)
OPERATING DATA:
Revenues:
National Revenues...................... $20,181 $19,475 $24,487 $ 88,691
Local and Regional Revenues............ 23,827 27,180 32,909 96,268
Other Revenue.......................... 5,588 5,510 4,924 12,538
Agency Commissions..................... (6,315) (6,659) (8,296) (26,414)
------- ------- ------- --------
Net Revenues........................... 43,281 45,506 54,024 171,083
Operating and Administrative Expenses.. 38,395 39,037 40,592 118,320
Depreciation and Amortization.......... 10,162 8,682 7,856 21,602
------- ------- ------- --------
Total Operating Expenses............... 48,557 47,719 48,448 139,922
------- ------- ------- --------
Operating Income (Loss)................ $(5,276) $(2,213) $ 5,576 $ 31,161
======= ======= ======= ========
OTHER DATA:
Earnings before Interest, Taxes,
Depreciation and Amortization......... $ 4,886 $ 6,469 $13,432 $ 52,763
======= ======= ======= ========
First Six Months 1994 Compared with First Six Months 1995. Revenues for PJC
Broadcasting's wholly owned businesses increased 13.9% for the first six months
of 1995 compared with 1994. Likewise revenues for the PJC Broadcasting Business
on a pro forma basis increased 10.1%. The increase resulted from continuing
improvement in local and regional marketing conditions combined with expanded
sports coverage in certain markets. Operating and administrative expenses on a
pro forma basis increased 5.8% primarily as a result of program development and
promotional incentive programs. Operating income on a pro forma basis increased
$5.7 million to $17.0 million for the first six months of 1995.
108
1994 Compared with 1993. General improvement in the local and national
economies and increased retail spending were the major factors in increasing
net revenues for 1994 compared with 1993. Actual net revenues were $54.0
million for 1994 as compared with actual net revenues of $45.5 million for
1993, an increase of $8.5 million or 18.7%. Also contributing to these
increases were changes in certain network affiliations, the impact for Fox
affiliates in gaining the rights to broadcast National Football League
coverage, advertising during the 1994 Winter Olympics coverage, increased
political advertising and a general strengthening of the commitment of the PJC
Broadcasting Business to purchase quality programming and follow an aggressive
marketing campaign.
Relatively flat actual operating and administrative expenses over these years
is attributed to the elimination of excess overhead, the effective
centralization of various functions and responsibilities and a general
reduction in the number of employees. These expenses were also affected by a
change in the approach to negotiating the purchase of programming rights. The
PJC Broadcasting Business is effectively using its position as a multiple
station broadcaster to control and/or reduce the costs of purchased
programming. Actual operating and administrative expenses were $40.6 million
for 1994, as compared to $39.0 million for 1993, an increase of 4.1%.
The decrease in depreciation and amortization reflects management's effort to
control capital spending.
The combined effect of these factors resulted in actual operating income of
$5.6 million for 1994, as compared to an operating loss of $2.2 million in
1993, an increase of $7.8 million.
1993 Compared with 1992. The increase in net revenue for this period was
5.1%. Local and regional revenues experienced an increase of 14.1%, while
national revenues decreased. These numbers were indicative of the entire
industry. A sagging national economy and decreased spending levels caused a
shift in advertising dollars from national campaigns, to local and regional
campaigns.
Management's commitment to control costs and rising overhead resulted in a
small increase in operating and administrative expenses. Depreciation and
amortization expense decreased 14.6% to $8.7 million from 1992 to 1993. This is
a direct reflection of management's effort to control capital expenditures.
Broadcast Television Outlook. Local network affiliated television stations
are expected to remain the dominant provider and distributor of local news and
entertainment programming. The launch during January 1995 of two new additional
national networks, Paramount and Warner Brothers, is evidence of the strength
and viability of broadcast television.
Competition for the attention of television is increasing. It is the strategy
of the PJC Broadcasting Business to protect and increase audience share and
revenue of each of its markets by maintaining a strong relationship with its
networks and producing local programs which create an identity to its viewers
and advertisers.
During 1995, the PJC Broadcasting Business will continue to take advantage of
news and local programming and other cost effective approaches available to
management. KHNL, the Station in Hawaii, will switch to NBC and launch local
news. This is expected to create new revenue sources for the Station and may
produce higher audience levels resulting in increased sales opportunities.
* * * *
INFLATION. Certain of Providence Journal's expenses, such as those for wages
and benefits increase with general inflation. However, Providence Journal does
not believe that its results of operations have been, or will be, adversely
affected by inflation, provided that it is able to increase its advertising
rates periodically.
RECENT ACCOUNTING PRONOUNCEMENTS. In May 1993, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for
109
Impairments of a Loan" ("SFAS 114"), which is effective for fiscal years
beginning after December 15, 1994. SFAS 114, as amended, addresses the
accounting for certain loans which may be deemed impaired. The effect of
implementing SFAS 114 will be immaterial to Providence Journal's financial
position and results of operations.
Effective January 1, 1994, Providence Journal was required to adopt Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). Under this standard, Providence
Journal's marketable equity securities are classified as "available for sale"
and unrealized gains, net of related tax effect, are recorded as a separate
component of stockholders' equity. At December 31, 1994, stockholders' equity
has been increased by $.1 million, net of taxes, resulting from the adoption of
this standard.
In March 1995, the FASB issued SFAS 121, which is effective for fiscal years
beginning after December 31, 1995 ("SFAS 121"). SFAS 121 addresses the
accounting for potential impairment of long-lived assets. The effect of
implementing SFAS 121 is expected to be immaterial to Providence Journal's
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES. Providence Journal's cash requirements are
funded primarily by its operating activities. If additional funds are needed,
Providence Journal draws upon a revolving credit facility, of which $43.2
million was available at June 30, 1995. This credit facility was amended in
1995 to require payment in full on June 30, 1996. Management expects to
discharge this indebtedness in conjunction with the Merger.
Providence Journal has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its revolving credit and term loan
facility. The interest rate under the swap agreement is equal to 6.71% plus an
applicable margin as defined in the revolving credit and term loan facility
which effectively sets the interest rate at 8.1% on the first $200 million of
outstanding debt. The amount of payment required to settle outstanding interest
rate swaps at June 30, 1995 approximated $4.7 million.
Cash Flow. During 1994, Providence Journal generated $24.9 million in cash
from continuing operations, compared with $23.4 million in 1993.
Cash used in investing activities of continuing operations during 1994
totaled $(5.0) million, as compared to $(15.8) million in 1993. The decrease
reflects lower capital expenditures and a decrease in investment securities
held for sale.
Cash used for financing activities of continuing operations was $(40.1)
million in 1994, as compared to cash provided of $.3 million in 1993. The cash
provided in 1993 included $30 million in proceeds from the revolving credit
facility which was used in part for early extinguishment of debt held by
discontinued cable businesses. Providence Journal paid dividends to
stockholders of $9.7 million and $8.9 million in 1994 and 1993, respectively.
Cash provided from financing activities during the first six months of 1995
included $53.5 million in proceeds from the revolving credit facility used
primarily for the purchase of all minority interests in Copley/Colony Inc., a
cable television business, for $47.8 million.
Future cash flow from operating activities of New Providence Journal is
expected to be sufficient to meet capital investment, debt repayment and
dividend requirements. However, future cash flow from operating activities is
not expected to be sufficient to repurchase outstanding stock at historical
levels without adversely affecting New Providence Journal's operations and
growth.
The Merger and Related Transactions. On November 18, 1994, Providence Journal
entered into an Agreement and Plan of Merger with Continental, whereby
Continental would acquire all of the PJC Cable Business in a tax-free merger.
This original agreement has been superseded by the Merger Agreement. As part of
the transaction contemplated by the Merger Agreement, Providence Journal will
contribute the PJC
110
Non-Cable Business to NPJ by means of the PJC Spin-Off. Upon completion of the
PJC Spin-Off, stockholders of Providence Journal will also own the equivalent
number and class of New Providence Journal Common Stock. For a description of
the internal transactions that will occur before the Merger can be consummated,
see "Pre-Merger Transactions".
Prior to the PJC Spin-Off, Providence Journal or one or more of the PJC Cable
Subsidiaries will incur the New Cable Indebtedness in the principal amount of
$410 million. In addition, prior to the Merger, Continental will purchase all
of the cable television businesses owned by KBC for an aggregate cash purchase
price of $405 million. Providence Journal anticipates that the proceeds of the
New Cable Indebtedness, together with the $405 million to be provided by
Continental for the King Cable Purchase, will be used as follows: approximately
$301 million will be applied to discharge all existing indebtedness of
Providence Journal, approximately $282 million will be applied to discharge all
existing indebtedness of KBC, approximately $265 million (including $5 million
in transaction fees) will be used to consummate the Kelso Buyout, approximately
$120 million will be used to pay taxes associated with the King Cable Purchase
and approximately $122 million will be used to purchase the interest in certain
PJC Cable Subsidiaries not presently wholly owned by Providence Journal or KHC
and to pay expenses associated with the Merger and certain deferred
compensation arrangements. In addition, New Providence Journal will incur the
NPJ Indebtedness in the principal amount of approximately $275 million in order
to meet the foregoing obligations, among others. (See "The Merger--General
Provisions--Share Exchange".) New Providence Journal will have no obligations
or liabilities with respect to the New Cable Indebtedness.
Providence Journal will indemnify Continental from any and all liabilities
arising from the PJC Non-Cable Businesses (including, without limitation, the
NPJ Indebtedness), and will be responsible for all federal and state income tax
liabilities for periods ending on or before the Closing Date. Pursuant to such
indemnification, New Providence Journal has agreed that for a period of four
years subsequent to the Closing, it will not sell or otherwise dispose of
assets, nor will it pay dividends or make other distributions such that the
fair market value of New Providence Journal falls below specified levels.
111
PRO FORMA CONDENSED FINANCIAL STATEMENTS
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET. The pro forma condensed
consolidated balance sheet of New Providence Journal has been derived from the
historical consolidated balance sheets of Providence Journal and KHC, after
giving effect to the PJC Spin-Off, the Merger and the transactions contemplated
thereby. The pro forma condensed consolidated balance sheet of New Providence
Journal has been prepared assuming these transactions occurred on June 30,
1995.
The pro forma condensed consolidated balance sheet should be read in
conjunction with each of the historical consolidated financial statements and
the notes thereto of Providence Journal and KHC for the year ended December 31,
1994 included herein. The pro forma condensed consolidated balance sheet is not
necessarily indicative of the financial position of New Providence Journal that
would have actually been obtained had these transactions been consummated on
June 30, 1995.
The pro forma condensed consolidated statements of operations of New
Providence Journal have been derived from the historical consolidated
statements of operations of Providence Journal and KHC adjusted for interest
expense, which is expected to increase as a result of these transactions, the
consolidation of the continuing operations of KHC (including eliminating
entries), and the increase in amortization expense as a result of the
acquisition by Providence Journal of the 50% minority ownership in KHC. The pro
forma condensed consolidated statements of operations of New Providence Journal
have been prepared assuming that the transactions occurred on January 1, 1994.
On July 18, 1995, Providence Journal sold the Omni Biltmore Hotel for
approximately $7 million. This transaction has not been reflected in the Pro
Forma Condensed Consolidated Balance Sheet and Statements of Operations as it
is not material to the Pro Forma Condensed Financial Statements.
The pro forma condensed consolidated statement of operations should be read
in conjunction with each of the historical consolidated financial statements
and the notes thereto of Providence Journal and KHC for the year ended December
31, 1994 included herein. The pro forma condensed consolidated statement of
operations is not necessarily indicative of the financial results of New
Providence Journal that would have actually been obtained had the transactions
been consummated on January 1, 1994.
112
PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1995
---------------------
KING NEW
PROVIDENCE HOLDING PRO FORMA ADJUSTMENTS PROVIDENCE
JOURNAL CORP. -------------------------- JOURNAL
HISTORICAL HISTORICAL DEBIT CREDIT PRO FORMA
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 298 $ 570 $ 685,100(1) $ 265,000(2) $ 868
405,000(1) 583,030(3)
120,000(5)
97,070(6)
25,000(7)
Accounts receivable,
net................... 23,098 25,401 48,499
Television program
rights................ 3,606 2,378 5,984
Deferred income taxes.. 20,526 20,526
Prepaid expenses and
other current assets.. 9,009 2,369 11,378
-------- -------- --------
Total Current Assets. 56,537 30,718 87,255
Investments in and
advances to affiliated
companies.............. 92,328 265,000(2) 343,788(4) 13,540
Notes receivable........ 18,078 18,078
Television program
rights, net............ 392 663 1,055
Property, plant and
equipment, at cost less
accumulated
depreciation........... 125,556 56,999 182,555
Intangible assets and
goodwill, net.......... 33,731 120,690 201,600(4) 356,021
Other assets............ 29,798 12,460 14,700(6) 27,558
Net assets of
discontinued cable
operations............. 404,861 250,443 62,000(6) 432,304(9) 0
120,000(6) 405,000(1)
-------- -------- --------
$761,281 $471,973 $686,062
======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current Liabilities:
Accounts payable and
accrued expenses...... $ 98,269 $ 4,816 35,070(6) $ 37,015
31,000(7)
Current installments
of long-term debt..... 13,567 33,606 33,606(3) 1,067
12,500(3)
Current portion of
television program
rights payable........ 3,024 2,703 5,727
-------- -------- --------
Total Current Liabil-
ities............... 114,860 41,125 43,809
Long-term debt.......... 296,895 248,862 288,062(3) 685,100(1) 283,933
248,862(3)
410,000(9)
Television program
rights payable......... 1,345 1,210 2,555
Deferred income taxes... 11,279 17,202 33,600(4) 62,081
Other liabilities and
deferrals.............. 58,538 5,662 64,200
-------- -------- --------
Total Liabilities.... 482,917 314,061 456,578
-------- -------- --------
Continental Class A com-
mon stock 596,000(9) 596,000(10) 0
Stockholders' Equity:
Class A common stock... 96 58(10) 38
Class B common stock... 118 21 21(4) 47
71(10)
Additional paid-in
capital............... 1,225 210,314 210,314(4) 129(10) 7,354
6,000(7)
Retained earnings
(deficit)............. 285,265 (52,423) 52,423(4) 222,937
596,000(10) 573,696(9)
7,448(8)
14,700(6)
17,876(4)
Unrealized loss on
securities available
for resale............ (892) (892)
Treasury Stock......... (7,448) 7,448(8) 0
-------- -------- --------
Total Stockholders'
equity.............. 278,364 157,912 229,484
-------- -------- --------
Total Liabilities and
Stockholders' Equi-
ty.................. $761,281 $471,973 $686,062
======== ======== ========
See accompanying notes to pro forma financial statements
113
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------
KING NEW
PROVIDENCE HOLDING PRO FORMA ADJUSTMENTS PROVIDENCE
JOURNAL CORP. --------------------- JOURNAL
HISTORICAL HISTORICAL DEBIT CREDIT PRO FORMA
---------- ---------- ----------- ----------- ----------
(IN THOUSANDS)
Revenues................ $192,291 $117,059 -- -- $309,350
Operating, selling,
general, and
administrative......... 182,279 78,537 -- 3,525(11) 257,291
Depreciation and
amortization........... 20,708 13,746 7,140(12) -- 41,594
-------- -------- --------
Operating income (loss). (10,696) 24,776 -- -- 10,465
Interest expense........ (2,426) (8,694) 13,675(13) -- (24,795)
Other income, net....... 5,223 24 3,525(11) -- 1,722
Equity in loss of
affiliates............. (10,962) -- -- 7,134(11) (3,828)
-------- -------- --------
Income (loss) from
continuing operations,
before income taxes.... (18,861) 16,106 -- -- (16,436)
Income taxes............ 2,367 8,843 -- 1,680(12) 4,060
-- 5,470(13)
-------- -------- --------
Income (loss) from
continuing operations.. $(21,228) $ 7,263 $(20,496)
======== ======== ========
Loss per share from
continuing operations.. $(250.09) -- -- $(241.46)
======== ========
Weighted Average shares
outstanding............ 84,882 84,882
======== ========
SIX MONTHS ENDED JUNE 30, 1995
---------------------------------------------------------------
KING NEW
PROVIDENCE HOLDING PRO FORMA ADJUSTMENTS PROVIDENCE
JOURNAL CORP. --------------------- JOURNAL
HISTORICAL HISTORICAL DEBIT CREDIT PRO FORMA
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Revenues................ $95,816 $57,364 $153,180
Operating, selling,
general and
administrative......... 91,069 38,516 1,763(11) 127,822
Depreciation and
amortization........... 9,612 6,824 3,570(12) 20,006
------- ------- --------
Operating income (loss). (4,865) 12,024 5,352
Interest expense........ (1,176) (4,136) 7,086(13) (12,398)
Other income, net....... 2,928 95 1,763(11) 1,260
Equity in loss of
affiliates............. (240) 1,960(11) (2,200)
------- ------- --------
Income (loss) from
continuing operations,
before income taxes
(benefits)............. (3,353) 7,983 (7,986)
Income taxes (benefits). (1,671) 4,062 840(12) (1,283)
2,834(13)
------- ------- --------
Income (loss) from
continuing operations.. $(1,682) $ 3,921 $ (6,703)
======= ======= ========
Loss per share.......... $(19.86) $ (79.15)
======= ========
Weighted Average shares
outstanding............ 84,689 84,689
======= ========
See accompanying notes to pro forma financial statements
114
NOTES TO PRO FORMA CONDENSED BALANCE SHEET AND STATEMENT OF OPERATIONS
(1) To record (i) the incurrence by Providence Journal prior to the Merger of
the New Cable Indebtedness and the NPJ Indebtedness in the amounts of $410
million and $275 million, respectively, and (ii) the receipt by Providence
Journal prior to the Merger of the purchase price for the King Cable
Purchase in the amount of $405,000,000.
(2) To record the purchase by Providence Journal of the minority 50% ownership
in KHC for $265 million (including $5 million in transaction fees).
(3) To record the repayment of outstanding borrowings of $300.6 million and
$282.5 million under the Providence Journal and KHC revolving credit and
term loan facilities, respectively.
(4) To record the consolidation of KHC into Providence Journal. Also, to record
the excess purchase price over book value of $168.0 million resulting from
the KHC purchase as intangible assets of the PJC Broadcasting Business and
to adjust goodwill and deferred taxes by $33.6 million for the tax effect
of the difference between the assigned values and the tax bases of the
assets and liabilities associated with the purchase of KBC as required by
FAS 109.
(5) To record the payment of taxes of approximately $120 million related to
the sale of KBC's cable systems to Continental.
(6) To record the purchase of minority interests and the payment of expenses
incurred in connection with the transactions, which are estimated at
approximately $97 million, including the Working Capital and Capital
Expenditures Adjustments of $28 million and legal, accounting, investment
banking and severance expenses of $35 million. Also to record the write-off
of unamortized deferred financing costs amounting to $14.7 million
associated with debt of Providence Journal and KHC to be repaid with the
proceeds of the New Cable Indebtedness and the NPJ Indebtedness.
(7) To record the payment of deferred compensation of $31 million.
(8) To retire treasury stock outstanding as of the Effective Time.
(9) To record the disposition of Providence Journal Cable comprised of (i)
approximately $596 million of Continental Class A Common Stock to be
received by Providence Journal stockholders, (ii) and the assumption of
$410 million of the New Cable Indebtedness by Continental. After giving
effect to the payment by Continental of the purchase price of $405 million
in connection with the King Cable Purchase, the excess of the purchase
price over the net assets of discontinued cable operations is estimated to
be $556 million.
(10) To reflect the deemed distribution of approximately $596 million of the
proceeds from the sale of Providence Journal Cable and the PJC Spin-Off.
Proceeds of $596 million are in the form of Continental Class A Common
Stock to be distributed by Continental directly to Providence Journal
stockholders in the Merger. 38,825 shares of New Providence Journal Class
A Common Stock and 46,825 shares of New Providence Journal Class B Common
Stock, both at par values of $1.00 per share, will be distributed to the
stockholders of Providence Journal in the PJC Spin-Off.
(11) To record the elimination of equity in loss of cable television
affiliates and the consolidation of KHC into Providence Journal,
including the elimination of affiliated company management fees.
(12) To record additional amortization for the increase in intangibles
resulting from the purchase of KBC. Intangibles are being amortized over
an average life of 30 years.
(13) To increase interest expense as a result of additional indebtedness
incurred upon the purchase of the KHC 50% minority interest, other costs
and expenses of the Merger and deferred compensation payment. Interest
expense was determined by assuming outstanding debt on New Providence
Journal would have been $285 million at the beginning of the period,
carrying an effective interest rate of 8.7%, which is the weighted
average effective interest rate of all outstanding debt of Providence
Journal for the year ended December 31, 1994.
MARKET PRICE OF NEW PROVIDENCE JOURNAL COMMON STOCK AND DIVIDEND POLICY OF NEW
PROVIDENCE JOURNAL
No established public trading market exists for the Providence Journal
Common Stock, and accordingly no high and low bid information or quotations
are available with respect to the Providence Journal Common Stock. As of July
15, 1995, there were approximately 428 holders of record of Providence Journal
Class A Common Stock and 261 holders of record of Providence Journal Class B
Common Stock. Since a number of holders own shares of both Providence Journal
Class A Common Stock and Providence Journal Class B Common Stock, the number
of Providence Journal stockholders is approximately 470.
Following completion of the PJC Spin-Off and the Merger, New Providence
Journal expects to pay quarterly dividends on the New Providence Journal
Common Stock at a rate that is generally consistent
115
with the rate currently paid with respect to Providence Journal Common Stock.
New Providence Journal's dividend policy will be subject to the exercise by the
New Providence Journal Board of Directors of its fiduciary obligations and the
exercise of the Board's business judgment in connection with, among other
things, any and all requirements of Delaware Law or other applicable law, and
all covenants, restrictions or limitations in connection with any financing for
New Providence Journal, New Providence Journal's future earnings, capital
requirements, financial condition and other factors.
EXECUTIVE OFFICERS AND DIRECTORS OF PROVIDENCE JOURNAL AND NEW PROVIDENCE
JOURNAL
The executive officers and Directors of New Providence Journal immediately
following the PJC Spin-Off are expected to be identical to the executive
officers and Directors of Providence Journal prior to the PJC Spin-Off. It is
expected that, immediately prior to the PJC Spin-Off, each of the present
executive officers of Providence Journal will be appointed as executive
officers of New Providence Journal. It is also expected that, immediately prior
to the PJC Spin-Off, Providence Journal, as sole stockholder of New Providence
Journal, will elect each of the Providence Journal Directors to serve as
Directors of New Providence Journal. The names of and positions held by each
Director and executive officer are listed below. There are no family
relationships among the following persons.
NAME OF DIRECTOR OR EXECUTIVE POSITION WITH PROVIDENCE JOURNAL COMPANY AND
OFFICER NEW PROVIDENCE JOURNAL COMPANY
----------------------------- --------------------------------------------
Stephen Hamblett(1).............. Chairman of the Board, Chief Executive
Officer, Publisher and Director
Trygve E. Myhren................. President, Chief Operating Officer and
Director
F. Remington Ballou.............. Director
Henry P. Becton, Jr.(2).......... Director
Fanchon M. Burnham(2)............ Director
Peter B. Freeman(2).............. Director
Benjamin P. Harris, III.......... Director
John W. Rosenblum(2)............. Director
Henry D. Sharpe, Jr.(1).......... Director
W. Nicholas Thorndike(1)......... Director
John W. Wall(1).................. Director
Patrick R. Wilmerding(1)......... Director
James F. Stack................... Vice President--Finance and Chief
Financial Officer
John A. Bowers................... Vice President--Human Resources
Jack C. Clifford................. Vice President--Broadcasting and Cable
Television
John L. Hammond.................. Vice President--Legal
Joanne L. Yestramski............. Vice President--Comptroller
Howard G. Sutton................. Vice President--General Manager
Joel N. Stark.................... Vice President--Publishing Development
and Marketing
James V. Wyman................... Vice President and Executive Editor
Harry Dyson...................... Treasurer and Secretary
--------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
As in the case of Providence Journal, New Providence Journal will have three
classes of Directors, Class I, Class II and Class III, the terms of office of
which will expire, respectively, at the annual meetings of
116
stockholders in 1998, 1997 and 1996. The term of the current Class I Directors,
Messrs. Hamblett, Wilmerding and Rosenblum and Ms. Burnham, will expire at the
1998 Annual Meeting of New Providence Journal. The term of current Class II
Directors, Messrs. Wall, Thorndike, Becton and Myhren, will expire at the 1997
Annual Meeting of New Providence Journal. The term of current Class III
Directors, Messrs. Sharpe, Freeman, Ballou and Harris, will expire at the 1996
Annual Meeting of New Providence Journal. Successors to any Directors whose
terms are expiring are elected to three-year terms and hold office until their
successors are elected and qualified. Executive officers of New Providence
Journal will be elected to serve until they resign or are removed or are
otherwise disqualified to serve.
The following is a description of the business experience during the past
five years of each Director and executive officer of Providence Journal and New
Providence Journal and includes, as to Directors, other directorships held in
companies required to file periodic reports with the Commission and registered
investment companies.
Stephen Hamblett, 60, is Chairman of the Board and Chief Executive Officer of
Providence Journal and Publisher of the Journal-Bulletin newspapers and has
been since 1987. Mr. Hamblett was first employed by Providence Journal in 1957
in its advertising department and has been continuously employed by Providence
Journal since that time, serving as Assistant Vice President for
Administration, Vice President Marketing, Vice President Marketing and
Corporate Development, Executive Vice President and President and Chief
Operating Officer before assuming his current positions. He has been a Director
of Providence Journal since 1985. Mr. Hamblett also serves on the Board of
Directors of the Associated Press and the Inter American Press Association.
Trygve E. Myhren, 58, has been President and Chief Operating Officer of
Providence Journal since 1990. From 1981 to 1988, Mr. Myhren was Chairman and
Chief Executive Officer of American Television and Communications Corporation.
Mr. Myhren was a member of the Board of Directors of the National Cable
Television Association from 1980 to 1991 and served as its Chairman in 1986 and
1987. Prior to joining Providence Journal, Mr. Myhren served as President and
Chief Executive Officer of Myhren Media and General Partner of Arizona &
Southwest Cable from 1989 to 1990. Mr. Myhren is currently a Director of
Advanced Marketing Services, Inc. Mr. Myhren has been a Director of Providence
Journal since 1994.
F. Remington Ballou, 66, is the President and Chief Executive Officer of B.
A. Ballou & Co., Inc. a jewelry manufacturing company and has been since 1965.
Mr. Ballou has served as a Director of Providence Journal since 1985. He is
also a Director of Keyport Life Insurance Co.
Henry P. Becton, Jr., 51, has been President and General Manager of WGBH
Education Foundation, the operator of public television and radio stations in
Massachusetts and producer of educational broadcast and non-broadcast
programming and software, since 1984. Mr. Becton has been a Director of
Providence Journal since 1992. He is also a Director of Becton Dickinson and
Company and is a trustee or Director of the following investment companies
managed by Scudder, Stevens & Clark: Scudder Cash Investment Trust; Scudder
California Tax Free Trust; Scudder Municipal Trust; Scudder State Tax Free
Trust; Scudder Investment Trust; and Scudder Portfolio Trust.
Fanchon M. Burnham, 50, has been a partner in the accounting firm of F.M.
Burnham and Associates (formerly Brooks/Burnham) in Washington, D.C., since
1985. Ms. Burnham has been a Director of Providence Journal since 1992.
Peter B. Freeman, 63, has been a Director of Providence Journal since 1981.
During the past five years Mr. Freeman has been self-employed as a corporate
director and trustee, including serving as a Director of Blackstone Valley
Electric Company, AMICA Mutual Insurance Company and AMICA Life Insurance
Company, a trustee of Eastern Utilities Associates, as well as a trustee or
director of the following investment companies managed by Scudder, Stevens &
Clark: Scudder Fund, Inc.; Scudder Institutional Fund, Inc.; Scudder Cash
Investment Trust; Scudder California Tax Free Trust; Scudder Municipal Trust;
Scudder State
117
Tax Free Trust; Scudder Tax Free Money Fund; Scudder Tax Free Trust; Scudder
Funds Trust; and Scudder Variable Life Investment Fund.
Benjamin P. Harris, III, 58, has been a partner in the law firm of Edwards &
Angell, Providence, Rhode Island, since 1969 and has practiced law with the
firm since 1961. Mr. Harris has been a Director of Providence Journal since
1985. Mr. Harris is also a director of The Providence Mutual Fire Insurance
Company.
John W. Rosenblum, 51, became the Taylor Murphy Professor of Business
Administration at the Darden School of Business, University of Virginia, in
1993. From 1982 to 1993, Mr. Rosenblum was the Dean of the Darden School of
Business. Mr. Rosenblum serves on the Board of Directors of Cadmus
Communications Corp., Chesapeake Corporation, Comdial Corporation, Cone Mills
Corporation and T. Rowe Price Associates. He has been a Director of Providence
Journal since 1992.
Henry D. Sharpe, Jr., 72, has been a Director of Providence Journal since
1964. Mr. Sharpe is currently Chairman of Brown & Sharpe Manufacturing Company,
a position he has held since 1954. From 1951 to 1980 Mr. Sharpe was the Chief
Executive Officer of Brown & Sharpe Manufacturing Company.
W. Nicholas Thorndike, 62, has been a Director of Providence Journal since
1984. Mr. Thorndike serves as a corporate Director or trustee of a number of
organizations, including Bradley Real Estate, Inc., Courier Corporation, Data
General, Eastern Utilities Associates and The Putnam Funds. He also serves as a
trustee of Massachusetts General Hospital, having served as Chairman of the
Board from 1987 to 1992 and President from 1992 to 1994. In February 1994 he
accepted appointment as a successor trustee of private trusts in which he has
no beneficial interest, and concurrently became, serving until October 1994,
Chairman of the Board of two privately owned corporations controlled by such
trusts that filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in August 1994.
John W. Wall, 70, retired as Vice-Chairman of Hospital Trust, Providence,
Rhode Island in 1986. Mr. Wall had been with Hospital Trust since 1946. He
returned to Hospital Trust at management's request to serve as Chairman and
Chief Executive Officer from 1991 to 1992. Since 1992 Mr. Wall has served as
Vice-Chairman of Hospital Trust. Mr. Wall has served as a Director of
Providence Journal since 1975.
Patrick R. Wilmerding, 52, has been a Director of Providence Journal since
1979. Mr. Wilmerding has been chairman of Private Signals, Inc., an
import/export company since 1994. Prior to that, he served as a Division
Executive with The First National Bank of Boston. Mr. Wilmerding is a Director
of the Indian Opportunities Fund.
James F. Stack, 56, has been Vice President--Finance and Chief Financial
Officer since July, 1991. From 1988 to 1991 Mr. Stack served as Vice President
of Finance and Chief Financial Officer of Meredith Corp. Prior to that, Mr.
Stack held a number of positions with General Electric Company over a 25 year
period including Vice President and General Manager of GE Capital Housing
Finance Department and Chief Financial Officer of GE Lighting Business Group.
John A. Bowers, 42, has been Vice President--Human Resources since November,
1990. Prior to that time, Mr. Bowers served in various Human Resources
positions with Providence Journal and its subsidiaries since 1980.
Jack C. Clifford, 61, has been Vice President--Broadcasting and Cable
Television since 1982.
John L. Hammond, 49, has been Vice President--Legal since October 1992. Mr.
Hammond was Vice President, General Counsel and Secretary of Landstar System,
Inc. from 1989 to 1992. Prior to that, Mr. Hammond was employed by The Singer
Company for ten years and was Deputy General Counsel at the time of his
departure.
118
Joanne L. Yestramski, 42, has been Vice President--Comptroller since April
1994. From 1991 to 1994, Ms. Yestramski served as Vice President--Treasurer of
the Museum of Science, Boston, Massachusetts. From 1985 to 1991, Ms. Yestramski
served as Vice President, Treasurer of Biotechnica International, Inc.
Howard G. Sutton, 45, is currently Vice President--General Manager, a
position he has held since 1987.
Joel N. Stark, 50, is currently Vice President--Publishing Development and
Marketing, a position he has held since 1988.
James V. Wyman, 71, is currently Vice President and Executive Editor, a
position he has held since 1989.
Harry Dyson, 58, is currently Treasurer and Secretary, a position he has held
since 1986.
Committees of the Board of Directors of New Providence Journal. The standing
committees of the Board of Directors of New Providence Journal will be an
Executive Committee, an Audit Committee, an Executive Compensation Committee
and a Nominating Committee. The functions of each of these four committees are
described and the members of each are listed below.
The Executive Committee may exercise substantially all authority of the Board
of Directors with specific exceptions provided by law and the New Providence
Journal By-Laws. The members of the Executive Committee will be Henry D.
Sharpe, Jr., Chairman, Patrick R. Wilmerding, W. Nicholas Thorndike, John W.
Wall and Stephen Hamblett.
Each year the Audit Committee will review New Providence Journal's audit
plan, the scope of activities of the independent auditors and of internal
auditors, the results of the audit after completion, and the fees for services
performed during the year, and recommend to the Board of Directors the firm to
be appointed as independent auditors. During portions of some meetings this
Committee will meet with representatives of the independent auditors without
any officers or employees of New Providence Journal present. The members of the
Audit Committee will be Peter B. Freeman, Chairman, Fanchon M. Burnham, John W.
Rosenblum and Henry P. Becton, Jr.
The Executive Compensation Committee will administer New Providence Journal's
Incentive Compensation Plan, its Stock Option Plans and all its retirement and
benefit plans, will determine the compensation of key officers of New
Providence Journal, will authorize and approve bonus-incentive compensation
programs for executive personnel, and will oversee management succession and
promotions. The members of the Executive Compensation Committee will be John W.
Rosenblum, Chairman, F. Remington Ballou and W. Nicholas Thorndike.
The Nominating Committee will consider and recommend to the Board nominees
for possible election to the Board of Directors and will consider other matters
pertaining to the size and composition of the Board of Directors and its
Committees. The members of the Nominating Committee will be F. Remington
Ballou, Chairman, Henry P. Becton, Jr. and Fanchon M. Burnham. The Nominating
Committee will give appropriate consideration to qualified persons recommended
by stockholders if such recommendations are accompanied by information
sufficient to enable the Nominating Committee to evaluate the qualifications of
the persons recommended.
COMPENSATION OF NEW PROVIDENCE JOURNAL DIRECTORS
The Board of Directors of New Providence Journal will be comprised of twelve
Directors, two of whom will be salaried employees of New Providence Journal.
The members of the New Providence Journal Board of Directors who are not
officers of New Providence Journal will receive an annual retainer of $10,000
and a fee of $950 for each meeting attended. New Providence Journal will also
pay each Director who is not an officer of New Providence Journal a fee of $750
for each New Providence Journal Board committee meeting attended. In addition,
the Chairmen of the Executive Committee, Audit Committee, the Executive
119
Compensation Committee and Nominating Committee of the New Providence Journal
Board of Directors will receive an annual retainer of $3,000, $2,500, $2,500
and $1,000, respectively. Directors who reside outside the Providence area will
be reimbursed for their travel expenses incurred in connection with attendance
at meetings of the New Providence Journal Board of Directors.
The Directors of Providence Journal are participants in the Providence
Journal Incentive Stock Unit Plan (the "IUP"). (See "Executive Compensation--
Providence Journal Incentive Stock Unit Plan.") At December 31, 1994, the
Directors held 658 units in the IUP ("Stock Units"). Upon the termination and
liquidation of the IUP, which is expected to occur prior to the consummation of
the Merger, the Directors will be paid in a combination of cash and stock, net
of tax obligations. Based upon a Stock Unit value of $11,489 per unit
(determined as described in footnote (1) to the table, Aggregate SAR Exercises
in last Fiscal Year and Year-End SAR Values included herein), the amount of the
total payout to Providence Journal Directors is estimated to be $3.8 million.
The IUP will not be assumed by New Providence Journal.
New Providence Journal will be assuming the 1994 Non-Employee Director Stock
Option Plan. Each Director received a stock option to purchase five shares of
Providence Journal Class A Common Stock on October 1, 1994, and will receive a
stock option to purchase five additional shares of New Providence Journal Class
A Common Stock on each subsequent October 1st. (See "Stock Incentive Plans of
Providence Journal Assumed by New Providence Journal".)
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31, 1994,
1993 and 1992 information regarding compensation paid by Providence Journal to
the Chief Executive Officer and Providence Journal's other four most highly
compensated executive officers (the "Providence Journal Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ---------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION (1) STOCK AWARDS(2) COMPENSATION (3)
------------------ ---- -------- -------- ---------------- --------------- ----------------
Stephen Hamblett........ 1994 $600,000 $360,000 $ -- $ -- $ 702
Chairman, Chief 1993 600,000 360,000 -- 1,013,800 30,702
Executive Officer 1992 600,000 300,000 -- -- 702
and Publisher
Trygve E. Myhren........ 1994 500,000 300,000 -- -- $ 702
President and 1993 500,000 300,000 51,949 762,200 25,702
Chief Operating Officer 1992 500,000 200,000 55,180 -- 1,301
James F. Stack.......... 1994 275,000 165,000 -- -- $ 702
Vice President--Finance 1993 275,000 165,000 49,478 503,200 20,771
and Chief Financial 1992 270,000 132,500 -- -- --
Officer
Jack C. Clifford........ 1994 260,000 171,000 47,481 -- $544,702
Vice President-- 1993 260,000 156,000 -- 407,000 702
Broadcast and Cable 1992 240,000 120,000 -- -- 702
Television
John A. Bowers.......... 1994 180,000 108,000 52,544 -- $ 702
Vice President-- 1993 180,000 108,000 -- 273,800 9,702
Human Resources 1992 173,000 110,201 -- -- 702
--------
(1) This column includes the aggregate incremental cost to Providence Journal
of providing various perquisites and personal benefits. Includes automobile
purchase allowances in 1994 for Mr. Clifford and
120
Mr. Bowers of $21,702 and $31,540, respectively. During 1993 Mr. Myhren and
Mr. Stack were granted allowances to purchase vehicles including tax
reimbursement for $23,148 and $25,119, respectively. Includes relocation
expenses totaling $21,273 for Mr. Myhren in 1992.
(2) This column shows the market value of restricted stock unit awards made
pursuant to the Providence Journal Restricted Stock Unit Plan on the date
of grant, which was October 1, 1993, to senior officers of Providence
Journal including the executives listed on the table above. Restricted
stock shares will be completely vested at the end of a three year period.
The number of restricted stock holdings at the end of 1994 were for Mr.
Hamblett, 137 shares; Mr. Myhren, 103 shares; Mr. Stack, 68 shares; Mr.
Clifford, 55 shares; and Mr. Bowers, 37 shares. Dividends are added to the
awards as and when declared, but have not been accrued in the listed
valuation. For further information concerning the Restricted Stock Unit
Plan, see "Stock Incentive Plans of Providence Journal Assumed by New
Providence Journal-Restricted Stock Unit Plan".
(3) The amount shown for Mr. Clifford in 1994 includes a payout of $544,000
pursuant to a previous deferred bonus arrangement. The amounts shown for
1993 include Providence Journal Class A Common Stock granted in lieu of
salary increases in 1993 to Mr. Hamblett, Mr. Myhren, Mr. Stack and Mr.
Bowers in the amounts of $30,000, $25,000, $19,250 and $9,000,
respectively. The remaining amounts shown in the table are amounts
contributed under the Journal 401(k) Plan as described below under the
caption "Retirement Benefits".
The following table sets forth stock options granted October 1, 1994 to the
Providence Journal Named Executive Officers pursuant to the 1994 Employee Stock
Option Plan.
OPTION/SAR GRANTS IN FISCAL YEAR 1994
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE($/SH)(1) DATE 5%($) 10%($)
---- ---------- ------------- -------------- ---------- --------- -----------
Stephen Hamblett........ 150 21.1% $7,700 9/30/04 $ 726,300 $ 1,840,800
Trygve E. Myhren........ 115 16.2% 7,700 9/30/04 556,830 1,411,280
James F. Stack.......... 65 9.1% 7,700 9/30/04 314,730 797,680
Jack C. Clifford........ 55 7.7% 7,700 9/30/04 266,310 674,960
John A. Bowers.......... 35 4.9% 7,700 9/30/04 169,470 429,520
--------
(1) The per share option exercise price represents the fair market value of
Providence Journal Class A Common Stock at the date of grant. A May 1994
valuation by an independent appraisal firm was used as the principal basis
to determine the fair market value inasmuch as Providence Journal shares
are not traded on a public market. The options granted become exercisable
in four equal annual installments beginning one year after the grant date.
For further information concerning the 1994 Employee Stock Option Plan, see
"Stock Incentive Plans of Providence Journal Assumed by New Providence
Journal--1994 Stock Option Plans".
(2) The dollar amounts under these columns result from calculations at the 5%
and 10% assumed appreciation rate set by the Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the
Providence Journal Class A Common Stock price. At the 5% and 10% assumed
appreciation rate the price per share of Providence Journal Class A Common
Stock would be $12,542 and $19,972, respectively.
PROVIDENCE JOURNAL INCENTIVE STOCK UNIT PLAN. The following table relates to
the Providence Journal IUP, created in 1971. The IUP provides incentive
compensation to key officers and to all Directors of Providence Journal. The
purpose of the IUP is to attract and retain persons of outstanding competence
and
121
to promote stockholder interests. The IUP is administered by the Executive
Committee of the Board, which is authorized, under the IUP, to (a) select those
employees and Directors to be granted Stock Units; (b) determine the number of
Stock Units to be granted; (c) determine the time or times when Stock Units may
be granted; (d) determine the time or times when amounts may become payable
with respect to the Stock Units; (e) determine the fair market value of the
stock of Providence Journal for purposes of the IUP; (f) determine the
appropriate interest rate for installment payments under the IUP; and (g)
approve purchases of Stock Units through the voluntary deferral of
compensation.
The Executive Committee is to maintain an account for each grantee of Stock
Units under the IUP with the number of Stock Units granted and their fair
market value on the date granted. Any dividends declared and paid by Providence
Journal on its outstanding common stock shall be credited to the account of
each grantee of the IUP with respect to the Stock Units in such grantee's
account, with dividend equivalents converted into additional Stock Units at the
end of each calendar year.
For purposes of the IUP, the fair market value of the Stock Units is 100% of
the fair market value of the Providence Journal Common Stock determined by
reference to the most recent price offered by Providence Journal to purchase
shares under its quarterly stock repurchase program, or, if no such program is
in effect, by reference to an appropriate measure of current value as
determined by the Executive Committee, historically, the appraised fair market
value as determined by an independent appraisal firm selected by the Board.
Employee grants under the IUP are subject to a five year vesting schedule at
the rate of 20% per calendar year of employment after the calendar year in
which the grant was made. Director grants vest immediately.
The measure of benefit payable to any grantee upon termination of grantee's
participation in the IUP is the vested portion of the excess, if any, of the
total fair market value of the Stock Units in such grantee's account on the
date of such termination over the fair market value on the date of grant.
Termination of participation in, and valuation under, the IUP occur upon
termination of grantee's employment or service as a director, total disability
or retirement. Amounts payable under the IUP may be made in installments over a
period not to exceed ten years or in one sum, as determined in the discretion
of the Executive Committee. Interest on the unpaid balance of installment
payouts shall be earned at a rate determined by the Executive Committee.
Any grantee who has attained the age of 55 may request liquidation of up to
20% of his or her vested Stock Units in any calendar year. Such special request
may be granted in the sole discretion of the Executive Committee. During 1994,
Mr. Hamblett was granted liquidations of vested Stock Units in the amount of
$3,957,894. In addition, any grantee may elect to convert his or her vested
Stock Units to fixed dollar deferred compensation beginning at age 55 of up to
10% per year or such other rate as the Executive Committee may approve.
The Executive Committee has determined that the IUP will be terminated and
liquidated upon the next independent appraisal of Providence Journal Class A
Common Stock, which is anticipated to be prior to the Effective Time. Such
liquidation will be paid in a combination of cash and stock net of tax
obligations. Based upon an estimated Stock Unit value of $11,489 per unit
(determined as described in the footnote to the table immediately below), the
estimated payout to employee grantees upon termination of the IUP would be
approximately $21.8 million. (See the Providence Journal Pro Forma Condensed
Balance Sheet, footnote (7), included herein.)
122
AGGREGATED SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END SAR VALUES
APPRECIATED VALUE OF
IUP
ACCUMULATED UNITS AT DECEMBER 31, 1994
NAME VESTED/NON-VESTED VESTED/NON-VESTED(1)
---- ----------------- --------------------
Stephen Hamblett........................ 1,417/55 $12,882,671/$753,348
Trygve E. Myhren........................ 625/173 3,775,991/1,213,803
Jack C. Clifford........................ 512/15 4,218,154/ 216,761
James F. Stack.......................... 181/124 939,736/ 704,979
John A. Bowers.......................... 110/76 428,376/ 333,531
--------
(1) IUP values are based upon an estimated stock unit value of $11,489 per unit
as of December 31, 1994. Given the absence of a current independent
appraisal and the lack of an established trading market, the Executive
Committee established this estimated value by reference to the nominal
value attributed by Bear Stearns to the Continental Merger Stock and the
Providence Journal's estimate of the pro forma equity value of New
Providence Journal, both as determined in November 1994.
RETIREMENT BENEFITS. The following table illustrates the maximum annual
benefits payable as a single life annuity under the basic benefit formula in
the Providence Journal Pension Plan (see below) to an officer retiring at age
65 with the specified combination of final average salary and years of credited
service.
PENSION PLAN TABLE
EARNINGS CREDITED
FOR RETIREMENT
BENEFITS YEARS OF SERVICE AT RETIREMENT
----------------- ------------------------------
10 15 20 25
------- --------------- --------------- -------
150,000....................... 28,177 42,265 53,353 70,442
200,000....................... 38,177 57,265 76,353 95,442
300,000....................... 58,177 87,265 116,353 145,442
400,000....................... 78,177 117,265 156,353 195,442
500,000....................... 98,177 147,265 196,353 245,442
600,000....................... 118,177 177,265 236,353 295,442
700,000....................... 138,177 207,265 276,353 345,442
800,000....................... 158,177 237,265 316,353 395,442
900,000....................... 178,177 267,265 356,353 445,442
1,000,000....................... 198,177 297,265 396,353 495,442
1,100,000....................... 218,177 327,265 436,353 545,442
1,200,000....................... 238,177 357,265 476,353 595,442
Providence Journal maintains a retirement income plan (the "Providence
Journal Pension Plan") which is a funded, qualified, non-contributory, defined
benefit plan that covers all employees, including executive officers, of
Providence Journal and its subsidiaries. The Providence Journal Pension Plan
provides benefits based on the participant's highest average salary for the 60
consecutive months within the ten years last served with Providence Journal
prior to retirement and the participant's length of service. The amounts
payable under the Providence Journal Pension Plan are in addition to any Social
Security benefit to be received by a participant. The Providence Journal
Pension Plan benefit vests upon completion of five years of service with
Providence Journal.
As of December 31, 1994, the Providence Journal Named Executive Officers have
the following years of credited service with Providence Journal: Mr. Hamblett,
37 years; Mr. Myhren, 4 years; Mr. Stack, 3 years; Mr. Clifford, 16 years; and
Mr. Bowers, 15 years. However, for purposes of calculating their retirement
benefit
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in the above table, Mr. Myhren, Mr. Stack and Mr. Clifford are deemed to have
been employed with Providence Journal since age 35. The resulting benefit for
each of these three executive officers would be reduced by an amount which
represents the estimate of benefits under the provisions of the Providence
Journal Pension Plan based upon the executive officer's years of service with
prior employers. (See discussion of Supplemental Retirement Plan, below.)
The amounts shown in the table above have been calculated without reference
to the maximum limitations imposed by the Code on benefits which may be paid,
or on compensation that may be recognized, under a qualified defined benefit
plan. The amounts include the estimated total annual retirement benefits that
would be paid from the Providence Journal Pension Plan and, if applicable, the
Excess Benefit Plan and the Supplemental Retirement Plan.
Providence Journal has established an Excess Benefit Plan to provide pension
benefits for certain employees, including the Providence Journal Named
Executive Officers. The Excess Benefit Plan provides that each participant will
receive benefits thereunder equal to the difference between the amount such
participant is entitled to receive under the Providence Journal Pension Plan
and the amount he or she would have been entitled to receive without regard to
the maximum limitations imposed by the Code. Participants will be vested under
the Excess Benefit Plan according to the same vesting provisions as the
Providence Journal Pension Plan. The Excess Benefit Plan is unfunded.
Providence Journal has also established a Supplemental Retirement Plan to
provide full retirement benefits (less an imputed benefit for service with
previous employers) for any of the five top executive officers of Providence
Journal who retire as employees of Providence Journal and who would not
otherwise receive full pension benefits because of a shortened length of
service with Providence Journal. The Supplemental Retirement Plan is unfunded.
"Covered Compensation" for the Providence Journal Named Executive Officers
under the Supplemental Retirement Plan is the total of their salary and bonus
payments shown in the Summary Compensation Table, above.
Providence Journal has established the Journal Qualified Compensation
Deferral Plan (the "Journal 401(k) Plan") to provide a savings incentive for
employees. The Journal 401(k) Plan involves a contribution of up to $10.50/week
by Providence Journal for each participating employee and a matching
contribution of $3 per week for each participant who deducts from 2% to 15% of
pre-tax income. Employees who have completed six months of service with
Providence Journal, including the Providence Journal Named Executive Officers,
are eligible to participate in the Journal 401(k) Plan.
CHANGE OF CONTROL AGREEMENTS. On October 11, 1993, Providence Journal entered
into an agreement with each of Messrs. Hamblett, Myhren, Stack, Clifford and
Bowers, which agreements become effective upon a change in control of
Providence Journal.
In the event of a change in control, each of the agreements with the
Providence Journal Named Executive Officers provides a three-year term of
employment with responsibilities, compensation and benefits at least
commensurate with those experienced by such officer during the prior six (6)
months. If terminated involuntarily, the individual is entitled to 299% of the
highest annual base salary and average bonus received during the prior three
years (the "Maximum Severance") as a lump sum severance payment. In the event
of a voluntary resignation, the agreement provides a severance benefit equal to
six months of base salary. Dismissal of the officer for cause results in no
severance payment to the individual. The PJC Spin-Off and the Merger do not
constitute a "change of control" for purposes of the Change of Control
Agreements.
On October 11, 1993, in a supplemental letter agreement, Providence Journal
agreed to pay the Maximum Severance in the event any of the Providence Journal
Named Executive Officers were to be involuntarily terminated as a result of a
corporate restructuring, such as the PJC Spin-Off and the Merger (or a lesser
severance for certain other executives), even if prior to a change of control.
However, the Maximum Severance (or such lesser severance) will not apply in the
case of any termination for cause, for unsatisfactory performance or as a
result of a reduction in staff for economic reasons. The Change of Control
Agreements specify that if Providence Journal seeks to retain the executive
subsequent to the restructuring,
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even with diminished responsibilities, and such executive declines, a severance
payment from Providence Journal to the executive would be discretionary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Providence
Journal has no compensation committee of its Board of Directors but its
Executive Committee performs the functions thereof. The members of the
Executive Committee during 1994 were Messrs. Hamblett, Sharpe, Thorndike, Wall
and Wilmerding. Mr. Hamblett is the Chairman of the Board and Chief Executive
Officer of Providence Journal.
STOCK INCENTIVE PLANS OF PROVIDENCE JOURNAL ASSUMED BY NEW PROVIDENCE JOURNAL
Providence Journal maintains the following Stock Incentive Plans, which, upon
approval of the Providence Journal Proposals by the stockholders of Providence
Journal, will be assumed by New Providence Journal: (i) the 1994 Employee Stock
Option Plan; (ii) the 1994 Non-Employee Director Stock Option Plan; and (iii)
the Restricted Stock Unit Plan. All references therein to Providence Journal
and Providence Journal Class A Common Stock will be deemed to refer to New
Providence Journal and New Providence Journal Class A Common Stock.
1994 EMPLOYEE STOCK OPTION PLAN. The 1994 Employee Stock Option Plan was
adopted by the Board of Directors of Providence Journal effective as of October
1, 1994 and is being submitted for approval by the stockholders of Providence
Journal at its Annual Meeting in September 1995. If such approval has not
occurred by September 28, 1995, the 1994 Employee Stock Option Plan shall be
terminated, and any option grants previously made shall be void. Assuming that
such stockholder approval is obtained prior to September 28, 1995, and assuming
stockholder approval of the PJC Spin-Off and the Merger at the Providence
Journal Special Meeting, the 1994 Employee Stock Option Plan shall remain in
effect until the earlier of five years from October 1, 1994 or termination of
the 1994 Employee Stock Option Plan by the Board of Directors of New Providence
Journal. If the Providence Journal Proposals are not approved, the 1994
Employee Stock Option Plan will remain in effect with Providence Journal.
The 1994 Employee Stock Option Plan is intended to provide long-term
incentive compensation and share ownership opportunities to selected key
employees, thereby allowing Providence Journal to attract and retain high
quality key employees. These incentives will contribute to the success of
Providence Journal by further aligning the participants' and stockholders'
interests.
Under the terms of the 1994 Employee Stock Option Plan, key employees
recommended by the Executive Committee of the Board (or by any other committee
appointed by the Board consisting of two or more non-employee Directors), are
eligible to receive grants of stock options. According to the provisions of the
1994 Employee Stock Option Plan, such committee has a wide degree of
flexibility in selecting the participants in the 1994 Employee Stock Option
Plan, determining the size of grants of options, establishing the terms and
conditions of such option grants, amending the terms and conditions of any
outstanding option brought about by any adjustments and reorganizations, as
discussed below (see "Adjustments and Reorganizations"), and otherwise making
such determinations and/or interpretations and establishing such procedures as
may be necessary or advisable for the administration of the 1994 Employee Stock
Option Plan.
Shares Subject to the 1994 Employee Stock Option Plan. The maximum number of
shares of Providence Journal Class A Common Stock that can be used for purposes
of the 1994 Employee Stock Option Plan is 3,750 shares. Of these, no more than
750 such shares may be issued to any one individual. Shares may be awarded from
authorized and unissued shares or from treasury shares, as determined by the
Executive Committee.
Stock Options. Stock options granted under the 1994 Employee Stock Option
Plan are Non-Qualified Stock Options that do not satisfy the criteria of
Section 422 of the Code. The exercise price of any stock option granted under
the 1994 Employee Stock Option Plan shall be the fair market value on the date
of the grant. Subject to the maximum number of shares issuable under the 1994
Employee Stock Option Plan, the Executive Committee shall have discretion in
determining the number of options and shares subject to such options.
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The options shall vest and be exercisable at such times and according to such
terms and conditions as determined by the Executive Committee, and the
Executive Committee shall have the authority to accelerate the vesting of any
stock options as it deems appropriate for the 1994 Employee Stock Option Plan
or Providence Journal. The Executive Committee shall also set forth at the time
of grant the terms and conditions of the treatment of any outstanding stock
options in the event of a termination of employment.
All options granted become exercisable in four equal annual installments
beginning one year after the grant date. The option term is ten years.
Change of Control Benefits. Upon a "Change of Control" of Providence Journal
(defined in the 1994 Employee Stock Option Plan to include (i) a change of
control of Providence Journal of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A (or similar
schedule) of the Exchange Act; (ii) Providence Journal becoming a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which the then-current Directors constitute less
than a majority of the Board thereafter; (iii) a series of events over a period
of 24 consecutive months in which Directors at the beginning of that time do
not constitute at least a majority of the Board; or (iv) any person becomes
beneficial owner of securities of Providence Journal representing 20% or more
of the combined voting power of Providence Journal's then outstanding
securities, unless the Board has approved such acquisition, but not in excess
of 50% of the combined voting power) stock options granted under the 1994
Employee Stock Option Plan will become immediately vested and exercisable,
irrespective of the original vesting schedule or any attempt by the Executive
Committee to alter this right of immediate vesting. The PJC Spin-Off and the
Merger do not constitute a Change of Control for purposes of the 1994 Employee
Stock Option Plan. Upon consummation of the Merger, the 1994 Employee Stock
Option Plan will be assumed by New Providence Journal.
Adjustments and Reorganization. In the event of a merger, reorganization,
consolidation, recapitalization, share combination, stock dividend, stock
split, spin-off or other distribution (other than normal cash dividends) of
Providence Journal's assets to its stockholders, or other change in the
structure of Providence Journal affecting its shares, such appropriate
adjustments shall be made (i) in the aggregate number and class of shares which
may be issued under the 1994 Employee Stock Option Plan, and (ii) the number
and class of and/or price of shares subject to outstanding options granted
under the 1994 Employee Stock Option Plan, as deemed appropriate by the
Executive Committee in its discretion, to prevent the dilution or enlargement
of rights to any participant.
Tax Aspects. The following is a brief description of the federal tax
treatment that will generally apply to awards made under the 1994 Employee
Stock Option Plan, based on federal income tax laws in effect on the date
hereof. The exact federal income tax treatment of awards will depend on the
specific nature of any such award.
The 1994 Employee Stock Option Plan allows for grants of Non-Qualified Stock
Options that do not satisfy the criteria of Section 422 of the Code. The grant
of such an option to acquire stock is generally not a taxable event for the
optionee. Upon exercise of the option, the optionee will generally recognize
ordinary income in an amount equal to the excess of the fair market value of
the stock acquired upon exercise (determined as of the date of exercise) over
the exercise price of such option, and Providence Journal will be entitled to a
deduction equal to such amount.
Special rules will apply, however, if, upon registration of New Providence
Journal's stock, the optionee is subject to Section 16 of the Exchange Act and
the option is exercised during the period within six months after the time the
option is granted (the "Section 16(b) Period"), when a sale of stock acquired
upon exercise of the option could subject such optionee to suit under Section
16. In such case, the optionee would not recognize ordinary income, and New
Providence Journal would not be entitled to a deduction until the expiration of
the Section 16(b) Period. Upon such expiration, the optionee would recognize
ordinary income, New Providence Journal would be entitled to a deduction, equal
to the excess of the fair market value of the
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stock (determined as of the expiration of the Section 16(b) Period) over the
option exercise price. Such an optionee may elect under Section 83(b) of the
Code to recognize ordinary income on the date of exercise, in which case New
Providence Journal would be entitled to a deduction at that time equal to the
amount of the ordinary income recognized.
Upon registration of New Providence Journal stock under Section 12 of the
Exchange Act, Section 162(m) of the Code limits to $1 million the deductibility
of compensation received in a year by New Providence Journal's chief executive
officer or by any one of the other four most highly compensated officers,
unless such compensation qualifies as "performance-based" or falls within other
exemptions under Section 162(m). Awards under the 1994 Employee Stock Option
Plan will be deemed to qualify as "performance-based compensation," in which
case New Providence Journal would be entitled to a deduction for compensation
paid in the same amount as income is realized by the employee without any
reduction under Section 162(m) of the Code.
Rule 16b-3. Upon registration of New Providence Journal stock under Section
12 of the Exchange Act, pursuant to Section 16(b) of the Exchange Act,
Directors, certain officers and 10% stockholders of New Providence Journal
would be generally liable to New Providence Journal for repayment of any
"short-swing" profits realized from any non-exempt purchase and sale of New
Providence Journal stock occurring within a six-month period. Rule 16b-3,
promulgated under the Exchange Act, provides an exemption from Section 16(b)
liability for certain transactions by an officer or director pursuant to an
employee benefit plan that complies with such Rule. Specifically, the grant of
an option under an employee benefit plan that complies with Rule 16b-3 will not
be deemed a purchase of a security and the actual or deemed sale of shares in
connection with certain option exercises will not be deemed a sale for Section
16(b) purposes. The 1994 Employee Stock Option Plan is designed to comply with
Rule 16b-3.
THE 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The 1994 Non-Employee
Director Stock Option Plan was adopted by the Board of Directors of Providence
Journal effective on October 1, 1994 and is being submitted for approval by the
stockholders of Providence Journal at its Annual Meeting in June 1995. If such
approval has not occurred by August 31, 1995, the 1994 Non-Employee Director
Stock Option Plan shall be terminated, and any option grants previously made
shall be void. Assuming that such stockholder approval is obtained prior to
August 31, 1995, and assuming stockholder approval of the PJC Spin-Off and the
Merger at the Providence Journal Special Meeting, the 1994 Non-Employee
Director Stock Option Plan shall remain in effect until the earlier of five
years from October 1, 1994 or termination of the 1994 Non-Employee Director
Stock Option Plan by the Board of Directors of New Providence Journal. If the
Providence Journal Proposals are not approved, then the 1994 Non-Employee
Director Stock Option Plan shall remain in effect with Providence Journal.
The 1994 Non-Employee Director Stock Option Plan is intended to provide long-
term incentive compensation and share ownership opportunities to non-employee
Directors, thereby helping Providence Journal to attract and retain high
quality directors. These incentives will contribute to the success of
Providence Journal by providing a greater identity of interest between the
Directors and stockholders.
Under the terms of the 1994 Non-Employee Director Stock Option Plan, the non-
employee Directors are eligible to receive grants of stock options. All ten
non-employee Directors participate in the plan automatically and will continue
to participate in the 1994 Non-Employee Director Stock Option Plan immediately
after October 1, 1994.
Shares Subject to the 1994 Non-Employee Director Stock Option Plan. The
maximum number of shares of Providence Journal Class A Common Stock that can be
used for purposes of the 1994 Non-Employee Director Stock Option Plan is 400
shares. Shares may be awarded from authorized and unissued shares or from
treasury shares, as determined by the Executive Committee.
Stock Options. Stock options granted under the 1994 Non-Employee Director
Stock Option Plan are non-qualified stock options that do not satisfy the
criteria of Section 422 of the Code. Each non-employee Director received a
stock option to purchase five shares of Providence Journal Class A Common Stock
on
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October 1, 1994 and will receive a stock option to purchase five additional
shares of New Providence Journal Class A Common Stock on each subsequent
October 1st each year the plan is in effect. The exercise price of any stock
option granted under the 1994 Non-Employee Director Stock Option Plan will be
100% of the fair market value on the date of grant. Each stock option shall
have a term of ten years and shall become initially exercisable on the first
anniversary of the grant date.
When a Director ceases to be a member of the Board, each option held by such
Director shall continue to be exercisable for a period of three years or the
end of the original term, whichever is first to occur.
Change of Control Benefits. Upon a "Change of Control" of Providence Journal
(defined in the 1994 Non-Employee Director Stock Option Plan to include (i) a
change of control of Providence Journal of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or
similar schedule) of the Exchange Act; (ii) Providence Journal becoming a party
to a merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which the then-current Directors constitute less
than a majority of the Board thereafter; (iii) a series of events over a period
of 24 consecutive months in which Directors at the beginning of that time do
not constitute at least a majority of the Board; or (iv) any person becomes
beneficial owner of securities of Providence Journal representing 20% or more
of the combined voting power of Providence Journal's then outstanding
securities, unless the Board has approved such acquisition, but not in excess
of 50% of the combined voting power) stock options granted under the 1994 Non-
Employee Director Stock Option Plan will become immediately exercisable. The
PJC Spin-Off and the Merger do not constitute a Change of Control for purposes
of the 1994 Non-Employee Director Stock Option Plan. Upon consummation of the
Merger, the 1994 Non-Employee Director Stock Option Plan will be assumed by New
Providence Journal.
Adjustments and Reorganization. In the event of a merger, reorganization,
consolidation, recapitalization, share combination, stock dividend, stock
split, spin-off or other distribution (other than normal cash dividends) of
Providence Journal's assets to its stockholders, or other change in the
structure of Providence Journal affecting its shares, such appropriate
adjustments shall be made (i) in the aggregate number and class of shares which
may be issued under the 1994 Non-Employee Director Stock Option Plan, and (ii)
the number and class of and/or price of shares subject to outstanding options
granted under the 1994 Non-Employee Director Stock Option Plan, as deemed
appropriate by the Executive Committee in its discretion, to prevent the
dilution or enlargement of rights to any participant.
Tax Aspects. The tax consequences of options granted under the 1994 Non-
Employee Director Stock Option Plan are the same as those of options granted
under the 1994 Employee Stock Option Plan, as discussed above under the heading
"1994 Employee Stock Option Plan--Tax Aspects".
Rule 16b-3.The 1994 Non-Employee Director Stock Option Plan is designed to
comply with Rule 16b-3. (See "1994 Employee Stock Option Plan--Rule 16b-3".)
RESTRICTED STOCK UNIT PLAN. The Board of Directors of Providence Journal
approved awards under the Restricted Stock Unit Plan on October 1, 1993. The
purpose of the Restricted Stock Unit Plan is to provide a significant incentive
opportunity based on stockholder value to retain key management during the
reorganization of Providence Journal.
Administration. The Restricted Stock Unit Plan is administered by the
Executive Committee of the Board of Directors.
Shares. A maximum of 680 shares of Providence Journal Class A Common Stock
may be awarded under the Restricted Stock Unit Plan. Shares awarded under the
Restricted Stock Unit Plan may be either shares reacquired by Providence
Journal, including shares purchased in the open market, or authorized but
previously unissued shares. Shares forfeited by participants under the
Restricted Stock Unit Plan may be awarded to other participants under such
plan.
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Participation. Shares under the Restricted Stock Unit Plan may be awarded to
key employees, including officers of Providence Journal and its subsidiaries.
Restricted Stock Unit Awards. Grants under the Restricted Stock Unit Plan are
structured so that each award is equivalent to one share of Providence Journal
Class A Common Stock. Dividend equivalents accrue on the awards prior to payout
and are deemed to be reinvested in additional shares.
Vesting. Grants under the Restricted Stock Unit Plan, including additional
awards accrued as a result of dividends and the reinvestment of dividends will
be 100% vested at the end of three years, except in the case of certain
acceleration provisions. Upon vesting, the awards will be paid out, net of
withholding, in actual shares of New Providence Journal Class A Common Stock.
Acceleration of Vesting. Vesting of the awards under the Restricted Stock
Unit Plan will be accelerated in the event of death, total disability, or
retirement (with pro rata distribution) and upon termination of employment of
the participant when initiated by Providence Journal other than for cause.
Termination for any other reason will result in forfeiture of the unvested
grants.
Deferral of Payment. Participants will be offered the opportunity to defer
receipt of the payout of vested awards. Participants may elect this voluntary
deferral prior to the commencement of the third year of the vesting period.
Deferred amounts will be paid out in actual shares at the time of retirement,
termination of employment, or after a specific period of time, at the election
of the participant. During the deferral period, the grants under the Restricted
Stock Unit Plan free of restrictions will continue to accrue and reinvest
dividends.
Federal Income Tax Features. Under current law, no taxable income for federal
income tax purposes will be realized by participants who receive awards of
shares during the year in which they are awarded. At the time the shares are
vested and received by the participant free of restrictions, the participant is
subject to federal income tax for the fair market value of the stock at the
time of the vesting. The participant will receive a reduced number of shares to
account for the payment of his or her income tax obligation. Participants who
defer receipt of the awards under the Restricted Stock Unit Plan free of
restrictions will delay the recognition of the shares' value as ordinary income
until such time as the shares are received.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Providence Journal's compensation of senior executives is administered by the
five member Executive Committee of the Board of Directors. Four members of the
Executive Committee are non-employee Directors. The sole employee member, Mr.
Hamblett, makes recommendations to the Executive Committee but does not vote on
compensation matters. The Executive Committee, with the assistance of an
external compensation consultant, develops and adopts executive compensation
policy, as well as annual compensation for senior management, subject, in some
cases, to ratification by Providence Journal's Board of Directors.
Compensation policy is structured to attract, motivate and retain high
quality management talent. Principal components of executive compensation
include: base salary, annual performance-based bonus, and long-term incentive
compensation, which historically has been in the form of incentive stock units.
Compensation for the Chief Executive Officer, as well as other corporate
executive officers, is established annually by recommendation of the Executive
Committee to the Board of Directors. Base salary is established based upon
similar positions at other media companies of a comparable size. A
comprehensive media industry salary survey is utilized in addition to weighing
such factors as an individual's qualifications, experience, responsibilities,
and performance.
Incentive compensation focuses on both short and long-term performance:
a. The annual bonus plan is based upon Providence Journal's earnings
before interest, depreciation, and taxes (EBIT). In addition, the Executive
Committee has discretion to increase or decrease the bonus earned for EBIT
performance based upon accomplishment of individual non-financial
objectives.
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b. Long-term incentive opportunity has been provided by the Incentive
Stock Unit Plan. An explanation of the plan is provided as part of the
Incentive Stock Unit Plan table. This long-term plan is intended to
encourage ownership and have executives share stockholder interests in
Providence Journal's performance. The plan also promotes long-term
retention of participating executives.
In the past three years, several actions (described below) were taken by the
Executive Committee to increase the performance-based component of total
compensation for the CEO and top four corporate executives. Frederic W. Cook &
Company, Inc., an independent compensation consulting firm, was retained by the
Executive Committee to evaluate all aspects of executive compensation.
a. base salaries were not increased in 1993, 1994, and 1995.
b. shares of Providence Journal stock were awarded in lieu of base salary
increases in 1993 only.
c. since 1993, the annual bonus opportunity was increased from 50 percent to
60 percent of salary, to be earned based upon Providence Journal's actual EBIT
as compared to EBIT objectives.
d. in 1993, a restricted stock unit plan was implemented to further
stockholder interests and in a particular effort to retain management during
the reorganization of Providence Journal. At the end of three years,
compensation is paid in company stock, net of taxes.
e. in 1994, Providence Journal implemented non-qualified stock option plans
as a more relevant and competitive long-term incentive. The plans will replace
the IUP. These plans, the "Providence Journal 1994 Stock Option Plan" and the
"Providence Journal 1994 Non-Employee Director Stock Option Plan" will be
presented for stockholder approval at the 1995 Annual Meeting.
This report has been submitted by the members of the Executive Committee:
Henry D. Sharpe, Jr. (Chairman)
Stephen Hamblett
W. Nicholas Thorndike
John W. Wall
Patrick R. Wilmerding
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STOCKHOLDER RETURN PERFORMANCE GRAPH
The following line graph is a comparison based on an initial $100 investment
of the yearly percentage change in Providence Journal's cumulative total
stockholder return with the cumulative total return of the Standard & Poor's
500 Stock Index and the cumulative total return of a group of peer issuers.
Providence Journal Common Stock is not traded on a public exchange. Valuations
for this graph for the years 1989 through 1993 have been based upon an annual
fair market appraisal of an independent appraisal firm. The value for 1994 is
based upon an estimated stock price of $11,489 per share as of December 31,
1994. Given the absence of a current independent appraisal and the lack of an
established trading market, the Executive Committee established this estimated
value by reference to the nominal value attributed by Bear Stearns to the
Continental Merger Stock and Providence Journal's estimate of the pro forma
equity values of New Providence Journal both as determined in November 1994.
The peer group includes Meredith Corporation, Multimedia Corporation, The New
York Times Company, Times Mirror Company, Tribune Company and The Washington
Post Company.
For purposes of the graph, it was assumed that $100 was invested in Providence
Journal Common Stock, the S & P 500 Stock Index and the Peer Group which is
also weighted by market capitalization. Dividends are assumed to be reinvested.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Edwards & Angell, of which Mr. Harris is a partner,
regularly performs legal services for Providence Journal. Edwards & Angell has
acted as Providence Journal's principal counsel for over 60 years.
OWNERSHIP OF PROVIDENCE JOURNAL CAPITAL STOCK AND NEW PROVIDENCE JOURNAL
CAPITAL STOCK
Information relating to the ownership of Providence Journal Common Stock is
set forth in "The Special Meetings--Ownership of Providence Journal
Securities". Following the PJC Spin-Off and the Merger, holders of shares of
Providence Journal Common Stock immediately prior to the PJC Spin-Off who have
not exercised and perfected dissenters' rights under the RIBCA will own shares
of New Providence Journal Common Stock constituting 100% of the equity and
voting power of New Providence Journal, in the same proportion (and of the
same class and amount) as shares of Providence Journal Common Stock which had
been held as of such date.
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DESCRIPTION OF NEW PROVIDENCE JOURNAL COMMON STOCK
Immediately prior to the PJC Spin-Off, New Providence Journal will be
authorized to issue 226,825,000 shares of capital stock consisting of: (i)
180,000,000 shares of New Providence Journal Class A Common Stock, of which a
maximum of 38,825 shares will be issued pursuant to the PJC Spin-Off and
135,000,000 shares of which can be issued only upon the exercise of rights
issued pursuant to the NPJ Rights Agreement and (ii) 46,825,000 shares of New
Providence Journal Class B Common Stock, 46,825 of which will be issued
pursuant to the PJC Spin-Off and 35,118,750 of which can be issued only upon
the exercise of rights issued pursuant to the NPJ Rights Agreement.
NEW PROVIDENCE JOURNAL COMMON STOCK
GENERAL. The New Providence Journal Certificate is similar in most respects
to the Providence Journal Charter. The rights, privileges and preferences of
New Providence Journal Class A Common Stock and New Providence Journal Class B
Common Stock are identical in all material respects to the rights, privileges
and preferences of Providence Journal Class A Common Stock and Providence
Journal Class B Common Stock, respectively, except that in order to protect the
tax-free nature of the PJC Spin-Off and the Merger, for a period of one year
following the Effective Time the shares of New Providence Journal Class A
Common Stock and New Providence Journal Class B Common Stock will be subject to
the NPJ Transfer Restrictions. (For a description of the Transfer Restrictions,
see "The Merger--General Provisions--Restrictions on Transfer of Continental
Merger Stock," "Restrictions on Transfer of New Providence Journal Common
Stock"). In addition, the New Providence Journal Certificate and the New
Providence Journal By-Laws will not include preemptive rights and right of
first refusal provisions. (See "Comparison of Rights of Stockholders of
Providence Journal and Continental--Rights to Purchase or Redeem Shares,
"Preemptive Rights"). Also, in order to provide greater flexibility, New
Providence Journal will have significantly more authorized shares than
Providence Journal.
VOTING. Each share of New Providence Journal Class A Common Stock entitles
the holder thereof to one vote on all matters submitted to the stockholders and
each share of New Providence Journal Class B Common Stock entitles the holder
thereof to four votes on all such matters. Except as set forth below and except
as may otherwise be required by law, all actions submitted to a vote of New
Providence Journal's stockholders will be voted on by holders of New Providence
Journal Class A Common Stock and New Providence Journal Class B Common Stock
together as a single class. The affirmative vote of the holders of a majority
of the outstanding shares of New Providence Journal Class A Common Stock and
New Providence Journal Class B Common Stock, voting separately as a class, is
required (i) to approve any amendment to the New Providence Journal Certificate
that would alter or change the powers, preferences or special rights of such
series so as to affect it adversely and (ii) to approve such other matters as
may require class votes under the DGCL.
DIVIDENDS AND OTHER DISTRIBUTIONS (INCLUDING DISTRIBUTIONS UPON LIQUIDATION
OR SALE). Each share of New Providence Journal Class A Common Stock and New
Providence Journal Class B Common Stock will be equal in respect of dividends
and other distributions in cash, stock or property (including distributions
upon liquidation of New Providence Journal and consideration to be received
upon a merger or consolidation of New Providence Journal or a sale of all or
substantially all of New Providence Journal's assets), except a dividend
payable in shares of New Providence Journal Class B Common Stock to holders of
New Providence Journal Class B Common Stock and in shares of New Providence
Journal Class A Common Stock to the holders of New Providence Journal Class A
Common Stock shall be deemed to be shared equally among both classes. No
dividend shall be declared or paid in shares of New Providence Journal Class B
Common Stock except to holders of New Providence Journal Class B Common Stock,
but dividends may be declared and paid, as determined by the Board of
Directors, in shares of New Providence Journal Class A Common Stock to all
holders of New Providence Journal Common Stock.
TRANSFERABILITY OF SHARES. Subject to the NPJ Transfer Restrictions, New
Providence Journal Class A Common Stock is freely transferable. (For a
description of the NPJ Transfer Restrictions, see "The Merger--
133
General Provisions--Restrictions on Transfer of Continental Merger Stock" and
"Restrictions on Transfer of New Providence Journal Common Stock".) New
Providence Journal Class B Common Stock is not transferable by a stockholder
except to or among, principally, such holder's spouse, parents or a lineal
descendant of a parent, certain trusts established for their benefit and
certain corporations (collectively, "NPJ Permitted Transferees"). Further, any
securities convertible into shares of New Providence Journal Class B Common
Stock or which carry a right to subscribe to or acquire shares of New
Providence Journal Class B Common Stock are subject to the same restrictions on
transfer applicable to New Providence Journal Class B Common Stock described
above. Any purported transfer of New Providence Journal Class B Common Stock
other than to a NPJ Permitted Transferee shall be null and void and of no
effect and the purported transfer by a holder of New Providence Journal Class B
Common Stock, other than to a NPJ Permitted Transferee, will result in the
immediate and automatic conversion of such holder's shares of New Providence
Journal Class B Common Stock into shares of New Providence Journal Class A
Common Stock. In addition, the New Providence Journal Class B Common Stock is
convertible at the holder's option at all times, without cost to the
stockholder, into New Providence Journal Class A Common Stock on a share-for-
share basis.
CERTAIN PROVISIONS IN THE NEW PROVIDENCE JOURNAL CERTIFICATE
The New Providence Journal Certificate and the New Providence Journal By-Laws
are similar in most respects to the Providence Journal Charter and the
Providence Journal By-Laws, except as noted above and except for requirements
under Delaware Law. Accordingly, the New Providence Journal Certificate and the
New Providence Journal By-Laws provide for indemnification of Directors and
officers to the fullest extent permitted by applicable law, and contain various
antitakeover provisions intended to (i) promote stability of New Providence
Journal's stockholder base and (ii) render more difficult certain unsolicited
or hostile attempts to take over New Providence Journal, which could disrupt
New Providence Journal, divert the attention of New Providence Journal's
Directors, officers and employees and adversely affect the independence and
integrity of New Providence Journal's media operations. A summary of the
principal antitakeover provisions is set forth below.
CLASSIFIED BOARD OF DIRECTORS, REMOVAL OF DIRECTORS AND RELATED
MATTERS. Pursuant to the New Providence Journal Certificate, the Board shall
consist of twelve members and will be divided into three classes, each class to
be equal in number. The terms of office of Directors will expire, respectively,
at the annual meetings of stockholders in 1996, 1997 and 1998. Successors to
any Directors whose terms are expiring are elected to three-year terms and hold
office until their successors are elected and qualified. The New Providence
Journal Certificate also provides that Directors of New Providence Journal may
be removed at any time, without cause, and only by an affirmative vote of the
holders of at least 80% of the combined voting power of the then outstanding
shares of stock of all classes entitled to vote generally in the election of
Directors cast at a meeting of stockholders called for the purpose of such
removal; provided, however, such 80% vote shall not be required for any such
removal recommended to the stockholders by the vote of not less than two-thirds
of the whole Board of Directors.
INCREASED STOCKHOLDER VOTE REQUIRED IN CERTAIN BUSINESS COMBINATIONS AND
OTHER TRANSACTIONS. The New Providence Journal Certificate provides that in
addition to any vote ordinarily required under Delaware Law, the affirmative
vote of (i) not less than two-thirds of the whole Board of Directors or (ii) if
subsection (i) above is not fully complied with, the holders of at least 80% of
the combined voting power of the then outstanding shares of stock of all
classes entitled to vote generally in the election of Directors would be
required to approve certain business combinations.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD. The New Providence Journal
Certificate provides that prior to voting with regard to any business
combination, the Board shall consider all relevant factors, including, but not
limited to, (i) freedom of the press, (ii) the independence and integrity of
New Providence Journal's ability to publish an independent, high quality,
comprehensive newspaper and to freely conduct its other operations to the
advantage of the customers and markets served, (iii) the social and economic
effects of the transactions on stockholders, employees, customers, suppliers
and other constituents of New
134
Providence Journal and its subsidiaries, (iv) the economic strength, business
reputation, managerial ability and recognized integrity of the party proposing
the business combination and (v) the effects on the communities served by New
Providence Journal's newspapers and by its other operations.
AMENDMENT OF CERTAIN CHARTER AND BY-LAW PROVISIONS. The New Providence
Journal Certificate provides that any alteration, amendment, repeal or
rescission of certain sections of the New Providence Journal Certificate must
be approved by the affirmative vote of the holders of at least 80% of the
combined voting power of the then outstanding shares of stock of all classes
entitled to vote generally in the election of Directors, cast at a meeting of
the stockholders called for the purpose of amending, altering, changing,
repealing or adopting any provisions inconsistent with the existing section;
provided, however, such requirement shall not apply if the amendment,
alteration, change, repeal or adoption shall be recommended to the stockholders
by the vote of not less than two-thirds of the entire Board of Directors and
shall instead require only the vote, if any, required by the applicable
provisions of Delaware Law.
NPJ RIGHTS AGREEMENT
Immediately after the PJC Spin-Off, New Providence Journal will become a
party to the NPJ Rights Agreement with The First National Bank of Boston, as
Rights Agent, pursuant to which the Board of Directors of New Providence
Journal will authorize the issuance of one Class A right (a "Class A Right")
with respect to each share of New Providence Journal Class A Common Stock and
one Class B right (a "Class B Right") with respect to each share of New
Providence Journal Class B Common Stock to the holders of record at the close
of business on the date of the PJC Spin-Off. In addition a Right shall be
issued with respect to any share of New Providence Journal Common Stock that
shall become outstanding between the PJC Spin-Off and the earlier of a
Distribution Date or the Expiration Date (both as hereinafter defined). The
Class A Rights and the Class B Rights (collectively, the "Rights") will be
transferrable only in connection with the transfer of the New Providence
Journal Common Stock.
As soon as practicable after a Distribution Date, the Rights Agent shall send
to the record holders of New Providence Journal Common Stock at the close of
business on the Distribution Date a Rights certificate. "Distribution Date"
means the earlier of (i) the tenth business day after the commencement of a
tender or exchange offer under the Exchange Act for a number of shares of the
New Providence Journal Common Stock having 15% or more of the voting power,
unless during such ten business day period the Board of Directors of New
Providence Journal declares that the tenth business day following such tender
or exchange offer shall not be a Distribution Date, or (ii) the tenth business
day after a Stock Acquisition Date. A "Stock Acquisition Date" means the first
date of public announcement (or determination by New Providence Journal,
whether or not announced publicly) by an acquiror (unless approved by the New
Providence Journal Board of Directors or having certain prior relationships
with New Providence Journal) that it has become the beneficial owner of 10% or
more of the voting power of New Providence Journal.
The Board of Directors of New Providence Journal may elect to redeem all but
not less than all of the then outstanding Rights at a redemption price of $.01
per Right, as such amount may be adjusted to reflect any combination or
subdivision of the outstanding New Providence Journal Common Stock or any
similar transaction, at any time up to and including the tenth business day
after a Stock Acquisition Date. Subject to certain conditions, the holder of
any Rights certificate may exercise the Rights evidenced thereby at any time
after the date on which New Providence Journal's right to redeem has expired
upon surrender of the Rights certificate to the Rights Agent, together with
payment of the purchase price, on or prior to August 31, 2005 (the "Expiration
Date"). The initial purchase price to a holder for a share of New Providence
Journal Class A Common Stock or New Providence Journal Class B Common Stock
pursuant to the exercise of either a Class A Right or Class B Right will be
fixed at a number which is approximately one half of the market value of the
New Providence Journal Common Stock, subject to adjustment from time to time as
provided in
135
Sections 11 and 13 of the NPJ Rights Agreement. The purchase price may be
adjusted as a result of, among other things, the declaration of a dividend, the
combination of outstanding New Providence Journal Class A Common Stock and New
Providence Journal Class B Common Stock into a smaller number of shares or the
issuance of shares in connection with a reclassification.
In the event that on or after a Stock Acquisition Date:
(i) any company shall merge into New Providence Journal or any of its
subsidiaries or otherwise combine with New Providence Journal or any of its
subsidiaries and New Providence Journal or such subsidiary shall be the
continuing and surviving corporation of such merger or combination; or
(ii) any person shall sell or otherwise transfer assets to New Providence
Journal in exchange for 50% or more of the shares of any class of capital
stock of New Providence Journal or any of its subsidiaries, and any class
of New Providence Journal Common Stock shall remain outstanding and
unchanged; or
(iii) any person shall become the beneficial owner of a number of shares
of the outstanding New Providence Journal Common Stock having 15% or more
of the voting power of New Providence Journal;
and in certain other circumstances, the Board of Directors of New Providence
Journal shall order an exchange of New Providence Journal Common Stock for all
or part of the then outstanding and exercisable Rights at an exchange ratio of
three shares of New Providence Journal Class A Common Stock per Class A Right
and three shares of New Providence Journal Class B Common Stock per Class B
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction. Pursuant to the New Providence Journal Certificate,
approximately 75% of the shares of each of New Providence Journal Class A
Common Stock and New Providence Journal Class B Common Stock are reserved for
issuance under the NPJ Rights Agreement.
If at any time on or after a Stock Acquisition Date, New Providence Journal
merges into another company or another company merges into New Providence
Journal or if New Providence Journal shall sell or transfer assets or earning
power aggregating more than 50% of the assets or earning power of New
Providence Journal, each holder of a Right shall have the right to receive such
number of shares of common stock of the acquiring company as shall have a value
equal to twice the value of New Providence Journal Common Stock held by such
holder.
The acquiring company shall be liable for, and shall assume by virtue of the
merger, all obligations and duties of New Providence Journal pursuant to the
NPJ Rights Agreement. Under the NPJ Rights Agreement, the acquiring company
shall take the necessary steps to reserve sufficient authorized but unissued
capital stock to permit the exercise by New Providence Journal stockholders of
their rights under the NPJ Rights Agreement.
The Rights certificates can be transferred, split up, combined or exchanged;
however, no person holding Class B Rights may transfer such Rights except to a
NPJ Permitted Transferee. Any purported transfer of Class B Rights other than
to a NPJ Permitted Transferee shall be null and void and of no effect and the
purported transfer by the holder of the Class B Rights will result in immediate
and automatic conversion of the Class B Rights purported to be transferred by
such holder to Class A Rights.
136
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL
If the PJC Spin-Off contemplated by the Merger Agreement is completed,
holders of Providence Journal Class A Common Stock and Providence Journal Class
B Common Stock will become holders of the same number of shares of New
Providence Journal Class A Common Stock and New Providence Journal Class B
Common Stock and the rights of the former Providence Journal stockholders will
be governed by Delaware Law, the New Providence Journal Certificate and the New
Providence Journal By-Laws. In addition, the holders of rights under the Rights
Agreement will hold the same number and class of rights under the NPJ Rights
Agreement. The New Providence Journal Certificate will be similar in most
respects to the Providence Journal Charter. The rights, privileges and
preferences of New Providence Journal Class A Common Stock and New Providence
Journal Class B Common Stock specified in the New Providence Journal
Certificate will be identical in all material respects to the rights,
privileges and preferences of Providence Journal Class A Common Stock and
Providence Journal Class B Common Stock specified in the Providence Journal
Charter, respectively, except that for a period of one year following the
Effective Time the shares of New Providence Journal Class A Common Stock and
New Providence Journal Class B Common Stock will be subject to restrictions on
transfer identical to the NPJ Transfer Restrictions. (For a description of the
NPJ Transfer Restrictions, see "The Merger--General Provisions--Restrictions on
Transfer of Continental Merger Stock" and "Restrictions on Transfer of New
Providence Journal Common Stock".) In addition, the New Providence Journal
Certificate and the New Providence Journal By-Laws will not include preemptive
rights and right of first refusal provisions. (See "Comparison of Rights of
Stockholders of Providence Journal and Continental--Rights to Purchase or
Redeem Shares", "Preemptive Rights"). Also, in order to provide greater
flexibility, New Providence Journal will have significantly more authorized
shares than Providence Journal. For a discussion of a comparison of rights of
stockholders under Rhode Island Law and stockholders under Delaware Law, see
"Comparison of Rights of Stockholders of Providence Journal and Continental".
137
DESCRIPTION OF PROVIDENCE JOURNAL CABLE TELEVISION BUSINESS
BUSINESS
As measured by basic cable subscribers, Providence Journal Cable is currently
the 15th largest cable system operator in the United States. As of June 30,
1995, Providence Journal Cable owned and managed cable television systems
passing approximately 1,262,000 Homes and serving approximately 773,000 basic
subscribers/1/ in nine states.
Providence Journal Cable's goal is to acquire and retain customers that will
subscribe to a broad range of video services. This is achieved through the
formation of regional system clusters, development of technologically advanced
systems and a strong commitment to customer service and community relations.
CABLE TELEVISION BUSINESS
Cable television delivers a wide variety of channels of television
programming, primarily video entertainment and informational programming, to
subscribers who pay a monthly fee for the service they receive. Television and
radio signals are received off-air or via satellite delivery by antennas,
microwave relay stations and satellite earth stations and are modulated,
amplified and distributed over a network of coaxial and fiber-optic cable to
the subscribers' television sets. Cable television systems typically are
constructed and operated pursuant to non-exclusive franchises awarded by local
governmental authorities for specified periods of time.
Providence Journal Cable's systems offer subscribers choices of services, any
of which may include television signals available off-air in any locality,
television signals from distant cities (so-called "super stations"), non-
broadcast channels (such as Entertainment and Sports Programming Network
("ESPN"), Cable News Network ("CNN"), Cable Satellite Public Affairs Network
("C-SPAN"), The USA Network ("USA") and MTV: Music Television ("MTV")),
displays of information such as time, news, weather and stock market reports
and public, educational and governmental access channels. Providence Journal
Cable's systems also provide premium television services to their subscribers
for an extra monthly charge. These services (including Home Box Office ("HBO"),
Cinemax, Showtime, The Movie Channel, The Disney Channel and regional sports
channels) feature full-length motion pictures without commercial interruption,
sporting events, concerts and other entertainment programming. In addition,
many of Providence Journal Cable's systems offer digital audio services as a
separate premium service.
Providence Journal Cable, like other cable television operators, offers to
its subscribers multiple channels of television programming, consisting
primarily of video entertainment, sports and news, as well as informational
services, locally originated programming and digital audio programming.
Although services vary from system to system because of differences in channel
capacity and viewer interest, each of Providence Journal Cable's systems
typically offers a basic package, a second tier of cable programming services,
four a la carte services which are also offered in a grouping which Providence
Journal Cable considers a "new product tier" under recent FCC rulings, four to
six optional premium services, 30 channels of digital audio programming and two
to four pay-per-view channels. Subscribers are required by federal law to
purchase the basic service package in order to be able to purchase any other
services. (See "Legislation and Regulation--Federal Regulation".)
--------
/1/A "basic subscriber" means a person who subscribes, at a minimum, to
Providence Journal Cable's basic tier, which consists of broadcast
television signals available locally off-air, local origination and public,
educational and governmental access channels. Bulk subscribers are accounted
for on an "equivalent billing unit" basis, by dividing aggregate bulk-billed
service revenues by the combination of stated basic service, the stated
second tier of cable programming service and the stated a la carte service
rates. Bulk service revenues include charges for bulk basic programming and
bulk non-premium cable programming services. The number of residential
subscribers minus the number of courtesy accounts is added to the bulk
equivalent to determine the total subscriber number. The number shown
includes 100% of subscribers from certain systems that are currently
partially owned, but which are anticipated to be wholly owned at the
Effective Time.
138
Providence Journal Cable offers basic services generally consisting of
television signals available locally off-air, some superstations and local
origination and public, educational and governmental access channels.
Advertiser-supported cable programming services are available typically on an
additional tier. In furtherance of Providence Journal Cable's strategy of
providing maximum choice to its subscribers, Providence Journal Cable offers a
variety of tiers and premium services. See "Legislation and Regulation" for a
description of recent legislation and pending regulation that limit Providence
Journal Cable's ability to price and tier its programming services.
Providence Journal Cable's revenues are derived principally from monthly
subscription fees. Rates charged to subscribers vary from market to market. At
June 30, 1995, Providence Journal Cable's monthly rates for basic cable service
averaged $10.64 company-wide with a low of $7.20 and a high of $19.46, second
tier cable programming service rates averaged $9.42 with a range of $5.24 to
$15.89, a la carte rates averaged $0.88 per channel with a low of $0.30 and a
high of $1.54, and premium service rates ranged from $6.95 to $12.55 per
service. Providence Journal Cable also offers combinations of selected services
at discounted prices. Providence Journal Cable generally charges monthly fees
for converters, program guides, and descrambling and remote control tuning
devices. Subscribers are free to terminate service at any time without
additional charge, but are charged a reconnection fee to resume service.
In addition to subscriber fees, Providence Journal Cable derives revenues
from the sale of advertising time on advertising-supported, satellite-delivered
networks such as ESPN, MTV and CNN, as well as on locally originated
programming. Providence Journal Cable's advertising revenues increased from
$8.6 million in 1989 to $17.4 million in 1994, representing a compound growth
rate of 15%. Providence Journal Cable's advertising revenues in the first half
of 1995 were $7.8 million, an increase of 2% over the first half of 1994.
Another source of revenues is the sale of pay-per-view movies and events to
Providence Journal Cable's basic subscribers in systems where such service is
offered. Revenues from pay-per-view movies and events increased 5.3% to $5.1
million during 1994. During the first half of 1995, pay-per-view movie and
event revenue was $3.1 million compared to $2.7 million in the first half of
1994, an increase of 14%. Providence Journal Cable also receives a percentage
of the proceeds from subscribers' purchases of merchandise offered on "home
shopping" programs. Although Providence Journal Cable believes that these and
other services could become more substantial sources of income over time, there
can be no assurance in this regard.
Providence Journal Cable's cable operations are conducted through Colony and
Colony Cablevision as well as its Copley/Colony and King Videocable joint
ventures.
DEVELOPMENT OF PROVIDENCE JOURNAL CABLE
From Providence Journal Cable's inception through the early 1990's, the
majority of Providence Journal Cable's growth was attributable to constructing,
operating and marketing new cable television systems. Providence Journal
Cable's growth since then is largely attributable to intensive marketing of its
basic and premium services, to line extensions within its existing franchise
areas and to the purchase and development of existing cable television systems,
which are usually in close proximity to Providence Journal Cable's existing
systems. In particular, Providence Journal Cable's acquisition of King
Videocable and the former Palmer Systems (now Colony Cablevision) in 1992 more
than doubled the number of Providence Journal Cable's basic subscribers. More
recently, Providence Journal Cable's growth has been supplemented by ancillary
revenue sources, including advertising, pay-per-view movies and events and home
shopping revenues.
139
The following table summarizes the growth of Providence Journal Cable since
December 31, 1992.
AS OF DECEMBER 31 AS OF JUNE 30
---------------------------------- -------------
1992 1993 1994 1995
---------- ---------- ---------- -------------
Homes Passed by Cable(1)..... 1,202,000 1,224,000 1,253,000 1,262,000
Number of Basic
Subscribers(2).............. 722,000 738,000 771,000 773,000
Basic penetration(3)......... 60.0% 60.3% 61.5% 61.3%
Number of Premium
Subscriptions(4)............ 440,000 467,000 510,000 512,000
Premium Penetration(5)....... 61.0% 63.3% 66.2% 66.2%
Monthly Revenue per Average
Basic Subscriber(6)......... $30.78 $30.63 $29.44 $29.50
--------
(1) Estimated dwelling units located sufficiently close to Providence Journal
Cable's cable plant to be practicably connected without any further
extension of principal transmission lines.
(2) A "basic subscriber" means a person who subscribes, at a minimum, to
Providence Journal Cable's basic tier, which consists of broadcast
television signals available locally off-air, local origination and public,
educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis by dividing aggregate
bulk-billed service revenues by the combination of stated basic service the
stated second tier of cable programming service and the stated a la carte
service rates. Bulk service revenues include charges for bulk basic
programming and bulk non-premium cable programming services. The number of
residential subscribers minus the number of courtesy accounts is added to
the bulk equivalent to determine the total subscriber number. The number
shown includes 100% of subscribers from certain systems that are currently
partially owned, but which are anticipated to be wholly owned at the
Effective Time. Due to the seasonality inherent in certain of Providence
Journal's cable systems in Florida, the number of basic subscribers may
fluctuate over the course of the year.
(3) Basic subscribers as a percentage of Homes passed by cable.
(4) Equals the number of premium services subscribed to by subscribers. Premium
services include only single channel services offered for a monthly fee per
channel and do not include packages of channels offered for a single
monthly fee.
(5) Premium subscriptions as a percentage of basic subscribers. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium subscriber. This ratio may be greater than 100% if the
average customer subscribes to more than one premium service.
(6) Subscriber revenue divided by the average number of basic subscribers for
Providence Journal Cable's combined systems during the twelve month period
ended December 31 for each year presented and the six month period ended
June 30, 1995.
140
PROVIDENCE JOURNAL CABLE'S SYSTEMS
The following table sets forth information relating to Providence Journal
Cable's systems as of June 30, 1995.
COMBINED SUMMARY SUBSCRIBER DATA
NUMBER OF NUMBER OF
HOMES PASSED BASIC BASIC PREMIUM PREMIUM
BY CABLE SUBSCRIBERS PENETRATION SUBSCRIPTIONS PENETRATION
------------ ----------- ----------- ------------- -----------
COLONY:
Southeastern, MA........ 99,347 65,194 65.6% 44,844 68.8%
Lowell, MA.............. 66,387 44,605 67.2% 36,449 81.7%
Pawtucket, RI........... 32,241 18,442 57.2% 14,644 79.4%
Westerly, RI............ 22,003 15,489 70.4% 9,718 62.7%
New York................ 71,390 58,801 82.4% 40,455 68.8%
Florida................. 145,254 79,838 55.0% 50,077 62.7%
Lakewood, CA............ 27,626 14,403 52.1% 12,051 83.7%
--------- ------- ----- ------- ------
TOTAL COLONY............ 464,248 296,772 63.9% 208,238 70.2%
--------- ------- ----- ------- ------
COLONY CABLEVISION:
Naples, FL.............. 175,777 106,260 60.5% 55,615 52.3%
Palm Desert, CA......... 107,103 66,384 62.0% 45,849 69.1%
--------- ------- ----- ------- ------
TOTAL COLONY CABLEVI-
SION................... 282,880 172,644 61.0% 101,464 58.8%
--------- ------- ----- ------- ------
COPLEY/COLONY(1):
Costa Mesa, CA.......... 40,296 21,827 54.2% 22,004 100.8%
Harbor, CA.............. 54,230 22,629 41.7% 25,408 112.3%
Cypress, CA............. 19,783 10,925 55.2% 10,727 98.2%
--------- ------- ----- ------- ------
TOTAL COPLEY/COLONY..... 114,309 55,381 48.4% 58,139 105.0%
--------- ------- ----- ------- ------
KING VIDEOCABLE(2):
Tujunga, CA............. 44,505 31,945 71.8% 17,384 54.4%
Santa Clarita, CA....... 32,960 28,214 85.6% 16,176 57.3%
Riverside, CA........... 36,917 24,072 65.2% 16,872 70.1%
Placerville, CA......... 27,054 18,385 68.0% 11,556 62.9%
Lodi, CA................ 26,823 14,286 53.3% 9,332 65.3%
San Andreas, CA......... 17,210 11,425 66.4% 4,329 37.9%
Mammoth Lakes, CA....... 8,552 7,334 85.8% 2,862 39.0%
Mt. Shasta, CA.......... 8,307 5,422 65.3% 2,851 52.6%
Menifee, CA............. 1,993 1,738 87.2% 1,074 61.8%
Ellensburg, WA.......... 9,300 5,760 61.9% 1,871 32.5%
Twin Falls, ID.......... 26,020 16,295 62.6% 8,615 52.9%
Brooklyn Park/St. Croix,
MN..................... 161,152 83,813 52.0% 51,389 61.3%
--------- ------- ----- ------- ------
TOTAL KING.............. 400,793 248,689 62.0% 144,311 58.0%
--------- ------- ----- ------- ------
TOTAL PROVIDENCE JOURNAL
CABLE.................. 1,262,230 773,486 61.3% 512,152 66.2%
========= ======= ===== ======= ======
--------
(1) Providence Journal has signed a purchase agreement for the 50% interest in
Copley/Colony and closed the purchase in escrow, pending receipt of
franchise authority approvals for the transfer.
(2) King Videocable is presently an indirect wholly owned subsidiary of KHC,
which is owned 50% by Providence Journal and 50% by the Kelso Partnerships.
The information provided includes all of King Videocable, which Providence
Journal anticipates will be wholly owned at the Effective Time.
141
COLONY. Colony consists of seven systems, representing forty-one franchise
areas serving subscribers in Rhode Island, Massachusetts, New York, Florida,
and California. Approximately 88% of Colony's basic subscribers are served by
systems with at least 54-channel capacity. All of the Colony systems have
addressable capability.
COLONY CABLEVISION. Colony Cablevision consists of two systems, representing
sixteen franchise areas serving subscribers in California and Florida.
Approximately 69% of Colony Cablevision's basic subscribers are served by
systems with at least 54-channel capacity. All of the Colony Cablevision
systems have addressable capability.
COPLEY/COLONY. Copley/Colony consists of three systems, representing eight
franchise areas serving subscribers in California. All of Copley/Colony's basic
subscribers are served by systems with at least 54-channel capacity. All of the
Copley/Colony systems have addressable capability.
KING VIDEOCABLE. King Videocable consists of twelve systems, representing
seventy-five franchise areas serving subscribers in Minnesota, Wisconsin,
California, Washington and Idaho. Approximately 81% of King Videocable's basic
subscribers are served by systems with at least 54-channel capacity.
Approximately 68% of the King Videocable systems have addressable capability.
TECHNOLOGICAL DEVELOPMENTS
Providence Journal Cable continues to upgrade the technical quality of its
cable plant and to increase channel capacity for the delivery of additional
programming and new services. Providence Journal Cable anticipates that system
upgrades will enable it to provide customers with greater programming
diversity, better picture quality and alternative communications delivery
systems made possible by the introduction of fiber-optic technology and by the
future application of digital compression.
The use of fiber-optic cable as a supplement to coaxial cable is playing a
major role in expanding channel capacity and improving the performance of cable
television systems. Fiber-optic cable is capable of carrying hundreds of video,
data and voice channels and, accordingly, its use is essential to the
enhancement of a cable television system's technical capabilities. Providence
Journal Cable's current policy to use fiber-optic technology in substantially
all rebuild projects is based upon the benefits that fiber-optic technology
provides over traditional coaxial cable distribution plant, the elimination of
headends, lower ongoing maintenance and utility costs and improved picture
quality and reliability.
As of December 31, 1994, approximately 51% of Providence Journal Cable's
subscribers were served by addressable converters. Addressable technology
enables the cable operator to activate from a central control point cable
television services to be delivered to each customer. As a result, Providence
Journal Cable can upgrade or downgrade services to a customer immediately,
without the delay or expense associated with dispatching a technician to the
home. Addressable technology also reduces premium service theft, is an
effective enforcement tool in collecting delinquent payments and allows
Providence Journal Cable to offer pay-per-view services. Approximately 74% of
Providence Journal Cable's subscribers are served by systems having at least
54-channel capacity.
FRANCHISES
Cable television systems are generally constructed and operated under non-
exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as amended. (See "Legislation and Regulation--Cable Communications
Policy Act of 1984" and "Federal Regulation".)
142
As of June 30, 1995, Providence Journal Cable held 138 franchises. These
franchises, all of which are non-exclusive, generally provide for the payment
of fees to the franchising authority. Annual franchise fees imposed on
Providence Journal Cable's systems range up to 5.0% of gross revenues. For the
past three years, total franchise fee payments made by Providence Journal Cable
have averaged approximately 4.4% of total revenues. The 1984 Cable Act
prohibits franchising authorities from imposing annual franchise fees in excess
of 5.0% of gross revenues and also permits the cable system operator to seek
renegotiation and modification of franchise requirements if warranted by
changed circumstances. Most of Providence Journal Cable's franchises can be
terminated by the applicable franchising authority prior to their stated
expiration for breach of material provisions. Providence Journal Cable has
never had a franchise revoked and, to date, all of Providence Journal Cable's
franchises have been renewed or extended at or prior to their stated
expirations, frequently on modified but satisfactory terms.
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld
or, if renewal is withheld and the system is acquired by the franchise
authority or a third party, the franchise authority must pay the operator the
"fair market value" for the system covered by such franchise. In addition, the
1984 Cable Act establishes comprehensive renewal procedures which require that
an incumbent franchisee's renewal application be assessed on its own merit and
not as part of a comparative process with competing applications. (See
"Legislation and Regulation-- Federal Regulation" and "Renewal of Franchises".)
Franchises representing approximately 206,026 basic subscribers (approximately
26.6% of basic subscribers of Providence Journal Cable as of June 30, 1995) are
scheduled to expire through 1998.
PROGRAMMING
Providence Journal Cable provides programming to its subscribers pursuant to
contracts with programming suppliers. Providence Journal Cable generally pays a
monthly fee per subscriber for the right to distribute programming through all
activated outlets in a subscriber's premises for Providence Journal Cable's
second tier of cable programming services and for its premium services.
Providence Journal Cable's programming contracts are generally for fixed
periods of time and are subject to negotiated renewal. The costs to Providence
Journal Cable to provide cable programming have increased in recent years and
are expected to continue to increase due to additional programming being
provided to subscribers, increased costs to produce or purchase cable
programming, inflationary increases, regulation and other factors. Under the
1992 Cable Act, local broadcasting stations may require cable television
operators to pay a fee for the right to continue to carry their local
television signals. Alternatively, a local broadcaster may demand carriage
under the 1992 Cable Act's "must-carry" provisions. Providence Journal Cable
did not pay any fees to local broadcasting stations for local carriage but did
enter into various in-kind compensation arrangements. (See "Legislation and
Regulations--Federal Regulation" and "Carriage of Broadcast Television
Signals".)
COMPETITION
Providence Journal Cable competes with other communications and entertainment
media, including conventional off-air television broadcast services,
newspapers, movie theaters, live sporting events and home video products. Cable
television service was first offered as a means of improving television
reception in markets where terrain factors or remoteness from major cities
limited the availability of off-air television. In some of the areas served by
Providence Journal Cable, a substantial variety of television programming can
be received off-air. For the last several years, the FCC has been authorizing
the creation of additional low-power (UHF) television stations, which will
increase the number of television signals in the country and provide off-air
television programs to limited local areas. The extent to which cable
television service is competitive depends upon a cable television system's
ability to provide, on a cost effective basis, an even greater variety of
programming than that available off-air or through other alternative delivery
sources.
Since Providence Journal Cable's systems operate under non-exclusive
franchises, other companies may obtain permission to build cable television
systems in areas where Providence Journal Cable presently
143
operates. While Providence Journal Cable believes that the current level of
overbuilding is not material, Providence Journal Cable is currently unable to
predict the extent to which overbuilds may occur in Providence Journal Cable's
franchise areas and the impact, if any, such overbuilds may have on Providence
Journal Cable in the future.
Additional competition may come from satellite master antenna television
("SMATV") systems servicing condominiums, apartment complexes and certain other
private residential developments. The operators of these private systems often
enter into exclusive agreements with apartment building owners or homeowners'
associations that preclude operators of franchised cable television systems
from serving residents of such private complexes. The widespread availability
of reasonably priced earth stations enables private cable television systems to
offer both improved reception of local television stations and many of the same
satellite-delivered program services that are offered by franchised cable
television systems. FCC regulations permit SMATV operators to use point-to-
point microwave service to distribute video entertainment programming to their
SMATV systems. A private cable television system normally is free of the
regulatory burdens imposed on franchised cable television systems. Although a
number of states have enacted laws to afford operators of franchised systems
access to private complexes, the U.S. Supreme Court has held that cable
companies cannot have such access without compensating the property owner. The
access statutes of several states have been challenged successfully in the
courts, and others are currently being challenged, including statutes in states
in which Providence Journal Cable operates.
In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for certain
existing technologies and to create substantial additional competition to cable
television systems. These technologies include, among others, DBS services
which transmit signals by satellite to receiving facilities located on
customers' premises. Although satellite-delivered programming is currently
available to backyard earth stations, new, high-powered direct-to-home
satellites make possible the wide-scale delivery of programming to individuals
throughout the United States using roof-top or wall-mounted antennas. Companies
offering DBS services plan to use video compression technology to increase
satellite channel capacity and to provide a package of movies, broadcast
stations and other program services competitive with those of cable television
systems. Several companies are preparing to have DBS systems in place during
this decade, and two companies began offering high-powered DBS service in 1994
in competition with cable television operators. Several companies intend to
offer more than 100 channels of service over high-powered satellites using
video compression technology. DBS service providers may be able to offer new
and highly specialized services using a national base of subscribers. The
ability of DBS service providers to compete with the cable television industry
will depend on, among other factors, the availability of reception equipment at
reasonable prices. Although it is not possible at this time to predict the
likelihood of success of any DBS service ventures, initial sales of DBS
services indicate that DBS may offer substantial competition to cable
television operators in the future.
Cable television systems also may compete with wireless program distribution
services such as MMDS, commonly called wireless cable systems, which are
licensed to serve specific areas. MMDS uses low power microwave frequencies to
transmit pay television programming over-the-air to subscribers. MMDS systems'
ability to compete with cable television systems has previously been limited by
a lack of channel capacity, the inability to obtain programming and regulatory
delays. Recently, NYNEX Corp. and Bell Atlantic Corp., agreed to invest up to
$100,000,000 in CAI Wireless Systems Inc., a MMDS operator. In addition,
Pacific Telesis Group announced that it has acquired Cross Country Wireless
Inc., a MMDS operator. A series of actions taken by the FCC, including
reallocating certain frequencies to the wireless services, are intended to
facilitate the development of wireless cable television systems as an
alternative means of distributing video programming. The FCC also initiated a
new rule-making proceeding to allocate frequencies in the 28 GHz band for a new
multi-channel wireless video service. Providence Journal Cable is unable to
predict the extent to which additional competition from these services will
materialize in the future or the impact such competition would have on
Providence Journal Cable's operations.
144
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and to businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast
services, including data transmissions. The FCC established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. Telephone companies and other common carriers also provide facilities
for the transmission and distribution of data and other non-video services.
In the past, federal cross-ownership restrictions have limited entry into the
cable television business by potentially strong competitors such as telephone
companies. Proposals recently adopted by the FCC and pending litigation and
future legislation, could make it possible for companies with considerable
resources, and consequently a potentially greater willingness or ability to
overbuild, to enter the business. The FCC recently amended its rules to permit
local telephone companies to offer "video dialtone" service for video
programmers, including channel capacity for the carriage of video programming
and certain non-common carrier activities such as video processing, billing and
collection and joint marketing agreements. Furthermore, several federal
district courts have struck down as unconstitutional a provision in the 1984
Cable Act which prevents local telephone companies from offering video
programming on a non-common carrier basis directly to subscribers in their
local telephone service areas. Two such district court decisions have been
upheld by the United States Courts of Appeals for the Fourth Circuit and the
Ninth Circuit. The Supreme Court has agreed to hear arguments on this issue
during its 1995-1996 term. Separate bills to repeal the telco/cable cross-
ownership ban, subject to certain regulatory requirements, have been passed by
the United States House of Representatives and the United States Senate. Under
the terms of these bills, a telephone company could build and operate a cable
television system within its region or acquire an in-region cable operator,
under certain circumstances. These bills would also, inter alia, preempt state
and locally-imposed barriers to the provision of intrastate and interstate
telecommunications services by cable system operators in competition with local
telephone companies. Even in the absence of further changes in the cross-
ownership restrictions, the expansion of telephone companies' fiber-optic
systems may facilitate entry by other video service providers in competition
with cable systems. (See "Legislation and Regulation--Federal Regulation".)
PROPERTIES
A cable television system consists of four principal operating components.
The first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the headend
and extends throughout the system's service area, consists of microwave relays,
coaxial or fiber-optic cables placed on utility poles or buried underground and
associated electronic equipment. The third component of the system is a "drop
cable," which extends from the distribution network into each customer's home
and connects the distribution system to the customer's television set. The
fourth component, a converter, is the home terminal device that expands channel
capacity to permit reception of more programming. In recent years, Providence
Journal Cable has begun to install in its systems converters than can be
"addressed" by sending coded signals from the headend over the cable network.
Addressable converters enable the system operator automatically to change the
customer's level of service without visiting the customer's home. Addressable
converters improve system programming flexibility, enable the operator to
simplify its billing procedures, allow customers the option of changing levels
of service on short notice and enable customers to select and pay for pay-per-
view programming events.
Providence Journal Cable's fiber-optic and coaxial cables generally are
attached to utility poles under pole rental agreements with local public
utilities, although in some areas the distribution cable is buried in
underground ducts or trenches in the public right-of-way. The physical
components of Providence Journal Cable's systems require maintenance and
periodic upgrading to keep pace with technological advances.
145
Providence Journal Cable leases office space for its corporate headquarters
located in Providence, Rhode Island. Providence Journal Cable owns or leases
parcels of real property for signal reception sites (antenna towers and
headends), microwave facilities and business offices, and owns almost all of
its service vehicles. Providence Journal Cable believes that its properties,
both owned and leased, are in good condition and are suitable and adequate for
Providence Journal Cable's business operations.
EMPLOYEES
At June 30, 1995, Providence Journal Cable had 1,262 full-time and 203 part-
time employees. Providence Journal Cable considers its relations with its
employees to be good. There is one collective bargaining agreement relating to
twelve employees in Twin Falls, Idaho.
LEGAL PROCEEDINGS
On January 17, 1995, Cable LP I, Inc. ("Cable LP") brought a declaratory
judgment action against Providence Journal, Colony and Dynamic Cablevision of
Florida, Inc. ("Dynamic") in the Circuit Court of the Eleventh Judicial Circuit
in and for Dade County, Florida. This case relates to the Dynamic Partnership,
in which Dynamic is the general partner with an 89.8% interest, and Cable LP is
the limited partner with a 10.2% interest. In this action, Cable LP claims that
Dynamic was obligated to offer to sell to Cable LP Dynamic's general
partnership interest before Providence Journal entered into the Merger
Agreement with Continental. Cable LP further claims that Dynamic's offer to
purchase Cable LP's limited partnership interest for $13.1 million triggered a
right of first refusal entitling Cable LP to purchase the general partnership
interest for $115 million. Cable LP seeks a declaration by the court that the
right of first refusal it is asserting applies and supplemental relief in the
form of an injunction barring consummation of the sale of the general partner's
interest in the Dynamic Partnership to Continental.
Providence Journal, Colony and Dynamic made a motion to strike allegations
against them of bad faith and breach of fiduciary duty, which motion was
granted by the court, and they filed an Answer to the Complaint and a
Counterclaim on March 16, 1995. In their counterclaim, Colony and Dynamic seek
a declaratory judgment that Cable LP unreasonably refused consent to the
transfer of the general partner's interest to Continental and that a purported
transfer of Cable LP's interest in the Dynamic Partnership to a partnership to
be managed by Adelphia Communications, Inc. violates Dynamic's right of first
refusal under the Dynamic Partnership Agreement. Discovery is well underway.
The case is scheduled to be tried in October.
In the event that, as a result of such litigation, Dynamic is required, prior
to the Merger, to sell its interest in the Dynamic Partnership to Cable LP or
to contribute such interest to New Providence Journal, the Merger Agreement
provides that the amount of New Cable Indebtedness will be reduced by (i) $115
million and (ii) (in the case of a required sale to Cable LP) the excess of (a)
the amount by which the consideration received by Dynamic for the sale of its
interest exceeds $115 million over (b) the incremental taxes payable as a
result of any such excess consideration.
In the event that, as a result of such litigation, Dynamic is required, after
the Merger, to sell its interest in the Dynamic Partnership to Cable LP, the
Merger Agreement provides that New Providence Journal will pay to Continental
simultaneously with the closing of such sale an amount equal to the sum of (i)
the amount (if any) by which the consideration received by Dynamic for the sale
of such interest is less than $115 million plus (ii) the taxes which would have
been payable assuming the purchase price for such interest equaled $115
million.
Providence Journal's management believes that the claims asserted by Cable LP
are without merit and intends to vigorously defend this matter.
Providence Journal Cable is a party to various other legal proceedings that
are ordinary and incidental to its business. Management does not believe that
any legal proceedings currently pending will have a material adverse effect on
the combined financial condition or results of operation of Providence Journal
Cable.
146
SELECTED COMBINED FINANCIAL DATA OF PROVIDENCE JOURNAL CABLE
The following selected combined financial information for Providence
Journal's owned and partially owned cable businesses has been derived from the
combined financial statements of Providence Journal Cable which consists of
Colony (a wholly owned subsidiary of Providence Journal), Colony Cablevision
(a wholly owned division of Providence Journal since December 1992),
Copley/Colony (a 50% owned joint venture of Colony), and King Videocable (a
50% owned joint venture of Providence Journal since February 1992). The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Providence Journal Cable" and
the combined financial statements and notes thereto included elsewhere herein
for Providence Journal Cable. The combined statement of operations data for
the years ended December 31, 1992, 1993 and 1994 and the combined balance
sheet data as of December 31, 1992, 1993 and 1994 have been derived from the
audited combined financial statements of Providence Journal Cable. The
combined statement of operations data for the two years ended December 31,
1990 and 1991 and the combined balance sheet data as of December 31, 1990 and
1991 have been derived from the separate audited financial statements of
Colony and Copley/Colony. The combined statement of operations data for the
six months ended June 30, 1994 and 1995 and the combined balance sheet data as
of June 30, 1995 have been derived from the unaudited financial statements of
Providence Journal Cable that, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. Operating results for the six months ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1995.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------------- --------
(IN THOUSANDS, EXCEPT RATIOS)
STATEMENT OF OPERATIONS
DATA:
Total Revenue........... $114,937 $118,791 $199,684 $281,593 $284,993 $141,704 $145,380
Operating expenses...... 50,049 48,554 76,523 105,037 114,868 56,528 59,941
Selling, general and
administrative
expenses............... 27,396 28,951 45,180 62,446 58,152 29,650 29,106
Depreciation and
amortization........... 23,179 24,640 58,750 99,554 85,783 45,610 42,314
Allocation of corporate
overhead (1)........... 5,947 7,751 6,513 9,651 11,034 3,703 3,818
-------- -------- -------- -------- -------- -------- --------
Operating income........ 8,366 8,895 12,718 4,905 15,156 6,213 10,201
Allocated interest
expense from parent
companies (2).......... -- -- (16,516) (39,938) (41,318) (20,035) (20,880)
Other, net.............. (1,139) 3,466 591 (1,841) 555 1,121 1,545
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle.............. 7,227 12,361 (3,207) (36,874) (25,607) (12,701) (9,134)
Provision for income
taxes.................. 3,648 6,166 694 (11,219) (8,182) (3,994) (2,621)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
change in accounting
principle.............. 3,579 6,195 (3,901) (25,655) (17,425) (8,707) (6,513)
Cumulative effect of
change in accounting
principle.............. -- -- 4,831 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
minority interests..... $ 3,579 $ 6,195 $ 930 $(25,655) $(17,425) $ (8,707) $ (6,513)
======== ======== ======== ======== ======== ======== ========
AS OF DECEMBER 31,
------------------------------------------------ AS OF JUNE 30,
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------------
BALANCE SHEET DATA:
Total assets............ $140,747 $133,921 $867,150 $813,306 $777,102 $818,633
Long term debt.......... 22,500 17,500 15,000 -- -- --
Amounts due to parent
companies.............. 5,915 1,235 596,885 593,073 574,821 611,567
Group equity............ 45,662 51,929 89,334 70,403 57,142 52,915
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------------- --------
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA (3).............. $ 37,492 $ 41,286 $ 77,981 $114,110 $111,973 $ 55,526 $ 56,333
EBITDA as a Percentage
of Revenue............. 32.6% 34.8% 39.1% 40.5% 39.3% 39.2% 38.7%
Net Cash Provided by
Operating Activities... 20,741 28,932 53,753 69,940 68,288 34,508 40,707
Capital Expenditures.... 22,605 18,722 27,391 49,094 47,766 23,142 25,631
147
--------
(1) Parent companies provided certain services to Providence Journal Cable,
including cash management, human resources, accounting, legal, tax and
other corporate services. Corporate overhead relating to these services
has been allocated to Providence Journal Cable. In the opinion of
management these charges have been made on a reasonable basis (individual
business revenue to total revenue), however, these charges are not
necessarily indicative of the level of expenses that might have been
incurred by Providence Journal Cable on a stand-alone basis.
(2) Represents allocation of interest expense on amounts due to parent
companies.
(3) Operating income plus depreciation, amortization and allocation of parent
company corporate overhead. Based on its experience in the cable
television industry, Providence Journal believes that EBITDA and related
measures of cash flow serve as important financial analysis tools for
measuring and comparing cable television companies in several areas, such
as liquidity, operating performance and leverage. EBITDA should not be
considered by the reader as an alternative to operating or net income
(computed in accordance with GAAP) as an indicator of Providence Journal
Cable's performance, or as an alternative to cash flows from operating
activities (computed in accordance with GAAP) as a measure of liquidity.
148
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PROVIDENCE JOURNAL CABLE
Four cable entities comprise all of the cable television systems of
Providence Journal Cable owned or partially owned by Providence Journal. These
entities are Colony (a wholly owned subsidiary of Providence Journal), Colony
Cablevision (a division of Providence Journal), Copley/Colony (a 50% owned
joint venture of Colony), and King Videocable (a 50% owned joint venture of
Providence Journal). The selected financial data contained in the text and
tables herein was prepared on a combined basis for Providence Journal Cable
with appropriate elimination of intercompany transactions, allocation of
corporate overhead and interest expense.
Although Providence Journal accounted for the operations of investments in
the 50% joint ventures under the equity method, the operations of such
ventures have been fully combined on the basis that they are managed, together
with all wholly owned and majority owned cable television businesses, by
Providence Journal and its subsidiaries.
Providence Journal Cable's revenue growth has been primarily achieved by
internal subscriber growth, acquisitions and increases in rates for services
provided. Recent significant acquisitions include the purchase of a 50%
ownership interest in King Videocable (as a part of Providence Journal's
investment in KHC on February 25, 1992) and the purchase of cable systems of
Colony Cablevision (formerly owned by Palmer) in November and December 1992.
These two acquisitions more than doubled the number of basic subscribers
serviced by Providence Journal Cable.
Federal laws reregulating the cable television industry were implemented by
the FCC effective September 1, 1993 and have limited Providence Journal
Cable's ability to increase rates for certain subscriber services and to
restructure its rates for certain services. The reregulation activities, which
are further discussed under "Recent Legislation" herein, were designed to
reduce subscriber rates and limit rate increases for certain cable services.
Substantially all of Providence Journal Cable's revenues are earned from
subscriber fees for basic cable programming and premium television services,
the rental of converters and remote control devices, and installation fees.
Additional revenues are generated by pay-per-view programming fees, the sale
of advertising, and payments received as a result of revenue sharing
agreements for products sold through home shopping networks.
RESULTS OF OPERATIONS. This discussion should be read in conjunction with
the accompanying audited financial statements and notes thereto. The results
of operations for Providence Journal Cable represent the combined operations
of all of the cable television systems owned or partially owned by Providence
Journal. These historical financial results do not necessarily reflect the
results of operations that would have existed had Providence Journal Cable
been an independent company.
149
The following table summarizes Providence Journal Cable's financial results:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Basic cable service.......... $141,262 $205,846 $202,654 $101,906 $104,429
Premium cable service........ 38,193 44,643 45,395 22,602 22,789
Advertising sales............ 9,946 14,042 17,410 7,649 7,815
Pay-per-view................. 3,727 4,887 5,145 2,687 3,052
Other........................ 6,556 12,175 14,389 6,860 7,295
-------- -------- -------- -------- --------
Total Revenues............. 199,684 281,593 284,993 141,704 145,380
Operating expenses........... 76,523 105,037 114,868 56,528 59,941
Selling, general and
administrative expenses..... 45,180 62,446 58,152 29,650 29,106
Depreciation and
amortization................ 58,750 99,554 85,783 45,610 42,314
Allocation of corporate
overhead.................... 6,513 9,651 11,034 3,703 3,818
-------- -------- -------- -------- --------
Operating income........... 12,718 4,905 15,156 6,213 10,201
Allocated interest expense
from parent companies....... (16,516) (39,938) (41,318) (20,035) (20,880)
Other, net................... 591 (1,841) 555 1,121 1,545
-------- -------- -------- -------- --------
Loss before income taxes and
cumulative effect of change
in accounting principle..... (3,207) (36,874) (25,607) (12,701) (9,134)
Provision for income taxes... 694 (11,219) (8,182) (3,994) (2,621)
-------- -------- -------- -------- --------
Loss before change in
accounting principle........ (3,901) (25,655) (17,425) (8,707) (6,513)
Cumulative effect of change
in accounting principle..... 4,831 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before minority
interests................... $ 930 $(25,655) $(17,425) $ (8,707) $ (6,513)
======== ======== ======== ======== ========
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- ------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
SUBSCRIBER INFORMATION:
Basic Subscribers............ 722,000 738,000 771,000 744,000 773,000
Premium Subscriptions........ 440,000 467,000 510,000 494,000 512,000
Premium Penetration.......... 61.0% 63.3% 66.2% 66.4% 66.2%
Monthly Revenue per Average
Basic Subscriber............ $ 30.78 $ 30.63 $ 29.44 $ 29.92 $ 29.50
Average Monthly Premium
Revenue per Subscription.... $ 8.80 $ 8.22 $ 7.70 $ 7.77 $ 7.36
Six Months Ended June 30, 1995 Compared with Six Months Ended June 30,
1994. Revenues rose 2.6% in the first six months of 1995 compared with the same
period in 1994. Basic subscribers were up minimally in the first six months to
773,000 from the December 31, 1994 level. Due to the seasonality inherent in
certain of Providence Journal's cable systems in Florida, the number of basic
subscribers may fluctuate over the course of the year. Monthly revenue per
average basic subscriber was $29.50 in the first six months of 1995 compared
with $29.92 in the comparable period of 1994. Revenue per subscriber decreased
because of the FCC mandated rate reductions implemented on July 14, 1994 and
refund reserves accrued as a result of rate reviews by local and FCC
authorities. (See "Recent Legislation".)
Premium cable service revenue increased 1.0% while premium subscriptions
increased from 494,000 at June 30, 1994 to 512,000 as of June 30, 1995. The
512,000 premium subscriptions represent a minimal increase from the December
31, 1994 level, as new promotional programs attracted more subscribers. The
premium penetration remained flat at 66.2% during the six months ended June 30,
1995. Average monthly
150
premium revenue per subscription was $7.77 in last year's first six months
compared with $7.36 in 1995's first six months. This decline is due to
promotional programs used to attract new premium subscribers at discounted
rates.
First six months' operating, selling, general and administrative expenses in
1995, excluding depreciation and amortization and allocated corporate overhead,
rose 3.3%. The overall increase in expenses was primarily due to higher
programming costs and technical costs related to increased basic subscriber
levels. Depreciation and amortization expense decreased over the prior year's
six months, reflecting a lower asset base.
Operating loss before minority interests declined from $(8.7) million in the
first six months of 1994 to $(6.5) million in the comparable period of 1995
reflecting primarily the improved operating results.
1994 Compared with 1993. Revenues rose 1.2% compared with 1993, reflecting
higher basic subscriber levels. The highest growth in basic subscribers was in
Hialeah, Florida, Los Angeles, California and Minneapolis, Minnesota. Monthly
revenue per average basic subscriber was $29.44 in 1994 compared with $30.63 in
1993. Revenue per subscriber decreased because of the FCC mandated rate
reductions implemented on September 1, 1993, and again on July 14, 1994. (See
"Recent Legislation".)
Premium cable service revenue increased 1.7%. Premium subscriptions increased
from 467,000 at December 31, 1993 to 510,000 as of December 31, 1994. The 9.2%
increase is the result of new promotional programs. The premium penetration
percentage increased from 63.3% to 66.2% during the year ended December 31,
1994. Average monthly premium revenue per subscription was $8.22 in 1993
compared with $7.70 in 1994. This decline is due to promotional programs used
to attract new premium subscribers at discounted rates.
Operating, selling, general and administrative expenses in 1994, excluding
depreciation and amortization and allocated corporate overhead, rose 3.3%. The
overall increase in expenses was primarily due to the following: (1) higher
programming costs; (2) technical costs related to increased basic subscriber
levels; and (3) a change in the method of accounting to expense rather than
capitalize the installation of wiring and additional outlets located in cable
customers' homes. Depreciation and amortization expense decreased versus the
prior year reflecting this change in capitalization policy as well as full
amortization of certain intangible assets associated with the King Videocable
and Colony Cablevision acquisitions.
The increase in allocation of corporate overhead from $9.7 million to $11
million is primarily due to increased compensation costs associated with
executive compensation programs. Corporate overhead has been allocated on the
basis of revenue of Providence Journal Cable to total Providence Journal owned
and managed revenue; however, these charges are not necessarily indicative of
the level of expenses that might have been incurred by Providence Journal Cable
on a stand-alone basis.
Loss before minority interests declined from ($25.6) million to $(17.4)
million due primarily to lower depreciation and amortization expense.
1993 Compared with 1992. Revenues rose 41.0% over the prior year as a result
of full year impact of the acquisitions of Colony Cablevision and King
Videocable. Colony Cablevision added approximately 168,000 basic subscribers to
Providence Journal Cable and Providence Journal's purchase of the Palmer
Systems in December 1992 amounted to an approximate $56 million increase in
revenue from 1992 to 1993. Providence Journal's investment in King Videocable
added approximately 222,000 basic subscribers to Providence Journal Cable as of
February 25, 1992 amounting to an approximate $18 million increase in revenue
from 1992 to 1993. These acquisitions were accounted for as purchases and their
results of operations have been included in the combined financial statements
from the date of acquisition. As a result of these acquisitions, the number of
basic subscribers serviced by Providence Journal Cable more than doubled to
722,000 by the end of 1992. Through further internal growth, basic subscribers
grew by 2.2%, to 738,000 at the end of 1993.
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Monthly revenue per average basic subscriber declined from $30.78 in 1992 to
$30.63 in 1993, reflecting the impact of FCC mandated rate reductions and lower
subscriber rates in acquired companies. Effective September 1, 1993, all of
Providence Journal Cable's systems had their rates set using a benchmark
approach which compares its rates to those which are in effect for cable
systems deemed by the FCC to be facing effective competition. The impact of
adjusting rates to the FCC benchmark was a $4.9 million reduction in Providence
Journal Cable's revenues for the four months ended December 31, 1993.
Premium subscriptions increased from 440,000 in 1992 to 467,000 in 1993, and
the premium penetration percentage increased from 61.0% to 63.3% over the same
period. Average monthly premium revenue per subscription decreased from $8.80
to $8.22 reflecting price discounting in promotional programs targeted to
increase premium subscriptions.
Operating and selling, general and administrative expenses in 1993 increased
by 37.6%, consistent with the 41.0% increase in revenue and reflecting the
full-year impact of Providence Journal's cable system acquisitions. The
increase in operating and selling, general and administrative expenses
associated with the King Videocable and Colony Cablevision acquisitions was
approximately $42 million from 1992 to 1993. Significantly higher depreciation
and amortization expense, which rose 69.5% in 1993, to $99.6 million, reflected
increased capital spending levels in 1992 and 1993, a full year of depreciation
and amortization from the acquisitions and accelerated depreciation of cable
home wiring. Due to provisions of the 1992 Cable Act that effectively
transferred to cable customers ownership of wiring and additional outlets
located in cable customer's homes, Providence Journal Cable reduced the
estimated useful lives of these related assets to reflect customer churn rates
and accelerated depreciation on older related assets, resulting in a $6.8
million increase in depreciation expense.
The increase in allocation of corporate overhead from $6.5 million to $9.7
million in 1993 is primarily due to increased corporate costs associated with
executive compensation programs.
Operating income decreased by 61.4% in 1993. Providence Journal Cable's
revenue growth and operating income are expected to continue to be adversely
affected in 1994 by the full year effect of the FCC's ongoing reregulation
activities.
The loss in 1993 before minority interest of ($25.7) million included
allocated intercompany interest expense of $40 million for the year. The
interest is primarily associated with the intercompany financing of the cable
system acquisitions in 1992. Advances due to parent companies was $593.1
million at December 31, 1993 with an average effective interest rate of 7.6%
for 1993.
1992 income before minority interest of $.9 million reflected a partial year
of intercompany financing charges associated with the King Videocable
acquisition as well as a $4.8 million cumulative benefit from the adoption of
the new accounting standard for income taxes.
LIQUIDITY AND CAPITAL RESOURCES. Providence Journal Cable's cash requirements
are funded primarily by its operating activities. Cash in excess of day-to-day
operating requirements is used to repay intercompany debt as part of shared
cash management systems with its parent companies. If funds are required,
Providence Journal Cable obtains them through advances from its parent
companies. Providence Journal Cable had advances due to parent companies of
$593.1 million and $574.8 million at December 31, 1993 and December 31, 1994,
respectively.
Net cash from operations in 1994 decreased $1.7 million from the prior year
resulting primarily from the impact of rate regulations.
Providence Journal Cable invests heavily in its cable plant, continually
replacing and modernizing its technology by rebuilding and upgrading its
systems, some with fiber-optic cable. Capital expenditures
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increased 69.6% in 1993, continuing a substantial upward trend that began in
1992 and reflecting the expansion of the PJC Cable Business. Providence Journal
Cable spent $49.1 million and $47.8 million on capital expenditures in 1993 and
1994, respectively. Under the terms of the Merger Agreement, Providence Journal
Cable is obligated to spend $55.0 million in capital expenditures on an
annualized basis between December 1994 and the Closing of the Merger.
During 1992, Providence Journal Cable acquired cable television systems for
an aggregate purchase price of $678 million, all of which were financed through
advances from parent companies and other joint-venture financing.
The following table highlights certain items from the combined Statements of
Cash Flows (in thousands):
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 JUNE 30
---------------------------- -----------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- -------
Net cash provided by
operating activities..... $ 53,753 $ 69,940 $ 68,288 $ 34,508 $40,707
Capital expenditures...... (27,391) (49,094) (47,766) (23,142) (25,631)
Principal payments on long
term debt................ (5,000) (15,000) -- -- --
EBITDA. This presentation of EBITDA is part of the presentation of liquidity
and capital resources. EBITDA is defined herein as operating income plus
depreciation, amortization and allocation of corporate overhead. Based on its
experience in the cable television industry, Providence Journal Cable believes
that EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage. EBITDA
should not be considered by the reader as an alternative to net income as an
indicator of Providence Journal Cable's performance or as an alternative to
cash flows as a measure of liquidity. EBITDA and the EBITDA Margin (EBITDA to
Revenues) for the last three years were as follows:
%
EBITDA INCREASE EBITDA
(MILLIONS) (DECREASE) MARGIN
---------- ---------- ------
1992.......................................... $ 78.0 88.9% 39.1%
1993.......................................... $114.1 46.3% 40.5%
1994.......................................... $112.0 (1.8%) 39.3%
Six months ended June 30, 1995................ $ 56.3 38.7%
The substantial increases in EBITDA in 1992 and 1993 were due in part to
acquisitions of Colony Cablevision and King Videocable in 1992. The decrease in
EBITDA for 1994 reflects the impact of recent FCC regulations.
Effects of Inflation. The net effect of inflation on operations has not been
material in the last few years because of the relatively low rate of inflation
during this period and because of efforts of Providence Journal Cable to lessen
the effect of rising costs through a strategy of improving productivity,
particularly through the implementation of incentive bonus plans, controlling
costs and, where regulatory and competitive conditions permit, increasing
rates.
Recent Legislation. In October 1992, Congress enacted the 1992 Cable Act.
This legislation made significant changes to the legislative and regulatory
environment in which the cable industry operates, particularly in the areas of
rate regulation and the retransmission of broadcast television signals.
The FCC was directed to establish regulations to implement various provisions
of the 1992 Cable Act, including rate regulation. An FCC mandated basic and
cable programming service rate freeze became
153
effective in April 1993 and concluded May 15, 1994. The April 1993 rate
regulations also adopted a benchmark price cap system for measuring the
reasonableness of existing basic and cable programming service tier rates
(other than per-event or per-channel service rates), and a formula for
evaluating future rate increases. Alternatively, cost-of-service measurements
to justify rates above the applicable benchmarks are also permitted. In
general, under the April 1993 rules, the reduction for existing basic and cable
programming service tier rates was the greater of the applicable benchmark
level or the rates in force as of September 30, 1992, minus 10 percent adjusted
forward for inflation. Future rate increases may not exceed an inflation-
indexed amount, plus increases in certain costs such as taxes, franchise fees
and programming costs that exceed the inflation index. Cost recovery and
pricing allowances are also provided for new programming services added to the
regulated tiers. The April 1993 rate regulations became effective September 1,
1993. Basic and cable programming service tier rates, related equipment and
installation charges, and additional outlet charges were adjusted so as to
bring these rates and charges into compliance with the applicable benchmark.
The FCC's September 1993 guidelines were significantly modified in February
1994. Among other things, the FCC ordered a further reduction of 7% in basic
and cable programming service tier rates in effect on September 30, 1992, if
those rates exceeded a new per-channel benchmark recomputed by the FCC. This
would result in an overall reduction of 17% in basic and cable programming
service tier rates in effect on September 30, 1992. The guidelines to implement
this most recent modification were released on March 30, 1994 and the
regulations became effective May 1994 with allowable extension to July 1994.
On December 22, 1994, the FCC issued an Order concerning one cable television
system of Providence Journal Cable. The Order ruled that certain "a la carte"
channels offered by the system were subject to rate regulation and directed the
system to recalculate its maximum permitted rates as determined under rules and
regulations of the FCC. Providence Journal Cable has filed a petition for
reconsideration of this decision with the FCC. If such petition does not result
in adequate relief, Providence Journal Cable can, and presently intends to,
pursue its remedy of an appeal to the FCC and/or the courts. In addition, in
March and April, 1995, the FCC issued rate orders on two cable franchises of
Providence Journal Cable. The FCC has agreed to stay final action on these
orders until resolution of the aforementioned order. It is too early for
management to determine whether any rate refunds and prospective rate
reductions to subscribers may result from these actions, and no refunds have
been accrued.
Additionally, on July 6, 1995, the City of Los Angeles issued a draft order
that the a la carte channels offered by the cable system servicing part of the
Los Angeles area should be treated as cable programming service tiers and
therefore be subject to regulation. Providence Journal Cable has documented its
opposition to the City's conclusions and intends to seek relief with an appeal
to the FCC, if necessary. Because of the uncertainty as to the ultimate outcome
on reconsideration by the City, or with appeal to the FCC, Providence Journal
Cable has established an accrual for potential rate refunds of $1.9 million.
It is possible that pursuant to further review by the franchising authorities
and the FCC, certain additional rate reductions may be required. Various cable
operators have pending litigation challenging certain aspects of the 1992 Cable
Act. The outcome of this litigation cannot be predicted.
154
DESCRIPTION OF CONTINENTAL
BUSINESS
Continental is currently the fifth largest cable television system operator
in the United States. Continental's five management regions operate cable
television systems/1/ in 16 states, principally in suburban areas and mid-
sized cities. As of June 30, 1995, Continental's systems and those of its
domestic affiliates passed approximately 5,437,000 Homes and provided cable
service to approximately 3,133,000 basic subscribers./2/ Giving effect to the
Merger and other acquisitions described herein, Continental anticipates that
it will become the third largest cable television system operator in the
United States, passing approximately 7,116,000 Homes and serving approximately
4,117,000 basic subscribers in 20 states. Continental also participates in
cable television and telecommunications ventures outside of the United States.
Continental owns, subject to receipt of regulatory approvals, an approximate
50% interest in the largest cable television operator in Argentina, which
currently serves over 600,000 subscribers; has a 25% equity interest in a
joint venture that is constructing a cable television system (which
Continental will manage for a period of time) to serve Singapore's
approximately 820,000 households; and has formed a joint venture in Australia
in which Continental currently holds a 46.5% equity interest and which is
constructing a network to provide cable television, local telephone and a
variety of advanced broadband interactive services to business and residential
customers. Continental continues to pursue other international cable
television and telecommunications investments. Continental recently signed a
memorandum of understanding relating to the provision of cable television,
telephony, multimedia and interactive services in Japan. In addition,
Continental has made investments in (i) the telecommunications and technology
industries, including companies offering competitive access telephony and DBS
service in the United States and (ii) various programming ventures.
Continental's objective is to further build its subscriber base by acquiring
and retaining customers that will subscribe to a broad range of video and
telecommunications services. This objective is achieved through the pursuit of
the following key operating principles: (i) the continued expansion of its
nationwide operating scale (as measured by Homes passed); (ii) the formation
of large regional system clusters in demographically attractive markets; (iii)
the continued development of locally responsive management; (iv) the
development of technologically advanced networks capable of providing both
expanded video and telecommunications services; (v) a focus on targeted
marketing; and (vi) a commitment to superior customer service and community
relations.
Continental intends to apply these operating principles, as appropriate, in
its international operations as they develop. (See "International
Operations".)
DOMESTIC CABLE TELEVISION BUSINESS
Cable television is a service that delivers a wide variety of channels of
television programming, consisting primarily of video entertainment, sports
and news, as well as informational services, locally originated programming
and digital radio programming, to the homes of subscribers who pay a monthly
fee for the service. Television and radio signals are received by off-air
antennas, microwave relay systems and satellite earth stations and then are
modulated, amplified and distributed to subscribers' homes over networks of
coaxial and fiber-optic cables.
--------
/1/Each of Continental's systems includes all areas served from a single
"headend"; thus, a system may include one or more communities or franchise
areas.
/2/A "basic subscriber" means a person who subscribes, at a minimum, to
Continental's Basic Broadcast Tier ("BBT"), which generally consists of
broadcast television signals available locally off-air, local origination and
public, educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis, by dividing aggregate BBT
bulk-billed revenues by the stated BBT rate. In reporting subscriber and other
data for systems not controlled or managed by Continental, only that portion
of data corresponding to Continental's percentage ownership is included. (See
"Description of Continental--Domestic Cable Television Business".)
155
Cable television systems typically are constructed and operated under
nonexclusive franchises awarded by local governmental authorities for a
specified multi-year term. Franchises typically contain many conditions, such
as deadlines for the commencement or completion of construction; fees to
government authorities; conditions of service to schools and other public
institutions; and the maintenance of insurance and indemnity bonds. The
provisions of franchises are subject to both the 1984 Cable Act and the 1992
Cable Act. Continental has never had a franchise revoked, and to date, all of
Continental's franchises have been renewed or extended at their expirations,
frequently on modified but satisfactory terms.
Continental's systems offer subscribers various levels (or "tiers") of cable
services consisting of television signals available off-air in any locality,
television signals from so-called "superstations" originating in distant cities
(such as WTBS, WGN and WWOR), various satellite-delivered, non-broadcast
channels (such as ESPN, CNN, USA, and MTV), displays of information featuring
news, weather and stock market reports and programming originated locally by
the systems (such as public, educational and governmental access channels).
Continental's systems also provide premium services to basic subscribers for an
extra monthly charge. These premium services include HBO, Cinemax, Showtime,
The Movie Channel, The Disney Channel and certain regional sports networks,
which are satellite-delivered channels that consist principally of feature
films, live sporting events and other special entertainment features, usually
presented without commercial interruption. Certain of Continental's systems
also carry "multiplexed" premium services, which are available from certain
premium-service providers such as HBO. Multiplexing allows a premium-service
provider to offer its programming on two or more channels simultaneously, but
scheduled differently, so as to provide the subscriber with an expanded choice
of programs at any given time.
Although services vary from system to system because of differences in
channel capacity and viewer interest, each of Continental's systems offers a
BBT as the lowest-priced tier (consisting generally of broadcast television
signals available locally off-air, local origination and public, educational
and governmental access channels), one or more Cable Programming Service
("CPS") tiers (which include satellite-delivered cable programming services)
and several premium and pay-per-view channels. Subscribers may choose various
combinations of such services. In a limited number of Continental's systems,
certain satellite-delivered, non-broadcast services are currently offered as a
New Product Tier ("NPT"), which the FCC has indicated it will forebear from
regulating. (See "Legislation and Regulation" for a description of recent
legislation and regulation which limits Continental's ability to price and tier
certain programming services.) Continental may offer such NPTs to subscribers
in additional systems as it expands channel capacity in such systems.
A customer generally pays an initial installation charge and fixed monthly
fees for BBT, CPS, NPT and premium programming services. Such monthly service
fees constitute Continental's primary source of revenues. In addition to these
monthly revenues, Continental's systems generate revenues from additional fees
paid by customers for pay-per-view programming of movies and special events and
from the sale of available advertising spots on advertiser-supported
programming. Continental's systems also offer home shopping services, from
which Continental receives a share of revenues from sales of merchandise in its
service areas.
DOMESTIC OPERATING STRATEGY
Continental's objective is to further build its subscriber base by acquiring
and retaining customers that will subscribe to a broad range of video and
telecommunications services. Continental's key operating principles are:
OPERATING SCALE. Continental is committed to preserving and further expanding
its operating scale, as measured by the number of Homes passed by its systems,
through internal growth and strategic acquisitions. Continental believes that
operating scale is critical to its ability to meet the growing capital and
technical requirements that are vital to its long-term competitiveness and will
enable it to realize lower programming costs, enhance its ability to develop
and deploy new technologies, provide new services and improve operating
margins.
156
As of June 30, 1995, Continental's systems and those of its domestic
affiliates served approximately 3,133,000 basic subscribers and passed
approximately 5,437,000 Homes, making it the fifth largest cable television
company in the United States. Giving effect to the Merger and the other
acquisitions described herein (certain of which are still pending),
Continental anticipates that it will become the third largest cable television
operator in the United States, passing approximately 7,116,000 Homes and
serving approximately 4,117,000 basic subscribers in 20 states.
LARGE REGIONAL SYSTEM CLUSTERS. Since its inception, Continental has
concentrated its operations in large regional system clusters located
primarily in suburban communities and mid-sized cities. Continental has built
and acquired cable television systems in communities that are contiguous or in
close proximity to its existing systems in order to achieve greater operating
efficiencies. Continental believes that clustering creates operating
efficiencies through reduced marketing and personnel costs and lower capital
expenditures, particularly in systems where cable service can be delivered to
several communities within a single region through a central headend reception
facility. In addition, regional system clusters are attractive to advertisers
in that they maximize the scope and effectiveness of advertising expenditures.
Continental is also exploring opportunities to enlarge and enhance key
regional system clusters by exchanging certain systems with other cable
television operators. Such transactions would enable Continental to further
realize the benefits of clustering without further commitment of capital.
Continental's systems have attractive demographics and are geographically
diverse. Areas served by Continental's systems have a median household income
of approximately $41,400, versus the national median of approximately
$34,600/3/. Continental's systems are currently located in 16 states and are
divided into five management regions, with no single region accounting for
more than 27% of total basic subscribers. This geographic diversity reduces
Continental's exposure to an economic downturn in any one particular region.
LOCALLY RESPONSIVE MANAGEMENT. Continental has developed a decentralized and
locally responsive management structure that brings significant management
experience and stability to every region and allows Continental to respond
effectively to the specific needs of the communities it serves. Broad
operating authority has been delegated to the Senior Vice President managing
each region, who has, on average, 12 years of experience with Continental and
18 years within the cable industry. Certain employees, including the regional
Senior Vice Presidents, are awarded equity compensation in the form of
restricted stock grants, which vest over time, as an additional incentive to
maximize stockholder value. Continental believes that the experience,
stability and commitment of its regional management is integral to its ability
to provide superior customer service, maintain strong community relations and
maximize growth potential.
TECHNOLOGICALLY ADVANCED SYSTEMS. Continental strives to maintain the
highest technological standards in the industry and is continually upgrading
its systems. By deploying high-capacity fiber-optic cable and addressable
technology in its network, Continental continues to develop the foundation
from which to provide a broad range of video and telecommunications services.
Fiber-optic cable generates the capacity necessary to provide such services,
while addressable technology is essential to realize the full growth potential
of pay-per-view, tiered programming offerings such as NPTs, and other
interactive services. Continental's continuing investment in its systems
enhances picture quality and signal reliability, reduces operating costs, and
improves overall customer satisfaction.
--------
/3/Median household income data in this Joint Proxy Statement-Prospectus are
derived from demographic information provided by Equifax Marketing Decision
Systems, Inc. The demographic information was provided by zip code area and
was averaged by Continental (weighted by the number of households in each zip
code area) (i) for all of the zip code areas Continental serves and (ii) for
the zip code areas in each of Continental's five domestic cable television
management regions. Equifax Marketing Decision Systems, Inc. developed the
1994 demographic information by adjusting 1990 census data to take into
account estimated growth rates which were developed by the WEFA Group
(formerly Wharton Econometric Forecasting Associates and Chase Econometrics).
157
As of June 30, 1995, Continental provided at least 54-channel capacity in
systems serving over 75% of its basic subscribers. In addition, Continental has
addressable technology in systems serving over 85% of its basic subscribers.
Continental believes that it is among the leaders in the cable industry in
the deployment of fiber-optic cable. Continental is deploying a fiber-to-the-
serving-area architecture (which represents a hybrid network of fiber-optic and
coaxial cable) in all of its system rebuilds and upgrades, and has replaced
more than 25% of the total existing trunk cable for its systems with fiber-
optic cable. Such a fiber-to-the-serving-area architecture will position
Continental to effectively provide a broad range of services in the future,
while preserving the flexibility to adapt to changing technologies. In
addition, Continental uses fiber-optic cable for point-to-point applications,
such as connecting or eliminating headends or microwave relay sites.
Continental plans to continue to upgrade its systems with addressable
technology and fiber-optic cable and anticipates that 80% of its basic
subscribers will be served by systems with at least 78-channel capacity by the
end of 1997. Continental will also begin to deploy digital converter boxes, as
they become commercially available, to certain basic subscribers. Digital
compression significantly increases the number of video channels that can be
carried on a cable television system and greatly enhances Continental's ability
to provide advanced video and telecommunication services. In addition to
upgrading its systems, Continental is deploying an information technology
system in order to take advantage of the growing success of on-line services,
home sales of personal computers and widespread Internet access.
Continental has recently installed digital advertising insertion systems in
seven markets including Boston, Richmond, Jacksonville, Pompano, Dayton, Fresno
and Detroit. These digital advertising insertion systems allow Continental to
download advertisements electronically to certain headends, thereby
significantly enhancing the flexibility and reliability of Continental's
advertising sales. Continental's New England region employs high-speed
Asynchronous Transfer Mode switches, which, in addition to facilitating its
advertising insertion efforts, have other potential uses, including improving
Continental's ability to provide expanded video, voice and data offerings.
TARGETED MARKETING. As part of its operating strategy, Continental seeks to
maximize revenues by increasing subscriptions to BBT, CPS, NPT, premium and
pay-per-view programming services through targeted marketing, combined with a
local focus on customer service and community relations. Continental markets
cable television services through telemarketing, direct mail and door-to-door
solicitation, reinforced by radio, cable television, off-air television and
newspaper advertising. Continental seeks to attract and retain long-term
subscribers and increase the percentage of Homes in its service areas that
subscribe to expanded service offerings. Continental believes that its
marketing efforts, coupled with its technologically advanced systems and the
demographic profile of its subscriber base, are essential to its ability to
sustain pay-to-basic penetration rates which have consistently exceeded the
industry average. As of June 30, 1995, Continental's 85.1% ratio of premium
service subscriptions to basic subscribers was one of the highest in the
industry, according to Cable TV Investor, a leading industry newsletter
published by Paul Kagan & Associates. As a result, Continental's total monthly
revenue per average basic subscriber of $35.65 as of June 30, 1995, is among
the highest in the cable industry.
Continental has been recognized repeatedly by the cable industry for its
marketing efforts. Each year the Cable Television Administration and Marketing
Society, Inc. ("CTAM"), the industry's marketing professional society, presents
"MARK" Awards to companies with the best marketing efforts in the industry.
Continental has won significantly more MARK awards over the last five years
than any other cable company.
CUSTOMER SERVICE AND COMMUNITY RELATIONS. Continental believes that it is an
industry leader in addressing the needs of its local customers. Continental
received the "Operator of the Year" Award, which rated it the "most admired
company in the cable industry," from Cablevision Magazine for the three years
in which the award was based upon a poll of its readers (1988-1990). Through
the use of surveys, focus groups, and other research tools, and by continually
investing in operating systems and training programs,
158
Continental believes it has created one of the most extensive customer-service
programs in the industry, supported by training centers in each of its regions.
To improve its customer-service efforts, Continental is in the process of
incorporating wide-area computer networks into its customer-service functions,
which will enable it to review customer accounts more easily. In addition,
these desktop technologies will bring Continental into closer contact with
customers and enable it to provide customer service more efficiently.
Continental's emphasis on customer service has helped it to foster and
sustain good relationships with the communities it serves. With 19 Beacon
Awards in the past three years, Continental has received more public service
awards from the Cable Television Public Affairs Association ("CTPAA") than any
other cable company during that period. In addition, CTPAA awarded to Amos B.
Hostetter, Jr., Continental's Chairman and CEO, its 1992 Crystal Beacon Award
for his and Continental's commitment to public affairs. In 1993 and 1994,
Continental received the Partnership in Education award for its outstanding
record in partnering with local schools. In 1991 and 1992, Continental also won
Community Action Network Awards for applying the resources of cable television
to help solve social problems in various communities. In 1990, Continental
received a Broadcasting Award from the National Education Association ("NEA")
for its work in supporting education, the first time the NEA had so recognized
a cable operator. Continental is a founder of Cable in the Classroom, an
industry-wide initiative providing 525 hours of commercial-free educational
programming each month to more than 3,000 public and private schools in the
communities it serves. Amos B. Hostetter, Jr. served as the first Chairman of
Cable in the Classroom.
Continental believes that its focus on customer service and community
relations will provide a competitive advantage as it plans to market a broader
range of video and telecommunications services to Homes in its operating
regions, frequently in competition with other providers of these services. (See
"Competition".)
EXPANDED SERVICE OFFERINGS. Continental believes that the operating strategy
described above has generated and will continue to enable it to generate
additional revenues from numerous sources, as customer demand and regulations
permit. Continental believes that the delivery of superior and diverse services
to its subscribers is a key component in its continued success and growth.
Increased channel capacity and addressability will enable Continental to
offer expanded programming services such as "tiered" and "multiplexed"
services. Continental believes that the "tiering" of programming services,
which includes providing NPTs, leads to increased customer acceptance by
offering subscribers a wider variety of programming and pricing packages from
which to choose. In addition, Continental currently uses "multiplexing" in many
systems to enhance the value of certain of its premium service offerings.
In recent years, Continental has begun to generate revenues from additional
sources, including advertising, pay-per-view and home shopping services.
Continental derives revenues from the sale of advertising time on advertising-
supported, satellite-delivered networks such as ESPN, MTV and CNN, as well as
on locally originated programming. Continental's advertising revenues increased
from $18 million for the year ended December 31, 1989 to $58 million for the
year ended December 31, 1994 (representing a 26% compound annual growth rate in
advertising revenues) and accounted for 4.8% and 4.7% of Continental's total
revenues for the year ended December 31, 1994 and the six months ended June 30,
1995, respectively. Continental has increased its advertising sales through its
participation in several regional cable advertising interconnects (associations
of cable companies designed to effectively deliver a large market to
advertisers), as well as through the deployment of advanced technologies,
including digital advertising insertion systems. Continental also participates
in the national development of cable advertising through its ownership interest
in National Cable Communications, L.P. ("NCC"), the largest cable advertising
representation firm in the country.
Pay-per-view programming is offered to subscribers on an individual event
basis and consists of recently released movies and special events (including
boxing matches, other sporting events and concerts). Continental realized 14%
compound annual growth in pay-per-view revenues from December 31, 1989 to
159
December 31, 1994; for the year ended December 31, 1994, and the six months
ended June 30, 1995 pay-per-view revenues accounted for approximately 2% of
Continental's total revenues. Continental experienced a 5% decline in pay-per-
view revenues for the year ended December 31, 1994 as compared to 1993, due
primarily to an industry-wide lack of availability of special events.
Continental believes that increased channel capacity and the further deployment
of addressable technology in its systems will enable it to expand the number of
channels dedicated to pay-per-view services and increase the number of
subscribers with access to pay-per-view programming.
Continental also receives a percentage of the proceeds from subscribers'
purchases of merchandise offered on home shopping programming services such as
QVC, Inc. ("QVC"), Home Shopping Network ("HSN") and Valuevision. Combined
advertising, pay-per-view and home shopping revenues have increased at a
compound annual rate of 22% over the past five years. Continental believes that
these and other services could become more substantial sources of revenue over
time, however, there can be no assurance in this regard.
REGULATORY RESPONSE
In October 1992, Congress enacted the 1992 Cable Act, which, among other
things, authorizes the FCC to set standards for governmental authorities to
regulate the rates for certain cable television services and equipment and
gives local broadcast stations the option to elect mandatory carriage or
require retransmission consent.
Pursuant to authority granted under the 1992 Cable Act, the FCC in April 1993
promulgated rate regulations that established maximum allowable rates for cable
television services, except for services offered on a per-channel or per-
program basis. On February 22, 1994, the FCC adopted a revised regulatory
scheme which included, among other things, interim cost-of-service standards
and a new benchmark formula. In creating the new benchmark formula, the FCC
authorized a further reduction in rates for certain regulated services. As a
result, rates for certain regulated services currently in effect were then
reduced by as much as 17% below their September 30, 1992 levels if they
exceeded the new per-channel benchmark. The old benchmark formula called for a
reduction of up to 10%.
Under current law both the FCC and local franchise authorities have the
ability to regulate cable rates. Local franchise authorities may certify to the
FCC in order to regulate the rates charged for BBT services and equipment and
installation. Currently, local franchise authorities in systems representing
approximately 38% of Continental's BBT subscribers have certified to regulate
rates. The rates charged for CPS are regulated by the FCC if a subscriber or
other interested party filed a valid complaint with the FCC on or before
February 28, 1994, or files a valid complaint within 45 days of a future CPS
rate increase. Complaints were filed with the FCC concerning CPS rates covering
approximately 52% of Continental's CPS subscribers. Premium services such as
HBO and Showtime, NPTs and pay-per-view channels, remain unregulated. In
addition, systems serving approximately 2% of Continental's subscribers are
subject to effective competition as defined by the 1992 Cable Act and are
thereby exempt from regulation. By law, local franchise authorities must
observe the rate regulation rules established by the FCC. The primary means
established by the FCC for regulating both BBT and CPS rates uses certain
formulas or "benchmarks" to establish the applicable tier rate. Equipment rates
are set based on actual cost plus a reasonable return and allowance for taxes.
The FCC also allows cable operators to use cost-of-service showings to justify
rates higher than the otherwise applicable benchmark, if the benchmark formulas
do not yield a rate sufficient to cover costs and yield an appropriate return
on a cable operator's investment. Companies electing to justify rates using
cost-of-service instead of the benchmark methodology initially were required by
the FCC to rely on general rate-making principles. After the first round of
cost-of-service justifications were filed, the FCC issued interim cost-of-
service regulations, but it has not yet adopted final rules.
160
After extensive evaluation of cost-of-service principles and economic and
legal analyses by experts in the rate regulation area, Continental decided to
defend certain of its service rates using the FCC's benchmark methodology in
regulated systems serving approximately 20% of its BBT subscribers and 24% of
its CPS subscribers, and certain of its service rates using the cost-of-service
methodology in regulated systems serving approximately 18% of its BBT
subscribers and 29% of its CPS subscribers. The decision to rely on cost-of-
service showings was based in part on the fact that Continental's systems
generally have substantially higher channel capacities and addressability than
the industry as a whole, reflecting greater capital investment on a per
subscriber basis. Having decided to pursue the cost-of-service process in some
of its systems, Continental added the resources and availed itself of the
expertise needed to support the filings both at the FCC and locally.
On August 3, 1995, the Social Contract between Continental and the FCC was
adopted. The Social Contract covers all of Continental's existing franchises,
including those that are currently unregulated, and is the first comprehensive
rate agreement involving cable television ever approved by the FCC. The Social
Contract is designed to (1) assure fair and reasonable rates for Continental's
cable service customers; (2) improve Continental's cable service by
substantially upgrading the channel capacity and technical reliability of its
domestic cable systems; and (3) reduce the administrative burden and costs of
regulation for local governments, the FCC and Continental. The Social Contract
settles Continental's pending cost-of-service rate cases and its benchmark CPS
tier rate cases. Benchmark BBT cases will be resolved by Continental and local
franchising authorities. As part of the Social Contract, Continental agrees to,
among other things, (i) invest at least $1.35 billion in domestic system
rebuilds and upgrades from 1995 through 2000 to expand channel capacity and
improve system reliability and picture quality, (ii) make in-kind refunds to
affected subscribers totalling approximately $9.5 million and (iii) reduce all
of its BBT regulated and unregulated rates, as described below. The resolution
of pending rate cases is without any finding by the FCC of any wrongdoing by
Continental.
Pursuant to the Social Contract, Continental agrees to convert, by no later
than January 1, 1996, all its existing BBT services to a low price "lifeline
basic" tier by setting rates at levels specified in the Social Contract and
then reducing those rates 15% to 20%. The specified levels of BBT rates before
the reduction are: (i) the benchmark rates, where Continental defended
regulated rates by the FCC's benchmark formula; (ii) the lower of the current
rate or the benchmark rate, where Continental defended regulated rates using
the cost-of-service methodology; and (iii) current rates in unregulated
franchise areas. Continental must reduce the BBT rates by 15%, but it has
discretion to reduce them as much as 20% where BBT rates in franchise areas
within a single system vary and the deeper reduction would achieve greater
uniformity of rates. The programming for the "lifeline basic" tier (consisting
generally of broadcast television signals locally available off-air, local
origination and public, educational and governmental access channels) will be
maintained for the life of the Social Contract. The Social Contract will allow
Continental to offset BBT revenue reductions resulting in the creation of
"lifeline basic" tiers with adjustments to rates on its CPS tiers. In the
future, rates for the "lifeline basic" tier can be increased for external cost
increases and inflation. Local franchise authorities will be able to opt out of
the BBT refund provision of the Social Contract with respect to the cost-of-
service BBT cases over which they have jurisdiction and independently resolve
with Continental any refund amounts for the 12 months preceding the "lifeline
basic" tier restructuring. In some cases, Continental has waived the 12 month
rule and must defend its rates under cost-of-service principles from the start
of regulation until rates are restructured. Local franchise authorities may not
opt out of any other provisions of the Social Contract. In unregulated areas or
in areas where rates were defended using the FCC's benchmark formula, local
franchise authorities may not opt out of any provisions of the Social Contract.
By January 1, 1996, (i) all regulated CPS rates that are determined
according to the FCC's benchmark formula will be set at the benchmark and (ii)
all regulated CPS rates that are currently defended using the cost-of-service
methodology, as well unregulated CPS rates, will be maintained at current
levels. In each case,
161
Continental will be permitted to adjust its CPS rates to offset the 15% to 20%
reductions in its BBT and to allow for external cost increases, inflation and
channel additions permitted by the FCC's "going forward" rules. Under the
"going forward" rules, Continental, along with other cable operators, during
the three-year period beginning January 1, 1995, is permitted, subject to
limits prescribed in those rules, to add new services and to reflect the cost
of those new services by an amount not to exceed $.20 per added channel, plus
the actual license fees for the added channels not to exceed $.30 per added
channel (the "Going Forward Rules".)
Pursuant to the Social Contract, Continental is permitted to conduct a second
round of channel additions during the three-year period commencing January 1,
1998 on the same terms as the first round of the Going Forward Rules.
Continental is the first cable operator that has been be afforded a second
round of Going Forward channel additions.
Pursuant to the Social Contract, Continental is permitted to average broad
categories of equipment and various installation costs for all its systems on a
state-wide or region-wide basis, rather than on a franchise by franchise basis.
Those rates will be reviewed and approved by the FCC, subject to enforcement by
local franchise authorities.
Finally, Continental is permitted on each system to move up to four existing
services on CPS tier(s) to a single Migrated Product Tier, provided the
Migrated Product Tier is offered without requiring customers to purchase any
tier other than the BBT. The rates of the Migrated Product Tier will be
regulated in accordance with price limits contained in the Social Contract
until January 1, 1997, at which point Continental systems may elect to convert
their Migrated Product Tiers into NPTs, as defined by the Going Forward Rules,
provided the tiers continue to be offered without requiring customers to
purchase any tier other than the BBT. The rates for the NPTs are regulated by
market forces. (See "Legislation and Regulation--Federal Regulation--Rate
Regulation".) In addition, Continental has the right to add an unlimited number
of new channels to its Migrated Product Tier at $.20 per channel, plus the
actual license fees for the added channels.
Continental has the right to petition the FCC to incorporate future
acquisitions of cable television systems under the Social Contract. No
determination has been made at this time on whether or not to seek to include
Providence Journal Cable and other acquisitions under the Social Contract. (See
"Domestic Acquisitions and Investments--Domestic Acquisitions".)
The rate restructuring, Migrated Product Tier and "going forward" adjustments
that Continental is implementing under the Social Contract will continue to
apply to cable systems divested by Continental through a system sale or trade.
Other rights and obligations will apply only if the new owner notifies the FCC
that it agrees to be bound by the same or similar terms and conditions as those
contained in the Social Contract. Continental will not be relieved of its total
investment requirement under the Social Contract by reason of these
divestitures.
DEVELOPMENT OF CONTINENTAL AND ITS BUSINESS
From Continental's inception through the early 1980's, the majority of its
growth was attributable to constructing, operating and marketing new cable
television systems in the United States. Continental's growth since then is
largely attributable to targeted marketing of its basic and premium services,
to line extensions within its existing franchise areas and to the purchase and
development of existing cable television systems, which have typically been
contiguous or in close proximity to Continental's existing systems. More
recently, Continental's growth has been supplemented by ancillary revenue
sources, including advertising, pay-per-view movies and events and home
shopping revenues. In addition, Continental has made investments in
(i) the telecommunications and technology industries, including companies
offering competitive access telephony and DBS service in the United States;
(ii) cable television businesses in certain international markets where growth
prospects are attractive; and (iii) programming, including, among others,
investments in Turner Broadcasting System, Inc. ("Turner"), E! Entertainment
Television, Inc. ("E!") and New England Cable News. (See "Domestic Acquisitions
and Investments," "International Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Continental--
Liquidity and Capital Resources".)
162
The following table summarizes the growth of Continental and its affiliates
within the United States since December 31, 1991.
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------------------ ---------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
Homes Passed by
Cable(1)............... 4,880,000 4,981,000 5,192,000 5,372,000 5,437,000
Number of Basic
Subscribers(2)......... 2,784,000 2,856,000 2,895,000 3,081,000 3,133,000
Basic Penetration(3).... 57.0% 57.3% 55.8% 57.4% 57.6%
Number of Premium
Subscriptions(4)....... 2,603,000 2,545,000 2,454,000 2,635,000 2,666,000
Premium Penetration(5).. 93.5% 89.1% 84.8% 85.5% 85.1%
Monthly Revenue per
Average Basic
Subscriber(6).......... $32.98 $34.46 $35.76 $35.29 $35.65
--------
(1) Estimated dwelling units located sufficiently close to Continental's cable
plant to be practicably connected without any further extension of
principal transmission lines. In reporting Homes passed and subscriber and
other data for systems not controlled or managed by Continental, only that
portion of data corresponding to Continental's percentage ownership is
included.
(2) A "basic subscriber" means a person who subscribes, at a minimum, to
Continental's BBT, which generally consists of broadcast television
stations available locally off-air, local origination and public,
educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis, by dividing aggregate
BBT bulk-billed revenues by the stated BBT rate. In reporting subscriber
and other data for systems not controlled or managed by Continental, only
that portion of data corresponding to Continental's percentage ownership is
included.
(3) Basic subscribers as a percentage of Homes passed by cable. Continental's
basic penetration for the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995 reflects the FCC's rate regulation rules
adopted on April 1, 1993, which for the first time provided a standardized
definition of "households".
(4) Equals the number of premium services subscribed to by subscribers. Premium
services include single channel services offered for a monthly fee per
channel.
(5) Premium subscriptions as a percentage of basic subscribers. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium subscription. This ratio may be greater than 100% if the
average customer subscribes to more than one premium service.
(6) Revenue divided by the weighted average number of basic subscribers for
Continental's consolidated subsidiaries during the twelve month period
ended December 31 for each year presented and the six month period ended
June 30, 1995.
163
DOMESTIC CONTINENTAL SYSTEMS
The following table sets forth certain information related to Continental's
domestic systems and the systems of certain domestic affiliates as of June 30,
1995.
BASIC SERVICE
---------------------------------
HOMES NUMBER OF NUMBER OF
PASSED BASIC BASIC PREMIUM PREMIUM
MANAGEMENT REGIONS BY CABLE SUBSCRIBERS PENETRATION SUBSCRIPTIONS PENETRATION
------------------ --------- ----------- ----------- ------------- -----------
NEW ENGLAND REGION
Eastern New England (MA).. 359,670 242,525 67.4% 194,015 80.0%
Southern New England (MA). 272,457 204,638 75.1% 172,439 84.3%
Northern New England (NH,
ME)...................... 229,637 177,502 77.3% 88,294 49.7%
Western New England (MA,
CT)...................... 221,512 151,308 68.3% 120,736 79.8%
New York
(Haverstraw/Ossining).... 77,751 60,034 77.2% 57,347 95.5%
--------- --------- ---- --------- -----
Total................... 1,161,027 836,007 72.0% 632,831 75.7%
========= ========= ==== ========= =====
WESTERN REGION
Southern California....... 1,044,800 330,312 31.6% 425,638 128.9%
Greater Metropolitan
Fresno................... 294,858 146,572 49.7% 140,887 96.1%
Greater Metropolitan
Stockton................. 121,800 66,972 55.0% 55,282 82.5%
Yuba City, California..... 43,971 32,904 74.8% 19,915 60.5%
Reno, Nevada.............. 13,640 9,736 71.4% 6,391 65.6%
--------- --------- ---- --------- -----
Total................... 1,519,069 586,496 38.6% 648,113 110.5%
========= ========= ==== ========= =====
SOUTHEAST REGION
Jacksonville, Florida..... 411,337 242,581 59.0% 223,623 92.2%
Pompano, Florida.......... 237,740 148,296 62.4% 106,166 71.6%
Richmond, Virginia........ 243,960 161,246 66.1% 118,506 73.5%
--------- --------- ---- --------- -----
Total................... 893,037 552,123 61.8% 448,295 81.2%
========= ========= ==== ========= =====
MICHIGAN/OHIO REGION
Greater Dayton............ 248,596 169,842 68.3% 106,858 62.9%
Greater Metropolitan
Detroit.................. 174,998 121,692 69.5% 125,424 103.1%
Lansing and Greater
Metropolitan Lansing..... 125,504 87,694 69.9% 41,161 46.9%
Greater Metropolitan
Cleveland................ 121,259 84,973 70.1% 57,679 67.9%
North Central Ohio........ 120,767 81,618 67.6% 53,335 65.3%
--------- --------- ---- --------- -----
Total................... 791,124 545,819 69.0% 384,457 70.4%
========= ========= ==== ========= =====
CENTRAL REGION
Greater Metropolitan
Chicago (West)........... 416,778 251,023 60.2% 254,683 101.5%
Southern Illinois......... 84,860 61,335 72.3% 33,433 54.5%
St. Louis, Missouri....... 173,018 98,158 56.7% 114,319 116.5%
St. Paul, Minnesota....... 147,474 64,115 43.5% 59,396 92.6%
--------- --------- ---- --------- -----
Total................... 822,130 474,631 57.7% 461,831 97.3%
========= ========= ==== ========= =====
Affiliated Companies(1)..... 250,661 137,677 54.9% 90,443 65.7%
--------- --------- ---- --------- -----
Total................... 5,437,048 3,132,753 57.6% 2,665,970 85.1%
========= ========= ==== ========= =====
SYSTEMS DESIGNATION:
Consolidated Systems...... 5,186,387 2,995,076 57.7% 2,575,527 86.0%
Affiliated Companies(1)... 250,661 137,677 54.9% 90,443 65.7%
--------- --------- ---- --------- -----
Total................... 5,437,048 3,132,753 57.6% 2,665,970 85.1%
========= ========= ==== ========= =====
--------
(1) Affiliated Companies are those companies not majority-owned or controlled
by Continental. The systems held by Affiliated Companies consist of
systems held by five limited partnerships. (See "Domestic Acquisitions and
Investments--Domestic Minority Cable Investments".) Continental owns less
than 50% of the outstanding limited partnership interests of each such
partnership. None of the systems owned by Affiliated Companies are managed
by Continental. In reporting subscriber and other data for systems not
controlled or managed by Continental, only that portion of data
corresponding to Continental's percentage ownership is included. N-COM
Limited Partnership II ("N-COM") is currently an Affiliated Company.
Continental has entered into an agreement, which is in the process of
being renegotiated, to purchase the remaining partnership interests in N-
COM and assume certain liabilities from the other partners. Continental
anticipates that this acquisition will close in 1995. No assurances can be
made at this time that such transaction will be consummated. (See
"Domestic Acquisitions and Investments" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of
Continental".)
164
MANAGEMENT REGIONS: A description of Continental's five domestic cable
television management regions and their significant operating clusters is set
forth below:
New England. The New England region is Continental's largest management
region, representing approximately 21% of Continental's total Homes passed and
27% of its total basic subscribers as of June 30, 1995. This region includes
systems in the New England states of Maine, New Hampshire, Massachusetts and
Connecticut, as well as in Westchester County, New York. Significant operating
clusters in Massachusetts, which include the Boston suburban communities of
Needham, Cambridge, Newton, Wellesley, Watertown and Winchester in the eastern
part of the state, and Northfield, Springfield, Longmeadow, and Westfield in
the western part of the state, represent approximately 68% of the region's
total basic subscribers. The New England region commenced a five year rebuild
program in 1994, which upon completion will result in a combination of 550 MHz
and 750 MHz capacity for most of the region. The median household income for
the communities served by Continental in the New England region is
approximately $49,000, versus the national median household income of $34,600.
Upon the consummation of the Merger, the New England region's basic
subscriber base will increase by approximately 24%, to more than 1,000,000
basic subscribers.
Western. The Western region represented approximately 28% of Continental's
total Homes passed and 19% of its total basic subscribers as of June 30, 1995.
This region includes its systems in Los Angeles, where Continental is the
largest cable operator, with approximately 80% of its basic subscribers
clustered in geographically contiguous franchises served by two headends. This
region also includes Continental's Northern California systems, which include
the cities of Fresno, Visalia, Stockton, and Yuba City, as well as Reno,
Nevada. An upgrade of the Los Angeles systems, that will bring capacity to 750
MHz, is currently under way. The median household income for the communities
served by Continental in the Western region is approximately $34,500.
Upon the consummation of the Merger and another pending acquisition, the
Western region's basic subscriber base will increase by approximately 53%, to
more than 890,000 basic subscribers.
Southeast. The Southeast region represented approximately 16% of
Continental's total Homes passed and 18% of its total basic subscribers as of
June 30, 1995. This region includes significant operating clusters serving the
communities surrounding Jacksonville and Pompano, Florida and Richmond,
Virginia. The Jacksonville cluster is one of Continental's largest, serving
over 200,000 basic subscribers. In 1994, the Jacksonville and Pompano systems
commenced rebuild projects which will provide 750 MHz capacity to fiber nodes
serving approximately 2,000 or fewer homes by 1997. The median household income
for the communities served by Continental in the Southeast region is
approximately $36,900.
Upon the consummation of the Merger, the Southeast region's basic subscriber
base will increase by approximately 34%, to more than 738,000 basic
subscribers.
Michigan/Ohio. The Michigan/Ohio region represented approximately 15% of
Continental's total Homes passed and 17% of its total basic subscribers as of
June 30, 1995. This region includes Continental's systems in greater
metropolitan Detroit and Lansing, which includes the communities of Southfield,
Dearborn Heights, Westland, and Jackson. In Ohio, Continental's systems serve
the greater Dayton and Cleveland communities, as well as several communities
throughout North Central Ohio. By mid-1995, The Dayton systems have recently
been rebuilt to provide 550 MHz capacity to fiber nodes serving approximately
2,000 or fewer homes. The median household income for the communities served by
Continental in the Michigan/Ohio region is approximately $39,000.
Continental has reached agreement to purchase several cable systems in 1995,
which will increase the Michigan/Ohio region's basic subscriber base by
approximately 24%, to more than 670,000 total basic subscribers. (See "Domestic
Acquisitions and Investments" and "Management's Discussion of Financial
Condition and Results of Operations of Continental.")
165
Central. The Central region represented approximately 15% of Continental's
total Homes passed and 15% of its total basic subscribers as of June 30, 1995.
This region includes Continental's systems in metropolitan Chicago and Southern
Illinois, St. Paul, Minnesota, and St. Louis, Missouri. Continental's
metropolitan Chicago cluster, which includes the Chicago suburban communities
of Elmhurst, Forest Park, Oak Brook, Rosemont, Northfield, Westchester, and
Willmette, is one of Continental's largest, with 241,000 basic subscribers
served by four headends. All of the Central region's systems are scheduled to
be rebuilt or upgraded by 1997, at which time all major markets will have
between 600 MHz and 750 MHz capacity. The median household income for the
communities served by Continental in the Central region is approximately
$47,100.
In August 1995, Continental acquired several cable television systems serving
approximately 88,000 basic subscribers in the Chicago, Illinois area. These
basic subscribers combined with those resulting from the Merger will increase
this region's basic subscribers by 36% to more than 640,000 basic subscribers.
FRANCHISES. Continental believes it has maintained good relations with its
local franchise authorities. Continental has never had a franchise revoked, and
to date all of its franchises have been renewed or extended at their
expirations, frequently on modified but satisfactory terms. Continental's
franchises establish the terms and conditions under which its systems are
operated. Typically, they establish certain performance and safety standards
related to Continental's construction and maintenance of facilities in, under
and over public streets and rights of way in the franchise areas. Some, but not
all, of these franchises specify the services to be offered. Nearly all of
Continental's franchises provide for the payment of fees to the local
franchising authorities, which currently average approximately 3% of gross
revenues. The 1984 Cable Act prohibits local franchising authorities from
imposing annual franchise fees in excess of 5% of gross revenues and also
permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. Continental's
franchises are usually issued for fixed terms ranging from 10 to 15 years and
must periodically be renewed. Most of such franchises can be terminated prior
to their stated expirations for breach of material provisions.
Franchises representing approximately 1,292,000 basic subscribers
(approximately 41% of the basic subscribers of Continental and its domestic
affiliates as of June 30, 1995) are scheduled to expire through 1999. The 1984
Cable Act provides, among other things, for an orderly franchise renewal
process in which a franchise renewal will not be unreasonably withheld or, if
renewal is withheld and the system is acquired by the franchise authority or a
third party, the franchise authority must pay the operator the "fair market
value" of the system covered by such franchise. In addition, the 1984 Cable Act
establishes comprehensive renewal procedures which require that an incumbent
franchisee's renewal application be assessed on its own merit and not as part
of a comparative process with competing applications. (See "Legislation and
Regulation--Cable Communications Policy Act of 1984".)
PROGRAMMING. Continental provides programming to its subscribers pursuant to
contracts with programming suppliers. Continental generally pays a flat monthly
fee per subscriber for programming on its basic and premium services. Some
programming suppliers provide volume discount pricing structures and/or offer
marketing support to Continental. Continental's programming contracts are
generally for fixed periods of time ranging from 3 to 10 years and are subject
to negotiated renewal. The costs to Continental to provide cable programming
have increased in recent years and are expected to continue to increase due to
additional programming being provided to basic subscribers, increased costs to
produce or purchase cable programming, inflationary increases and other
factors. Increases in the cost of programming services have been offset in part
by additional volume discounts as a result of the growth of Continental and its
success in selling such services to its customers. Effective in May 1994, the
FCC's rate regulations under the 1992 Cable Act permit operators to pass
through to customers increases in programming costs in excess of the inflation
rate. Management believes that Continental will continue to have access to
programming services at reasonable price levels. (See "Legislation and
Regulation".)
166
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains new broadcast
signal carriage requirements, and the FCC has adopted regulations which are
currently in force implementing such statutory carriage requirements. These new
rules allow local commercial television broadcast stations, commencing on June
17, 1993 and every three years thereafter, either to elect required carriage
("must-carry" status), or to require a cable television system to negotiate for
"retransmission consent" rights. A cable television system generally is
required to devote up to one-third of its activated channel capacity for the
mandatory carriage of local commercial television stations. Local non-
commercial television stations are also given mandatory carriage rights on
cable television systems under the 1992 Cable Act and the FCC's rules; however,
such stations are not given the option to negotiate for retransmission consent
rights. Additionally, as of October 6, 1993, cable television systems were
required to obtain retransmission consent for all "distant" commercial
television stations (except for commercial satellite-delivered independent
"superstations" such as WTBS), commercial radio stations and certain low power
television stations carried by cable television systems. With its 1993
agreement with Capital Cities/ABC Inc. ("Capital Cities") and The Hearst
Corporation ("Hearst"), Continental was the first major cable television
company to reach a retransmission consent agreement with a broadcaster not
requiring cash compensation in exchange for the right to carry the
broadcaster's local television signals. In exchange for permission to carry the
local television signals of broadcast stations owned by Capital Cities and
Hearst, Continental agreed to carry ESPN2, a national sports programming
network owned by Capital Cities and Hearst. Since then, Continental has been
successful at reaching retransmission consent agreements, for terms generally
ranging from 3 to 7 years, with virtually all of the local broadcast stations
that elected retransmission consent (all without payment of cash compensation),
and only in a very few instances has Continental been forced to drop a local
broadcast signal from its programming. Some of Continental's systems have been
required to carry television broadcast stations that they otherwise would not
have elected to carry due to must-carry elections. At this time, Continental
cannot predict the outcome of any future must-carry elections by and
retransmission consent negotiations with local broadcasters.
DOMESTIC ACQUISITIONS AND INVESTMENTS
Management believes that the telecommunications industry, including the cable
television and telephony industries, is in a period of consolidation
characterized by mergers, joint ventures, acquisitions, cable system exchanges
and similar transactions. Management also believes that Continental is well
positioned to participate in this consolidation trend due to its well-clustered
systems, the technical quality of its cable plant, its management strengths and
its relationships within the cable industry. Continental, like other cable
television companies, has participated from time to time and will continue to
participate in discussions with third parties regarding a variety of potential
transactions, any of which, if consummated might be material to Continental and
its stockholders.
DOMESTIC ACQUISITIONS. Continental seeks to selectively acquire cable
television systems that are contiguous or in close proximity to its existing
system clusters to expand its operating scale and enlarge and enhance its
regional system clusters. Continental generates growth in operating income in
such acquired systems through a combination of efficiencies resulting from
system consolidation and expansion of the service offerings of the acquired
systems. Continental may also make acquisitions of cable television systems
that would form the basis for the creation of additional system clusters. In
addition, Continental periodically reviews opportunities to exchange its
systems for those of other cable television system operators in order to
enlarge and enhance its regional system clusters. The following is a summary of
recent and pending acquisitions of domestic cable systems, excluding the
Merger:
In June 1994, Continental acquired a cable television system serving
approximately 44,000 basic subscribers in Manchester, New Hampshire and its
surrounding communities for a purchase price of approximately $48,000,000. The
Manchester system is adjacent to several of Continental's existing systems in
the New England region.
In November 1994, Continental acquired three cable television systems serving
approximately 34,000 basic subscribers in Florida for a purchase price of
approximately $67,000,000. These systems are in close proximity to
Continental's existing systems in the Southeast region.
167
In August 1995, Continental acquired several cable television systems serving
approximately 88,000 basic subscribers in the Chicago, Illinois area for a
purchase price of approximately $168,500,000. These systems are in close
proximity to Continental's existing systems in its Central region.
Continental has entered into a purchase and sale agreement with Columbia
Associates L.P., a Delaware limited partnership, to purchase several cable
television systems serving approximately 74,000 basic subscribers in Michigan
for approximately $155,000,000. Continental has also entered into an agreement,
which is in the process of being renegotiated, to acquire the remaining
partnership interests of N-COM, a limited partnership that operates cable
television systems serving approximately 56,000 basic subscribers in the
Detroit suburbs. Continental currently owns a 33.77% limited partnership
interest in such partnership. The purchase price for the remaining interests is
approximately $90,000,000. The Columbia and N-COM systems are in close
proximity to Continental's existing systems in its Michigan/Ohio region. The
Columbia and N-COM acquisitions are expected to close in 1995.
In addition, in March 1995, Continental entered into a purchase and sale
agreement with Consolidated Cablevision of California to purchase cable
television systems serving approximately 12,000 basic subscribers in Northern
California for approximately $17,000,000. This acquisition is expected to close
in 1995. These systems are in close proximity to Continental's existing systems
in California.
There can be no assurances that any of the foregoing pending transactions
will be consummated. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Continental--Liquidity and Capital
Resources--Capital Expenditures and Domestic Acquisitions".)
The following table summarizes certain pro forma operating data of
Continental's domestic systems and its domestic affiliates and gives effect to
the Merger and the other acquisitions described above.
JUNE 30,
1995
---------
Homes Passed by Cable(1)
Continental........................................................ 5,437,000
Providence Journal................................................. 1,262,000
Other(2)........................................................... 417,000
---------
Total.............................................................. 7,116,000
=========
Number of Basic Subscribers(3)
Continental........................................................ 3,133,000
Providence Journal................................................. 773,000
Other(2)........................................................... 211,000
---------
Total.............................................................. 4,117,000
=========
Basic Penetration(4)
Continental........................................................ 57.6%
Providence Journal................................................. 61.3%
Other(2)........................................................... 50.6%
---------
Total.............................................................. 57.9%
=========
Number of Premium Subscriptions(5)
Continental........................................................ 2,666,000
Providence Journal................................................. 512,000
Other(2)........................................................... 168,000
---------
Total.............................................................. 3,346,000
=========
Premium Penetration(6)
Continental........................................................ 85.1%
Providence Journal................................................. 66.2%
Other(2)........................................................... 79.6%
---------
Total.............................................................. 81.3%
=========
168
--------
(1) Estimated dwelling units located sufficiently close to Continental's cable
plant to be practicably connected without any further extension of
principal transmission lines.
(2) "Other" includes the Illinois acquisition and the pending acquisitions in
Michigan and Northern California, which are expected to close in 1995.
Approximately 66.3% of N-COM's total Homes passed and subscriber data is
included under "Other" with the remaining 33.7% included under
"Continental", reflecting Continental's current minority stake in N-COM.
(3) A "basic subscriber" means a person who subscribes, at a minimum, to
Continental's BBT, which generally consists of broadcast television signals
available locally off-air, local origination and public, educational and
governmental access channels. Bulk subscribers are accounted for on an
"equivalent billing unit" basis, by dividing aggregate BBT bulk-billed
revenues by the stated BBT rate. In reporting subscriber and other data for
systems not controlled or managed by Continental, only that portion of data
corresponding to Continental's percentage ownership is included.
(4) Basic subscribers as a percentage of Homes passed by cable.
(5) Equals the number of premium services subscribed to by subscribers. Premium
services include single channel services offered for a monthly fee per
channel.
(6) Premium subscriptions as a percentage of basic subscribers. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium subscription. This ratio may be greater than 100% if the
average customer subscribes to more than one premium service.
DOMESTIC MINORITY CABLE INVESTMENTS. The acquisition of minority ownership
interests in various domestic cable television companies has contributed to
Continental's nationwide operating scale. As of June 30, 1995, through wholly
owned subsidiaries, Continental held minority ownership positions in the
following domestic cable companies.
JUNE 30, 1995
------------------------------
HOMES TOTAL BASIC PERCENTAGE
INVESTMENT PASSED SUBSCRIBERS OWNERSHIP
---------- ------- ----------- ----------
Insight Communications Company, L.P.............. 298,961 157,458 34.42%
Meredith/New Heritage Strategic Partners, L.P.... 236,947 120,447 37.90%
N-COM Limited Partnership II(1).................. 91,791 56,246 33.77%
Prime Cable of Hickory, L.P...................... 51,798 35,688 33.30%
Inland Bay Cable TV Associates................... 19,815 14,188 49.00%
------- -------
Total.......................................... 699,312 384,027
======= =======
--------
(1) Continental anticipates that in 1995 it will acquire the remaining
ownership interests in N-COM from the other partners and assume certain
liabilities for total consideration of approximately $90,000,000. No
assurances can be made at this time that such transaction will be
consummated. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Continental--Liquidity and Capital
Resources--Capital Expenditures and Domestic Acquisitions".)
INTERNATIONAL OPERATIONS
Continental has made and continues to pursue investments in international
video networks and also seeks to make investments in international telephony
networks. Such investments represent opportunities for Continental to apply its
managerial, technical and marketing expertise in attractive international
markets. In addition, Continental receives valuable information and experience
operating in lines of business, such as telephony, that have not been open to
Continental in the United States. In considering such investments, Continental
seeks the following characteristics: (i) favorable demographics and attractive
growth prospects, (ii) well-capitalized investment partner(s) with extensive
knowledge of the local market(s) and (iii) favorable regulatory and competitive
environments. To date, Continental has made investments in cable television
systems in Argentina and Singapore, has formed a joint venture in Australia,
and has signed a memorandum of understanding relating to a potential joint
venture in Japan. Continental is pursuing other international opportunities
principally in Latin America, Asia and the Pacific Rim. (See "Risk Factors--
Risk Factors Related to the Continental Merger Stock--International
Investments".) Continental's international investments include the following:
169
ARGENTINA. In 1994, Continental acquired an approximate 50% interest in
Fintelco, S.A. ("Fintelco"), an Argentine cable television operator, subject to
the receipt of certain governmental approvals permitting Continental to hold an
equity interest in an Argentine cable television company (such approvals are
pending). Fintelco is the largest cable television operator in Argentina, with
over 618,000 subscribers in regional system clusters in the Argentine provinces
of Buenos Aires, Cordoba and Santa Fe.
Fintelco's operating strategy focuses on creating regional system clusters in
key markets. As of June 30, 1995, Fintelco had over 315,000 subscribers in the
province of Buenos Aires, 190,000 subscribers in the province of Cordoba and
113,000 subscribers in the province of Santa Fe. Average rates for Fintelco's
cable television services are the equivalent of approximately US$30 per month.
There is currently no regulation of cable subscription rates in Argentina. Most
systems in Argentina provide a single package of services, which typically
includes premium movie channels such as HBO Ole.
Fintelco was one of Argentina's first cable television operators through its
primary operating subsidiary in Buenos Aires, Video Cable Comunicacion, S.A.
("VCC"). In the late 1980's VCC grew through the construction of cable
television systems in Buenos Aires as well as through strategic acquisitions of
smaller systems in the region. More recently, Fintelco's growth has come
through strategic acquisitions in the provinces of Cordoba and Santa Fe. Sixty-
six percent of the country's population is located in the provinces of Buenos
Aires, Cordoba and Santa Fe. Fintelco will continue to seek opportunities over
time to grow through acquisitions in these regions.
As of June 30, 1995, Continental had invested approximately US$148 million in
Fintelco and its subsidiaries and had committed to invest an additional US$33.5
million. These systems are currently managed by Continental's Argentine
partner, with technical assistance provided by Continental.
Continental and Fintelco are currently seeking approvals for the acquisition
of Continental's equity interest in Fintelco from the applicable Argentine
regulatory authority which must approve transfers of ownership in any Argentine
cable property. While Continental expects to obtain all required governmental
approvals, there can be no assurances in this regard.
Argentina has a population of 33 million, with over 9.1 million television
households, and VCR and pay television (which includes wireline cable and MMDS)
penetration rates of approximately 32% and 45%, respectively. Argentina has one
of the most developed cable television industries in Latin America, with an
estimated four million total subscribers nationwide as of December 31, 1994.
Total Argentine cable revenues for 1994 are estimated to be over US$1 billion.
The television audience in Buenos Aires has access to five major national
broadcast "networks" and over 90 satellite-delivered cable channels, including
both Argentine and international programming.
Cable operators in Argentina are issued non-exclusive broadcast licenses for
the carriage of their programming services, and may compete with other cable
operators for the same subscribers. Fintelco competes in certain areas of
Buenos Aires. Other cable operators in the province of Buenos Aires include:
Cablevision (which is currently 51% owned by U.S. cable operator TCI), Grupo
Clarin (d/b/a Multicanal) and Fin Cable S.A. (d/b/a Telefe).
SINGAPORE. In 1994, Continental acquired 25% of the outstanding capital stock
of Singapore CableVision Private Limited ("SCV"), which is constructing a cable
television system in Singapore, a country with approximately 2.8 million
residents. Cable television service has not previously been available in
Singapore. Continental's partners in this venture are Singapore Technologies
Venture Pte. Ltd., Singapore International Media Pte. Ltd. and Singapore Press
Holdings Limited, each of which is affiliated with the government of Singapore.
SCV is constructing a high capacity system that will serve substantially all of
Singapore's approximately 820,000 households. The system activated its first
subscribers in June 1995, and by 1999, when construction is expected to be
completed, it is anticipated that there will be nearly 1 million households in
Singapore. SCV will include both Mandarin and English language programming.
Continental is managing the system's construction and ongoing operations under
a five year renewable agreement, for which it will receive a management fee
based upon the gross revenues generated by the system.
170
Continental has made capital contributions of US$17.6 million and has
committed to make additional capital contributions to SCV of approximately
US$27 million (based upon exchange rates as of June 30, 1995) to be paid
through 1996. In addition, Continental has made commitments to SCV to lend up
to approximately US$45 million (based upon exchange rates as of June 30, 1995)
if third party debt financing cannot be obtained. SVC is in the process of
arranging an aggregate of S$200 million in senior credit facilities with
certain financial institutions. Such facilities may be increased to S$300
million at the option of SCV under certain circumstances. No assurances can be
given at this time that such facilities will be successfully raised.
Continental anticipates that it may explore additional investments in Asia and
the Pacific Rim, including investments with certain of its SCV partners.
Randall Coleman, the former Vice President and General Manager of Continental's
St. Paul, Minnesota system, currently serves as President of SCV.
AUSTRALIA. Continental has entered into an agreement with Optus
Communications Pty Limited ("Optus"), a provider of long-distance and cellular
telephone services in Australia, Publishing and Broadcasting Limited ("Nine"),
the parent company of Kerry Packer's Nine Network, and Seven Network Limited
("Seven") to create a broadband communications network in Australia. The
venture, Optus Vision, is owned 46.5% by Continental, 46.5% by Optus, 5% by
Nine and 2% by Seven. Each of Nine and Seven has an option to increase its
shareholding to 20% and 15%, respectively, at any time prior to July 1, 1997.
Optus Vision will provide cable television, local telephone and a variety of
advanced broadband interactive services to business and residential customers
in Australia's major markets. Formation of the joint venture has received all
necessary regulatory approvals from the Australian government.
Australia has a population of 17 million, with over 5.6 million television
households and VCR penetration of approximately 71%. Construction of the Optus
Vision network has commenced construction, with 1,000 homes being passed per
day. Optus Vision's plan anticipates passing approximately three million
households throughout Australia in the venture's first four years, beginning
with the major metropolitan centers of Sydney, Melbourne and Brisbane. The
planned network will be bi-directional, and is anticipated to be the first of
its kind in the world to deliver telephone calls to the home exclusively over a
single fiber-coaxial network.
Although the network will have capacity for 64 channels, Optus Vision plans
to provide an initial video programming package of over 20 channels, including
two movie channels, two sports channels and a variety of local and
international programming. The movie channels will be supported by a supply of
movies from Warner Brothers, Disney, MGM, Village Roadshow and New Regency. The
sports channels will include major Australian sporting events as well as
significant international sports sourced through ESPN International. Nine and
Seven will provide local sports programming.
The subscription television industry in Australia has been and is expected to
continue to be competitive. Optus Vision expects to compete in Australia with,
among others, (i) TNC, the publicly announced joint venture between Telstra
Corporation Limited, the government-owned Australian national
telecommunications carrier, and The News Corporation Limited, a major
international media and entertainment company, which will provide subscription
television services under the name FOXTEL over a proposed cable television
network, and (ii) Australis, which will provide subscription television
services via both MMDS and DBS technology.
Optus Vision currently employs approximately 450 people, including several
Continental employees. Frank Anthony, the former Senior Vice President and
General Manager of Continental's New England region, currently serves as the
Chief Operating Officer of Optus Vision.
As of June 30, 1995, Continental had invested approximately US$33.4 million.
Optus Vision anticipates that the required funding needs of the project will
total over US$1.5 billion (based upon exchange rates as of June 30, 1995)
through 1999, which will be provided by a combination of equity from the joint
venture partners and third-party debt.
JAPAN. In March 1995, Continental and Tomen Corporation, a leading Japanese
trading company, signed a memorandum of understanding relating to the provision
of cable television, telephony, multimedia
171
and interactive services in Japan. In addition to agreeing to conduct
feasibility studies, Continental and Tomen Corporation have agreed to form a
new company, CT Telecom, which may, either individually or in conjunction with
other Japanese companies, seek to obtain licenses to provide these services to
markets with a total of at least one million homes in Japan. At this time, the
terms of the joint venture have not been finalized.
Currently, approximately 1.6 million of Japan's 44 million households
receive broadcast and cable networks over cable television systems. However,
recent reforms of its cable television and telecommunications laws have
encouraged foreign investment in cable television companies and the creation
of multiple system operators in Japan, where cable television licenses are
awarded on a non-exclusive basis.
Tomen Corporation has ownership interests in four cable television systems
in Japan, one of which is conducting a 300-home technology and market test
involving telephony, fax, personal computer and near video on demand services.
Tomen Corporation is also the contractor for telecommunications networks in
Thailand, the Philippines, Malaysia, Indonesia and Romania.
Continental's capital commitment to CT Telecom will be dependent upon the
licenses received, the associated construction schedule and the other equity
partners involved. Additionally, no assurances can be given at this time as to
the degree of success that CT Telecom will have in obtaining licenses to
provide cable television and telecommunications services in Japan.
STRATEGIC INVESTMENTS
Continental's investments and potential investments include certain emerging
businesses, such as telecommunications and technology, and programming.
Continental views lines of business outside of cable television as key markets
for the future. All of Continental's strategic investments are currently held
by wholly owned subsidiaries and include the following:
TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS. Continental is rebuilding and
upgrading its plant to create advanced fiber-optic and coaxial cable networks,
which will serve as the infrastructure for the provision of expanded video
services and both wireline and wireless telephony services. Continental
believes that its fiber-optic plant will position it to provide these new
services as they become available. As markets develop for these services,
Continental will make the additional capital investments required to provide
such services. Although Continental believes that demand exists to support the
entry of cable television companies into the wireline and wireless telephony
businesses, the offering of these services will require the removal of
existing regulatory and legislative barriers to local telephone competition.
(See "Competition" and "Legislation and Regulation".)
Teleport Communications Group Inc. Continental has a 20% equity interest in
Teleport Communications Group Inc. ("TCG"), a local telecommunications
services provider and a leading fiber-optic-based competitor to local
telephone companies nationwide. Continental believes that its involvement in
TCG is an effective means of utilizing its existing fiber-optic and coaxial
cable network to participate in the growth of the local competitive access
telephony business.
TCG provides local telecommunications services over high-capacity fiber-
optic networks (which it owns or leases from cable operators such as
Continental) to meet the voice, data and video transmission needs of high-
volume business customers in major metropolitan areas throughout the United
States. TCG's customers include long-distance carriers and resellers,
international telephone carriers, financial services firms, banking and
brokerage institutions, media companies and other telecommunications-intensive
businesses. In competition with the Regional Bell Operating Companies (the
"RBOCs") and other local exchange carriers ("LECs"), TCG offers its customers
vendor diversity for local service, superior quality, competitive pricing and
state-of-the-art technology.
Since 1985, TCG has owned and operated the nation's largest non-LEC local
telecommunications network in the New York City metropolitan area, the
country's leading telecommunications market. Beginning in 1988 with the
construction of a Boston network, TCG has actively expanded its network
operations to 24 telecommunications markets in the United States, including
Los Angeles, Chicago, San Francisco, Dallas, Detroit, Miami, Houston, Seattle,
San Diego and Milwaukee. In several of these markets,
172
Continental is a partner and a primary network provider for TCG. As of June 30,
1995, TCG provided service to more than 3,240 buildings and had networks which
spanned over 4,700 route miles.
TCG has emphasized the expansion of the telecommunications services and
products it offers to its customers. TCG was the first competitive access
telephony provider to offer local switched services using sophisticated digital
switching devices capable of routing a call over different available circuits
to reach the intended termination point of the call anywhere on the public
switched telephone network. Local dedicated line and special access services
represent an available market of approximately $5.9 billion nationally, and
switched access services for business represent approximately $20 billion of
the $98.7 billion local telecommunications services market in the United
States.
Through June 30, 1995, Continental had invested $116.5 million in TCG and
related joint ventures. In addition to these investments, Continental has made
commitments to TCG to loan up to $69.9 million through 2003, of which $54
million was outstanding as of June 30, 1995. In May 1995 TCG entered into a
$250 million revolving credit facility with a group of financial institutions
to fund general corporate purposes. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Continental--Liquidity and
Capital Resources".)
In addition to Continental, the other partners in TCG currently include Cox,
TCI and Comcast, which have interests of approximately 30%, 30% and 20%,
respectively.
The recently announced business arrangement among TCI, Cox and Comcast (the
"Cable Partners") and Sprint contemplates the contribution to the Sprint
venture of the Cable Partners' interests in TCG, in the local joint ventures
among the Cable Partners and TCG, and in other competitive access assets owned
by them. The contribution of the Cable Partners' interests in TCG to the Sprint
venture would require the prior consent of Continental. Should it be in its
best interest, Continental would negotiate with the Cable Partners regarding
the acquisition of Continental's interests in TCG and TCG's local joint
ventures. William T. Schleyer, the President and Chief Operating Officer of
Continental, and Nancy Hawthorne, a Senior Vice President and Chief Financial
Officer of Continental, serve on the Board of Directors of TCG.
Other Telecommunications Activities. Continental is currently exploring
various business arrangements through which to provide wireline and wireless
telephony services, although there can be no assurances that any such
arrangement will be consummated. Continental's options include: (i) affiliating
with other cable television companies; (ii) affiliating with an RBOC or an
Interexchange Carrier ("IXC"); (iii) entering the business on its own in
certain markets or (iv) market-by-market affiliations. Given its national
operating scale, large regional system clusters in demographically attractive
markets and technologically advanced systems, Continental believes that it is
well positioned to provide both wireline and wireless telephony services in the
future (either alone or in conjunction with one or more partners).
Continental is one of six cable television operators participating in Cable
Television Laboratories' ("CableLabs") telecommunications Request for Proposal
("RFP"), which is an initiative to achieve a uniform network architecture for
delivery of expanded video and telephony services. CableLabs has received
quotes on this RFP from approximately 45 equipment manufacturers.
The FCC is currently auctioning broadband licenses for wireless personal
communications services ("PCS"). The first phase of these auctions, for
licenses in the 51 Major Trading Areas ("MTAs") of the United States, was
completed recently. A partnership between Continental and Cablevision Systems
Corporation bid for PCS licenses in the Boston, Massachusetts and Cleveland,
Ohio MTAs, and Continental bid independently for broadband PCS licenses in
other MTAs, representing no more than 6.1 million people in the aggregate. Both
the partnership and Continental were unsuccessful in their bids. However,
Continental, either independently or in partnership, may: (i) continue to
pursue direct ownership of licenses in the subsequent phases of the PCS
auctions in the 493 Basic Trading Areas of the United States; (ii) acquire PCS
licenses from successful bidders after the auctions have been completed; or
(iii) invest in or affiliate with successful bidders. Continental's strategy in
pursuing any one or a combination of these options is to enhance its ability to
bundle services such as wireless communications with wireline telephony and
existing cable services in markets where it has large system clusters.
173
PrimeStar Partners L.P. Continental currently owns a 10.4% interest in
PrimeStar Partners L.P. ("PrimeStar"), a nationwide provider of DBS service.
The remaining interests in PrimeStar are held by GE Americom Services, Inc. (an
affiliate of General Electric) with 16.6% and five other cable television
operators (TCI and Time Warner Cable own 20.9% each; Comcast, Cox and Newhouse
Broadcasting Corp. own 10.4% each). PrimeStar is the primary vehicle for
Continental's plan to use DBS to extend beyond the reach of Continental's
existing video network and expand the total potential market, and Continental's
share of such market. Continental views PrimeStar as an effective response to
competition from other DBS service providers in Continental's service areas.
Moreover, PrimeStar provides additional programming to cable subscribers with
limited programming options. Continental understands that PrimeStar has
estimated the potential market for DBS service to be 12 to 15 million
households, including 10 to 11 million households that are not currently passed
by cable.
PrimeStar provided medium-powered DBS service to approximately 492,000
subscribers nationwide as of June 30, 1995. PrimeStar acts as a wholesaler of
DBS services, securing programming services for eventual resale to consumers
and arranging for the transmission of the programming via satellite. PrimeStar
does not sell directly to end users, but rather sells the rights to resell
programming to local distributors, including Continental and its other cable
partners, who in turn sell to, service, and collect monthly fees from
consumers. Continental served over 48,000 of PrimeStar's 492,000 subscribers as
of June 30, 1995. PrimeStar currently offers a wide range of programming,
including 73 channels of cable and network television, sports and movies as
well as several music channels. In order to expand its service, PrimeStar's
partners have committed to support the construction of two high-powered
replacement satellites. Recently, however, the FCC International Bureau voided
the construction permit of Advanced Communications Corporation for high-powered
DBS service at 110 degrees. PrimeStar had planned to use this orbital location
for its high-powered satellites. The decision is being appealed to the full
FCC. If upheld, the decision could cause significant delays or possibly prevent
PrimeStar from launching a high-powered DBS service. PrimeStar is currently
investigating alternate locations for high-powered satellites. These new
satellites would enable PrimeStar to offer up to 200 channels of service. No
assurances can be given at this time that PrimeStar will be able to secure an
acceptable high-powered orbital slot. In the meantime, PrimeStar will continue
to provide medium-powered DBS service.
Continental's investment in PrimeStar was $13.5 million as of June 30, 1995.
In addition, a subsidiary of Continental has issued a $56.3 million standby
letter of credit on behalf of PrimeStar to guarantee a portion of the financing
that PrimeStar is incurring to construct a successor satellite system. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Continental--Liquidity and Capital Resources".) Jeffrey T.
DeLorme, an Executive Vice President of Continental, serves on the Partner
Committee of PrimeStar.
The following is a summary of financial and operating statistics for
PrimeStar, which commenced operations in 1991 (information is in thousands
except for percentage figures):
1992 1993 1994
------ ------- -------
Revenues........................................... $5,200 $10,900 $27,800
Growth Rate........................................ 643% 110% 155%
Subscribers........................................ 44.2 66.8 230.8
Growth Rate........................................ 235% 51% 246%
CERTAIN PROGRAMMING AND OTHER INVESTMENTS. Continental has made and continues
to make minority investments in programming services, based upon Continental's
belief that unique programming is a means of generating additional interest in
cable television. To date, Continental has made approximately $62 million in
programming investments (excluding Turner, QVC and HSN). The following
summarizes certain of Continental's programming investments:
Turner Broadcasting System and Home Shopping Network, Inc. Continental holds
marketable equity securities of Turner and HSN. As of June 30, 1995, the
approximate market values of Continental's investments in Turner and HSN were
$115.9 million and $4.2 million, respectively. In February 1995,
174
Comcast and TCI consummated a tender offer for all outstanding QVC shares at
$46 per share, which resulted in Continental selling all of its QVC shares for
$27.4 million and realizing a gain of $23 million. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Continental--Liquidity and Capital Resources".) Timothy P. Neher, Director and
Vice Chairman of the Board of Continental, serves on the Board of Directors of
Turner.
E! Entertainment Television, Inc. Continental owns a 10.4% interest in E!,
whose programming includes entertainment related news, information and
features. E! has agreements with every major domestic cable television operator
and, as of December 31, 1994, was distributed to over 27 million customers,
representing 48% of U.S. cable television subscribers. Continental's partners
in E! are Comcast, Cox, Newhouse Broadcasting Corp. and TCI, each with an
approximate 10.4% interest, and Time Warner Cable, with a 48% interest. Robert
A. Stengel, a Senior Vice President of Continental, serves on the Board of
Directors of E!.
The following is a summary of financial and operating statistics for E!
(information is in thousands except for percentage figures):
1992 1993 1994
------- ------- -------
Revenues........................................ $22,100 $31,700 $49,100
Growth Rate..................................... 53.5% 43.4% 54.9%
Subscribers..................................... 19,700 25,800 27,800
Growth Rate..................................... 8.1% 30.1% 7.8%
National Cable Communications, L.P. Continental has a 12.5% limited
partnership interest in NCC, a partnership that represents cable television
companies to advertisers. NCC is the largest representation firm in spot cable
advertising sales. It enhances affiliated cable television systems' ability to
generate advertising sales by enabling advertisers to place spots in selected
systems on a regional or national basis. The other limited partners in NCC are
Cox, Time Warner Cable and Comcast, each with a 12.5% interest. NCC's managing
partner is Katz Cable Corporation, with a 50% interest. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Continental--Liquidity and Capital Resources".)
New England Cable News. Continental and the Hearst Corporation each own 50%
of New England Cable News, a regional cable news network featuring news, sports
and weather programming on an exclusive basis to cable television systems in
the New England area. New England Cable News had revenues of $4.0 million for
the year ended December 31, 1994. William T. Schleyer, the President and Chief
Operating Officer of Continental, and Nancy Jackson, a Vice President of
Marketing in Continental's New England region, serve on the Board of Directors
of New England Cable News.
Viewer's Choice. PPVN Holding Co. ("PPVN"), which operates under the brand-
name Viewer's Choice, is a cable operator-controlled buying cooperative and
distributor for pay-per-view programming. Continental holds a 10% interest in
PPVN.
The Golf Channel. Continental owns an approximate 20% interest in The Golf
Channel, a newly formed cable programming service which provides golf-related
programming 24 hours a day. Timothy P. Neher, Director and Vice Chairman of the
Board of Continental, serves on the Board of Directors of The Golf Channel.
The Food Channel. Continental owns an approximate 15% interest in The Food
Channel, a cable operator-owned programming service which offers programs on
cooking, food preparation and other related topics. Robert A. Stengel, a Senior
Vice President of Continental, serves on the Management Committee of The Food
Channel.
The Sunshine Network Joint Venture ("The Sunshine Network"). Continental owns
an approximate 8% interest in The Sunshine Network, a joint venture which
provides programming consisting of Florida sporting events, sports news and
related programs, as well as local public affairs programs. Jeffrey T. DeLorme,
an Executive Vice President of Continental, serves on the Board of Directors of
The Sunshine Network.
175
Prime Sports Network Upper Midwest. Continental owns an approximate 17%
interest in Prime Sports Network Upper Midwest, a joint venture which provides
sports, public affairs, and general entertainment programming in Minnesota.
Emmett White, the Senior Vice President and General Manager of Continental's
Midwest region, serves on the Board of Directors of Prime Sports Network Upper
Midwest.
Digital Cable Radio Associates ("Digital Cable Radio"). Digital Cable Radio,
which operates under the brand-name Music Choice, distributes audio programming
in digital format via coaxial cable. The service allows cable television
customers to receive compact disc quality sound in several music formats.
Continental owns an approximate 10% interest in Digital Cable Radio.
Zing Systems, L.P. ("Zing"). Continental owns an approximate 13% interest in
Zing, which develops interactive software and hardware for use in cable
television systems. The Zing system package allows cable subscribers to
interact with licensed programmers and advertisers. Zing is expected to have a
limited introductory consumer launch in 1995.
COMPETITION
Continental's operating strategy, especially its focus on marketing, customer
service and community relations, improves its ability to compete with new
providers of video services. Management believes that investing in advanced
technologies will further strengthen Continental's competitive position.
Continental's systems compete with other communications and entertainment
media, including conventional off-air television broadcasting services,
newspapers, movie theaters, live sporting events and home-video products. Cable
television service was first offered as a means of improving television
reception in markets where terrain factors or remoteness from major cities
limited the availability of off-air television. In some of the areas served by
the systems, a substantial variety of television programming can be received
off-air. For the last several years, the FCC has been authorizing the creation
of additional low-power (UHF) television stations, which will increase the
number of television signals in the country and provide off-air television
programs to limited local areas. The extent to which cable television service
is competitive depends upon a cable television system's ability to provide, on
a cost-effective basis, an even greater variety of programming than that
available off-air or through other alternative delivery sources.
Since Continental's domestic cable television systems operate under non-
exclusive franchises, other companies may obtain permission to build cable
television systems in areas where Continental presently operates. While
Continental believes that the current level of overbuilding is not material, it
is currently unable to predict the extent to which overbuilds may occur in its
franchise areas and the impact, if any, such overbuilds may have on Continental
in the future.
Additional competition may come from SMATV cable television systems serving
condominiums, apartment complexes and other private residential developments.
The operators of these private systems often enter into exclusive agreements
with apartment building owners or homeowners' associations that preclude
operators of franchised cable television systems from serving residents of such
private complexes. The widespread availability of reasonably priced earth
stations enables private cable television systems to offer both improved
reception of local television stations and many of the same satellite-delivered
program services that are offered by franchised cable television systems. FCC
regulations permit SMATV operators to use point-to-point microwave service to
distribute video entertainment programming to their SMATV systems. A private
cable television system normally is free of the regulatory burdens imposed on
franchised cable television systems. Although a number of states have enacted
laws to afford operators of franchised systems access to private complexes, the
U.S. Supreme Court has held that cable companies cannot have such access
without compensating the property owner. The access statutes of several states
have been challenged successfully in the courts, and others are currently being
challenged, including statutes in states in which Continental operates.
In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for certain
existing technologies and to create substantial additional
176
competition to cable television systems. These technologies include, among
others, DBS services which transmit signals by satellite to receiving
facilities located on customers' premises. Although satellite-delivered
programming is currently available to backyard earth stations, new, high-
powered direct-to-home satellites make possible the wide-scale delivery of
programming to individuals throughout the United States using roof-top or wall-
mounted antennas. Companies offering DBS services plan to use video compression
technology to increase satellite channel capacity and to provide a package of
movies, broadcast stations and other program services competitive with those of
cable television systems. Several companies are preparing to have DBS systems
in place during this decade, and two companies began offering high-powered DBS
service in 1994 in competition with cable television operators and PrimeStar.
Continental has invested in PrimeStar, a medium-powered DBS service provider,
which currently offers 73 channels of video and audio service. Several
companies, including PrimeStar, intend to offer more than 100 channels of
service over high-powered satellites using video compression technology. DBS
service providers may be able to offer new and highly specialized services
using a national base of subscribers. The ability of DBS service providers to
compete with the cable television industry will depend on, among other factors,
the availability of reception equipment at reasonable prices. Although it is
not possible at this time to predict the likelihood of success of any DBS
services venture, initial sales of DBS services indicate that DBS may offer
substantial competition to cable television operators in the future. (See
"Strategic Investments--Telecommunications and Technology Investments".)
Cable television systems also may compete with wireless program distribution
services such as MMDS, commonly called wireless cable systems, which are
licensed to serve specific areas. MMDS uses low power microwave frequencies to
transmit pay television programming over-the-air to subscribers. MMDS systems'
ability to compete with cable television systems has previously been limited by
a lack of channel capacity, the inability to obtain programming and regulatory
delays. Recently NYNEX Corp. and Bell Atlantic Corp., agreed to invest up to
$100,000,000 in CAI Wireless Systems Inc., a MMDS operator. In addition,
Pacific Telesis Group has acquired Cross Country Wireless Inc., a MMDS
operator. A series of actions taken by the FCC, including reallocating certain
frequencies to the wireless services, are intended to facilitate the
development of wireless cable television systems as an alternative means of
distributing video programming. The FCC also initiated a new rule-making
proceeding to allocate frequencies in the 28 GHz band for a new multi-channel
wireless video service. Continental is unable to predict the extent to which
additional competition from these services will materialize in the future or
the impact such competition would have on Continental's operations.
Continental believes that as a result of its investment in technologically
advanced systems, it is well positioned to offer new services such as video
game channels, on-line services, data communications and telephony. Continental
believes that the ability to offer interactive services over a high-capacity,
two-way network provides a distinct competitive advantage over DBS and MMDS,
which are currently one-way services.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and to businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast
services, including data transmissions. The FCC established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. Telephone companies and other common carriers also provide facilities
for the transmission and distribution of data and other non-video services.
In the past, federal cross-ownership restrictions have limited entry into the
cable television business by potentially strong competitors such as telephone
companies. Proposals recently adopted by the FCC, pending litigation and
potential legislation, could make it possible for companies with considerable
resources, and consequently a potentially greater willingness or ability to
overbuild, to enter the business. The FCC recently amended its rules to permit
local telephone companies to offer "video-dialtone" service for video
programmers, including channel capacity for the carriage of video programming
and certain non-common
177
carrier activities such as video processing, billing and collection and joint
marketing agreements. Furthermore, several federal district courts have struck
down as unconstitutional a provision in the 1984 Cable Act, which prevents
local telephone companies from offering video programming on a non-common
carrier basis directly to subscribers in their local telephone service areas.
Two such district court decisions have been upheld by the United States Courts
of Appeals for the Fourth Circuit and the Ninth Circuit. The Supreme Court has
agreed to hear arguments on this issue during its 1995-1996 term. Separate
bills to repeal the telco/cable cross-ownership ban, subject to certain
regulatory requirements, have been passed by the United States House of
Representatives and the United States Senate. Under the terms of these bills, a
telephone company could build and operate a cable television system within its
region or acquire an in-region cable operator, under certain circumstances.
These bills would also, inter alia, preempt state and locally-imposed barriers
to the provision of intrastate and interstate telecommunications services by
cable system operators in competition with local telephone companies. Even in
the absence of further changes in the cross-ownership restrictions, the
expansion of telephone companies' fiber-optic systems may facilitate entry by
other video service providers in competition with cable systems. (See
"Legislation and Regulation--Federal Regulation".)
PROPERTIES
Continental's principal physical assets consist of cable television systems,
including signal receiving, encoding and decoding apparatus, headends,
distribution systems, and subscriber house drop equipment for each of its
systems. The signal receiving apparatus typically includes a tower, antenna,
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. Continental's distribution systems consist of coaxial and
fiber-optic cables and related electronic equipment. Subscriber equipment
consists of taps, house drops, converters and analog addressable converters.
Continental owns its distribution system, various office and studio fixtures,
test equipment and service vehicles. The physical components of Continental's
systems require maintenance and periodic upgrading to keep pace with
technological advances.
Continental's coaxial and fiber-optic cables are generally attached to
utility poles under pole rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts or
trenches. The FCC regulates pole attachment rates under the Federal Pole
Attachments Act. (See "Legislation and Regulation--Federal Regulation--Pole
Attachments".)
Continental owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices.
Continental owns the building which houses its headquarters in Boston,
Massachusetts.
Continental believes that its properties, both owned and leased, are in good
operating condition and are suitable and adequate for its business operations.
EMPLOYEES
Continental currently has approximately 7,000 full-time employees, including
approximately 100 employees located at Continental's Boston headquarters, who
provide staff support in the areas of corporate planning, finance, marketing,
program acquisition, employee training and benefits administration, government
relations, internal auditing, financial and tax reporting and regulatory
compliance. Continental believes that its relations with its employees are
good.
LEGAL PROCEEDINGS
There are no material pending legal proceedings against Continental.
Continental is subject to legal proceedings and claims which arise in the
ordinary course of business, none of which is material to its consolidated
financial condition or results of operations in the opinion of management.
178
CAPITALIZATION
The following table sets forth Continental's actual and pro forma
consolidated capitalization at June 30, 1995, after giving effect to (i) the
Continental Recapitalization Amendment (Pro Forma A) and (ii) the Merger, the
Continental Recapitalization Amendment, and other pro forma transactions (Pro
Forma B) described in the Notes to Continental's Pro Forma Condensed
Consolidated Balance Sheet and Statement of Income included elsewhere in this
Joint Proxy Statement-Prospectus. This table should be read in conjunction
with the Notes referred to above and the historical consolidated financial
statements and related notes included in this Joint Proxy Statement-
Prospectus.
AS OF JUNE 30, 1995
-------------------------------------
ACTUAL PRO FORMA A PRO FORMA B
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Senior Debt:
8 1/2% Senior Notes......................... $ 200,000 $ 200,000 $ 200,000
8 5/8% Senior Notes......................... 100,000 100,000 100,000
8 7/8% Senior Debentures.................... 275,000 275,000 275,000
9% Senior Debentures........................ 300,000 300,000 300,000
9 1/2% Senior Debentures.................... 525,000 525,000 525,000
1994 Credit Facility........................ 1,663,740 1,663,740 1,824,890
1995 Credit Facility(1)..................... -- -- 1,032,000
Prudential Notes............................ 138,250 138,250 138,250
----------- ----------- -----------
Total Senior Debt......................... 3,201,990 3,201,990 4,395,140
Subordinated Debt:
10 5/8% Senior Subordinated Notes........... 100,000 100,000 100,000
11% Senior Subordinated Debentures.......... 300,000 300,000 300,000
Senior Subordinated Floating Rate
Debentures................................. 100,000 100,000 100,000
----------- ----------- -----------
Total Subordinated Debt................... 500,000 500,000 500,000
----------- ----------- -----------
Other Debt.................................... 26,111 26,111 26,111
----------- ----------- -----------
Total Debt................................ 3,728,101 3,728,101 4,921,251
----------- ----------- -----------
Redeemable Common Stock, $.01 par value;
16,684,150 shares outstanding................ 242,721 242,721 242,721
----------- ----------- -----------
Stockholders' Equity (Deficiency):
Preferred Stock............................. -- -- --
Series A Convertible Preferred Stock........ 11 11 11
Class A Common Stock........................ 3 86 393
Class B Common Stock........................ 37 926 926
Additional Paid-In Capital.................. 618,236 617,264 1,213,026
Unearned Compensation....................... (51,708) (51,708) (51,708)
Net Unrealized Holding Gain on Marketable
Equity Securities.......................... 49,104 49,104 49,104
Deficit..................................... (2,340,718) (2,340,718) (2,340,718)
----------- ----------- -----------
Stockholders' Equity (Deficiency)......... (1,725,035) (1,725,035) (1,128,966)
----------- ----------- -----------
Total Capitalization.................... $ 2,245,787 $ 2,245,787 $ 4,035,006
=========== =========== ===========
Shares Authorized and Outstanding:
Preferred Stock, $.01 par value:
Authorized................................. 1,557,142 198,857,142 198,857,142
Issued..................................... -- -- --
Series A Convertible Preferred Stock, $.01
par value,
liquidation preference of $507,123,000,
Authorized and Outstanding................. 1,142,858 1,142,858 1,142,858
Class A Common Stock; $.01 par value:
Authorized................................. 7,500,000 425,000,000 425,000,000
Outstanding................................ 343,252 8,581,300 39,306,507
Class B Common Stock; $.01 par value:
Authorized................................. 7,500,000 200,000,000 200,000,000
Outstanding................................ 3,704,681 92,617,025 92,617,025
--------
(1) Includes the New Cable Indebtedness, $405,000,000 of borrowings for the
King Cable Purchase and $245,000,000 of borrowings for cable system
acquisitions in Michigan, adjusted downward for the Working Capital
deficit of approximately $16,000,000 and a Capital Expenditure Adjustment
of approximately $12,000,000. (See "The Merger--General Provisions--
Working Capital and Capital Expenditure Adjustment" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation of
Continental--Liquidity and Capital Resources".)
179
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF CONTINENTAL
The selected historical financial information provided below is derived from,
and should be read in conjunction with, the Consolidated Financial Statements
of Continental for the years ended December 31, 1990 through December 31, 1994
and the six months ended June 30, 1994 and 1995. The unaudited selected
historical financial information for the six months ended June 30, 1994 and
1995 reflects all adjustments of a normal recurring nature that are, in the
opinion of management, necessary for a fair presentation of that information.
Results of operations for the six months ended June 30, 1994 and 1995 are not
necessarily indicative of the results that may be expected for any other
interim period or the year as a whole.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ------------------
1990 1991 1992 1993 1994 1994 1995
--------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 938,032 $1,039,163 $1,113,475 $1,177,163 $1,197,977 $589,390 $650,048
Costs and Expenses:
Operating.............. 316,199 347,469 365,513 382,195 405,535 198,618 224,846
Selling, General and
Administrative........ 231,338 246,986 259,632 267,376 267,349 128,783 150,332
Depreciation and
Amortization.......... 262,703 267,510 272,851 279,009 283,183 135,523 148,412
Non-Cash Stock
Compensation(1)....... 6,903 10,067 9,683 11,004 11,316 5,675 5,905
--------- ---------- ---------- ---------- ---------- -------- --------
Total................ 817,143 872,032 907,679 939,584 967,383 468,599 529,495
--------- ---------- ---------- ---------- ---------- -------- --------
Operating Income........ 120,889 167,131 205,796 237,579 230,594 120,791 120,553
--------- ---------- ---------- ---------- ---------- -------- --------
Interest (Net).......... 313,858 324,976 296,031 282,252 315,541 147,910 166,314
Other (Income)
Expenses(2)............ 1,000 1,936 11,071 (10,978) 24,048 7,806 2,016
--------- ---------- ---------- ---------- ---------- -------- --------
Total................ 314,858 326,912 307,102 271,274 339,589 155,716 168,330
--------- ---------- ---------- ---------- ---------- -------- --------
Loss before Income
Taxes, Extraordinary
Item and Cumulative
Effect of Accounting
Change................. (193,969) (159,781) (101,306) (33,695) (108,995) (34,925) (47,777)
(Benefit) Provision for
Income Taxes........... 1,482 1,861 1,654 (7,921) (40,419) (11,304) (14,710)
--------- ---------- ---------- ---------- ---------- -------- --------
Loss before
Extraordinary Item and
Cumulative Effect of
Accounting Change...... (195,451) (161,642) (102,960) (25,774) (68,576) (23,621) (33,067)
Extraordinary Item, Net
of Income Taxes........ -- -- -- -- (18,265) -- --
--------- ---------- ---------- ---------- ---------- -------- --------
Loss before Cumulative
Effect of Accounting
Change................. (195,451) (161,642) (102,960) (25,774) (86,841) (23,621) (33,067)
Cumulative Effect of
Accounting Change...... -- -- -- (184,996) -- -- --
--------- ---------- ---------- ---------- ---------- -------- --------
Net Loss................ (195,451) (161,642) (102,960) (210,770) (86,841) (23,621) (33,067)
Preferred Stock
Preferences............ (61,102) (5,771) (16,861) (34,115) (36,800) (17,887) (19,347)
--------- ---------- ---------- ---------- ---------- -------- --------
Loss Available for
Common Stockholders.... $(256,553) $ (167,413) $ (119,821) $ (244,885) $ (123,641) $(41,508) $(52,414)
========= ========== ========== ========== ========== ======== ========
Loss Per Common Share:
Before Extraordinary
Item and Cumulative
Effect of Accounting
Change................ $ (54.80) $ (35.61) $ (25.06) $ (13.13) $ (23.04) $ (9.10) $ (11.14)
Extraordinary Item..... -- -- -- -- (3.99) -- --
Cumulative Effect of
Accounting Change..... -- -- -- (40.55) -- -- --
--------- ---------- ---------- ---------- ---------- -------- --------
Net Loss............... $ (54.80) $ (35.61) $ (25.06) $ (53.68) $ (27.03) $ (9.10) $ (11.14)
========= ========== ========== ========== ========== ======== ========
180
AS OF DECEMBER 31,
--------------------------------------------------------------- AS OF JUNE 30,
1990 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- ----------- --------------
BALANCE SHEET DATA:
Cash.................... $ 10,377 $ 14,265 $ 27,352 $ 122,640 $ 11,564 $ 15,342
Total Assets............ 2,175,120 2,082,182 2,003,196 2,091,853 2,483,639 2,693,894
Total Debt.............. 3,127,347 3,338,281 3,011,669 3,177,178 3,449,907 3,728,101
Redeemable Preferred
Stock.................. 157,835 -- -- -- -- --
Redeemable Common Stock. 436,700 445,463 223,716 213,548 232,399 242,721
Stockholder's Equity
(Deficiency)........... (1,759,535) (1,919,525) (1,486,231) (1,667,088) (1,688,334) (1,725,035)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- --------
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(3)............... $390,495 $444,708 $488,330 $527,592 $525,093 $261,989 $274,870
EBITDA to Revenues...... 41.6% 42.8% 43.9% 44.8% 43.8% 44.5% 42.3%
Total Debt (less cash)
to EBITDA(3)........... 7.98 7.47 6.11 5.79 6.55 6.11 6.75
EBITDA to Total Interest
Expense................ 1.24 1.37 1.65 1.87 1.66 1.77 1.65
Net Cash Provided From
Operating Activities... 82,196 123,543 215,045 250,504 236,304 123,568 77,526
Capital Expenditures.... 166,938 145,846 145,189 185,691 300,511 109,484 231,021
--------
(1) This is the difference between the consideration paid by employees for
purchases of shares of Continental Common Stock under Continental's
Restricted Stock Purchase Program and the fair market value of such shares
at the date of issuance (as determined by Continental's Board of
Directors), amortized over the vesting schedule of such shares. (See Note
11 to Continental's Consolidated Financial Statements.)
(2) Includes equity in net income (loss) of affiliates, minority interest in
net loss of subsidiaries, other non-operating income and expenses, and
gains of $10,253,000, $17,067,000 and $24,067,000 from Continental's sales
of its investment in affiliates in 1992 and 1993 and sale of an investment
and marketable equity securities during the six months ended June 30,
1995, respectively. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Continental".)
(3) Operating income before depreciation and amortization and non-cash stock
compensation. Based on its experience in the cable television industry,
Continental believes that EBITDA and related measures of cash flow serve
as important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA should not be considered by the reader as
an alternative to operating or net income (as determined in accordance
with GAAP) as an indicator of Continental's performance or as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. Substantially all of
Continental's financing agreements contain certain covenants in which
EBITDA is used as a measure of financial performance. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
of Continental".) For purposes of calculating the ratio of Total Debt to
EBITDA for the six months ended June 30, 1994 and 1995, EBITDA has been
annualized.
181
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CONTINENTAL
The following table sets forth for the periods indicated certain items in
the Selected Consolidated Financial Information.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
STATEMENT OF OPERATIONS
DATA:
Revenues:
Basic Cable Service.... $ 790,508 $ 845,213 $ 849,889 $419,215 $457,539
Premium Cable Service.. 249,020 242,956 245,605 121,793 126,480
Advertising............ 43,392 52,618 57,896 27,554 30,259
Pay-Per-View........... 22,191 25,746 24,523 12,748 13,158
Other.................. 7,319 8,875 14,035 7,222 8,433
DBS.................... 1,045 1,755 6,029 858 14,179
---------- ---------- ---------- -------- --------
Total................. 1,113,475 1,177,163 1,197,977 589,390 650,048
Operating, Selling,
General and
Administrative
Expenses............... 625,145 649,571 672,884 327,401 375,178
Depreciation and
Amortization........... 272,851 279,009 283,183 135,523 148,412
Non-Cash Stock
Compensation(1)........ 9,683 11,004 11,316 5,675 5,905
---------- ---------- ---------- -------- --------
Operating Income........ 205,796 237,579 230,594 120,791 120,553
Interest................ 296,031 282,252 315,541 147,910 166,314
Other (Income)
Expenses(2)............ 11,071 (10,978) 24,048 7,806 2,016
---------- ---------- ---------- -------- --------
Loss before Income
Taxes, Extraordinary
Item and Cumulative
Effect of Accounting
Change................. (101,306) (33,695) (108,995) (34,925) (47,777)
(Benefit) Provision for
Income Taxes........... 1,654 (7,921) (40,419) (11,304) (14,710)
---------- ---------- ---------- -------- --------
Loss before
Extraordinary Item and
Cumulative Effect of
Accounting Change...... (102,960) (25,774) (68,576) (23,621) (33,067)
Extraordinary Item...... -- -- (18,265) -- --
---------- ---------- ---------- -------- --------
Loss before Cumulative
Effect of
Accounting Change...... (102,960) (25,774) (86,841) (23,621) (33,067)
Cumulative Effect of
Change in
Accounting Principle... -- (184,996) -- -- --
---------- ---------- ---------- -------- --------
Net Loss................ $ (102,960) $ (210,770) $ (86,841) $(23,621) $(33,067)
========== ========== ========== ======== ========
OTHER DATA:
EBITDA(3)............... $ 488,330 $ 527,592 $ 525,093 $261,989 $274,870
EBITDA as a % of
Revenues............... 43.9% 44.8% 43.8% 44.5% 42.3%
--------
(1) This is the difference between the consideration paid by employees for
purchases of shares of Continental Common Stock under Continental's
Restricted Stock Purchase Program and the fair market value of such shares
at the date of issuance (as determined by Continental's Board of
Directors), amortized over the vesting schedule of such shares. (See Note
11 to Continental's Consolidated Financial Statements.)
(2) Includes equity in net income (loss) of affiliates, minority interest in
net loss of subsidiaries, other non-operating income and expenses, and
gains of $10,253,000, $17,067,000 and $24,067,000 from Continental's sales
of its investment in affiliates in 1992 and 1993 and sale of an investment
and marketable equity securities during the six months ended June 30,
1995, respectively. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Continental".)
(3) Operating income before depreciation and amortization and non-cash stock
compensation. Based on its experience in the cable television industry,
Continental believes that EBITDA and related measures of cash flow serve
as important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA should not be considered by the reader as
an alternative to operating or net income (as determined in accordance
with GAAP) as an indicator of Continental's performance or as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. Substantially all of
Continental's financing agreements contain certain covenants in which
EBITDA is used as a measure of financial performance. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
of Continental".)
182
RESULTS OF OPERATIONS. Continental's operations consist primarily of domestic
cable television systems with complementary operations and investments in three
other areas: (i) international cable television systems, (ii)
telecommunications and technology and (iii) programming.
Substantially all of Continental's revenues are earned from customer fees for
basic cable programming and premium television services, the rental of
converters and remote control devices, and cable installation fees. Additional
revenues are generated by the sale of advertising, pay-per-view programming
fees, DBS and payments received as a result of revenue sharing agreements for
products sold through home shopping networks. Continental expects that
advertising and home shopping revenues (which currently represent approximately
6% of Continental's total revenues) may become a larger percentage of total
revenues. These sources of revenues tend to be cyclical and seasonal in nature
and could introduce cyclicality and seasonality to Continental's total
revenues.
During the period from January 1, 1991 through December 31, 1993,
Continental's revenues increased at a compound annual growth rate of 8%
primarily through basic subscriber growth and increases in monthly revenue per
average basic subscriber. Revenues for the year ended December 31, 1994
increased only 1.8% compared to 1993 primarily as a result of basic rate
reductions and non-cash revenue reserves recorded in connection with the FCC
rate regulations. Continental's business is subject to significant regulatory
developments, including recent federal laws and regulations, which regulate
rates charged by Continental for certain cable services. (See "Legislation and
Regulation".) Such laws and regulations will limit Continental's ability to
increase or restructure its rates for certain services.
The high level of depreciation and amortization associated with Continental's
capital expenditures and acquisitions and the interest costs related to
financing activities, have caused Continental to report net losses. Continental
believes that such net losses are common for cable television companies.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994--
Revenues increased 10.3% (or $60,658,000) to $650,048,000. The acquisitions of
cable television systems that served approximately 78,000 basic subscribers
located in New England and Florida accounted for $13,201,000 of such revenue
increase. Excluding the effects of such acquisitions, revenues increased 8.1%
(or $47,457,000) as a result of a 3.2% increase in ending basic cable
subscribers, an increase in monthly basic cable revenue per average basic
subscriber and increases in premium, DBS and other revenues. Excluding the
acquisitions and DBS revenue, monthly cable revenue per average basic
subscriber increased from $35.29 to $35.94. The $.65 increase in monthly cable
revenue per average basic subscriber reflects an increase in basic rates during
the six months ended June 30, 1995, the recording of non-cash revenue reserves
during the six months ended June 30, 1994 in connection with the FCC's rate
regulations, (see "Liquidity and Capital Resources--Recent Legislation") and an
increase in premium and other revenue categories. Revenues from premium cable
services increased by $2,351,000 (excluding the acquisitions and DBS) due
primarily to a 3.6% increase in premium subscriptions to 2,614,000. The
increase in revenues (excluding the acquisitions and DBS) was also due to a
$2,703,000 increase in advertising revenues, a $1,116,000 increase in home
shopping revenues and a $188,000 increase in pay-per-view revenues. Revenues
from DBS services increased by $13,321,000 to $14,179,000 principally as a
result of an increase in DBS subscribers from approximately 5,000 to over
48,000.
Operating, selling, general and administrative expenses increased 15% to
$375,178,000 due to the acquisitions, the provision of DBS service, and
increases in programming costs and wages. Depreciation and amortization
expenses increased 10% to $148,412,000 due to the acquisitions and increased
levels of capital expenditures in 1994 and 1995. Operating income decreased
0.2% to $120,553,000. Interest expense increased approximately 12% to
$166,314,000 as a result of a 12% increase in average debt outstanding. The
effective interest rate remained consistent at 9.3%. Other (income) expenses
included a gain of $23,032,000 on the sale of Continental's shares of QVC
common stock and a gain of $1,035,000 on the partial sale of an investment in
NCC. Other (income) expenses also includes equity in net loss of affiliates,
which increased from $9,807,000 to $25,817,000 primarily due to Continental
recording its proportionate share of losses from
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TCG, the Golf Channel and the international investments in Argentina and
Singapore. As a result of such factors, the net loss before extraordinary item
for the six months ended June 30, 1995 compared to June 30, 1994 increased by
$9,446,000 to $33,067,000.
1994 Compared to 1993. Revenues increased by 1.8% (or $20,814,000) to
$1,197,977,000. The acquisitions of cable television systems serving
approximately 78,000 basic subscribers accounted for $8,025,000 of such
increase. (See "Domestic Acquisitions and Investments--Domestic
Acquisitions".) Excluding the effects of these acquisitions, revenue increased
1.1% (or $12,789,000) as a result of a 3.7% increase in ending basic
subscribers and an increase in premium and certain other revenue. Monthly
revenue per average basic subscriber decreased from $35.76 to $35.41. The $.35
decrease was primarily due to rate reductions and non-cash revenue reserves
recorded during 1994 in connection with the FCC's rate regulations; net of a
$.12 increase in premium, advertising, DBS and other revenue. (See "Liquidity
and Capital Resources--Recent Legislation" and "Legislation and Regulation".)
Revenues from premium cable services increased by $1,343,000 (excluding the
acquisition of cable television systems) due to an increase in premium
subscriptions from 2,454,000 to 2,594,000. The increase in revenues (excluding
the acquisition of cable television systems) was also due to a $5,050,000
increase in advertising revenue, a $4,274,000 increase in DBS revenue and a
$5,101,000 increase in other revenue due to continued growth in home shopping
revenue, less a $1,273,000 decrease in pay-per-view revenue. Pay-per-view
revenue decreased due to the lack of availability of special events offered as
compared to 1993, reflecting industry-wide trends.
Operating, selling, general and administrative expenses increased 3.6% to
$672,884,000, primarily due to the acquisitions and to increases in
programming costs and wages. Depreciation and amortization expenses increased
1.5% to $283,183,000 due to an increase in capital expenditures. Non-cash
stock compensation increased 2.8% to $11,316,000 due to the vesting of a
greater percentage of shares issued under Continental's Restricted Stock
Purchase Program as compared to 1993. Operating income decreased 2.9% to
$230,594,000. Interest expense increased approximately 11.8% to $315,541,000
due to a 5% increase in average debt outstanding and an increase in the
effective interest rate from 9.1% to 9.7%. Other (Income) Expenses decreased
as a result of equity in net loss of affiliates which increased from
$12,827,000 to $25,002,000, primarily due to Continental recording its
proportionate share of losses from PrimeStar and TCG and its affiliates.
Continental also recorded an extraordinary item of $18,265,000 due to the
extinguishment of debt.
As a result of such factors, loss before the cumulative effect of the
accounting change for the year ended December 31, 1994, compared to December
31, 1993, increased by $61,067,000 to $86,841,000, and net loss for the year
ended December 31, 1994, compared to December 31, 1993, decreased from
$210,770,000 to $86,841,000. Continental implemented SFAS 109 as of January 1,
1993. The cumulative effect of this change was a non-recurring increase in net
loss of $184,996,000 in 1993.
1993 Compared to 1992--Revenues increased 6% to $1,177,163,000, as a result
of a 1.4% increase in basic subscribers to 2,895,000 and an increase in
monthly revenue per average basic subscriber from $34.46 to $35.76. The $1.30
increase reflected primarily (i) an increase of $1.34 due to basic rate
increases prior to the imposition of the FCC's rate regulation and revenue
growth from other basic services, (ii) an increase of $.29 in advertising and
pay-per-view revenue, and (iii) a decrease of $.33 in premium subscription
revenue, which was due to the decrease in the pay-to-basic percentage from
88.5% to 84.2%, reflecting industry-wide trends. The total number of premium
subscriptions decreased from 2,545,000 to 2,454,000 in 1993.
Operating, selling, general and administrative expenses increased 4% to
$649,571,000, a rate of growth less than that of revenues, reflecting
continued operating efficiencies. Depreciation and amortization expenses
increased 2.3% to $279,009,000. Non-cash stock compensation increased 14% to
$11,004,000 due to the vesting of a greater percentage of shares issued under
Continental's Restricted Stock Purchase Program as compared to 1992. Operating
income increased 15.4% to $237,579,000. Interest expense decreased 4.7% to
$282,252,000 due to a reduction in the average debt outstanding and lower
effective interest rates during 1993.
184
Other (income) expenses included a gain of $4,322,000 on the sale of
marketable equity securities and a gain of $17,067,000 on the sale of
investments, which consisted of a gain of $15,919,000 due to the exchange of
Continental's equity interest in Insight Communications Company U.K., L.P. for
stock representing a minority interest in International CableTel, Incorporated
and a gain of $1,148,000 due to a post-closing adjustment in connection with
the sale of Continental's interest in North Central Cable Communications
Corporation ("North Central Cable"). Other (income) expenses also included a
gain of $2,325,000 relating to the reversal of previously accrued liabilities
recorded in connection with litigation relating to four partnerships managed by
a subsidiary of Continental, which was settled in 1993. Equity in net loss of
affiliates increased to $12,827,000 primarily due to Continental recording its
proportionate share of losses from TCG and its affiliates. (See "Strategic
Investments--Telecommunications and Technology Investments--Teleport
Communications Group, Inc.")
SFAS 109 required a change from the deferred to the liability method for
computing deferred income taxes. Continental implemented SFAS 109 as of January
1, 1993, and the cumulative effect of this change was a non-recurring increase
in net loss of $184,996,000. The cumulative change resulted from net deferred
tax liabilities recognized for the difference between the financial reporting
and tax bases of assets and liabilities. Income tax expense (benefit) changed
from an expense of $1,654,000 in 1992 to a benefit of $7,921,000 in 1993 due to
deferred tax benefits recognized under SFAS 109. The income tax benefit for
1993 was decreased by $4,182,000 as a result of applying the newly enacted
federal tax rates to deferred tax balances as of January 1, 1993.
As a result of such factors, net loss before the cumulative effect of this
accounting change for the year ended December 31, 1993 decreased by $77,186,000
to $25,774,000, and net loss for the year ended December 31, 1993 increased
from $102,960,000 to $210,770,000.
EBITDA. Based on its experience in the cable television industry, Continental
believes that EBITDA and related measures of cash flow serve as financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage. EBITDA
should not be considered as an alternative to operating or net income (measured
in accordance with GAAP) as an indicator of Continental's performance or as an
alternative to cash flows from operating activities (measured in accordance
with GAAP) as a measure of Continental's liquidity. For the six months ended
June 30, 1995, EBITDA increased approximately 5% to $274,870,000, as compared
to the same period in 1994, as a result of increases in revenue. DBS service
contributed ($844,000) and $1,242,000 of the EBITDA for the six months ended
June 30, 1994 and 1995, respectively. EBITDA decreased 0.5% to $525,093,000 for
the year ended December 31, 1994, primarily due to rate reductions and non-cash
revenue reserves recorded in connection with the FCC's rate regulations. EBITDA
increased 8% to $527,592,000 during the year ended December 31,1993, primarily
due to increases in revenue.
* * * *
Inflation. Certain of Continental's expenses, such as those for wages and
benefits, for equipment repair and replacement and for billing and marketing,
increase with general inflation. However, Continental does not believe that its
results of operations have been, or will be, adversely affected by inflation,
provided that it is able to increase its service rates periodically. (See
"Legislation and Regulation" for a description of recent laws and regulation
that may limit Continental's ability to raise its rates for certain services.)
Recent Accounting Pronouncements. In May 1993, the FASB issued SFAS 115,
which is effective for fiscal years beginning after December 15, 1993. SFAS 115
establishes standards for the accounting and reporting of investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Effective January 1, 1994, Continental implemented SFAS
115, which resulted in a net unrealized holding gain of $84,650,000 on
marketable equity securities after recording deferred income taxes of
$56,434,000 and is reported as a reduction of stockholders' deficiency.
In May 1993, the FASB issued SFAS 114, which is effective for fiscal years
beginning after December 15, 1994. SFAS 114 addresses the accounting for
certain loans which may be deemed impaired made by
185
Continental to affiliates and certain employees. The effect of implementing
SFAS 114 will be immaterial to Continental's financial position and results of
operation.
In October 1994, the FASB issued SFAS 119, which is effective for fiscal
years ending after December 15, 1994 and requires disclosure about amounts,
nature and terms of derivative and other financial instruments held.
In March 1995, the FASB issued SFAS 121, which is effective for fiscal years
beginning after December 31, 1995. SFAS 121 addresses the accounting for
potential impairment of long-lived assets. The effect of implementing SFAS 121
is expected to be immaterial to Continental's financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES. The cable television business requires
substantial financing for the construction, expansion and maintenance of plant
and for acquisitions and investments. Continental has historically financed its
capital expenditures, acquisitions and investments through long-term debt and,
to a lesser extent, through private issuances of equity and cash provided from
operating activities. Continental's ability to generate cash adequate to meet
its needs depends generally on the results of its operations and the
availability of external financing. Continental believes that cash generated
from operating activities, together with borrowings from existing and future
credit facilities and proceeds from future equity issuances will be sufficient
to meet its future debt service requirements and stock repurchase obligations
and to make anticipated acquisitions, investments and capital expenditures.
The following table sets forth for the period indicated certain items from
Continental's Statements of Consolidated Cash Flows (in thousands).
SIX MONTHS ENDED
JUNE 30, 1995
----------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES............. $ 77,527
=========
NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES:
Net Borrowings (Repayments)(1)........................ $ 278,194
Other................................................. 1,047
---------
Total............................................... $ 279,241
=========
NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES:
Property, Plant and Equipment......................... $(231,021)
Investments........................................... (121,719)
Other Assets.......................................... (28,788)
Proceeds from Sale of Marketable Equity Securities.... 27,357
Proceeds from Sale of Investment...................... 1,181
---------
Total............................................... $(352,990)
=========
--------
(1) Borrowings are shown net of financing fees paid.
Recent Financing Activities. On October 17, 1994 Continental closed its 1994
Credit Facility, which represents an amendment and restatement of the 1990
Credit Agreement, with a group of financial institutions (the "1994 Credit
Facility"). The 1994 Credit Facility is an unsecured, reducing revolving credit
facility with maximum credit availability of $2,200,000,000. Credit
availability under the 1994 Credit Facility will decrease annually commencing
December 31, 1997 with a final maturity in October 2003. As of June 30, 1995,
Continental had credit availability of $536,260,000 under the 1994 Credit
Facility (See "Description of Continental Indebtedness").
On July 18, 1995 certain of Continental's subsidiaries closed a new
unsecured, revolving credit facility with a group of financial institutions
(the "1995 Credit Facility"). The maximum credit availability under
186
the 1995 Credit Facility is $1,200,000,000 which will decrease annually
commencing December 31, 1998, with a final maturity in September 2004. Such
facility has other terms and conditions which are similar in certain respects
to those contained in the 1994 Credit Facility. Continental anticipates using
proceeds from the 1995 Credit Facility to fund: (i) the King Cable Purchase and
assumed liabilities in connection with the Merger in an aggregate amount of
$815,000,000 (see "Capital Expenditures and Domestic Acquisitions"), (ii)
approximately $245,000,000 of cable system acquisitions in Michigan and (iii)
general corporate purposes, which would include capital expenditures of the
acquired cable systems. The Closing of the Merger is a condition to funding
under the 1995 Credit Facility. (See "Description of Continental
Indebtedness".)
Credit Arrangements of the Company. On June 30, 1995, Continental had cash on
hand of $15,342,000 and the following credit arrangements: (i) $1,663,740,000
outstanding under the 1994 Credit Facility; (ii) $138,250,000 of 10.12% Senior
Notes Due 1999 to the Prudential Life Insurance Company (the "Prudential
Notes"); (iii) $200,000,000 of 8 1/2% Senior Notes Due 2001; (iv) $100,000,000
of 8 5/8% Senior Notes Due 2003; (v) $275,000,000 of 8 7/8% Senior Debentures
Due 2005; (vi) $300,000,000 of 9% Senior Debentures Due 2008; (vii)
$525,000,000 of 9 1/2% Senior Debentures Due 2013; (viii) $100,000,000 of 10
5/8% Senior Subordinated Notes Due 2002; (ix) $100,000,000 of Senior
Subordinated Floating Rate Debentures Due 2004; and (x) $300,000,000 of 11%
Senior Subordinated Debentures Due 2007. Other miscellaneous debt was
$26,111,000 as of June 30, 1995.
In addition, a subsidiary of Continental has issued a standby letter of
credit of $56,250,000 on behalf of PrimeStar, which guarantees a portion of the
financing PrimeStar incurred to construct a successor satellite system.
Continental anticipates that the obligations under such letter of credit will
increase next year up to a maximum of $70,625,000. The letter of credit is
secured by certain marketable equity securities with a fair market value of
$120,042,000 as of June 30, 1995.
The annual maturities of Continental's indebtedness for the years ending
December 31, 1995, 1996, 1997, 1998 and 1999 will be $24,265,000, $27,250,000,
$30,550,000, $33,250,000 and $35,000,000 respectively.
Interest Rate Protection Products. Continental's policy is to use interest
rate protection products (including interest rate exchange agreements and
interest rate cap agreements) to hedge its interest rate risk. In accordance
with the 1994 Credit Facility, Continental is required to maintain a minimum of
50% of its debt at fixed interest rates, when the ratio of total debt to EBITDA
exceeds certain levels.
. Interest Rate Exchange Agreements ("Swaps") are matched with either fixed
or variable rate debt. Continental accounts for outstanding Swaps on a
settlement basis as an adjustment to interest expense. Gains or losses
resulting from the termination of Swaps are amortized over the remaining
life of the underlying debt or the Swap, whichever is less. As of June
30, 1995 Continental had Swaps pursuant to which it pays fixed interest
rates averaging approximately 9.0% on notional amounts of $900,000,000
(expiring in 1995 through 2000) and variable interest rates on notional
amounts of $1,575,000,000 (expiring in 1998 through 2003). The variable
interest rates are based on 6-month LIBOR, which currently is
approximately 6.0%.
. As of June 30, 1995, Continental had $800,000,000 of Interest Rate Cap
Agreements ("Caps"), which limit 6-month LIBOR to approximately 8%.
Continental amortizes the cost of its Caps over the life of the Cap
agreement as an adjustment to interest expense.
As of June 30, 1995, Continental's ratio of fixed interest rate debt (which
factors in Swaps, Caps and debt fixed by its terms) to total debt was
approximately 56%. Continental's exposure, if the other parties fail to perform
under both Swaps and Caps, would be limited to the impact of variable interest
rate fluctuations and the periodic settlement of amounts due under these
agreements.
CAPITAL EXPENDITURES AND DOMESTIC ACQUISITIONS. Continental's expenditures
for property, plant and equipment totaled $231,021,000 for the six months ended
June 30, 1995 ($32,774,000 of which was related to the provision of DBS
service). Continental anticipates that it will spend up to approximately
$350,000,000
187
for capital expenditures for its existing systems during 1995. In addition,
Continental anticipates spending approximately $55,000,000 for DBS home-
premises equipment in connection with its role as a distributor for PrimeStar.
However, Continental is continually re-evaluating its capital budget. The
anticipated increase in capital expenditures for 1995 as compared to 1994 is
due to: (i) Continental's intention to further expand channel capacity and to
deploy addressable technology more extensively in its systems and (ii) the
provision of DBS service. Continental anticipates funding its capital
expenditures in 1995 with proceeds from the 1994 Credit Facility and cash
provided from operating activities. In accordance with the recently adopted
Social Contract with the FCC (see Legislation and Regulation), Continental is
required to invest a certain amount in domestic system rebuilds and upgrades
over time to expand channel capacity and improve system reliability and picture
quality. (See "Description of Continental--Regulatory Response".)
In November 1994, Continental entered into a purchase and sale agreement to
purchase several cable television systems in Michigan for approximately
$155,000,000, of which $7,500,000 was funded in escrow and included in Other
Assets in 1994. Subsequent to December 31, 1994, Continental entered into
purchase and sale agreements to purchase cable television systems in Chicago,
Illinois and Northern California for approximately $168,500,000 (see Other
Financing and Investment Activities) and $17,000,000, respectively. Continental
also entered into an agreement, which is currently being renegotiated, to
acquire the remaining ownership interests and assume certain liabilities of N-
COM, a limited partnership that owns and operates cable television systems in
Michigan, for total consideration of approximately $90,000,000. Continental
currently owns a 33.77% limited partnership interest in N-COM. For the most
part, these cable television systems serve communities that are contiguous or
in close proximity to Continental's existing systems. The Illinois acquisition
closed on August 4, 1995. The remaining pending acquisitions are expected to
close in 1995. Continental will fund the cable system acquisitions in Michigan
with proceeds from the 1995 Credit Facility. Continental funded the cable
system acquisition in Illinois and will fund the cable system acquisition in
Northern California with proceeds from its 1994 Credit Facility. (See "Pro
Forma Condensed Financial Statements".) There can be no assurances that all or
any of the pending acquisitions will be consummated (See "Domestic Acquisitions
and Investments--Domestic Acquisitions".)
INVESTMENTS. For purposes of the Statements of Consolidated Cash Flows,
investments include investments in telecommunications and technology,
international investments and other investments.
Investments in Telecommunications and Technology. Continental has made
numerous investments which are related to its ownership interests in TCG and
PrimeStar.
In 1993, Continental purchased 20% of TCG for a purchase price of
$66,020,000. In addition, Continental has committed to lend up to $69,920,000
to TCG through 2003, of which $53,800,000 was advanced as of June 30, 1995.
Continental has also invested $50,507,000 in joint ventures involving TCG and
other cable operators and may in the future make additional investments in TCG
and joint ventures involving TCG. Such future possible investments cannot be
quantified at this time and will be evaluated by Continental on a project-by-
project basis. On May 22, 1995 TCG entered into a $250 million revolving credit
facility with a group of financial institutions. Proceeds from the facility may
be used for general corporate purposes of TCG, including capital expenditures.
Such facility will reduce the amount of future advances from TCG's
shareholders, including Continental.
Continental also owns an approximate 10% partnership interest in PrimeStar
and has an investment of $13,481,000 as of June 30, 1995. (See "Strategic
Investments--Telecommunications and Technology Investments".) Continental has
made cash investments to fund PrimeStar's ongoing operations and may in the
future make additional investments in PrimeStar. Continental anticipates
funding any additional investments in PrimeStar with cash provided from
operating activities and proceeds from the 1994 Credit Facility.
International Investments. Continental has advanced US$148,000,000 to
Fintelco, a company which owns and operates cable television systems serving
over 600,000 subscribers in Argentina. Continental
188
currently holds an approximate 50% interest in Fintelco subject to certain
regulatory approvals. (See "International Operations".) In addition,
Continental has recorded commitments to contribute an additional US$33,469,000
to Fintelco in order to finance a portion of certain acquisitions of Argentine
cable television systems. Continental anticipates funding such commitments with
proceeds from its 1994 Credit Facility and cash provided from operating
activities. In addition, Fintelco is in the process of arranging an aggregate
of approximately $150 million in senior credit facilities with a group of
financial institutions. Such facilities may reduce the amount of future
advances from Fintelco's shareholders, including Continental. No assurance can
be given at this time that such facilities will be successfully raised.
In September 1994, Continental acquired a 25% equity interest in SCV which
will construct, own and operate an exclusive cable television system in
Singapore. To date, Continental has made capital contributions of US$17,614,000
and committed to contribute up to approximately US$27,000,000 (based on
exchange rates as of June 30, 1995) in additional capital through 1996. In
addition, Continental has committed to lend up to approximately US$45,000,000
(based on exchange rates as of June 30, 1995) to SCV if third-party debt
financing is unavailable. SCV is in the process of arranging an aggregate of
S$200,000,000 in senior credit facilities with certain financial institutions.
Such facilities, which can be increased to S$300,000,000 at the option of SCV
under certain circumstances, will reduce the amount of future advances from
SCV's shareholders, including Continental. No assurance can be given at this
time that such facilities will be successfully raised. (See "International
Operations".) Continental anticipates funding such commitments with proceeds
from its 1994 Credit Facility and cash provided from operating activities.
Continental and Optus, a provider of long-distance and cellular telephone
services in Australia, have formed a joint venture to create a broadband
communications network in Australia. The venture, called Optus Vision, is owned
46.5% by Continental, 46.5% by Optus, 5% by Nine and 2% by Seven. Each of Nine
and Seven has an option to increase its shareholdings to 20% and 15%,
respectively, at any time prior to July 1, 1997. Optus Vision will provide
cable television, local telephony and a variety of advanced broadband
interactive services to businesses and residential customers in Australia's
major markets.
As of June 30, 1995 Continental has invested approximately US$33.4 million in
Optus Vision. Optus Vision anticipates at this time that the required funding
needs of the project will total over US$1.5 billion (based upon exchange rates
at June 30, 1995) through 1999, which will be provided by a combination of
equity from the joint venture partners and third-party debt. Consummation of
the joint venture is subject to the receipt of regulatory approvals. No
assurances can be given at this time that such approvals will be granted.
Continental anticipates funding its share of the equity contributions to Optus
Vision with proceeds from its 1994 Credit Facility, cash provided from
operating activities, and other capital transactions which could include the
issuance of new indebtedness and/or equity. Continental's funding requirements
would be reduced if either or both of Nine and Seven exercise their options to
increase their equity interests in Optus Vision to 20% and 15%, respectively.
There can be no assurances that Nine and/or Seven will exercise their options.
Other Financing and Investment Activities. Other Assets increased by
$28,788,000 during the six months ended June 30, 1995 due primarily to a
$16,850,000 deposit in connection with the acquisition of a cable system in
Chicago, Illinois, which closed in August 1995, and approximately $13,000,000
of loans to certain employees to cover tax obligations in connection with the
Company's Restricted Stock Purchase Program (see Note 11 to the Company's
Consolidated Financial Statements).
In addition, the Company sold its shares of QVC common stock in a tender
offer for approximately $27,357,000 and sold a portion of its investment in NCC
for approximately $1,181,000. The proceeds from these sales were used to repay
amounts outstanding under the 1994 Credit Facility.
RECENT STOCK REPURCHASES AND 1998-1999 SHARE REPURCHASE PROGRAM. Continental
is a party to a liquidity agreement (the "Stock Liquidation Agreement") with
certain stockholders, including H. Irving Grousbeck (a co-founder of
Continental), and the partners of certain general investment limited
partnerships
189
managed by Burr, Egan, Deleage & Co. (the "BED Partnerships") (collectively,
the "Subject Stockholders"), which provides for various liquidity arrangements
for its stockholders. Continental extended to its other stockholders the
opportunity to participate in such program (all such shares held by
stockholders electing to participate in the Stock Liquidation Agreement,
including the Subject Stockholders, are referred to as "Continental Redeemable
Common Stock"). The Stock Liquidation Agreement required, among other things,
that Continental make a tender offer (the "Mandatory Tender Offer") to all of
its stockholders, including the Subject Stockholders, to repurchase at least
300,000 shares of Continental Common Stock during 1993 (not giving effect to
the Continental Stock Split). On October 1, 1992, Continental purchased 715,761
shares (not giving effect to the Continental Stock Split) of Continental Common
Stock pursuant to a tender offer for an aggregate purchase price of
approximately $239,852,000, fully satisfying Continental's obligation to make
the Mandatory Tender Offer.
The only remaining obligation of Continental under the Stock Liquidation
Agreement is to repurchase the remaining shares of Continental Redeemable
Common Stock held by the Subject Stockholders, as well as by the other
stockholders who elected to participate in this aspect of the liquidity program
(collectively, the "Selling Stockholders"), on December 15, 1998 (or January
15, 1999, at each Selling Stockholder's election). The purchase price for such
redemption is equal to the greater of (i) the dollar amount that a holder of
Continental Common Stock would receive per share of Continental Common Stock
upon a sale of Continental
as a whole pursuant to a merger or a sale of stock or, if greater, the dollar
amount a holder of Continental Common Stock would then receive per share of
Continental Common Stock derived from the sale of Continental's assets and
subsequent distribution of the proceeds therefrom (net of corporate taxes,
including sales and capital gains taxes in connection with such sale of
assets), in either case less a discount of 22.5% or (ii) the dollar amount
equal to the net proceeds which would be expected to be received by a
stockholder of Continental from the sale of a share of Continental Common Stock
in an underwritten public offering after, under certain circumstances, being
reduced by pro forma expenses and underwriting discounts.
In a series of transactions in late 1993 and 1994, Continental repurchased
67,492 shares (not giving effect to the Continental Stock Split) of Continental
Common Stock from certain BED Partnerships for $485 per share, which was the
same per share price at which shares were sold in private placements of
Continental Class A Common Stock which occurred in November 1993 and November
1994. A condition to some of the repurchases by Continental was the release by
certain parties of all rights under the Stock Liquidation Agreement as to any
shares not sold to Continental.
As a result of the tender offer in 1992 and subsequent repurchases of
Continental Redeemable Common Stock, Continental has reduced its obligations to
repurchase shares of Continental Redeemable Common Stock pursuant to the 1998-
1999 Share Repurchase Program to 667,366 shares (16,684,150 shares, giving
effect to the Continental Recapitalization Amendment and the Continental Stock
Split) (representing approximately 9.5% of its outstanding shares of
Continental Common Stock on a fully diluted basis, assuming conversion of the
outstanding shares of Continental Series A Preferred Stock after giving effect
to the Merger and the Continental Recapitalization Amendment and the
Continental Stock Split) from the Selling Stockholders pursuant to the 1998-
1999 Share Repurchase Program. None of the officers or Directors of Continental
elected to participate in the 1998-1999 Share Repurchase Program. The Selling
Stockholders have agreed not to acquire any additional shares of Continental
Common Stock (or securities convertible into or granting the right to purchase
shares of Continental Common Stock).
The obligation of Continental to repurchase shares of Continental Redeemable
Common Stock pursuant to the 1998-1999 Share Repurchase Program is subject to
applicable requirements of law, including the relevant Delaware corporate
statutes relating to impairment of capital. Section 160 of the DGCL provides
that, for the purpose of redeeming or otherwise acquiring outstanding shares of
its capital stock, a corporation may use only those surplus funds which
represent the amount by which the value of its net assets exceeds the aggregate
amount represented by all the shares of its capital stock; to the extent funds
used for redemption purposes exceed this amount, a corporation is deemed to
have impaired its capital in violation of Section 160.
190
If Continental's financial position is such that it is unable to fulfill its
obligations under the Stock Liquidation Agreement while continuing to comply
with this statutory requirement, Continental will be prohibited from
consummating such transactions. Continental's obligations under the 1998-1999
Share Repurchase Program are also subject to existing and future agreements of
Continental, including all existing and future financing agreements. Provisions
in such agreements restricting Continental's ability to incur indebtedness or
to make distributions to, or redeem or repurchase shares of capital stock from,
its stockholders may prevent Continental from consummating the 1998-1999 Share
Repurchase Program. (See Note 7 to Continental's Consolidated Financial
Statements.) To the extent such program is thus prohibited, the Stock
Liquidation Agreement provides that Continental's obligation to consummate the
relevant repurchase or portion thereof will be deferred until such time as the
consummation of such repurchase or portion thereof would be in compliance with
such requirements of law and agreements.
In the event Continental is unable to perform its obligation to complete the
1998-1999 Share Repurchase Program within six months of the payment date
therefor, Continental is obligated, at the request made within such six month
period of any one or more Subject Stockholders or transferees holding an
aggregate of at least 100,000 shares (which is equivalent to 2,500,000 shares
after giving effect to the Continental Recapitalization Amendment and the
Continental Stock Split) of such transferred shares of Continental Redeemable
Common Stock, to use its best efforts (subject to compliance with applicable
laws and regulations) to cause the sale of all or substantially all of the
assets of Continental and, following the consummation of such sale, to
liquidate Continental. All shares of Continental Common Stock, including the
Continental Redeemable Common Stock, would share equally in the proceeds of any
liquidation, after all payments are made or set aside for holders of
indebtedness or Continental Preferred Stock.
CAPITAL RESOURCES. Historically, cash generated from Continental's operating
activities in conjunction with borrowings and proceeds from private equity
issuances has been sufficient to meet its debt service requirements, stock
repurchase obligations and acquisition, investment and capital expenditure
requirements. Continental believes that cash generated from operating
activities, together with borrowings from existing and future credit facilities
(including the 1995 Credit Facility) and proceeds from future equity issuances,
will be sufficient to meet its future debt service requirements and stock
repurchase obligations and to make anticipated acquisitions, investments and
capital expenditures. However, there can be no assurance in this regard.
Continental anticipates that it will offer shares of its capital stock in a
private or public offering in the future. (See "The Merger--Undertakings
Regarding Public Offering".) There can be no assurance in this regard or that
any such future equity issuance would be at a price per share equal to or
greater than the price per share ascribed to the Continental Merger Stock.
Furthermore, there can be no assurance that the terms available for any future
debt financing would be favorable to Continental.
RECENT LEGISLATION. In October 1992, Congress enacted the 1992 Cable Act,
which, among other things, authorizes the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services and
equipment and gives local broadcast stations the option to elect mandatory
carriage or require retransmission consent.
Pursuant to authority granted under the 1992 Cable Act, the FCC in April 1993
promulgated rate regulations that established maximum allowable rates for cable
television services, except for services offered on a per-channel or per-
program basis. On February 22, 1994, the FCC adopted a revised regulatory
scheme which included, among other things, interim cost-of-service standards
and a new benchmark formula to determine certain service rates. In creating the
new benchmark formula, the FCC authorized a further reduction in rates for
certain regulated services. As a result, rates for certain regulated services
in effect were then reduced by as much as 17% below their September 30, 1992
levels if they exceeded the new per-channel benchmark rates. The old benchmark
formula called for a reduction of up to 10%. As part of the implementation of
the regulations, the FCC froze rates for regulated services from April 1, 1993
through May 15, 1994.
191
The regulations require rates for equipment to be cost-based and require
reasonable rates for regulated cable television services to be established
based on, at the election of the cable television operator, either application
of the FCC's benchmarks or a cost-of-service showing pursuant to standards
adopted by the FCC.
To the extent that a cable television system's rates are found to exceed the
reasonable rate determined by the methodology selected by the cable television
operator, the rates will be subject to "rollbacks" and, in some cases, refunds.
In addition, if a cable television system's rates for regulated services do not
need to be reduced by 17% in order to reach the new benchmark adopted on
February 22, 1994, such rates may nonetheless be subject to further reduction,
up to a maximum reduction of 17% from the rates in effect on September 30,
1992, based upon the results of a pending FCC study of the operating costs of
such cable television systems. (See "Legislation and Regulation".) The timing
and amount of such rollbacks, refunds and further reductions, if any, for any
system will depend on a number of factors, including the method of rate
determination selected by the cable television operator, further clarification
of the benchmark and cost-of-service methodologies adopted on February 22,
1994, the ability of the FCC to efficiently process cost-of-service showings
submitted by cable television operators, the success on the merits of such
cost-of-service showings and the outcome of pending litigation challenging
various aspects of the 1992 Cable Act.
Under current FCC regulations, a rate complaint or certification of a local
franchising authority is required to regulate a system. In accordance with the
regulations, Continental has either reduced rates under the FCC's benchmark
methodology or supported current rates by cost-of-service showings for these
regulated franchises. Certain positions taken by Continental in its cost-of-
service filings are based on provisions of the FCC's interim cost-of-service
rules that allow certain "presumptions" in the rules to be overcome on a case-
by-case basis. While Continental believes that its showings in this regard are
sufficient, the results of these cases are unknown. As a result Continental
recorded a revenue reserve in 1994. In the opinion of management, the ultimate
resolution of these existing filings will not have a material adverse effect on
Continental's consolidated financial position.
Continental has settled all of its pending cost-of-service rate cases and all
of its benchmark CPS tier rate cases through the recently adopted Social
Contract with the FCC. Benchmark BBT cases will continue to be resolved by
Continental and local franchising authorities. (For a description of the Social
Contract, see "Description of Continental--Regulatory Response".)
192
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Balance Sheet has been prepared
based upon the historical consolidated balance sheets of Continental and
Providence Journal Cable as of June 30, 1995, and gives effect to (i) the
Merger and certain related transactions, including the assumption of
$410,000,000 of New Cable Indebtedness and the King Cable Purchase for
$405,000,000 (a portion of the 1995 Credit Facility will fund the New Cable
Indebtedness and the King Cable Purchase); (ii) various other acquisitions of
domestic cable television systems (Columbia Cable of Michigan, Cablevision of
Chicago, N-COM and Consolidated Cablevision of California); and (iii) the
Continental Recapitalization Amendment and the Continental Stock Split, in each
instance as though each of such events had occurred as of June 30, 1995. The
following unaudited Pro Forma Condensed Statements of Operations for the year
ended December 31, 1994 and the six months ended June 30, 1995 gives effect to:
(i) each of the above transactions, (ii) the Manchester, New Hampshire and Clay
Cablevision acquisitions, (iii) the closing of the 1994 Credit Facility and
(iv) the redemption of the 12 7/8% Senior Subordinated Debentures ("12 7/8%
Debt") as though each of such events had occurred as of January 1, 1994. Pro
forma adjustments are described in the accompanying notes.
These pro forma financial statements should be read in conjunction with the
Consolidated Financial Statements and related notes of Continental and
Providence Journal Cable included elsewhere in this Joint Proxy Statement-
Prospectus. The Pro Forma Condensed Statements of Operations are not
necessarily indicative of the actual results of operations that would have been
reported if the acquisitions and the other transactions described above had
occurred as of January 1, 1994, nor do they purport to indicate the results of
future operations of Continental. In the opinion of management, all adjustments
necessary to present fairly such pro forma financial statements have been made.
193
PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1995
(IN THOUSANDS)
PRO FORMA
ADJUSTMENTS
PRO FORMA PROVIDENCE PROVIDENCE
ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA
CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL
----------- ----------- ----------- ---------- ----------- -----------
ASSETS
Cash.................... $ 15,342 $ 1,334 (1) $ 16,676 $ 210 $ -- $ 16,886
Accounts Receivable--
net.................... 60,203 1,025 (1) 61,228 25,423 -- 86,651
Prepaid Expenses and
Other.................. 3,536 154 (1) 3,690 5,396 -- 9,086
Supplies................ 76,542 -- 76,542 7,198 -- 83,740
Marketable Equity
Securities............. 120,042 -- 120,042 -- -- 120,042
Investments............. 432,487 -- 432,487 -- -- 432,487
Property, Plant and
Equipment--net......... 1,482,638 142,856 (1) 1,625,494 257,656 153,665 (3) 2,036,815
Other Assets--net....... 503,104 284,960 (1) 788,064 522,750 794,692 (3) 2,105,506
----------- -------- ----------- -------- --------- -----------
TOTAL................. $ 2,693,894 $430,329 $ 3,124,223 $818,633 $ 948,357 $ 4,891,213
=========== ======== =========== ======== ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Accounts Payable........ $ 71,062 $ 354 (1) $ 71,416 $ 12,466 $ -- $ 83,882
Accrued Interest........ 74,061 -- 74,061 -- -- 74,061
Accrued and Other
Liabilities............ 197,451 2,159 (1) 199,610 41,217 -- 240,827
Debt.................... 3,728,101 406,150 (1) 4,134,251 -- 815,000 (3) --
(12,000)(3) 4,921,251
(16,000)(3) --
Due to Affiliate--
Providence Journal..... -- -- -- 611,567 (611,567)(3) --
Deferred Income Taxes... 101,735 21,666 (1) 123,401 86,066 244,172 (3) 453,639
Minority Interest in
Subsidiaries........... 3,798 -- 3,798 14,402 (14,402)(3) 3,798
Redeemable Common Stock. 242,721 -- 242,721 -- -- 242,721
Stockholders' Equity
(Deficiency):
Series A Convertible
Preferred Stock....... 11 -- 11 -- -- 11
Common Stock........... 40 972 (2) 1,012 -- 307 (3) 1,319
Additional Paid-In
Capital............... 618,236 (972)(2) 617,264 -- 595,762 (3) 1,213,026
Unearned Compensation.. (51,708) -- (51,708) -- -- (51,708)
Net Unrealized Holding
Gain on Marketable
Equity Securities..... 49,104 -- 49,104 -- -- 49,104
Retained Earnings
(Deficit)............. (2,340,718) -- (2,340,718) 52,915 (52,915)(3) (2,340,718)
----------- -------- ----------- -------- --------- -----------
TOTAL................. $ 2,693,894 $430,329 $ 3,124,223 $818,633 $ 948,357 $ 4,891,213
=========== ======== =========== ======== ========= ===========
See Notes to Pro Forma Condensed Balance Sheets.
194
NOTES TO PRO FORMA CONDENSED BALANCE SHEET
The following adjustments are presented to reflect the effects of recording
the acquisitions and applying purchase accounting to the accounts of the
following cable television systems: (i) Columbia Cable of Michigan, purchase
price of approximately $155,000,000; (ii) Consolidated Cablevision of
California, purchase price of approximately $17,000,000 (iii) Cablevision of
Chicago, purchase price of approximately $168,500,000; and (iv) for the
remaining non-owned interest in N-COM, purchase price of approximately
$90,000,000 (which includes assumed liabilities). (See "Description of
Continental--Domestic Acquisitions and Investments".) A summary of the combined
purchase adjustment is as follows (in thousands):
Purchase Price:
Purchase Price of Cable Television Systems......................... $352,242
Net Working Capital Deficit and Liabilities of Cable Television
Systems assumed................................................... 78,258
--------
Total $430,500
========
Allocation of Purchase Price:
Estimated Fair Value of Property, Plant and Equipment.............. $142,856
Estimated Fair Value of Acquired Franchises........................ 287,644
Deferred Taxes Related to Property, Plant and Equipment
and Acquired Franchise Write-up ($430,500-$374,946) X 39%......... (21,666)
--------
408,834
--------
Excess of Purchase Price Over Property, Plant and Equipment and
Acquired Franchises............................................... $ 21,666
========
(1) To record the fair value of property, plant and equipment, franchise costs
and certain current assets and current liabilities of the above cable
television systems. The adjustment for goodwill and deferred taxes
represents the preliminary estimate of the excess of the purchase price
plus net liabilities assumed over the fair value of property, plant and
equipment and acquired franchises, reduced by the property, plant and
equipment and acquired franchises previously recorded by the above cable
television systems. Continental will borrow a total of $406,150,000 in debt
under the 1994 Credit Facility and 1995 Credit Facility to finance the
acquisitions (excluding the Merger) and refinance liabilities assumed (see
"Management Discussion and Analysis of Financial Condition and Results of
Operations of Continental--Liquidity and Capital Resources--Capital
Expenditures and Domestic Acquisitions"). As of June 30, 1995, Continental
has funded an escrow deposit of $7,500,000 relating to the acquisition of
Columbia Cable of Michigan and an escrow deposit of $16,850,000 relating to
the acquisition of Cablevision of Chicago, which were included in Other
Assets. The Cablevision of Chicago acquisition closed on August 4, 1995.
The preliminary estimates of the fair value of property, plant and
equipment and acquired franchises may change upon final appraisal.
The following table sets forth as of June 30, 1995 the fair value of the
property, plant and equipment, franchise costs and certain assets and
current liabilities of the above cable television systems and the debt
incurred to finance these acquisitions or refinance the liabilities assumed
(in thousands):
CONSOLIDATED
COLUMBIA CABLE CABLEVISION CABLEVISION
N-COM OF MICHIGAN OF CHICAGO OF CALIFORNIA TOTAL
-------- -------------- ----------- ------------- --------
ASSETS
Cash.................... $ 1,334 $ -- $ -- $ -- $ 1,334
Accounts Receivable--
net.................... 1,025 -- -- -- 1,025
Prepaid Expenses and
Other.................. 154 -- -- -- 154
Property, Plant and
Equipment--net......... 40,706 46,500 50,550 5,100 142,856
Other Assets--net....... 70,960 101,000 101,100 11,900 284,960
-------- -------- -------- ------- --------
Total................. $114,179 $147,500 $151,650 $17,000 $430,329
======== ======== ======== ======= ========
LIABILITIES
Accounts Payable........ $ 354 $ -- $ -- $ -- $ 354
Accrued and Other
Liabilities............ 2,159 -- -- -- 2,159
Debt.................... 90,000 147,500 151,650 17,000 406,150
Deferred Income Taxes... 21,666 -- -- -- 21,666
-------- -------- -------- ------- --------
Total................. $114,179 $147,500 $151,650 $17,000 $430,329
======== ======== ======== ======= ========
195
(2) To record the increase in Continental Common Stock due to the Continental
Recapitalization Amendment and the Continental Stock Split.
(3) To record the estimated fair value of $596,069,000 for the 30,725,207
shares of Continental Class A Common Stock to be issued to shareholders of
Providence Journal in exchange for all the shares of Providence Journal
Common Stock. To record $410,000,000 of New Cable Indebtedness, which will
be made available to Providence Journal and/or a subsidiary under the 1995
Credit Facility prior to the Effective Time and will be assumed by a
Continental subsidiary upon consummation of the Merger. To record the King
Cable Purchase for $405,000,000, which will be funded under the 1995 Credit
Facility. To record the Working Capital deficit of approximately
$16,000,000 and Capital Expenditure Adjustment of approximately $12,000,000
both to be paid in cash to Continental. The cash will be utilized to repay
amounts outstanding under the 1995 Credit Facility. To adjust property,
plant and equipment and acquired franchises of Providence Journal Cable to
fair value based on preliminary estimates and to eliminate historical
equity accounts. The adjustment for goodwill and deferred taxes represents
the preliminary estimate of the excess of the purchase price plus net
liabilities assumed over the fair value of the property, plant and
equipment and acquired franchises, reduced by the property, plant and
equipment and acquired franchises previously recorded by Providence Journal
Cable. Such amount may change upon final appraisal.
The following adjustments are presented to reflect the effects of recording
the Merger and applying purchase accounting to the accounts of Providence
Journal Cable. A summary of the basis for these adjustments is as follows
(in thousands):
Purchase Price:
Estimated Fair Value of Shares to be Issued.................... $ 596,069
Cash Payment for King Cable Purchase........................... 405,000
New Cable Indebtedness of Providence Journal Cable Assumed..... 410,000
----------
1,411,069
Liabilities of Providence Journal Cable Assumed by Continental. 73,522
----------
Total........................................................ $1,484,591
==========
Allocation of Purchase Price:
Estimated Fair Value of Property, Plant and Equipment.......... $ 411,321
Estimated Fair Value of Acquired Franchises.................... 1,073,270
Deferred Taxes Related to Property, Plant and Equipment
and Acquired Franchise Write-up ([$1,484,591--$858,509] X
39%).......................................................... (244,172)
----------
1,240,419
----------
Excess of Purchase Price Over Property, Plant and Equipment
and Acquired Franchises....................................... $ 244,172
==========
196
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
PRO FORMA
ADJUSTMENTS
PRO FORMA PROVIDENCE PROVIDENCE
ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA
CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL
----------- ----------- ----------- ---------- ----------- ----------
Revenues................ $1,197,977 $103,859 (1) $1,301,836 $284,993 $ -- $1,586,829
Costs and Expenses:
Operating.............. 405,535 42,697 (1) 448,232 114,868 -- 563,100
Selling, General and
Administrative........ 267,349 22,320 (1) 289,669 58,152 -- 347,821
Allocated Corporate
Overhead from
Parent Companies...... -- -- -- 11,034 (11,034)(4) --
Restricted Stock
Purchase Program...... 11,316 -- 11,316 -- -- 11,316
Depreciation and
Amortization.......... 283,183 26,513 (1) 309,696 85,783 (11,715)(5) 383,764
---------- -------- ---------- -------- -------- ----------
Total................ 967,383 91,530 1,058,913 269,837 (22,749) 1,306,001
---------- -------- ---------- -------- -------- ----------
Operating Income........ 230,594 12,329 242,923 15,156 22,749 280,828
Interest Expense--net... 315,541 35,606 (1) 336,156 41,318 13,772 (6) 391,246
(16,133)(2)
1,142 (3)
Other Expenses--net..... 24,253 (2,341)(1) 21,912 (555) -- 21,357
Minority Interest....... (205) -- (205) -- -- (205)
---------- -------- ---------- -------- -------- ----------
Loss from Operations.... (108,995) (5,945) (114,940) (25,607) 8,977 (131,570)
---------- -------- ---------- -------- -------- ----------
Income Tax (Benefit)
Expense................ (40,419) (2,319)(7) (42,738) (8,182) 3,501 (7) (47,419)
---------- -------- ---------- -------- -------- ----------
Net Loss Before
Extraordinary Item..... $ (68,576) $ (3,626) $ (72,202) $(17,425) $ 5,476 $ (84,151)
========== ======== ========== ======== ======== ==========
Per Share Data:
Earnings Per Share
Before
Extraordinary Item.... $ (.92)(8) $ (.83)(8)
========== ==========
Average Common Shares
Outstanding........... 114,334 (9) 145,059 (10)
========== ==========
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS)
PRO FORMA
ADJUSTMENTS
PRO FORMA PROVIDENCE PROVIDENCE
ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA
CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL
----------- ----------- ----------- ---------- ----------- ---------
Revenues................ $650,048 $44,792 (1) $694,840 $145,380 $ -- $840,220
Costs and Expenses:
Operating.............. 224,846 18,392 (1) 243,238 59,941 -- 303,179
Selling, General and
Administrative........ 150,332 10,087 (1) 160,419 29,106 -- 189,525
Allocated Corporate
Overhead from
Parent Companies...... 3,818 (3,818)(4) --
Restricted Stock
Purchase Program...... 5,905 -- 5,905 -- -- 5,905
Depreciation and
Amortization.......... 148,412 11,009 (1) 159,421 42,314 (5,280)(5) 196,455
-------- ------- -------- -------- ------ --------
Total................ 529,495 39,488 568,983 135,179 (9,098) 695,064
-------- ------- -------- -------- ------ --------
Operating Income........ 120,553 5,304 125,857 10,201 9,098 145,156
Interest Expense--net... 166,314 15,231 (1) 181,545 21,234 8,279 (6) 211,058
Other Expenses--net..... 2,056 (1,494)(1) 562 (1,899) -- (1,337)
Minority interest....... (40) -- (40) -- -- (40)
-------- ------- -------- -------- ------ --------
Loss from Operations.... (47,777) (8,433) (56,210) (9,134) 819 (64,525)
-------- ------- -------- -------- ------ --------
Income Tax (Benefit)
Expense................ (14,710) (3,289)(7) (17,999) (2,621) 320 (7) (20,300)
-------- ------- -------- -------- ------ --------
Net Loss Before
Extraordinary Item..... $(33,067) $(5,144) $(38,211) $ (6,513) $ 499 $(44,225)
======== ======= ======== ======== ====== ========
Per Share Data:
Earnings Per Share
Before
Extraordinary Item.... $ (.45)(8) $ (.43)(8)
======== ========
Average Common Shares
Outstanding........... 117,627 (9) 148,352 (10)
======== ========
See Notes to Pro Forma Condensed Statements of Operations.
197
NOTES TO PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(1) To record the results of operations for the cable television systems
acquired in 1994 and acquired or to be acquired in 1995. The results of
operations for certain cable television systems have been adjusted, where
necessary, from a September 30 fiscal year end to a December 31 fiscal year
end. The results of operations have been adjusted to reverse historical
interest expense of $24,432,000 and record interest expense of $35,606,000
(the pro forma interest expense is net of amounts recorded by Continental
as a result of cable television systems already acquired and deposits paid)
for the year ended December 31, 1994, as a result of approximately
$538,000,000 of additional debt incurred to finance the cable television
systems acquired in 1994 and acquired or to be acquired in 1995. The
results of operations have been adjusted to reverse historical interest
expense of $15,231,000 and record interest expense of $12,518,000 for the
six months ended June 30, 1995, as a result of approximately $406,150,000
of additional debt incurred to finance the cable television systems to be
acquired in 1995 (excluding the Merger). The incremental interest rate used
to calculate pro forma interest expense for the year ended December 31,
1994 and six months ended June 30, 1995 was 7% and 7.5%, respectively.
Continental's equity in net loss includes a loss of $2,400,000 and
$1,541,000 for the year ended December 31, 1994 and the six months ended
June 30, 1995, respectively, relating to its 33.77% interest in N-COM. This
amount has been eliminated to reflect the results of operations of N-COM as
if it was wholly owned by Continental during 1994 and 1995. The results of
operations have also been adjusted to reverse historical depreciation and
amortization expense of $33,280,000 and $13,572,000 for the year ended
December 31, 1994 and the six months ended June 30, 1995, respectively, and
record depreciation and amortization expense of $26,513,000 and $11,009,000
for the year ended December 31, 1994 and the six months ended June 30,
1995, respectively, based on the fair value of the assets acquired and the
current expected lives of these assets. Depreciation and amortization
expense for property, plant and equipment has been determined based on an
estimated weighted average life of ten years. Costs of acquired franchises
and goodwill arising from the acquisitions are amortized over 40 years.
Such depreciation and amortization may change upon final appraisal.
The following table sets forth the historical results of operations of (i)
the cable television systems acquired in 1994, for the period in which they
were not owned by Continental (Manchester, acquired on June 30, 1994 and
Clay Cablevision, acquired in November, 1994) and; (ii) the cable television
systems acquired or to be acquired in 1995 for the year ended December 31,
1994 and the six months ended June 30, 1995 (in thousands).
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------------------------------
CABLE TELEVISION CABLE TELEVISION SYSTEMS
SYSTEMS ACQUIRED IN 1994 ACQUIRED OR TO BE ACQUIRED IN 1995
-------------------------- --------------------------------------------
CONSOLIDATED
COLUMBIA CABLEVISION
CLAY CABLEVISION CABLE OF OF PRO FORMA
MANCHESTER CABLEVISION N-COM OF CHICAGO MICHIGAN CALIFORNIA ADJUSTMENTS TOTAL
----------- ------------ -------- ----------- -------- ------------ ----------- --------
Revenues................ $6,391 $10,404 $ 21,320 $34,395 $26,428 $ 4,921 $ -- $103,859
Costs and Expenses:
Operating.............. 3,950 4,032 7,955 14,402 10,144 2,214 -- 42,697
Selling, General and
Administrative........ 753 1,782 3,828 9,092 5,941 924 -- 22,320
Depreciation and
Amortization.......... 831 2,430 13,001 5,288 7,620 4,110 (6,767) 26,513
----------- ------------ -------- ------- ------- ------- ------- --------
Total................ 5,534 8,244 24,784 28,782 23,705 7,248 (6,767) 91,530
----------- ------------ -------- ------- ------- ------- ------- --------
Operating Income (Loss). 857 2,160 (3,464) 5,613 2,723 (2,327) 6,767 12,329
Interest Expense--net... -- 2,012 10,549 10,280 -- 1,591 11,174 35,606
Other (Income)
Expense--net........... -- 17 -- 53 (9) (2) (2,400) (2,341)
----------- ------------ -------- ------- ------- ------- ------- --------
Income/(Loss) From
Operations Before
Income Taxes........... $ 857 $ 131 $(14,013) $(4,720) $ 2,732 $(3,916) $(2,007) $(20,936)
=========== ============ ======== ======= ======= ======= ======= ========
198
SIX MONTHS ENDED JUNE 30, 1995
---------------------------------------------------------------
CABLE TELEVISION SYSTEMS ACQUIRED
OR TO BE ACQUIRED IN 1995
-------------------------------------------
COLUMBIA CONSOLIDATED
CABLEVISION CABLE OF CABLEVISION PRO FORMA
N-COM OF CHICAGO MICHIGAN OF CALIFORNIA ADJUSTMENTS TOTAL
------- ----------- -------- ------------- ----------- -------
Revenues................ $10,555 $17,766 $14,046 $ 2,425 $-- $44,792
Costs and Expenses:
Operating.............. 4,675 7,065 5,501 1,151 -- 18,392
Selling, General and
Administrative........ 1,612 5,035 3,014 426 -- 10,087
Depreciation and
Amortization.......... 5,349 2,541 3,915 1,767 (2,563) 11,009
------- ------- ------- ------- ------ -------
Total................ 11,636 14,641 12,430 3,344 (2,563) 39,488
------- ------- ------- ------- ------ -------
Operating Income (Loss). (1,081) 3,125 1,616 (919) 2,563 5,304
Interest Expense--net... 6,061 5,543 -- 914 2,713 15,231
Other (Income)
Expense--net........... -- 33 7 7 (1,541) (1,494)
------- ------- ------- ------- ------ -------
Income/(Loss) From
Operations Before
Income Taxes........... $(7,142) $(2,451) $ 1,609 $(1,840) $1,391 $(8,433)
======= ======= ======= ======= ====== =======
(2) To record the net decrease in interest expense as a result of the
redemption by Continental of the $325,000,000 of 12 7/8% Debt in November
1994. The adjusted interest rate was 6 1/2% for the ten months ended
October 31, 1994.
(3) To record the net increase in interest expense associated with the
amortization of deferred financing costs of the 1994 Credit Facility and
the 12 7/8% Debt.
(4) To reverse Allocated Corporate Overhead from Parent Companies recorded by
Providence Journal Cable. These costs relate to allocated corporate
overhead such as executive salaries and other corporate departments such
as Treasury, Tax and Human Resources. These costs also include a portion
of the management fees assessed to KHC by the joint venture partners. As a
result of Continental's existing corporate infrastructure, no incremental
costs such as these are expected to be incurred upon the acquisition of
Providence Journal Cable.
(5) To reverse the historical depreciation and amortization expense of
$85,783,000 and $42,314,000 for the year ended December 31, 1994 and the
six months ended June 30, 1995, respectively, recorded by Providence
Journal Cable and record depreciation and amortization expense of
$74,068,000 and $37,034,000 for the year ended December 31, 1994 and the
six months ended June 30, 1995, respectively, based on the fair value of
the assets acquired based on the current expected lives of these assets.
Depreciation and amortization expense for property, plant and equipment
has been determined based on an estimated weighted average life of ten
years. Cost of acquired franchises and goodwill arising from the Merger
are amortized over 40 years. Such depreciation and amortization expense
may change upon final appraisal.
(6) To reverse historical interest expense of $41,318,000 and $21,234,000 for
the year ended December 31, 1994 and the six months ended June 30, 1995,
respectively, as a result of the Providence Journal Cable intercompany
debt and record interest expense of $55,090,000 and $29,513,000 for the
year ended December 31, 1994 and six months ended June 30, 1995,
respectively, due to the net $787,000,000 increase in debt ($410,000,000
of New Cable Indebtedness plus $405,000,000 of borrowings under the 1995
Credit Facility to finance the King Cable Purchase less the Working
Capital deficit of $16,000,000 and the Capital Expenditure Adjustment of
$12,000,000 to be paid in cash to Continental and utilized to repay
amounts outstanding under the 1995 Credit Facility). The incremental
interest rate used to calculate interest expense was 7% for the year ended
December 31, 1994 and 7.5% for the six months ended June 30, 1995.
(7) To record the income tax effect at an effective rate of 39%.
(8) Net Loss Before Extraordinary Item has been adjusted for Preferred Stock
Preferences in order to calculate loss per common share.
(9) Represents 4,573,000 and 4,705,000 weighted average shares outstanding
during the year ended December 31, 1994 and six months ended June 30,
1995, respectively, adjusted for the Continental Recapitalization
Amendment and the Continental Stock Split.
(10) Represents the actual weighted average shares outstanding during the year
ended December 31, 1994 and six months ended June 30, 1995 of 4,573,000
shares and 4,705,000, respectively, adjusted for the Continental
Recapitalization Amendment and the Continental Stock Split and the
issuance of 30,725,207 shares of Continental Class A Common Stock to be
issued upon the consummation of the Merger.
199
MARKET PRICE OF CONTINENTAL COMMON STOCK AND DIVIDEND POLICY OF CONTINENTAL
No established public trading market exists for the Continental Common Stock,
and accordingly no high and low bid information or quotations are available
with respect to the Continental Common Stock.
As of August 1, 1995 there were 157 holders of record of the Continental
Class A Common Stock and 270 holders of record of the Continental Class B
Common Stock. Certain stockholders hold both Class A and Class B Common Stock.
Continental has not paid cash dividends on the Continental Common Stock and has
no present intention of so doing. The payment of future dividends, if any, will
be determined by the Board of Directors in light of conditions then existing,
including Continental's earnings, financial condition and requirements,
restrictions in financing agreements, business conditions and other factors.
Certain agreements, pursuant to which Continental has borrowed funds, contain
provisions that limit the amount of cash dividends and stock repurchases that
Continental may make. (See "Description of Continental Indebtedness".)
DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF CONTINENTAL
The positions held by each Director, executive officer and other officer of
Continental are shown below. There are no family relationships among the
following persons. Each Director, executive officer and other officer of
Continental will continue to serve in his or her position after the Merger. Two
new Directors, nominated by Providence Journal, will be added to the
Continental Board, as described below.
NAME OF DIRECTOR OR EXECUTIVE OFFICER POSITION WITH CONTINENTAL
------------------------------------- -------------------------
Chairman of the Board, Chief Executive
Amos B. Hostetter, Jr.(1)........ Officer and Director
Timothy P. Neher................. Vice Chairman of the Board and Director
William T. Schleyer.............. President and Chief Operating Officer
Michael J. Ritter................ Director
Roy F. Coppedge III.............. Director
Jonathan H. Kagan(1)............. Director
Robert B. Luick.................. Director and Secretary
Henry F. McCance................. Director
Lester Pollack................... Director
Vincent J. Ryan(1)............... Director
Ronald H. Cooper................. Executive Vice President
Jeffrey T. DeLorme............... Executive Vice President
Senior Vice President and Chief
Nancy Hawthorne.................. Financial Officer
NAMES OF OTHER OFFICERS POSITION WITH CONTINENTAL
----------------------- -------------------------
Andrew L. Dixon, Jr.............. Senior Vice President--Human Resources
Senior Vice President--Engineering and
David M. Fellows................. Technology
Senior Vice President and Corporate
Richard A. Hoffstein............. Controller
Frederick C. Livingston.......... Senior Vice President--Marketing
Senior Vice President--Corporate and
Robert J. Sachs.................. Legal Affairs
Robert A. Stengel................ Senior Vice President--Programming
Senior Vice President--Information
Robert A. Strickland............. Systems
P. Eric Krauss................... Vice President and Treasurer
Nancy B. Larkin.................. Vice President--Community Relations
Phyllis A. Traver................ Vice President--Marketing
R.B. Lerch....................... Vice President--Programming
Lawrence F. Christofori.......... Assistant Treasurer
Benjamin A. Gomez................ Assistant Treasurer
W. Lee H. Dunham................. Assistant Secretary
Patrick K. Miehe................. Assistant Secretary
--------
(1)Members of the Executive Committee
200
Continental has a classified Board composed of three classes. Each class
serves for three years, with one class being elected each year. The current
Class C Directors, Messrs. Hostetter and Pollack, have been nominated to serve
as Directors for an additional three-year term, expiring at the 1998 Annual
Meeting of Continental. (See "Proposal to Approve and Adopt the Continental
Recapitalization Amendment, Election of Directors and Ratification of
Appointment of Accountants".) The term of the Class A Directors,
Messrs. McCance, Coppedge, Ritter and Luick, will expire at the 1996 Annual
Meeting of Continental. The term of the Class B Directors, Messrs. Neher, Ryan
and Kagan, will expire at the 1997 Annual Meeting of Continental. Under the
terms of certain stock purchase agreements with Continental, Corporate
Advisors, on behalf of the investors (the "Continental Preferred Stock
Investors") who purchased Continental Series A Preferred Stock, currently has
the right to designate two persons, and Boston Ventures Limited Partnership
III, on behalf of itself and Boston Ventures Limited Partnership IIIA, Boston
Ventures Limited Partnership IV and Boston Ventures Limited Partnership IVA
(collectively, the "Boston Ventures Investors"), currently has the right to
designate one person, to be nominated as members of the Board of Directors.
Lester Pollack and Jonathan H. Kagan are the designees of the Continental
Preferred Stock Investors, and Roy F. Coppedge III is the designee of the
Boston Ventures Investors. Under the terms of the Merger Agreement, Providence
Journal has the right to designate two persons to be appointed to Continental's
Board of Directors as of the Effective Time and, on the expiration of their
initial term as nominees, New Providence Journal has the right to designate two
individuals to be nominated as members of Continental's Board for another three
year term. Providence Journal has notified Continental that Stephen Hamblett
and Trygve Myhren will be its initial designees (although Providence Journal
has the right to change its designees at any time prior to the Effective Time
if reasonably acceptable to Continental.) (See "The Merger--Certain Covenants--
Certain Rights with Respect to Continental's Board of Directors".) If elected,
they will be Class C Directors.
The executive officers and other officers were elected by the Continental
Board of Directors on May 19, 1994, with the exception of Messrs. Strickland
and Christofori, who were appointed to their present positions by the Board of
Directors on November 17, 1994, Messrs. Krauss, Cooper and Lerch and Ms.
Traver, who were appointed to their present positions effective January 1,
1995, and Mr. Schleyer, who was appointed to his present position effective as
of March 15, 1995 to replace Mr. Ritter, who retired. All executive officers
and other officers hold office until the first meeting of the Continental Board
following the next annual meeting of stockholders and until their successors
are chosen and qualified.
The following is a description of the business experience during the past
five years of each Director and officer and includes, as to Directors, other
directorships held in companies required to file periodic reports with the
Commission and registered investment companies.
DIRECTORS AND EXECUTIVE OFFICERS
Amos B. Hostetter, Jr. (58), a cofounder of Continental, is the Chairman of
the Board and Chief Executive Officer of Continental. He has been a Director
since 1963. Mr. Hostetter is a past Chairman of the National Cable Television
Association ("NCTA") and currently serves on NCTA's Board and Executive
Committee. He is past Chairman and serves on the Executive Committee of the
Board of Directors of both Cable in the Classroom and C-SPAN and serves as a
Director and Chairman of the Audit Committee of Commodities Corporation (USA).
Timothy P. Neher (47) is the Vice Chairman of the Board of Continental. He
has been a Director since 1982 and has been employed by Continental since 1974.
Prior to 1991 he was President and Chief Operating Officer of Continental,
prior to 1986 he was an Executive Vice President of Continental, and prior to
1982 he was Vice President and Treasurer of Continental. He currently is on the
Board of Directors of Turner Broadcasting System, Inc.
William T. Schleyer (44) is the President and Chief Operating Officer of
Continental. Prior to March 15, 1995 he was an Executive Vice President and
prior to 1989 he was the Senior Vice President and General Manager of
Continental's New England management region. He is a member of the Boards of
Directors of
201
CableLabs, the research and development arm of the cable industry, and TCG. He
has been employed by Continental since 1978.
Michael J. Ritter (54) has been a Director since 1991 and was employed by
Continental from 1980 until March 15, 1995, at which time he retired as the
President and Chief Operating Officer of Continental. Prior to 1991 he was an
Executive Vice President, and prior to 1988 he was the Senior Vice President
and General Manager of Continental's Michigan management region.
Roy F. Coppedge III (47) has been a Director of Boston Ventures Management,
Inc. since 1983. He currently is on the Board of Directors of American Media
Inc. and Dial Page, Inc. He was elected to serve as a Director of Continental
in 1992.
Jonathan H. Kagan (39) is Managing Director of Corporate Advisors, L.P. and a
Managing Director of Lazard. He has been associated with Lazard since 1980. He
was elected to serve as a Director of Continental in 1992. Mr. Kagan currently
is on the Board of Directors of Tyco Toys, Inc.
Robert B. Luick (83) is of counsel to the law firm of Sullivan & Worcester,
which firm has acted as counsel to Continental since its inception. Mr. Luick
has been with Sullivan & Worcester since 1943. He is a member of the Board of
Directors of Ionics, Incorporated, a diversified water treatment company. He
has been Secretary and a Director of Continental since 1963.
Henry F. McCance (52) has been general partner of the following venture
capital partnerships (either directly or indirectly as the general partner of
the general partner of such partnerships) since their formation: Greylock
Ventures Limited Partnership (1983), Greylock Investments Limited Partnership
(1985), Greylock Capital Limited Partnership (1987), Greylock Limited
Partnership (1990) and Greylock Equity Limited Partnership (1994). He is also
President and Treasurer of Greylock Management Corporation, an investment
services organization, and a Director of Brookstone, Inc., Manugistics, Inc.
and Shiva Corporation. Prior to 1990, Mr. McCance was a Vice President and
Treasurer of Greylock Management Corporation. Mr. McCance has been a Director
of Continental since 1972.
Lester Pollack (61) is Senior Managing Director of Corporate Advisors, L.P.
and Chief Executive Officer of Centre Partners, L.P., investment partnerships
affiliated with Lazard, as well as a Managing Director of Lazard. He currently
is on the Board of Directors of SunAmerica Inc., Kaufman & Broad Home
Corporation, Tidewater, Inc., Loews Corporation, Parlex Corporation, Polaroid
Corporation and Sphere Drake Holdings Limited. He was elected to serve as a
Director of Continental in 1992.
Vincent J. Ryan (59) has been Chairman of the Board and a Director of
Schooner Capital Corporation, a venture capital organization, since 1971. Mr.
Ryan is also Chairman of the Board of Iron Mountain Information Management
Company, Inc., an information management company. He has been a Director of
Continental since 1980.
Jeffrey T. DeLorme (42) is an Executive Vice President of Continental. Prior
to March 1993, he was the Senior Vice President and General Manager of
Continental's Florida/Georgia management region. He was formerly the Director
of Corporate Services in Continental's Michigan management region. He has been
employed by Continental since 1980.
Ronald H. Cooper (38) is an Executive Vice President of Continental. Prior to
1995, he was the Senior Vice President of Continental's Southern California
management region. Prior to 1990 he was the Senior Vice President of
Continental's Northern California management region. He has been employed by
Continental since 1982.
Nancy Hawthorne (44) is the Chief Financial Officer and a Senior Vice
President of Continental. Prior to December, 1993, she was also the Treasurer
of Continental, in addition to being Chief Financial Officer and a Senior Vice
President. Prior to December 1992, she was a Senior Vice President and the
Treasurer of
202
Continental. Prior to 1988, she was a Vice President and the Treasurer of
Continental. She is a member of the Boards of Directors of Perini Corporation,
a construction company, and TCG. She has been employed by Continental since
1982.
OTHER OFFICERS
Andrew L. Dixon Jr. (53) is Senior Vice President--Human Resources of
Continental. From 1985 to 1991, he was the Vice President of Human Resources
of Continental. He has been employed by Continental since 1982.
David M. Fellows (42) is Senior Vice President--Engineering and Technology
of Continental. Prior to December 1992, he was the Vice President of Strategic
Operations and the President of Scientific Atlanta's Transmissions Systems
Business Division, where he was responsible for that company's head end, fiber
and digital compression products. He is a member of the Board of Directors of
Anadigics, Inc.
Richard A. Hoffstein (47) is a Senior Vice President and the Corporate
Controller of Continental. Prior to 1986, he was the Corporate Controller,
Assistant Treasurer and Assistant Secretary of Continental. He has been
employed by Continental since 1976.
Frederick C. Livingston (49) is Senior Vice President--Marketing of
Continental. Prior to 1988, he was a Vice President of Continental, and prior
to 1984 he was the Director of Marketing for Continental. He has been employed
by Continental since 1979.
Robert J. Sachs (46) is Senior Vice President--Corporate and Legal Affairs
of Continental. Prior to 1988, he was a Vice President of Continental, and
prior to 1983 he was Continental's Director of Corporate Development. He has
been employed by Continental since 1979.
Robert A. Stengel (52) is Senior Vice President--Programming of Continental.
Prior to 1988, he was a Vice President of Programming of Continental. He has
been employed by Continental since 1980.
Robert A. Strickland (32) is Senior Vice President--Information Systems of
Continental. He has been employed by Continental since August 1994. He was
formerly employed by Harvard Business School since 1991.
P. Eric Krauss (31) is a Vice President and the Treasurer of Continental.
Prior to January 1995, he was the Treasurer, and prior to December 1993, he
was the Assistant Treasurer of Continental. He has been employed by
Continental since January 1990. He was formerly employed by The First National
Bank of Boston since 1986.
Nancy B. Larkin (44) is a Vice President--Community Relations of
Continental. She has been employed by Continental since February 1988. She was
formerly employed by American Cablesystems Corporation, most recently as Vice
President of Corporate Communications and Training.
R. B. Lerch (34) is a Vice President--Programming of Continental. He has
been employed by Continental since October 17, 1988. Prior to January 1995, he
was the Director of Programming of Continental.
Phyllis A. Traver (43) is a Vice President--Marketing of Continental. She
has been employed by Continental since January 1995. She was formerly employed
by Nestle Foods Corp. as a Business Director and by Homeview Realty Centers as
Vice President of Marketing.
Lawrence F. Christofori (33) is an Assistant Treasurer of Continental. He
has been employed by Continental since October 1994. He was formerly employed
by The First National Bank of Boston since 1989.
Benjamin A. Gomez (29) is an Assistant Treasurer of Continental. He has been
employed by Continental since April 1994. He was formerly employed by The Bank
of New York since 1990.
W. Lee. H. Dunham (54) is an Assistant Secretary of Continental. He has been
a partner of the law firm of Sullivan & Worcester since 1974.
203
Patrick K. Miehe (47) is an Assistant Secretary of Continental. He has been a
partner of the law firm of Sullivan & Worcester since 1990.
Biographical information concerning the Directors, executive officers and
other officers is as of August 1, 1995.
EXECUTIVE COMPENSATION
The following table (the "Summary Compensation Table") discloses compensation
received by Continental's Chief Executive Officer and the four most highly
compensated other executive officers of Continental (the Chief Executive
Officer and the other executive officers are hereinafter referred to as the
"Continental Named Executive Officers") for the three fiscal years ended
December 31, 1992, 1993 and 1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------- -----------------------
OTHER ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK AWARDS COMPENSA-
NAMEAND PRINCIPAL POSITION YEAR # SALARY($) BONUS($)(1) SATION ($) ($)(2)(3) TION($)(4)
--------------------------- ------ --------- ----------- ------------ ------------ ----------
Amos B. Hostetter, Jr. 1994 $649,876 $ 97,991 $ $ $4,273
Chairman and Chief 1993 624,961 238,653 -- -- 4,273
Executive Officer 1992 615,154 203,470 -- 4,499,850 4,404
Michael J. Ritter(5) 1994 469,769 99,860 3,868
President and Chief 1993 439,845 146,691 -- -- 3,868
Operating Officer 1992 400,250 123,235 -- 2,999,900 3,910
William T. Schleyer(5) 1994 315,815 30,639 3,403
Executive Vice 1993 291,923 61,418 -- -- 3,403
President 1992 272,084 52,131 -- 1,499,950 3,360
Jeffrey T. DeLorme 1994 294,846 49,166 3,403
Executive Vice 1993 268,484 56,871 111,608(6) -- 3,403
President 1992 197,890 21,846 -- 1,437,317 3,361
Nancy Hawthorne 1994 241,938 18,331 3,403
Chief Financial 1993 224,896 46,590 -- -- 3,403
Officer and Senior 1992 198,000 86,454 -- 979,823 3,361
Vice President
--------
(1) (See Note 11 to Consolidated Financial Statements.) Continental has made
loans to these and other persons in amounts equal to the income taxes
incurred by them as a result of their restricted stock purchases. Such
loans were financed through cash provided from operating activities and
long-term borrowings. Continental charges interest on these loans generally
at rates ranging from 5% to 8% per annum and declares bonuses to each of
these persons in the amount of the interest due each year. Continental
declared no other bonus to any Continental Named Executive Officer during
the years presented (other than a $50,000 bonus to Nancy Hawthorne in 1992
which is reflected in the Summary Compensation Table). As of August 1,
1995, the amounts of the loans outstanding to certain of the Continental
Named Executive Officers and one other Executive Officer were as follows:
William T. Schleyer ($1,751,974), Jeffrey T. DeLorme ($1,311,077), Ronald
H. Cooper ($261,500) and Nancy Hawthorne ($1,100,277). The outstanding
principal balance of each such loan is generally payable upon the earlier
to occur of (i) the fifth anniversary of such loan or (ii) the termination
of such person's employment with Continental. Each of Mr. DeLorme and Mr.
Cooper has an additional loan from an Unrestricted Subsidiary of
Continental, of which the current amounts outstanding are: Mr. DeLorme
($400,000) and Mr. Cooper ($278,680). Since the beginning of the fiscal
year ended December 31, 1992,
204
the largest aggregate amounts of indebtedness of the following executive
officers were as follows: William T. Schleyer ($1,751,974), Jeffrey T.
DeLorme ($1,711,077), Ronald H. Cooper ($1,270,997) and Nancy Hawthorne
($1,100,277). (See "Compensation Committee Interlocks and Insider
Participation" for loan amounts to certain other Continental Named Executive
Officers.)
(2) Shares of restricted stock are entitled to dividends at the same rate as
all other shares of Continental Common Stock.
(3) Shown below are (i) the total number of unvested shares and current market
value of such shares as of December 31, 1994 and (ii) the vesting schedule
of such shares for each of the Continental Named Executive Officers (the
shares will be fully vested in two years):
TOTAL RESTRICTED SHARES
HELD AS OF 12/31/94 VESTING OVER THREE YEARS FROM 12/31/94
------------------------ ---------------------------------------------
NAME SHARES VALUE SHARES VESTING IN 1995 SHARES VESTING IN 1996
---- ------------------------ ---------------------- ----------------------
Amos B. Hostetter, Jr... 123,750 $ 2,400,750 82,500 41,250
Michael J. Ritter....... 107,500 2,085,500 80,000 27,580
William T. Schleyer..... 41,250 800,250 27,500 13,750
Jeffrey T. DeLorme...... 46,475 901,615 26,400 20,075
Nancy Hawthorne......... 28,525 553,385 17,975 10,550
(4) Includes payment by Continental in the fiscal years ended December 31,
1992, 1993 and 1994, respectively, of premiums for term life insurance on
behalf of the Continental Named Executive Officers: Amos B. Hostetter, Jr.
($1,350, $1,125 and $1,125), Michael J. Ritter ($856, $720 and $720),
William T. Schleyer ($306, $255 and $255), Jeffrey T. DeLorme ($307, $255
and $255) and Nancy Hawthorne ($307, $255 and $255). The remaining amounts
for the Continental Named Executive Officers represents the employer
matching contribution under Continental's matched savings plan.
(5) Mr. Ritter retired as the President and Chief Operating Officer, and was
replaced with Mr. Schleyer, effective March 15, 1995.
(6) Represents a one-time reimbursement of moving and related expenses incurred
by Mr. DeLorme in connection with his relocation to Continental's Boston,
Massachusetts office (grossed up for income taxes incurred by Mr. DeLorme).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Base annual
compensation for executive officers was determined during the last fiscal year
by the Chairman, the Vice Chairman and the President of Continental. Pursuant
to authority delegated by the Continental Board of Directors, the Chairman also
awarded grants of restricted stock in 1992 and 1995 to key employees designated
by the Continental Board in accordance with Continental's Restricted Stock
Purchase Program. Amos B. Hostetter, Jr., Timothy P. Neher and Michael J.
Ritter, the Chairman, Vice Chairman and President (until March 14, 1995) of
Continental, respectively, are Directors and participate in deliberations
concerning executive officer compensation.
Continental has made loans to these three executive officers and other
persons in amounts equal to the income taxes incurred by them as a result of
their restricted stock purchases. Such loans were financed through cash
provided from operating activities and long-term borrowings. Continental
charges interest on these loans generally at rates ranging from 5% to 8% per
annum and declares bonuses to each of these persons in the amount of the
interest due each year. As of August 1, 1995, the amounts of the loans
outstanding to the three executive officers named above were as follows: Amos
B. Hostetter, Jr. ($3,379,546), Timothy P. Neher ($2,669,856) and Michael J.
Ritter ($1,689,612). Since the beginning of the fiscal year ended December 31,
1992, the largest aggregate amounts of indebtedness of such executive officers
were as follows: Amos B. Hostetter, Jr. ($3,379,546), Timothy P. Neher
($4,057,356) and Michael J. Ritter ($2,020,797). The outstanding principal
balance of each such loan is generally payable upon the earlier to occur of (i)
the fifth anniversary of such loan or (ii) the termination of such person's
employment with Continental. For information regarding loans to other executive
officers, see footnote (1) to the Summary Compensation Table.
205
On December 31, 1993, Continental accepted payment for loans incurred in
connection with restricted stock purchases pursuant to Continental's 1989
Restricted Stock Purchase Agreement ("RSPA III") which became due on such date
by (i) transfer to Continental and cancellation of vested shares of Continental
Common Stock with a value equal to the loan outstanding, valued at $485 per
share, which would have been equivalent to $19.40 per share after giving effect
to the Continental Recapitalization Amendment and the Continental Stock Split
(the "Stock-for-Loan Exchange"), (ii) payment in cash or (iii) a combination of
the two. Continental also made an offer (the "RSPA Offer") in January 1994 to
purchase shares of Continental Common Stock up to a maximum of 53,399 (not
giving effect to the Continental Recapitalization Amendment and Continental
Stock Split) shares at a purchase price of $485 per share. The persons who were
eligible to participate in the Stock-for-Loan Exchange and to accept the RSPA
Offer were persons who held shares of Continental Common Stock issued pursuant
to RSPA III (current or former employees and family members of employees and
former employees). The valuation of the shares at $485 was equal to the price
last paid in a private placement of shares of Continental Class A Common Stock,
which was consummated in November, 1993. (See "Management's Discussion and
Analysis of Financial Position and Results of Operations of Continental--
Liquidity and Capital Resources".) The three executive officers named above
repaid the following loan amounts in shares of Continental Common Stock in the
Stock-for-Loan Exchange: Amos B. Hostetter, Jr. ($1,471,936), Timothy P. Neher
($1,387,500) and Michael J. Ritter ($331,185), and sold the following number of
shares of Continental Common Stock (not giving effect to the Continental
Recapitalization Amendment and Continental Stock Split) to Continental pursuant
to the RSPA Offer: Amos B. Hostetter, Jr. (0), Timothy P. Neher (1,192) and
Michael J. Ritter (397). (For information regarding other executive officers,
see "Certain Transactions".) In addition, the Hostetter Foundation, an entity
controlled by Mr. Hostetter, sold 1,184 shares of Continental Class B Common
Stock (not giving effect to the Continental Recapitalization Amendment and the
Continental Stock Split) to Continental in January, 1994 for a purchase price
of $485 per share.
RETIREMENT PLANS. The following table sets forth, as computed in accordance
with the basic benefit formula employed for purposes of Continental's
Retirement Plan (the "Continental Retirement Plan") and its Supplemental
Executive Retirement Plan ("SERP"), the estimated annual benefits payable upon
retirement to employees of Continental in the following compensation and years-
of-service classifications. Such benefits are before offset in recognition of
the employer contribution toward social security benefits.
YEARS OF SERVICE
--------------------------------------------
COMPENSATION 10 15 20 25 30 OR MORE
------------ ------- ------- -------- -------- ----------
$150,000........................... $14,250 $21,375 $ 28,500 $ 35,625 $ 42,750
$200,000........................... 19,000 28,500 38,000 47,500 57,000
$300,000........................... 28,500 42,750 57,000 71,250 85,500
$400,000........................... 38,000 57,000 76,000 95,000 114,000
$500,000........................... 47,500 71,250 95,000 118,750 142,500
$600,000........................... 57,000 85,500 114,000 142,500 171,000
$700,000........................... 66,500 99,750 133,000 166,250 199,500
Actual benefits are computed on the basis of (1) .95% of the employee's
average annual compensation less .37% of average annual compensation (limited
to social security covered compensation) multiplied by (2) the number of years
of service (not to exceed thirty years). Average annual compensation is the
average of a participant's compensation for the five consecutive years in which
compensation was the highest.
The SERP, effective in 1995, provides additional retirement benefits for any
employee of Continental whose accrued benefits under the Continental Retirement
Plan are limited by the Code's limit (currently $150,000) on compensation which
may be taken into account under that plan or by the Code's Section 415 limit on
the size of retirement benefits which may be funded under that plan. The SERP
is an unfunded, non tax-qualified plan which is intended to create for each
participant a benefit upon termination of employment generally equal in value
to the excess of what his accrued vested benefit in the Continental Retirement
Plan
206
would have been without the $150,000 compensation limit and the Section 415
limit on benefits which may be funded, over the actual benefit under that plan.
The benefit under the SERP is payable upon termination of employment, at the
participant's election, in a lump sum or in equal annual installments (with
interest) over 2, 5 or 10 years. A participant may designate a beneficiary
under the SERP to receive his benefit should he die before its complete pay-
out.
The covered compensation for each Continental Named Executive Officer is
based upon the amounts shown in the "Salary" column of the Summary Compensation
Table. For each Continental Named Executive Officer, the current compensation
covered by the Continental Retirement Plan does not differ substantially (by
more than 10%) from the aggregate compensation set forth in the Summary
Compensation Table.
The Continental Named Executive Officers have been credited with the
following years of service: Mr. Hostetter, 32 years; Mr. Ritter, 14 years; Mr.
Schleyer, 17 years; Mr. DeLorme, 15 years; and Ms. Hawthorne, 13 years.
COMPENSATION OF DIRECTORS
The members of the Continental Board of Directors who are not officers of
Continental currently receive an annual retainer of $10,000 and a fee of $2,500
for each meeting attended. In addition, Directors who reside outside the
Greater Boston Area are reimbursed for their travel expenses incurred in
connection with attendance at meetings of the Continental Board of Directors.
CERTAIN TRANSACTIONS
On June 22, 1992, Continental sold 1,142,858 shares of Continental Series A
Preferred Stock to a group of investors, including 728,953 shares to Corporate
Partners for a purchase price of $255,133,550 and 52,107 shares to Corporate
Offshore Partners for a purchase price of $18,237,450, both of which are
investment partnerships affiliated with Lazard. Lester Pollack, a Director of
Continental, is Senior Managing Director of Corporate Advisors and a Managing
Director of Lazard. Jonathan H. Kagan, a Director of Continental, is Managing
Director of Corporate Advisors and a Managing Director of Lazard.
Corporate Advisors is the sole general partner of Corporate Partners and
Corporate Offshore Partners. A wholly owned subsidiary of Lazard is the sole
general partner of Corporate Advisors. Corporate Advisors is also an investment
manager for the SBA which purchased 76,084 shares of Continental Series A
Preferred Stock in a private placement subject to its investment management
agreement with Corporate Advisors. Certain entities controlled by Lazard also
own limited partnership interests in Corporate Partners and Corporate Advisors.
On June 22, 1992, Continental sold 42,857 shares of Continental Series A
Preferred Stock to ContCable for a purchase price of $14,999,950. ContCable is
an affiliate of Chemical Bank, a co-agent of the 1994 Credit Facility, an agent
of the 1995 Credit Facility and provides other banking services to Continental.
On July 15, 1992, Continental sold 121,381 shares of Continental Class B
Common Stock (not giving effect to the Continental Recapitalization Amendment
and the Continental Stock Split) to Boston Ventures Limited Partnership III for
a purchase price of $39,570,206 and 31,993 shares to Boston Ventures Limited
Partnership IIIA for $10,429,718. On November 17, 1992, Continental sold 76,934
shares of Continental Class B Common Stock (not giving effect to the
Continental Recapitalization Amendment and the Continental Stock Split) to
Boston Ventures Limited Partnership IV for $26,134,480 and 70,255 shares to
Boston Ventures Limited Partnership IVA for $23,865,623. Roy F. Coppedge III, a
Director of Continental, is a general partner of each of the general partners
of these four limited partnerships and a Director of Boston Ventures
Management, Inc., which manages their investments.
207
Lazard received fees from Continental in an aggregate amount of approximately
$9,000,000 for its services as an underwriter of $400 million of senior
subordinated notes and debentures and as agent in connection with private
placements involving the Continental Preferred Stock Investors and the Boston
Ventures Investors, and for certain other investment banking services during
the year ended December 31, 1992. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Continental--Liquidity and
Capital Resources".)
Lazard also received fees and underwriting discounts from Continental in an
aggregate amount of $7,748,400 for its services as an underwriter to
Continental of $1.4 billion of senior notes and debentures during the year
ended December 31, 1993.
Lazard has acted as a financial advisor to Continental in connection with the
negotiations and the consummation of the Merger and the related transactions,
and, for such services, will receive a fee of $5,500,000, payable upon the
Closing. Continental has also agreed to reimburse Lazard for its reasonable
out-of-pocket expenses, including fees and expenses of legal counsel.
For a discussion of loans made to executive officers of Continental in
connection with Continental's Restricted Stock Purchase Program, see footnote
(1) to the Summary Compensation Table and "Compensation Committee Interlocks
and Insider Participation". For a description of Continental's Stock-for-Loan
Exchange and the RSPA Offer to repurchase shares of Continental Common Stock,
and information regarding certain executive officers who are Directors
participating therein, see "Compensation Committee Interlocks and Insider
Participation". The following executive officers who are not Directors of
Continental participated in the Stock-for-Loan Exchange in the following
amounts: William T. Schleyer ($291,000), Jeffrey T. DeLorme ($155,000), Ronald
H. Cooper ($159,497) and Nancy Hawthorne ($274,464). In addition, William T.
Schleyer made a cash payment for the remaining $141,063 of his outstanding loan
incurred in connection with restricted stock purchases pursuant to RSPA III.
All of the share numbers listed above are before the Continental
Recapitalization Amendment and the Continental Stock Split.
BENEFICIAL OWNERSHIP OF CONTINENTAL CAPITAL STOCK AFTER THE MERGER
The following table provides information as of August 1, 1995 (giving effect
to the Merger, the Continental Recapitalization Amendment and the Continental
Stock Split), with respect to the shares of Continental Common Stock and
Continental Series A Preferred Stock beneficially owned by each person known by
Continental to own more than 5% of the outstanding Continental Common Stock or
Continental Series A Preferred Stock, each Director of Continental, each
Continental Named Executive Officer and by all Directors and executive officers
of Continental as a group. (For information relating to percentage beneficial
ownership prior to the Merger and certain defined terms used in the following
table, see "The Special Meetings--Ownership of Continental Securities".) The
number of shares beneficially owned by each Director or executive officer is
determined according to rules of the Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and also any
shares which the individual or entity has the right to acquire within 60 days
of August 1, 1995 through the exercise of an option, conversion feature or
similar right. Except as noted below, each holder has sole voting and
investment power with respect to all shares of Continental Common Stock or
Continental Series A Preferred Stock listed as owned by such person or entity.
The amounts indicated in the columns listing Percentage of Outstanding Shares
of Continental Common Stock after the Merger and Percentage Voting Power are
calculated based on the number of shares of Continental Class A Common Stock
that will be issued to Providence Journal stockholders in the Merger if all
minority interests are purchased by Providence Journal prior to the Effective
Time. (See "The Merger--General Provisions--Share Exchange".)
208
NUMBER OF
PERCENTAGE OF SHARES OF PERCENTAGE OF
NUMBER OF OUTSTANDING CONTINENTAL OUTSTANDING
SHARES OF SHARES OF SERIES A CONTINENTAL
CONTINENTAL CONTINENTAL PREFERRED SERIES A
COMMON STOCK(1) COMMON STOCK(2) SHARES OF PERCENTAGE
BENEFICIALLY STOCK AFTER BENEFICIALLY PREFERRED VOTING
NAME OWNED THE MERGER OWNED STOCK POWER
---- --------------- ------------- ------------ ------------- ----------
Amos B. Hostetter,
Jr.(3)................. 45,272,425 30.46% -- -- 31.95%
Timothy P. Neher(4)..... 1,671,725 1.12 -- -- 1.18%
Michael J. Ritter....... 589,900 * -- -- *
Roy F. Coppedge III(5).. 7,514,075 5.06 -- -- 5.01%
Jonathan H. Kagan(6).... 28,571,450 16.13 1,142,858 100.00 20.16%
Robert B. Luick(7)...... 229,575 * -- -- *
Henry F. McCance(8)..... 258,125 * -- -- *
Lester Pollack(6)....... 28,571,450 16.13 1,142,858 100.00 20.16%
Vincent J. Ryan(9)...... 5,719,825 3.85 -- -- 4.04%
William T. Schleyer..... 766,200 * -- -- *
Jeffrey T. Delorme...... 391,525 * -- -- *
Nancy Hawthorne......... 209,325 * -- -- *
Stephen Hamblett(6)..... 100,305 * -- -- *
Trygve E. Myhren(6)..... 990 * -- -- *
Directors and Executive
Officers as a Group (15
persons)(6)............ 91,474,720 51.63 1,142,858 100.00 64.20%
H. Irving Grousbeck(10). 10,033,000 6.75 -- -- 7.08%
Boston Ventures Company
Limited Partnership III
Boston Ventures
Limited
Partnership III(11).. 3,034,525 2.04 -- -- 2.14%
Boston Ventures
Limited
Partnership IIIA(11). 799,825 * -- -- *
Boston Ventures Company
Limited Partnership IV
Boston Ventures
Limited
Partnership IV(11)... 2,381,725 1.60 -- -- 1.40%
Boston Ventures
Limited
Partnership IVA(11).. 1,298,000 * -- -- *
---------- -----
Total as a group.... 7,514,075 5.05 -- -- 5.02%
LFCP Corp. and Corporate
Advisors, L.P.(12)
Corporate Partners,
L.P.(12)............. 18,223,825 10.76 728,953 63.78 12.83%
Mellon Bank, N.A. as
Trustee for First
Plaza Group
Trust(12)(13)........ 4,285,725 2.76 171,429 15.00 3.02%
The State Board of
Administration of
Florida(12).......... 1,902,100 1.24 76,084 6.66 1.34%
Vencap Holdings (1992)
Pte Ltd(12).......... 1,785,700 1.17 71,428 6.25 1.26%
Corporate Offshore
Partners, L.P.(12)... 1,302,675 * 52,107 4.56 *
ContCable Co-
Investors, L.P.(12).. 1,071,425 * 42,857 3.75 *
---------- ----- --------- ------ -----
Total as a group.... 28,571,450 15.90%(14) 1,142,858 100.00 20.12%
--------
*Less than 1% of class.
209
(1) The number of shares of Continental Common Stock beneficially owned by
each listed holder reflects the number of such shares held after giving
effect to the Merger, the Continental Recapitalization Amendment and the
Continental Stock Split. The Continental Common Stock includes Continental
Class A Common Stock, which has one vote per share, and Continental Class
B Common Stock, which has ten votes per share. As the number of shares of
Continental Class A Common Stock represents 26.52% of the Continental
Common Stock and approximately 2.73% of the voting power of the
Continental Common Stock, the Continental Class A Common Stock has not
been shown as a separate class of stock, but rather Continental Common
Stock has been treated as one class. Every greater than 5% beneficial
owner of Continental Class B Common Stock would be a greater than 5%
beneficial owner of Continental Class A Common Stock.
(2) Under the rules for determining beneficial ownership promulgated by the
Commission, each holder of Continental Series A Preferred Stock is deemed
to own currently that number of shares of Continental Common Stock into
which the Continental Series A Preferred Stock is convertible. The
Continental Series A Preferred Stock will be presently convertible into
Continental Common Stock on a 25-for-one basis as a result of the
Continental Recapitalization Amendment and the Continental Stock Split.
The table therefore shows the number of shares of Continental Series A
Preferred Stock owned by each holder in the column for the Continental
Series A Preferred Stock and includes that number of shares in the column
for Continental Common Stock into which the Continental Series A Preferred
Stock would be convertible taking into effect the Continental
Recapitalization Amendment and the Continental Stock Split.
(3) Mr. Hostetter has shared voting and investment power as to 42,843,550
shares of Continental Common Stock held by the Trust of which Messrs.
Hostetter and Neher are the sole trustees. Mr. Hostetter has shared voting
and investment power as to a further 446,400 shares of Continental Common
Stock; as to 223,200 of such shares, he disclaims beneficial ownership.
Additionally, Mr. Hostetter disclaims beneficial ownership of 550,000
shares of Continental Common Stock with respect to which his wife acts as
a trustee with Mr. Neher and 38,950 shares of Continental Common Stock
held by him as custodian for four minor children. The shares listed in the
table as being beneficially owned by Mr. Hostetter include those as to
which Mr. Hostetter has shared voting and/or investment power and those as
to which Mr. Hostetter disclaims beneficial ownership. Mr. Hostetter's
address is The Pilot House, Lewis Wharf, Boston, Massachusetts 02110.
(4) Mr. Neher has shared voting and investment power as to 550,000 shares of
Continental Common Stock with respect to which he acts as a trustee with
Mrs. Hostetter, and as to 42,843,550 shares of Continental Common Stock
with respect to which he acts as a trustee with Mr. Hostetter. Mr. Neher
disclaims beneficial ownership as to such shares, and the table does not
indicate such shares as being beneficially owned by Mr. Neher. (See
footnote (3) above.) Additionally, Mr. Neher disclaims beneficial
ownership as to 165,000 shares with respect to which he acts as trustee
and 55,000 shares held by his wife as custodian for their minor children,
which are included in the table as being beneficially owned by Mr. Neher.
(5) All the shares listed in the table as beneficially owned by Mr. Coppedge
are held by the four limited partnerships described in Footnote (11)
below. Mr. Coppedge, a partner of each of the general partners of the
limited partnerships and a Director of Boston Ventures Management, Inc.,
which manages the investments of the four limited partnerships, has shared
voting and investment power as to these shares. Mr. Coppedge is entitled
to beneficial ownership of an indeterminate number of these shares and
disclaims beneficial ownership as to the balance. Mr. Coppedge's address
is c/o Boston Ventures Management, Inc., 21 Custom House Street, Boston,
Massachusetts 02110.
(6) All shares listed in the table as being beneficially owned by Mr. Pollack
and Mr. Kagan are beneficially owned by Corporate Advisors. (See footnote
(12) below.) Mr. Pollack may be deemed to have shared voting and
investment power over such shares as the Chairman and Treasurer and as a
Director of LFCP Corp. and Mr. Kagan may be deemed to have shared voting
and investment power over such shares as the President of LFCP Corp. LFCP
Corp. is the sole general partner of Corporate Advisors and a wholly owned
subsidiary of Lazard. Mr. Pollack and Mr. Kagan are both Managing
Directors of Lazard. Mr. Pollack's and Mr. Kagan's address is c/o
Corporate Advisors, L.P., One Rockefeller Plaza, New York, New York 10020.
Mr. Pollack and Mr. Kagan disclaim beneficial ownership of all such
shares. The shares listed in the table as being owned by Mr. Hamblett and
Mr. Myhren are shares that will be issued to them in the Merger as
stockholders of Providence Journal and are not currently owned. For
purposes of beneficial ownership calculation, it was assumed that Messrs.
Hamblett and Myhren would receive only shares of Continental Class A
Common Stock in the Merger. Mr. Hamblett and Mr. Myhren are not presently
Directors of Continental but will be appointed upon the Closing.
210
(7) The shares listed in the table as being beneficially owned by Mr. Luick
include 73,800 shares owned by Mr. Luick's daughter and 37,500 shares
with respect to which she acts as trustee for Mr. Luick's grandchildren.
Mr. Luick disclaims beneficial ownership of these shares.
(8) The shares listed in the table as being beneficially owned by Mr. McCance
include 225,000 shares held by Greylock Limited Partnership, of which Mr.
McCance is a general partner. Mr. McCance has shared voting and
investment power as to these shares, is entitled to beneficial ownership
of an indeterminate number of these shares and disclaims beneficial
ownership as to the balance. Of the remaining shares, Mr. McCance
disclaims beneficial ownership as to 12,500 shares with respect to which
his wife acts as trustee for his daughter and 12,500 shares held by his
daughter.
(9) Mr. Ryan holds 136,250 shares of Continental Common Stock. The remaining
shares of Continental Common Stock listed in the table as being
beneficially owned by Mr. Ryan are held by Schooner Capital Corporation
(and its subsidiaries), over which Mr. Ryan has shared voting and
investment power as the Chairman and principal stockholder.
(10) All of these shares are subject to the Stock Liquidation Agreement
pursuant to which Mr. Grousbeck must sell such shares to Continental in
either 1998 or 1999. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Continental--Liquidity
and Capital Resources--Recent Stock Repurchases and 1998-1999 Share
Repurchase Program".) Mr. Grousbeck's address is Room 382, Graduate
School of Business, Stanford University, Stanford, California 94305.
(11) These four limited partnerships may be deemed to be a "group" of persons
acting together for the purpose of acquiring, holding, voting or
disposing of shares of Continental Common Stock. BV Co. III, as the sole
general partner of each of Boston Ventures Limited Partnership III and
Boston Ventures Limited Partnership IIIA, is deemed to be the beneficial
owner of the shares held by such limited partnerships and to have shared
voting and investment power with respect to such shares. BV Co. IV, as
the sole general partner of each of Boston Ventures Limited Partnership
IV and Boston Ventures Limited Partnership IVA, is deemed to be the
beneficial owner of the shares held by such limited partnerships and to
have shared voting and investment power with respect to such shares. BV
Co. III disclaims beneficial ownership of the shares beneficially owned
by BV Co. IV; and BV Co. IV disclaims beneficial ownership of the shares
beneficially owned by BV Co. III. Mr. Coppedge may be deemed to
beneficially own all such shares. (See footnote (5).)
(12) These stockholders may be deemed to be a "group" of persons acting
together for the purpose of acquiring, holding, voting or disposing of
shares of Continental Series A Preferred Stock. Corporate Advisors, as
the general partner of Corporate Partners and Corporate Offshore
Partners, has sole voting and investment power as to the shares held by
them. Corporate Advisors serves as investment manager over a certain
investment management account for SBA and has sole voting and dispositive
power with respect to the shares of Continental Series A Preferred Stock
held by SBA. Pursuant to the Co-Investment Agreement, Corporate Advisors
has sole voting and dispositive power with respect to the shares held by
Vencap and ContCable. The address of Corporate Advisors, Corporate
Partners, Corporate Offshore Partners, FPGT, SBA, ContCable and Vencap
is: c/o Corporate Advisors, L.P., One Rockefeller Plaza, New York, New
York 10020. (See footnote (6) above.)
(13) Mellon Bank, N.A. acts as the trustee for FPGT, a trust under and for the
benefit of certain employee benefit plans of General Motors Corporation
and its subsidiaries. The shares listed in the table may be deemed to be
beneficially owned by GMIMC, a wholly owned subsidiary of General Motors
Corporation. GMIMC's principal business is providing investment advice
and investment management services with respect to the assets of certain
employee benefit plans of General Motors Corporation and its subsidiaries
and with respect to the assets of certain direct and indirect
subsidiaries of General Motors Corporation and associated entities. GMIMC
is serving as FPGT's investment manager with respect to these shares and,
in that capacity, it has the sole power to direct Mellon Bank, N.A. as to
the voting and disposition of these shares. Because of its limited role
as trustee, Mellon Bank, N.A. disclaims beneficial ownership of these
shares. Pursuant to the Co-Investment Agreement, FPGT is obligated,
subject to its fiduciary duties under the Employee Retirement Income
Security Act of 1974, as amended, (i) to transfer shares held by it only
in a transaction in which the other parties to the Co-Investment
Agreement participate on a pro rata basis and (ii) to exercise all voting
and other rights with respect to such shares in the same manner as is
done by Corporate Advisors on behalf of Corporate Partners and Corporate
Offshore Partners.
(14) The percentage ownership for the group assumes the conversion of shares
of Continental Series A Preferred Stock into Continental Common Stock by
all members of the group. The percentage ownership for each individual
member of the group assumes conversion by only that stockholder.
211
DESCRIPTION OF CONTINENTAL CAPITAL STOCK
The following description of the capital stock of Continental and certain
provisions of the Continental Restated Certificate and Continental By-Laws is a
summary and is qualified in its entirety by the Continental Restated
Certificate and the Continental By-Laws, which documents are incorporated
herein by reference.
After the effectiveness of the Continental Recapitalization Amendment the
authorized capital stock of Continental will consist of 425,000,000 shares of
Continental Class A Common Stock, 200,000,000 shares of Continental Class B
Common Stock and 200,000,000 shares of Continental Preferred Stock, of which
1,142,858 shares have been designated Continental Series A Preferred Stock. As
of August 1, 1995, there were outstanding 8,685,900 shares of Continental Class
A Common Stock and 109,196,050 shares of Continental Class B Common Stock
(giving effect to the Continental Recapitalization Amendment and the
Continental Stock Split).
CONTINENTAL COMMON STOCK
DIVIDENDS. Holders of shares of Continental Common Stock are entitled to
receive such dividends as may be declared by Continental's Board of Directors
out of funds legally available for such purpose, but only after payment of
dividends required to be paid on outstanding shares of any other class or
series of stock having preference over Continental Common Stock as to
dividends, including the Continental Series A Preferred Stock. No dividend may
be declared or paid in cash or property on either class of Continental Common
Stock unless simultaneously the same dividend is declared or paid on each share
of the other class of Continental Common Stock. In the case of a stock
dividend, holders of Continental Class A Common Stock are entitled to receive
the same dividends, payable in Continental Class A Common Stock, as the holders
of Continental Class B Common Stock receive, payable in Continental Class B
Common Stock. Continental's ability to pay cash dividends on its capital stock
is subject to certain restrictions set forth in its credit agreements. (See
"Description of Continental Indebtedness".)
VOTING RIGHTS. Subject to voting rights granted to holders of the Continental
Preferred Stock, including the holders of the Continental Series A Preferred
Stock who currently vote as if they had converted each of their shares into 25
shares of Continental Class B Common Stock (after giving effect to the
Continental Stock Split), holders of Continental Class A Common Stock and
Continental Class B Common Stock vote as a single class on all matters
submitted to a vote of the stockholders, with each share of Continental Class A
Common Stock entitled to one vote and each share of Continental Class B Common
Stock entitled to ten votes. For a detailed description of voting rights of the
Continental Preferred Stock, see "Continental Series A Preferred Stock".
Under the Continental Restated Certificate, the vote of holders of at least
66 2/3% of the total votes of all Continental Voting Stock is required for the
amendment or repeal of, or the adoption of any provision inconsistent with,
provisions in the Continental Restated Certificate establishing a classified
Board of Directors, or provisions of the Continental Restated Certificate
authorizing the Continental Preferred Stock and Continental Common Stock or
specifying the terms of the Continental Class A Common Stock and the
Continental Class B Common Stock (including an amendment to increase any shares
of authorized capital stock). In addition to voting together with all other
shares of Continental Voting Stock and in addition to any special rights that
the Continental Series A Preferred Stock has as a series the Continental
Preferred Stock has, under Delaware Law, a separate majority class vote with
respect to any amendment to the Continental Restated Certificate to increase or
decrease the authorized shares of Continental Preferred Stock, increase or
decrease the par value of the shares of such class or alter or change the
powers, preferences or special rights of such class so as to adversely affect
it. Certain other provisions also require a 66 2/3% vote. (See "DGCL and
Certain Provisions of the Continental Restated Certificate and the Continental
By-Laws".) There are no cumulative voting rights in the election of the
Continental Board of Directors.
212
LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding up of
Continental, the holders of Continental Class A Common Stock are entitled to
share ratably with the holders of Continental Class B Common Stock in all
assets available for distribution after payment in full of amounts owing to
creditors and holders of the Continental Preferred Stock. Thereafter, any
remaining amount would be shared ratably by both classes of Continental Common
Stock. Continental Redeemable Common Stock shares ratably with other
Continental Common Stock. (See "Description of Continental--Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Continental--Liquidity and Capital Resources".)
RESTRICTIONS ON TRANSFER OF CONTINENTAL CLASS B COMMON STOCK AND
CONVERTIBILITY OF CONTINENTAL CLASS B COMMON STOCK. The Continental Class B
Common Stock is not transferable by a stockholder except to a "Permitted Class
B Transferee" (which term is defined generally below) of a "Class B Holder"
(which term is defined below). Accordingly, no trading market has or will
develop in the Continental Class B Common Stock, and the Continental Class B
Common Stock will not be listed or traded on any exchange or in any market. Any
purported transfer of the economic, record or beneficial ownership of shares of
Continental Class B Common Stock not permitted under the Continental Restated
Certificate will result in the automatic conversion of such shares into shares
of Continental Class A Common Stock, effective on the date of such purported
transfer. Each share of Continental Class B Common Stock is convertible at any
time at the option of the holder into one share of Continental Class A Common
Stock.
Other than pursuant to conversions of Continental Class B Common Stock into
Continental Class A Common Stock as described above, shares of Continental
Class B Common Stock may be transferred only to a Permitted Class B Transferee
of the economic owner of such shares of Continental Class B Common Stock (the
"Class B Holder"). An "economic owner" is defined as a person who has a direct
or indirect pecuniary interest in the shares. "Permitted Class B Transferees"
of a Class B Holder are generally defined as certain affiliates of Class B
Holders, such as family members, family and other trusts controlled by the
Class B Holder and other entities controlled or owned by a Class B Holder or a
Permitted Class B Transferee of such Class B Holder.
CONVERSION OF CONTINENTAL CLASS B COMMON STOCK UPON CERTAIN OTHER EVENTS. If
at any time (i) the number of outstanding shares of Continental Class B Common
Stock falls below 7 1/2% of the aggregate number of issued and outstanding
shares of Continental Common Stock or (ii) the Continental Board of Directors
and the holders of a majority of the outstanding shares of Continental Class B
Common Stock approve the conversion of all of the Continental Class B Common
Stock into Continental Class A Common Stock, then each outstanding share of
Continental Class B Common Stock shall be converted into one share of
Continental Class A Common Stock without further action by Continental or its
stockholders.
OTHER PROVISIONS. The Continental Board of Directors has the power to issue
shares of authorized but unissued Continental Class A Common Stock, Continental
Class B Common Stock and Continental Preferred Stock without further
stockholder action. Neither the holders of Continental Common Stock nor the
holders of the Continental Series A Preferred Stock are entitled to preemptive
or similar rights.
213
UNISSUED CONTINENTAL PREFERRED STOCK
The 198,857,142 shares of authorized and unissued Continental Preferred Stock
(after giving effect to the Continental Recapitalization Amendment may be
issued with such designations, powers, preferences and other rights and
qualifications, limitations and restrictions thereon as the Continental Board
of Directors may authorize without further action by Continental's
stockholders, including but not limited to: (i) the designation of each series
and the number of shares that will constitute such series; (ii) the voting
rights, if any, of shares of such series; (iii) the dividend rate on the shares
of such series; restrictions, limitations or conditions upon the payment of
such dividends; and whether dividends shall be cumulative and the dates on
which dividends are payable; (iv) the prices at which, and the terms and
conditions on which, the shares of such series may be redeemed, if such shares
are redeemable; (v) the purchase or sinking fund provisions, if any, for the
purchase or redemption of shares of such series; (vi) any preferential amount
payable upon shares of such series in the event of the liquidation, dissolution
or winding up of Continental or the distribution of its assets; and (vii) the
prices or rates of conversion at which, and the terms and conditions on which,
the shares of such series may be converted into other securities, if such
shares are convertible. The rights of holders of shares of Continental Common
Stock as described above will be subject to, and may be adversely affected by,
the rights of holders of any Continental Preferred Stock that may be issued in
the future. The issuance of Continental Preferred Stock may also have the
effect of delaying, deferring or preventing a change of control of Continental
or other corporate action.
CONTINENTAL SERIES A PREFERRED STOCK
The terms of the Continental Series A Preferred Stock are set forth in a
Certificate of Designation that constitutes part of the Continental Restated
Certificate (the "Series A Certificate of Designation"). All of the 1,142,858
shares of Continental Preferred Stock that have been designated Continental
Series A Preferred Stock were issued in a private placement that closed on June
22, 1992 for a purchase price per share of $350 pursuant to a Stock Purchase
Agreement by and between Continental and the Continental Preferred Stock
Investors (the "Preferred Stock Purchase Agreement") and are still held by the
Continental Preferred Stock Investors.
DIVIDENDS. The Continental Series A Preferred Stock participates in all
dividends (other than dividends payable in shares of Continental Common Stock)
declared by the Continental Board of Directors on the Continental Common Stock
as if such shares had been converted into shares of Continental Common Stock.
The holders of Continental Series A Preferred Stock are entitled to receive
payment of any dividend declared, (other than dividends payable in shares of
Continental Common Stock) before any payment of such dividend is made to the
holders of Continental Common Stock.
VOTING RIGHTS. The shares of Continental Series A Preferred Stock are
entitled to vote together as a single class with the Continental Common Stock
on all matters voted on by holders of Continental Common Stock; each holder of
Continental Series A Preferred Stock is entitled to cast the number of votes
equal to the number of votes that could be cast by the shares of Continental
Common Stock into which such holder's shares of Continental Series A Preferred
Stock are then convertible. At the Effective Time and giving effect to the
Continental Recapitalization Amendment and the Continental Stock Split, and for
so long as each Continental Preferred Stock Investor or its Allowed Transferees
(as defined in "Conversion" below) continues to hold its shares and to meet
certain other requirements, each share of Continental Series A Preferred Stock
will be entitled to 250 votes per share. (See "Conversion" below.) If shares of
Continental Series A Preferred Stock are transferred to persons other than
Allowed Transferees, or if, under certain circumstances, Corporate Advisors
ceases to have voting and dispositive power over such shares, such shares will
be entitled to only 25 votes per share and will be convertible at any time only
into Continental Class A Common Stock. (See "Conversion" below.)
The Continental Series A Preferred Stock has separate voting rights as a
series with respect to certain matters. The affirmative vote of 66 2/3% of the
Continental Series A Preferred Stock is necessary (A) to
214
increase the authorized number of or issue any additional shares of Continental
Series A Preferred Stock, (B) to change by amendment to the Continental
Restated Certificate the aggregate authorized number or par value of the
Continental Series A Preferred Stock or the powers, preferences or special
rights of the Continental Series A Preferred Stock so as to affect the
Continental Series A Preferred Stock adversely, or (C) to purchase any
Continental Series A Preferred Stock when dividends on the Continental Series A
Preferred Stock are in arrears or there is a redemption default.
The Continental Series A Preferred Stock also has separate class voting
rights under Delaware Law as to (i) an increase or decrease in authorized
shares of Continental Preferred Stock, (ii) an increase or decrease in the par
value of shares of Continental Preferred Stock and (iii) an alteration or
change in the powers, preferences or special rights of Continental Preferred
Stock that would have an adverse effect on such class.
BOARD REPRESENTATION. Corporate Advisors, on behalf of the Continental
Preferred Stock Investors has the right to designate two persons to be
nominated to serve on Continental's Board of Directors. (See "Description of
Continental--Directors, Executive Officers and Other Officers of Continental".)
Mr. Hostetter has contractually agreed to vote all shares of Continental Common
Stock owned by him in favor of such nominees. The number of Directors Corporate
Advisors is entitled to designate for election is reduced to one if the
Continental Preferred Stock Investors do not beneficially own at least a 10
percent economic ownership interest in Continental's then outstanding voting
stock and to zero if the Continental Preferred Stock Investors' economic
ownership interest is less than 5 percent of Continental's then outstanding
voting securities (unless such reduction is caused by Continental's issuance of
additional voting stock).
In addition, holders of Continental Series A Preferred Stock have the right
(voting separately as a class or as a class with the holders of any other
capital stock of Continental ranking on parity, either as to dividends or upon
liquidation, dissolution or winding up with the Continental Series A Preferred
Stock if such holders are then entitled to elect additional Directors pursuant
to any similar provision of the Certificate of Designation for such stock) to
elect two additional Directors to the Continental Board of Directors
("Directors Upon Default") in the event of (a) a breach by Continental of the
Preferred Stock Purchase Agreement or (b) a failure to declare or pay dividends
or distributions on the Continental Series A Preferred Stock in accordance with
"Dividends" above or to redeem shares of Continental Series A Preferred Stock
when required. Upon such election, if the Continental Preferred Stock Investors
have two designees already serving on the Continental Board of Directors one
such designee must resign. Such right to designate two Directors Upon Default
continues until such time as Continental has cured the default, at which time
such Directors Upon Default must resign. Upon such resignation, the Continental
Preferred Stock Investors are entitled to designate an additional Director to
the extent they are entitled otherwise then to nominate two representatives to
the Continental Board of Directors.
LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of
Continental, holders of shares of Continental Series A Preferred Stock are
entitled to receive an amount per share equal to the greater of (i) the
Accreted Value (as defined in "Redemption Rights" below) determined as of the
date of such liquidation, dissolution or winding up and (ii) the aggregate
amount that would be distributable to holders of Continental Common Stock in
respect of the number of shares of Continental Common Stock into which a share
of Continental Series A Preferred Stock is then convertible, plus, in either
case, unpaid dividends, if any, that have been declared and are payable on the
Continental Series A Preferred Stock.
REDEMPTION RIGHTS. On June 22, 2002, any holder of the Continental Series A
Preferred Stock has the right to cause Continental to redeem its Continental
Series A Preferred Stock at a price per share (the "Series A Redemption Price")
equal to $350 plus an amount calculated to provide such holder with a yield of
8% thereon from June 22, 1992, compounded semi-annually in arrears, as adjusted
to reflect any cash dividends paid on the Continental Series A Preferred Stock
(the "Accreted Value"). Continental has the right to redeem all (but not less
than all) of the Continental Series A Preferred Stock at the Series A
Redemption Price by
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notifying the holders of the Continental Series A Preferred Stock of such
election not more than 30 or less than 20 trading days prior to June 22, 2002.
Continental may elect to pay all or any portion of the Series A Redemption
Price (other than unpaid dividends) in cash or in shares of Continental Common
Stock based on the then current market value (determined in accordance with the
provisions set forth in the Continental Restated Certificate) of the
Continental Common Stock. If Continental does not exercise its redemption
rights prior to June 22, 2002, Continental will have the right on such date to
redeem all (but not less than all) of the Continental Series A Preferred Stock
not put to Continental by the holders thereof on June 22, 2002, at a price per
share equal to the Accreted Value up to and including the date of redemption,
which may be paid at Continental's election, in cash or in shares of
Continental Common Stock or any combination thereof.
At any time after June 22, 1997, provided that the current market value
(determined in accordance with the provisions set forth in the Continental
Restated Certificate) of the number of shares of Continental Common Stock into
which a share of Continental Series A Preferred Stock is then convertible
exceeds 137.5% of the then Accreted Value (as of the date notice of conversion
is given), Continental may cause all (but not less than all) of the outstanding
shares of Continental Series A Preferred Stock to be converted into Continental
Common Stock.
CONVERSION. Giving effect to the Continental Recapitalization Amendment and
the Continental Stock Split, each share of Continental Series A Preferred Stock
is currently convertible at the option of the holder at any time into 25 shares
of Continental Common Stock. If the holder is one of the Continental Preferred
Stock Investors (i.e. one of the original purchasers) or an Allowed Transferee
of a Continental Preferred Stock Investor (which term has the same meaning as
that ascribed to a Permitted Class B Transferee, see "Restrictions on Transfer
of Class B Common Stock and Convertibility of Class B Common Stock"), such
holder is entitled to receive shares of Continental Class B Common Stock upon
conversion; otherwise the holder will receive shares of Continental Class A
Common Stock. The shares of Continental Series A Preferred Stock are not
transferable except among the Continental Preferred Stock Investors and their
Allowed Transferees and their limited partners until June 22, 1995, unless
Continental consummates an initial public offering prior to such date, in which
case the restrictions on transfer are terminated.
If a capital reorganization or certain reclassification of Continental Common
Stock or the consolidation or merger of Continental with any other entity or
the sale or conveyance of all or substantially all the assets of Continental
occurs, each share of Continental Series A Preferred Stock will thereafter be
convertible into the kind and amount of securities and property (including
cash) receivable upon such event by a holder of that number of shares of
Continental Common Stock into which such share of Continental Series A
Preferred Stock was convertible immediately prior to such event.
CHANGE OF CONTROL. If a Change of Control (as defined below) of Continental
occurs and at such time the current market value of the number of shares of
Continental Common Stock into which the Continental Series A Preferred Stock is
then convertible is less than the then Accreted Value of the Continental Series
A Preferred Stock, the holders of Continental Series A Preferred Stock have the
right to require Continental to redeem the Continental Series A Preferred Stock
at a per share price equal to the then Series A Redemption Price.
Continental may elect to redeem the Continental Series A Preferred Stock by
paying the Series A Redemption Price in cash or Continental Common Stock which,
for purposes of determining the number of shares to be issued, will be valued
at 90% of its then current market value (as determined in accordance with
provisions set forth in the Continental Restated Certificate).
"Change of Control" means: (a) the acquisition by any individual, entity or
group of 50% or more of the combined voting or economic power of the then
outstanding Continental voting securities, but excluding, for this purpose, any
such acquisition by (i) Continental or any of its subsidiaries or (ii) any
corporation with respect to which, following such acquisition, more than 50% of
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of Directors is then
beneficially owned, directly or indirectly, by individuals and entities who
were the beneficial owners of
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Continental voting securities in substantially the same proportion as their
ownership, immediately prior to such acquisition; or (b) approval by the
stockholders of Continental of a reorganization, merger or consolidation, in
each case, with respect to which all or substantially all the individuals and
entities who were the respective beneficial owners of the voting securities of
Continental immediately prior to such reorganization, merger or consolidation
do not, following such reorganization, merger or consolidation, beneficially
own, directly or indirectly, more than 50% of the combined voting or economic
power of the then outstanding Continental voting securities of the combined
corporation; or (c) the sale or other disposition of all or substantially all
the assets of Continental in one transaction or series of related transactions.
RESTRICTIONS ON CONTINENTAL. If (a) Continental breaches its obligations
under the Preferred Stock Purchase Agreement, (b) any dividends or
distributions payable on the Continental Series A Preferred Stock have not been
declared or paid or (c) shares of Continental Series A Preferred Stock have not
been redeemed as required, neither Continental nor any of its affiliates,
subject to certain exceptions, can (i) declare or pay dividends or make any
distribution on any capital stock ranking junior to (including the Continental
Common Stock) or on a parity with the Continental Series A Preferred Stock,
(ii) redeem or otherwise acquire any capital stock ranking junior to or on a
parity with the Continental Series A Preferred Stock or make any sinking fund
or similar payment thereon or (iii) make any loan or advance to any stockholder
of Continental or any affiliates or associates thereof.
RANKING WITH OTHER PREFERRED STOCK. Continental may not issue a series or
class of convertible Continental Preferred Stock that ranks prior to the
Continental Series A Preferred Stock with respect to dividends, liquidation
preference, or rights upon dissolution and winding up.
DGCL AND CERTAIN PROVISIONS OF THE CONTINENTAL RESTATED CERTIFICATE AND THE
CONTINENTAL BY-LAWS
The Continental Restated Certificate and the Continental By-Laws contain
certain provisions that could delay or make more difficult the acquisition of
Continental by means of a tender offer, a proxy contest or otherwise. These
provisions, as described below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Continental first to negotiate with
Continental. Continental believes that the benefits of increased protection of
Continental's ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Continental outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiations with respect to such proposals could result in an improvement of
their terms.
CLASSIFIED BOARD OF DIRECTORS. The Continental Restated Certificate and the
Continental By-Laws provide for a Board of Directors that is divided into three
classes of Directors, with the term of each class expiring in a different year.
(See "Description of Continental--Directors, Executive Officers and Other
Officers of Continental".) The Continental By-Laws provide that the number of
Directors will be fixed from time to time exclusively by the Continental Board,
but shall consist of not less than three Directors. The classified Board is
intended to promote continuity and stability of Continental's management and
policies since a majority of the Directors at any given time will have prior
experience as Directors of Continental. Such continuity and stability
facilitates long-range planning of Continental's business and ensures the
quality of Continental's business operations. The classification of Directors
has the effect of making it more difficult to change the composition of the
Continental Board of Directors. At least two annual stockholder meetings,
instead of one, would be required to effect a change in the majority control of
the Continental Board, except in the event of vacancies resulting from removal
(in which case the remaining Directors will fill the vacancies so created).
(See "Removal of Directors; Filling Vacancies on the Continental Board of
Directors".)
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE CONTINENTAL BOARD OF
DIRECTORS. Pursuant to the DGCL, a member of the Board of Directors of a
corporation with a classified board may be removed by the stockholders only for
cause, at any time during his term of office by affirmative vote of the holders
of a majority of the shares then entitled to vote at an election of Directors.
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The Continental By-Laws and the Continental Restated Certificate both provide
that a vacancy on the Continental Board, including a vacancy created by an
increase in the size of the Continental Board by the Directors, may be filled
by a majority of the remaining Directors or by a sole remaining Director, and
if no Directors remain, then by the stockholders. The Continental Restated
Certificate also provides that any Director elected by the Continental Board to
replace another Director of a given class of Directors will hold office until
the next election of such class of Directors. These provisions are to ensure
that a third-party would be precluded from removing incumbent Directors and
simultaneously gaining control of the Continental Board by filling the
vacancies created by such removal with its own nominees. Moreover, even if a
majority of the holders of the outstanding Continental voting securities were
to vote to remove Directors for cause, only the remaining Directors would have
the power to fill the vacancies created by such removal, unless such vote
provided for the removal of the entire Continental Board of Directors for
cause.
AMENDMENT OF CERTAIN PROVISIONS OF THE CONTINENTAL RESTATED CERTIFICATE AND
THE CONTINENTAL BY-LAWS. The Continental Restated Certificate and the
Continental By-Laws contain provisions requiring the affirmative vote of the
holders of at least 66 2/3% of the Continental voting securities, voting
together as a single class, to amend certain provisions of the Continental
Restated Certificate and the Continental By-Laws. In addition to the provisions
described under "Continental Common Stock--Voting Rights" above, this super-
majority voting provision also applies to (i) the provisions of the Continental
Restated Certificate authorizing Continental to release the Directors of
Continental from any liability for monetary damages as a result of any breach
of their fiduciary duties, with certain exceptions mandated by the DGCL, (ii)
the provisions allowing for the indemnification of officers and Directors of
Continental, and (iii) the provisions imposing certain restrictions on
Continental's stock to prevent any violations of governmental regulations.
Finally, the Continental Restated Certificate provides that the Continental By-
Laws may be amended only by a majority of the full Continental Board of
Directors or by the holders holding at least 66 2/3% of the total votes of all
outstanding Continental voting securities. The DGCL provides that by-laws may
not be amended by a corporation's Board of Directors unless the corporation's
certificate of incorporation expressly authorizes such amendments by the Board
of Directors; the Continental Restated Certificate includes such a provision.
PROVISIONS RELATING TO GOVERNMENTAL REGULATIONS. The Continental Restated
Certificate includes provisions designed to ensure that the ownership or
purchase of Continental's shares in the public market or otherwise will not
result in a violation of any laws or regulations that would materially
adversely affect Continental's business. Specifically, Continental may seek
information from stockholders and persons to whom shares of Continental's
capital stock are proposed to be transferred in order to ascertain whether
ownership of Continental's shares by such persons would violate such laws or
regulations. If any person refuses to provide such information or Continental
concludes in its good faith judgment that such ownership would result in the
violation of such laws and regulations, Continental may (a) refuse to transfer
shares to such person, (b) refuse to allow such stockholder to exercise such
rights with respect to Continental's shares as would result in such violation
or (c) redeem such shares for cash or certain other securities, as provided in
the Continental Restated Certificate.
Continental may redeem shares of Continental's capital stock to the extent
necessary to prevent the loss or secure the reinstatement of any license or
franchise from any governmental agency held by Continental to conduct any
material portion of Continental's business in accordance with the terms that
are summarized in general as follows:
(1) the redemption price of the price of the shares to be redeemed would
be equal to the lesser of (x) fair market value (as defined in the
Continental Restated Certificate) or (y) if such stock was purchased by the
stockholder within one year of the redemption date, then the price such
stockholder paid for such shares;
(2) the redemption price of such shares may be paid in cash, or certain
securities of Continental, or any combination thereof; and
(3) Continental shall give thirty (30) days' written notice of such
redemption.
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Each certificate representing shares of Continental Preferred Stock,
Continental Class A Common Stock and Continental Class B Common Stock must bear
a legend indicating that the shares are subject to these restrictions on their
transfer and these redemption rights.
ANTI-TAKEOVER STATUTE. Subject to certain exceptions set forth therein,
Section 203 of the DGCL provides that a corporation shall not engage in any
business combination with any "interested stockholder" for a three-year period
following the date that such stockholder becomes an interested stockholder
unless (a) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder, (b) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares) or (c) on or subsequent to such date, the business combination
is approved by the Board of Directors of the corporation and by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as specified therein, an interested
stockholder is defined to mean any person that (i) is the owner of 15% or more
of the outstanding voting stock of the corporation, or (ii) is an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date, or any affiliate or associate of such
person referred to in (i) or (ii) of this sentence. Under certain
circumstances, Section 203 of the DGCL makes it more difficult for an
interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or by-laws,
elect not to be governed by this section, effective twelve months after
adoption. The Continental Restated Certificate and the Continental By-Laws do
not exclude Continental from the restrictions imposed under Section 203 of the
DGCL. It is anticipated that the provisions of Section 203 of the DGCL may
encourage companies interested in acquiring Continental to negotiate in advance
with the Continental Board.
TRANSFER AGENT
The Bank of New York will serve as the Transfer Agent and Registrar for the
Continental Class A Common Stock and the Continental Class B Common Stock.
CONTINENTAL SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the consummation of the Merger, giving effect to the Continental
Recapitalization Amendment and the Continental Stock Split, there will be
39,411,107 shares of Continental Class A Common Stock, 109,196,050 shares of
Continental Class B Common Stock and 1,142,858 shares of Continental Series A
Preferred Stock outstanding.
Of these shares, the 30,725,207 shares of Continental Class A Common Stock
(otherwise referred to as the Continental Merger Stock) registered and sold to
the Providence Journal stockholders pursuant to the Continental Registration
Statement, after the expiration of the Transfer Restrictions will be freely
tradeable without restriction or registration under the Securities Act, except
for shares of Continental Merger Stock issued to current "affiliates" of
Providence Journal, which must be sold in accordance with the provisions of
Rule 145 promulgated under the Securities Act. (See "Rule 144 and 145
Restrictions" below.)
The remaining shares of Continental Class A Common Stock, all of the shares
of Continental Class B Common Stock and all of the shares of Continental Series
A Preferred Stock outstanding are "restricted securities", as that term is
defined in Rule 144 promulgated under the Securities Act. Treating the
Continental Class B Common Stock and the Continental Series A Preferred Stock
as if all outstanding shares thereof were converted into Continental Class A
Common Stock, (i) there would be approximately 143,397,450
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shares of restricted Continental Class A Common Stock outstanding (excluding
any unvested shares granted as part of incentive compensation to officers of
Continental and its subsidiaries) and, (ii) of such shares, (x) immediately
following the Registration Effective Date, approximately 44,746,525 shares
would be eligible for sale in the public market without regard to volume or
other limitations pursuant to Rule 144(k) of the Securities Act and (y)
beginning 90 days after the Registration Effective Date, approximately
94,499,900 shares would be eligible for sale, subject to compliance with volume
and other limitations under Rule 144. The remaining shares of currently
outstanding Continental Class A Common Stock or shares of Continental Class A
Common Stock issuable upon currently outstanding convertible securities would
become eligible for sale at various times thereafter.
RULE 144 AND 145 RESTRICTIONS
Restricted securities may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including Rule 144. In general, under Rule 144 as currently in
effect, beginning 90 days after the Registration Effective Date, a person (or
persons whose shares are required to be aggregated) who has beneficially owned
shares of Continental Common Stock or shares of Continental Series A Preferred
Stock (which is convertible into shares of Continental Common Stock) that have
been outstanding and not held by any "affiliate" of Continental for a period of
at least two years is entitled to sell within any three-month period a number
of shares that does not exceed the greater of (a) one percent of the then
outstanding shares of the Continental Class A Common Stock (approximately
394,111 shares, based on the number of shares of Continental Common Stock that
will be outstanding after the Merger), or (b) the average weekly reported
trading volume of the Continental Class A Common Stock during the four calendar
weeks preceding the date on which notice of such sale is given, subject to
certain manner of sale provisions, notice requirements and the availability of
current public information (which requirement as to the availability of current
public information is expected to be satisfied commencing 90 days after the
date of this Joint Proxy Statement-Prospectus). As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through the
use of one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer.
Affiliates of Continental are also subject to the restrictions and
requirements of Rule 144 with respect to restricted securities of Continental
beneficially owned by them. In addition, sales by affiliates of Continental of
shares of Continental Common Stock that are not "restricted securities" (such
as shares acquired by affiliates in the public market following the Merger) are
subject to the Rule 144 restrictions and requirements, other than the two-year
holding period requirement.
Under Rule 144(k), a person who is not an affiliate of Continental at any
time during the three months preceding a sale, and who has beneficially owned
shares of Continental Common Stock that were not acquired from Continental or
an affiliate of Continental within the previous three years, is entitled to
sell such shares without regard to volume limitations, manner of sale
provisions, notification requirements or the availability of current public
information concerning Continental.
The shares of Continental Class A Common Stock issued and sold pursuant to
the Continental Registration Statement in connection with the Merger are
registered securities, and thus not restricted securities. However, such shares
are subject to the Transfer Restrictions pursuant to the Continental By-Laws
for a period of one year after the Effective Time. Thereafter, non-affiliates
of Providence Journal will be able to freely sell the Continental Merger Stock
after the Merger in the public market.
Persons who are currently affiliates of Providence Journal and who are not
affiliates of Continental, for two years after the Effective Time (subject to
the Transfer Restrictions in the first year), may only sell the Continental
Merger Stock subject to the Rule 144 volume limitations, manner of sale
provisions, notification requirements and requirements as to current public
information concerning Continental. For the period from two years after the
Effective Time until three years after the Effective Time, such persons are
subject only to
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the Rule 144 requirement as to current public information regarding
Continental. After three years, such persons may sell their shares of
Continental Merger Stock freely.
Persons who are currently affiliates of Providence Journal and will become
affiliates of Continental after the Merger are (in addition to being subject to
the Transfer Restrictions) subject to the same Rule 144 requirements as an
affiliate of Continental with respect to non-restricted shares, except that no
notification of sale is required to be filed with respect to such shares. (See
"Description of Continental--Directors, Executive Officers and Other Officers
of Continental" for a description of the rights of Providence Journal to
appoint two persons to serve on the Board of Directors of Continental.)
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
an exemption from the registration requirements of the Securities Act for the
resale of shares originally purchased from an issuer by its employees,
directors, officers, consultants or advisers pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons
before such issuer becomes subject to the reporting requirements of the
Exchange Act. Securities issued in reliance on Rule 701 are "restricted";
however, beginning 90 days after the Registration Effective Date, such shares
may be sold (i) by persons other than affiliates of Continental subject only to
the manner of sale provisions of Rule 144 and (ii) by affiliates of Continental
under Rule 144 without compliance with its two-year minimum holding period
requirements, but subject to all other requirements of Rule 144.
In January 1995, Continental issued 2,393,750 shares of Continental Class B
Common Stock to certain of its officers and employees pursuant to its 1995
Restricted Stock Purchase Program V, including 832,500 shares to persons deemed
to be affiliates of Continental and 1,561,250 shares to non-affiliates of
Continental. Such shares are subject to vesting over a period of seven years at
6-month intervals, beginning on June 30, 1995. The vesting is not straight-line
and commences slowly, peaks in the middle years of the vesting schedule and
then slows again at the end of the vesting schedule. These shares of
Continental Class B Common Stock are convertible into shares of Continental
Class A Common Stock and may be sold in reliance on Rule 701 once they vest.
OUTSTANDING REGISTRATION RIGHTS
Certain persons and entities (the "Continental Rightsholders") are entitled
to certain rights with respect to the registration under the Securities Act of
a total of 1,760,499 shares of Continental Common Stock (which is equivalent to
44,012,475 shares of Continental Common Stock after giving effect to the
Continental Recapitalization Amendment and the Continental Stock Split and
assuming conversion of the Continental Series A Preferred Stock into
Continental Common Stock) (the "Registrable Shares") under the terms of
agreements among Continental and the Continental Rightsholders (the
"Registration Agreements"). The Continental Preferred Stock Investors have the
right to request that Continental register the 1,142,858 shares of Continental
Series A Preferred Stock outstanding or the Continental Common Stock into which
the Continental Series A Preferred Stock is convertible upon five occasions,
with Continental paying certain expenses of such registration upon four
occasions. The Boston Ventures Investors have the right to request that
Continental register the 300,563 shares of Continental Class A Common Stock
(which is equivalent to 7,514,075 shares after giving effect to the Continental
Recapitalization Amendment and the Continental Stock Split) shares of
Continental Common Stock that they own or would own upon conversion, upon two
occasions, certain expenses of which are to be paid by Continental. The other
purchasers who purchased Continental Class B Common Stock at the same time as
the Boston Ventures Investors do not have the right to demand registration;
however they have the right to participate with respect to 168,712 shares
(which is equivalent to 4,217,800 shares after giving effect to the Continental
Recapitalization Amendment and the Continental Stock Split) in any registration
requested by the Continental Preferred Stock Investors or the Boston Ventures
Investors. Each of the Registration Agreements also provides that in the event
Continental proposes to register any of its securities under the Securities Act
for its own account or upon the demand of a Continental Rightsholder, the
Continental Rightsholders shall be entitled, with certain exceptions, to
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include Registrable Shares in such registration, unless the managing
underwriters of such offering recommended excluding for marketing reasons some
or all of such Registrable Shares from such registration.
In addition to the rights of the Continental Rightsholders described above,
MD Co. has the right to demand registration of the shares of Continental Class
A Common Stock into which the 148,366 shares (which is equivalent to 3,709,150
shares after giving effect to the Continental Recapitalization Amendment and
the Continental Stock Split) of Continental Class B Common Stock held by it are
convertible; however, such rights do not continue after an initial public
offering of Continental Class A Common Stock and, therefore would not exist
after the consummation of the Merger. MD Co. does have rights which survive the
Merger to participate, in certain circumstances, in registrations; however, its
rights are junior in priority to those of the Continental Preferred Stock
Investors, the Boston Ventures Investors and the other investors who purchased
shares of Continental Class B Common Stock in a private placement. Continental
is required to use its best efforts to effect such registrations, subject to
certain conditions and limitations.
Prior to the Effective Time, there will be no public market for the
Continental Class A Common Stock and no predictions can be made as to the
effect, if any, that market sales of shares or the availability of shares for
sale will have on the market price for the Continental Class A Common Stock
prevailing from time to time. Sales of substantial amounts of Continental Class
A Common Stock in the public market could adversely affect prevailing market
prices.
DESCRIPTION OF CONTINENTAL INDEBTEDNESS
The following is a summary description of the various material credit
arrangements which Continental has entered into with its lenders or, in the
case of the 1995 Credit Facility, which it has arranged on behalf of certain of
its subsidiaries. The summary does not purport to be complete and is qualified
in its entirety by reference to such agreements. Copies of such agreements have
been filed as exhibits or are incorporated by reference as exhibits to the
Continental Registration Statement of which this Joint Proxy Statement-
Prospectus forms a part.
"Restricted Subsidiaries" are subsidiaries that Continental has designated as
such for purposes of certain of Continental's credit arrangements, including
the 1994 Credit Facility but excluding the 1995 Credit Facility. Restricted
Subsidiaries as a group are subject to the covenants and obligations imposed by
the agreements representing such indebtedness to the same extent as
Continental, and their relevant financial measures are taken into account in
computing the various ratios and tests imposed by such agreements. To be
eligible for such designation, Continental or one or more other Restricted
Subsidiaries must own at least 80% of the voting stock or the equity,
partnership or other beneficial interests of such subsidiary, and such
subsidiary must conduct its business so as to derive its revenues from the
cable television or telecommunications businesses and related activities. Upon
designation, Restricted Subsidiaries typically become guarantors of the
obligations of Continental under the 1994 Credit Facility and the Prudential
Notes. All subsidiaries of Continental that currently own and operate systems
located in the United States have been designated Restricted Subsidiaries. Upon
consummation of the Merger, the PJC Cable Subsidiaries initially will not be
designated as Restricted Subsidiaries for purposes of the 1994 Credit Facility
or the Prudential Notes.
"Unrestricted Subsidiaries" are subsidiaries that have not been so designated
as Restricted Subsidiaries. Continental's credit agreements give Continental
the ability to terminate the designation of a Restricted Subsidiary under
certain circumstances. The borrowers and guarantors under the 1995 Credit
Facility will be Unrestricted Subsidiaries for purposes of the 1994 Credit
Facility, the Prudential Notes and the Notes and Debentures described herein.
1994 CREDIT FACILITY. Continental and its Restricted Subsidiaries (the
"Restricted Group") are parties to the 1994 Credit Facility with various
financial institutions (the "Credit Agreement Lenders"), which provides for
revolving credit availability to Continental of $2,200,000,000. Credit
availability under the 1994 Credit Facility will decrease on a schedule
commencing December 31, 1997 with annual reductions on each
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December 31 thereafter, with a final maturity of October 10, 2003. As of June
30, 1995, Continental had credit availability of $536,260,000 under the 1994
Credit Facility. Continental's obligations under the 1994 Credit Facility are
guaranteed by substantially all of the Restricted Subsidiaries.
The 1994 Credit Facility permits Continental to elect interest rates from
time to time, as to all or a portion of the borrowings made thereunder, which
rates are composed of two elements: (i) the reference rate and (ii) the margin
(or "spread") over such reference rate. The reference rate is, subject to
certain exceptions, based on the "base" rate of the agent, as from time to time
in effect, or may be fixed for periods of up to 60 months for each fixing by
reference to interest rates prevailing at the date of fixing in selected
interbank Eurodollar markets ("Eurodollar" rates). The "spread" over the
reference rate is determined by the ratio of the consolidated total debt of the
Restricted Group, minus cash and certain cash equivalents held by the
Restricted Group ("Consolidated Total Debt"), to annualized consolidated
operating income, including income on account of management fees, before
depreciation, amortization, non-cash regulatory reserves and non-operating
expenses, interest and income taxes of the Restricted Group ("Consolidated
Operating Income"). The margins currently in effect are .25% for base rate
borrowings and 1.5% for Eurodollar borrowings.
In accordance with the 1994 Credit Facility, Continental is required to
maintain a minimum of 50% of its debt at fixed interest rates when the ratio of
total debt to EBITDA exceeds certain levels. As of June 30, 1995, Continental's
ratio of fixed interest rate debt (which factors in Swaps, Caps and debt fixed
by its terms) to total debt was approximately 56%. Continental's policy is to
use interest rate protection products in order to hedge its interest rate risk.
Swaps are matched with layers of either fixed or variable rate debt.
Continental accounts for outstanding Swaps on a settlement basis as an
adjustment to interest expense. Gains or losses resulting from the termination
of Swaps are amortized over the remaining life of the underlying debt or the
Swap, whichever is shorter. As of June 30, 1995 Continental had Swaps, pursuant
to which it pays fixed interest rates averaging approximately 9.0% on notional
amounts of $900,000,000 (expiring in 1995 through 2000) and variable interest
rates on notional amounts of $1,575,000,000 (expiring in 1998 through 2003).
The variable interest rates are based on 6-month LIBOR, which currently is
approximately 6.0%. As of June 30, 1995, Continental had $800,000,000 of Caps,
which limit 6-month LIBOR to approximately 8%. Continental amortizes the cost
of a Cap over the life of the Cap agreement as an adjustment to interest
expense. Continental's exposure, if the other parties fail to perform under
both Swaps and Caps, would be limited to the impact of variable interest rate
fluctuations and the periodic settlement of amounts due under these agreements.
Prepayments of outstanding borrowings under the 1994 Credit Facility are
required in certain circumstances out of a portion of the proceeds of certain
sales of Restricted Group assets.
In addition to customary financial covenants, covenants restricting the
incurrence of debt, investments and encumbrances on assets, and covenants
limiting mergers and acquisitions, the 1994 Credit Facility provides that (i)
the Restricted Group may not purchase or redeem, or pay cash dividends on,
capital stock of Continental and (ii) a Restricted Subsidiary may not pay cash
dividends on its capital stock (other than dividends paid to Continental or
another Restricted Subsidiary) if, at the time of such payment and giving
effect thereto, (i) there exists any default under the 1994 Credit Facility
(including defaults arising because of the existence of defaults under other
instruments relating to indebtedness) or (ii) the aggregate of all amounts
spent since June 30, 1994 for such repurchases of and dividends on capital
stock would exceed the sum of (a) $400,000,000 plus (b) the excess, if any, of
(I) Consolidated Operating Income after June 30, 1994 over (II) 120% of
consolidated interest expense (all interest accruable or paid in cash by the
Restricted Group, including payments in the nature of interest under
capitalized leases) incurred after that date, plus (c) the aggregate net
proceeds received by Continental since June 30, 1994 from the issuance or sale
of capital stock of Continental. Approximately $610,222,000 was available as of
June 30, 1995 for payments subject to this test. In addition to the foregoing
limitations, Continental is prohibited from paying cash dividends on its
capital stock outstanding on October 17, 1994 until Continental has received in
exchange for its capital stock,
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