-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, gc7gMx1/EDyzc6aotnwhBiE/VDAWCpJXhsRNzqwK8iq3tbo2cZYAreUtiKe4J+ly zrJTMGeB/69fxTQzNIiAMg== 0000950109-95-000153.txt : 19950608 0000950109-95-000153.hdr.sgml : 19950608 ACCESSION NUMBER: 0000950109-95-000153 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19950127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENCE JOURNAL CO CENTRAL INDEX KEY: 0000080816 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57479 FILM NUMBER: 95503560 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 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1995 REGISTRATION NO. 33- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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 reorganization of Providence Journal Company pursuant to the Plan of Reorganization of Providence Journal Company and the merger of a subsidiary of Providence Journal Company with and into Continental Cablevision, Inc. pursuant to the Amended and Restated 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. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF MAXIMUM AGGREGATE SECURITIES TO BE NUMBER TO BE OFFERING PRICE OFFERING AMOUNT OF REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE(2) - ------------------------------------------------------------------------------------- Class A Common Stock, Par Value $1.00 per share................ 38,689 $1,964 $75,985,196 $26,202 - ------------------------------------------------------------------------------------- Class B Common Stock, Par Value $1.00 per share................ 46,961 $1,964 $92,231,404 $31,804 - -------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for purpose of calculating the registration fee. (2) The registration fee has been calculated in accordance with Rule 457(f)(2) promulgated under the Securities Act of 1933 based on the book value of the shares of the Registrant's Class A Common Stock and Class B Common Stock registered pursuant hereto, computed as of September 30, 1994. ---------------- 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 THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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; Certain Considerations Relating to the Transactions Item 4. Terms of the Transaction..................... Summary; Certain Considerations Relating to 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.................................... Terms of the Merger Agreement; 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 and New Providence Journal 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; Certain Considerations Relating to the Transactions; Pre-Merger Transactions; 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 March , 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 April , 1995 at 11:00 a.m. at the offices of Providence Journal, 75 Fountain Street, Providence, Rhode Island. At the Providence Journal Special Meeting, stockholders will be asked to approve and adopt: (a) a Plan of Reorganization (the "Plan of Reorganization") for the internal corporate restructuring of Providence Journal and its subsidiaries, including (i) a spin-off to the stockholders (the "PJC Spin-Off") of shares of a new corporation ("New Providence Journal"), which will own and operate all of the existing businesses of Providence Journal other than its cable television operations, and (ii) a consolidation of those cable television businesses in a group of restructured corporations ("Restructured PJC"); and (b) an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "Merger") of Restructured PJC with and into Continental Cablevision, Inc. ("Continental"). In addition, the stockholders will be asked to approve the Providence Journal Cable Division Sale Bonus Plan providing bonus compensation to certain executives of Providence Journal's cable television businesses if the Merger is consummated. The Providence Journal Cable Division Sale Bonus Plan is designed to retain 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. As a result of the Merger, all outstanding shares of common stock of Restructured PJC will be converted into either all shares of Continental Class A Common Stock or, at Continental's option, a combination of Continental Class A Common Stock and Continental Series B Cumulative Redeemable Preferred Stock. Assuming no adjustments in the amount of consideration provided in the Merger Agreement, and that Continental elects to include the Series B Cumulative Redeemable Preferred Stock, 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 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of Continental Series B Cumulative Redeemable Preferred Stock. As part of the Plan of Reorganization, Providence Journal, and thus ultimately New Providence Journal, will become the 100% owner of television stations operating in Seattle, Portland, Honolulu, Spokane and Boise; these stations are 50%-owned at the present time. Then in the PJC Spin-Off, which will occur immediately prior to the Merger, each stockholder of Providence Journal at the time the Plan of Reorganization is carried out will receive, through a distribution by Restructured PJC, 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. In substance, the ongoing New Providence Journal will be a corporation identical to the present Providence Journal, but without any cable television business; also, it will be incorporated under the laws of Delaware rather than Rhode Island. The Plan of Reorganization and the Merger are 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 Plan of Reorganization and the Merger to be completed until the second half of 1995. FAILURE OF THE STOCKHOLDERS OF PROVIDENCE JOURNAL TO APPROVE EITHER THE PLAN OF REORGANIZATION OR THE MERGER WILL RESULT IN THE ABANDONMENT BY PROVIDENCE JOURNAL OF BOTH THE PLAN OF REORGANIZATION AND THE MERGER. Your Board of Directors has carefully considered the terms of the proposed Merger with Continental and believes that the Merger and the related Plan of Reorganization, including the transactions contemplated by it, are in the best interests of Providence Journal and its stockholders. The Board has unanimously approved the Plan of Reorganization, the Merger and the several related transactions 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 andChief Executive Officer PROVIDENCE JOURNAL COMPANY NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL , 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 April , 1995 at 11:00 a.m. local time at the offices of Providence Journal, 75 Fountain Street, Providence, Rhode Island, for the following purposes: 1. To consider and act upon the following integrated proposals (the "Providence Journal Proposals"): A. A proposal to approve and adopt a Plan of Reorganization of Providence Journal (the "Plan of Reorganization"), providing for the internal restructuring of Providence Journal as described in the accompanying Joint Proxy Statement-Prospectus. A copy of the Plan of Reorganization is attached as Annex II to the accompanying Joint Proxy Statement-Prospectus. B. A proposal to approve and adopt the Amended and Restated Agreement and Plan of Merger dated as of November 18, 1994 ( the "Merger Agreement"), by and among Continental Cablevision, Inc. ("Continental"), Providence Journal, King Holding Corp., King Broadcasting Company ("KBC") and The Providence Journal Company (a newly formed subsidiary of Providence Journal, which ultimately will hold the non-cable businesses and assets of Providence Journal, referred to in the accompanying Joint Proxy Statement- Prospectus as "New Providence Journal"), and each of the transactions contemplated thereby, including the merger (the "Merger") of KBC, which at the time of the Merger will hold all of Providence Journal's cable television businesses and assets, with and into Continental, 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. To consider and act upon 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. 3. Such other business as may properly come before the Providence Journal Special Meeting or any adjournments or postponements thereof. The Providence Journal Board of Directors has fixed the close of business on March , 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. All matters to come before the Providence Journal Special Meeting shall be voted upon separately, including the separate elements of the Providence Journal Proposals. FAILURE OF THE STOCKHOLDERS OF PROVIDENCE JOURNAL TO APPROVE EITHER THE PLAN OF REORGANIZATION OR THE MERGER WILL RESULT IN THE ABANDONMENT BY PROVIDENCE JOURNAL OF BOTH THE PLAN OF REORGANIZATION AND THE MERGER. Providence Journal stockholders entitled to vote at the Providence Journal Special Meeting have (i) a right to dissent to the Plan of Reorganization and the Merger and (ii) if the Plan of Reorganization and the Merger are 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 March , 1995 THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE PLAN OF REORGANIZATION, FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED THEREBY 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. March , 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 April , 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 Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of a subsidiary of Providence Journal Company ("Providence Journal"), which, following an internal corporate restructuring of Providence Journal and its subsidiaries, will own all of Providence Journal's cable television businesses ("Restructured PJC"), with and into Continental (the "Merger"). As a result of the Merger, all outstanding shares of common stock of Restructured PJC will be converted into shares of Continental Class A Common Stock and Continental Series B Cumulative Redeemable Preferred Stock (which will be a newly authorized series of Continental's Preferred Stock with the terms and preferences described in the accompanying Joint Proxy Statement- Prospectus). Assuming that no adjustments have been made to the amount of consideration to be paid to Restructured PJC stockholders as provided in the Merger Agreement 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 stockholders of Restructured PJC an aggregate of 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of Continental Series B Cumulative Redeemable Preferred Stock. 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 (which include, among other things, its internal corporate restructuring). As a result, it is expected that the Merger will be completed during the second half 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 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 stock to the Restructured PJC 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 four 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 public accountants 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 APRIL , 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 April , 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 Amended and Restated Agreement and Plan of Merger, dated as of November 18, 1994 (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 the merger (the "Merger") of KBC, which at the time of the Merger will hold all of Providence Journal's cable television businesses and assets, with and into Continental, 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 (a) the total number of authorized shares of capital stock of Continental from 17,700,000 to 825,000,000, (b) 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 (c) the number of authorized shares of Continental 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") and of which 4,987,113 will be designated Series B Cumulative Redeemable Preferred Stock upon consummation of the Merger. (3) The election of four 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 public accountants 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 March , 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 IV 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, Robert B. Luick, Secretary March , 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 JANUARY , 1995 PRELIMINARY COPIES CONTINENTAL CABLEVISION, INC. AND PROVIDENCE JOURNAL COMPANY JOINT PROXY STATEMENT FOR SPECIAL MEETINGS OF STOCKHOLDERS TO BE HELD APRIL , 1995 ------------ CONTINENTAL CABLEVISION, INC. PROSPECTUS 28,260,309 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE 4,987,113 SHARES OF SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE PER SHARE ------------ THE PROVIDENCE JOURNAL COMPANY PROSPECTUS 38,689 SHARES OF CLASS A COMMON STOCK, $1.00 PAR VALUE PER SHARE 46,961 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 April , 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 March , 1995. (continued on next page) THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT- PROSPECTUS. THE PROPOSED PLAN OF REORGANIZATION, 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. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY 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 ADEQUACY OF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS MARCH , 1995 This Joint Proxy Statement-Prospectus relates to the Amended and Restated Agreement and Plan of Merger, dated as of November 18, 1994 (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 ("KHC"), and King Broadcasting Company, a Washington corporation ("KBC") and certain related transactions. A copy of the Merger Agreement is attached hereto as Annex I. ------- Pursuant to the Merger Agreement, KBC, a subsidiary of Providence Journal, which following an internal corporate restructuring of Providence Journal and its subsidiaries will hold all of Providence Journal's cable television businesses and assets ("Restructured PJC"), will merge with and into Continental, and Continental will be the surviving corporation. (As used in this Joint Proxy Statement-Prospectus, the term "KBC" will mean King Broadcasting Company before the Restructuring, as defined below, and the term "Restructured PJC" will mean King Broadcasting Company after the Restructuring.) At the Special Meeting in Lieu of the Annual Meeting of Continental (the "Continental Special Meeting"), Continental stockholders will be asked to consider and vote upon the following proposals: (i) the Merger Agreement; (ii) an amendment to the Restated Certificate of Incorporation of Continental (the "Continental Recapitalization Amendment") to increase (a) the total number of authorized shares of capital stock of Continental from 17,700,000 to 825,000,000, (b) 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 (c) the number of authorized shares of Continental 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") and, upon consummation of the Merger, 4,987,113 of which will be designated as Series B Cumulative Redeemable Preferred Stock ("Continental Series B Preferred Stock"); (iii) the election of four 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 proposals described in items (i) and (ii) above are hereinafter collectively referred to as the "Continental Proposals". Each of the proposals described in items (i) through (iv) 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). (See "Description of Continental Capital Stock".) 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. At the Special Meeting of Providence Journal (the "Providence Journal Special Meeting"), Providence Journal stockholders will be asked to consider and vote upon the following proposals: A. The Plan of Reorganization of Providence Journal (the "Plan of Reorganization"), consisting of the internal corporate restructuring of Providence Journal and its subsidiaries (the "Restructuring"), pursuant to which each of the following transactions will occur in immediate succession: (i) the contribution of all the assets of KHC (consisting solely of 100% of the outstanding capital stock of KBC) to KBC in exchange for shares of KBC Common Stock and the assumption by KBC of all of KHC's liabilities, and the subsequent distribution of such KBC shares to Providence Journal and dissolution of KHC (KBC thereby becoming a direct wholly owned subsidiary of Providence Journal); ii (ii) the contribution by Providence Journal to KBC of all of its businesses and assets in exchange for shares of KBC Class A Common Stock, $1.00 par value per share ("Restructured PJC Class A Common Stock"), and KBC Class B Common Stock, $1.00 par value per share ("Restructured PJC Class B Common Stock" and, together with the Restructured PJC Class A Common Stock, the "Restructured PJC Common Stock") and the assumption by KBC of all of the obligations and liabilities of Providence Journal; and (iii) the dissolution of Providence Journal under the Rhode Island Business Corporations Act ("RIBCA" or "Rhode Island Law") and the contemporaneous distribution to Providence Journal stockholders of its sole asset, all of the shares of capital stock of KBC, in the form of one share of Restructured PJC Class A Common Stock to the holder of each share of Providence Journal Class A Common Stock, $2.50 par value per share ("Providence Journal Class A Common Stock") and one share of Restructured PJC Class B Common Stock to the holder of each share of 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"), each as outstanding immediately prior to such dissolution; (iv) the contribution (the "Contribution") by Restructured PJC of all of its businesses and assets unrelated to its cable television business and all liabilities related thereto ("PJC Non-Cable Business") to New Providence Journal (a newly formed Delaware corporation, which is currently wholly owned by Providence Journal and will, as a result of the Restructuring, be wholly owned by Restructured PJC), in exchange for 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 the New Providence Journal Class A Common Stock, the "New Providence Journal Common Stock"), equal to the number of shares of Restructured PJC Class A Common Stock and Restructured PJC Class B Common Stock, respectively, outstanding immediately prior to the Restructuring; and (v) the distribution (the "Distribution") by Restructured PJC (which, after the Contribution, will then hold only the former Providence Journal and KBC businesses and assets related to cable television ("PJC Cable Business")) to its stockholders of all of the shares of New Providence Journal Common Stock in the form of one share of New Providence Journal Class A Common Stock to the holder of each share of Restructured PJC Class A Common Stock and one share of New Providence Journal Class B Common Stock to the holder of each share of Restructured PJC 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 Restructuring will own the same number and class of shares in New Providence Journal as such holder owned in Providence Journal. B. The Merger Agreement, pursuant to which Restructured PJC will merge (the "Merger") with and into Continental, and each share of Restructured PJC Common Stock outstanding immediately prior to the Merger will be converted into shares of Continental Class A Common Stock and Continental Series B Preferred Stock. C. The Providence Journal Cable Division Sale Bonus Plan, which provides compensation bonuses to certain executives of Providence Journal's cable television business upon and subject to the consummation of the Merger. Proposals (A) and (B) above are hereinafter collectively referred to as the "Providence Journal Proposals". Each of the proposals above will be voted upon separately by the holders of Providence Journal Common Stock. 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 Plan of Reorganization. The affirmative vote or action by written iii consent 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. The affirmative vote or action by written consent 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 and adopt the Providence Journal Cable Division Sale Bonus Plan. 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 Providence Journal Cable Division Sale Bonus Plan being non-deductible for federal income tax purposes to the Providence Journal and in the imposition of an excise tax on the recipients of such payments. Failure of the stockholders of Providence Journal to approve either the Plan of Reorganization or the Merger will result in the abandonment by Providence Journal of both the Plan of Reorganization and the Merger. As described under "Rights of Dissenting Stockholders--Providence Journal", holders of Providence Journal Common Stock who exercise and perfect dissenters' rights under the 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 Restructured PJC Common Stock or, in turn, shares of Continental Class A Common Stock, Continental Series B Preferred 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".) The value ascribed under the terms of the Merger Agreement to the Continental Class A Common Stock and the Continental Series B Preferred Stock to be issued to the Providence Journal stockholders (collectively the "Continental Merger Stock") is $548,250,000 (or $19.40 per share of Continental Class A Common Stock) and $96,750,000 (or $19.40 per share of Continental Series B Preferred Stock), respectively, or an aggregate of $7,530.65 per share of Providence Journal Common Stock, which was outstanding on January 15, 1995. The Continental Merger Stock valuation was arrived at by Continental and Providence Journal as a result of arm's length negotiations and, as no public market exists for the Continental Merger Stock, was not in any manner based on the valuation at which such stock may trade in a public market for such shares. Accordingly, no assurance can be given that shares of the Continental Class A Common Stock or the shares of Continental Series B Preferred Stock will trade at or above such prices following the consummation of the Merger. (See "Certain Considerations Relating to the Transactions--Certain Considerations Related to the Continental Merger Stock--No Public Market; Possible Volatility of Stock Price".) Assuming that the Merger 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 in the aggregate approximately 16.2% 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 100% of the Continental Series B Preferred Stock and would hold an aggregate of 2.3% 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 Restructuring. (See "The Merger-- Ownership of Continental Stock after the Merger" and "Ownership of New Providence Journal after the PJC Spin-Off and the Merger".) 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 and the Continental Series B Preferred Stock to be issued in connection with the Merger. At the effective time of the Merger (the "Effective Time"), the shares of Continental Class A Common Stock and Continental Series B Preferred Stock issued in connection with the Merger will be iv listed for trading in the over-the-counter market and reported through the Nasdaq National Market ("NASDAQ") or on a national securities exchange. This Joint Proxy Statement-Prospectus also constitutes a prospectus of New Providence Journal with respect to (i) the New Providence Journal Class A Common Stock and (ii) the New Providence Journal Class B Common Stock to be issued in connection with the Contribution and the Distribution in accordance with the terms of the Plan of Reorganization and 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 Contribution and the Distribution will not be listed for trading on any securities exchange. Because of the uncertainty of the timing of the receipt of the required regulatory and other third-party approvals, if granted, the Restructuring, the Contribution, the Distribution (the Contribution and the Distribution are sometimes collectively referred to as the "PJC Spin-Off") and the Merger may not be consummated for a number of weeks after the approval of such transactions by the respective stockholders of Continental and Providence Journal. Pursuant to the Merger Agreement, the respective Boards of Directors of Continental and Providence Journal are soliciting stockholder approval at this time in order to be in a position to consummate such transactions as soon as practicable after the receipt of all necessary regulatory and other third- party approvals. All information contained in this Joint Proxy Statement-Prospectus relating to Continental has been supplied by Continental, and all information contained in this Joint Proxy Statement-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 March , 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 , 1995, (25 days after the Effective Time) all dealers effecting transactions in the Continental Class A Common Stock and the Continental Series B Preferred 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............................................................... 6 Continental Series B Preferred Stock Election............................ 8 Payment for Shares....................................................... 8 Working Capital Adjustment............................................... 8 Ownership of Continental Stock after the Merger.......................... 9 Recommendation of the Boards of Directors................................ 9 Opinion of Financial Advisor............................................. 9 Effective Time of Merger................................................. 10 Conditions to the Merger................................................. 10 NASDAQ Listing........................................................... 10 Acquisition Proposals.................................................... 10 Registration Rights...................................................... 11 Undertakings Regarding Public Offering................................... 11 Termination of the Merger Agreement...................................... 11 Corporate Governance..................................................... 12 Interests of Certain Persons............................................. 12 Certain Federal Income Tax Considerations................................ 12 Accounting Treatment..................................................... 13 Rights of Dissenting Stockholders........................................ 13 Voting Agreement......................................................... 13 Noncompetition Agreement................................................. 14 Comparison of Rights of Stockholders..................................... 14 Market Prices and Dividend Data.......................................... 14 Providence Journal Cable Division Sale Bonus Plan........................ 15 Providence Journal Summary Consolidated Financial Data................... 15 New Providence Journal Summary Pro Forma Financial Data.................. 16 Providence Journal Cable Summary Combined Financial Data................. 17 Continental Summary Consolidated Historical Information.................. 19 Continental Selected Pro Forma Financial Data............................ 21 THE SPECIAL MEETINGS....................................................... 22 Matters to Be Discussed at the Special Meetings.......................... 22 Record Dates; Stock Entitled to Vote; Quorum............................. 22 Required Votes........................................................... 23 Solicitation and Voting of Proxies....................................... 24 Ownership of Continental Securities...................................... 25 Ownership of Providence Journal Securities............................... 29 CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTIONS........................ 33 Reasons for the Transactions; Recommendation of Boards of Directors...... 33 Opinion of Financial Advisor to Providence Journal....................... 34
vi Certain Considerations Related to the Continental Merger Stock........... 38 Certain Considerations Related to the New Providence Journal Common Stock................................................................... 42 Interests of Certain Persons in the Transactions......................... 45 PRE-MERGER TRANSACTIONS.................................................... 46 New Cable Indebtedness................................................... 46 Kelso Buyout............................................................. 46 Plan of Reorganization................................................... 46 Certain Intercompany Transactions........................................ 48 THE MERGER................................................................. 49 General Provisions....................................................... 49 Conditions Precedent..................................................... 52 Certain Covenants........................................................ 55 Representations and Warranties........................................... 60 Indemnification.......................................................... 60 Tax Matters.............................................................. 61 Certain Employee Matters................................................. 61 Termination.............................................................. 63 Regulatory and Other Third Party Approvals............................... 65 Amendment; Waiver........................................................ 65 Ancillary Agreements..................................................... 65 Ownership of Continental Stock after the Merger.......................... 66 Ownership of New Providence Journal Stock after the PJC Spin-Off and the Merger.................................................................. 67 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. 67 Federal Income Tax Consequences of Certain Transactions.................. 67 Backup Withholding....................................................... 69 PROPOSAL TO APPROVE AND ADOPT THE CONTINENTAL RECAPITALIZATION AMENDMENT, ELECTION OF CONTINENTAL DIRECTORS AND RATIFICATION OF APPOINTMENT OF ACCOUNTANTS............................................................... 69 PROPOSAL TO APPROVE AND ADOPT THE PROVIDENCE JOURNAL CABLE DIVISION SALE BONUS PLAN................................................................ 70 Administration........................................................... 70 Review and Authorization................................................. 70 Eligibility to Receive Awards............................................ 71 Bonus Pool............................................................... 71 Conditions............................................................... 71 General Restrictions..................................................... 71 Amendment................................................................ 71 DESCRIPTION OF PROVIDENCE JOURNAL PUBLISHING BUSINESS...................... 72 General.................................................................. 72 Circulation and Pricing.................................................. 72 Advertising.............................................................. 72 Production and Raw Materials............................................. 73 Other Publishing Activities.............................................. 73 Competition.............................................................. 74 Employees................................................................ 75 Properties............................................................... 75
vii DESCRIPTION OF PROVIDENCE JOURNAL BROADCAST TELEVISION BUSINESS............ 75 General.................................................................. 75 Industry Background...................................................... 75 The Stations............................................................. 77 Programming Investments.................................................. 82 Local Marketing Agreements............................................... 83 Operating Strategy....................................................... 83 Acquisition Strategy..................................................... 84 Licensing and Regulation................................................. 85 Employees................................................................ 89 Properties............................................................... 89 DESCRIPTION OF PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL............... 90 Legal Proceedings........................................................ 90 Capitalization of Providence Journal and Pro Forma Capitalization of New Providence Journal...................................................... 90 Selected Consolidated Financial Data of Providence Journal............... 91 Management's Discussion and Analysis of Financial Condition and Results of Operation of Providence Journal...................................... 91 Unaudited Pro Forma Condensed Financial Statements....................... 101 Unaudited Pro Forma Condensed Balance Sheet.............................. 102 Unaudited Pro Forma Condensed Consolidated Statements of Operations...... 103 Market Price of New Providence Journal Common Stock and Dividend Policy of New Providence Journal............................................... 104 Executive Officers of Providence Journal and New Providence Journal...... 105 Compensation of New Providence Journal Directors......................... 108 Executive Compensation................................................... 109 Stock Incentive Plans of Providence Journal Assumed by New Providence Journal................................................................. 113 Compensation Committee Report on Executive Compensation.................. 118 Stockholder Return Performance Graph..................................... 119 Certain Relationships and Related Transactions........................... 120 Ownership of New Providence Journal Capital Stock........................ 120 DESCRIPTION OF NEW PROVIDENCE JOURNAL COMMON STOCK......................... 121 New Providence Journal Common Stock...................................... 121 Certain Provisions in the New Providence Journal Certificate............. 122 NPJ Rights Agreement..................................................... 123 COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND NEW PROVI- DENCE JOURNAL............................................................. 124 DESCRIPTION OF PROVIDENCE JOURNAL CABLE TELEVISION BUSINESS................ 125 Business................................................................. 125 Cable Television Business................................................ 125 Development of Providence Journal Cable.................................. 126 Providence Journal Cable's Systems....................................... 128 Franchises............................................................... 129 Programming.............................................................. 130 Competition.............................................................. 130 Properties............................................................... 132 Employees................................................................ 133 Legal Proceedings........................................................ 133 Selected Combined Financial Data of Providence Journal Cable............. 133 Management's Discussion and Analysis of Financial Condition and Results of Operations of Providence Journal Cable............................... 135
viii DESCRIPTION OF CONTINENTAL................................................. 141 Business................................................................. 141 Domestic Cable Television Business....................................... 141 Domestic Operating Strategy.............................................. 142 Regulatory Response...................................................... 146 Development of Continental and its Business.............................. 147 Domestic Continental Systems............................................. 148 Domestic Acquisitions and Investments.................................... 151 International Operations................................................. 153 Strategic Investments.................................................... 155 Competition.............................................................. 159 Properties............................................................... 161 Employees................................................................ 162 Legal Proceedings........................................................ 162 Capitalization........................................................... 163 Selected Consolidated Financial Information of Continental............... 164 Management's Discussion and Analysis of Financial Condition and Results of Operations of Continental............................................ 166 Unaudited Pro Forma Condensed Financial Statements....................... 176 Unaudited Pro Forma Condensed Balance Sheet.............................. 177 Market Price of Continental Common Stock and Dividend Policy of Continental............................................................. 182 Directors, Executive Officers and Other Officers of Continental.......... 182 Executive Compensation................................................... 185 Compensation of Directors................................................ 188 Certain Transactions..................................................... 188 Beneficial Ownership of Continental Capital Stock After the Merger....... 189 DESCRIPTION OF CONTINENTAL CAPITAL STOCK................................... 194 Continental Common Stock................................................. 194 Unissued Continental Preferred Stock..................................... 195 Continental Series A Preferred Stock..................................... 196 Continental Series B Preferred Stock..................................... 199 DGCL and Certain Provisions of the Continental Restated Certificate and the Continental By-Laws................................................................. 205 Transfer Agent........................................................... 207 CONTINENTAL SHARES ELIGIBLE FOR FUTURE SALE................................ 207 General.................................................................. 207 Rule 144 and 145 Restrictions............................................ 208 Rule 701................................................................. 209 Outstanding Registration Rights.......................................... 209 DESCRIPTION OF CONTINENTAL INDEBTEDNESS.................................... 210 COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND CONTINENTAL. 213 Rights To Purchase Or Redeem Shares...................................... 213 Required Vote for Certain Business Combinations.......................... 213 Charter Amendments....................................................... 214 By-Law Amendments........................................................ 215 Voting Rights............................................................ 215 Rights Agreement......................................................... 216 Preemptive Rights........................................................ 216 Transferability of Shares................................................ 216
ix Special Meetings....................................................... 216 Corporate Action Without A Meeting..................................... 217 Dividends.............................................................. 217 Liquidation............................................................ 218 Appraisal or Dissenters' Rights........................................ 218 Provisions Relating To Directors And Officers.......................... 219 Stockholder Nominations and Rights of Preferred Stockholders to Elect Directors............................................................. 219 Removal................................................................ 219 Derivative Suits....................................................... 220 Conflict of Interest Transactions...................................... 220 State Anti-Takeover Statutes........................................... 220 LEGISLATION AND REGULATION............................................... 221 Cable Communications Policy Act of 1984................................ 221 Cable Television Consumer Protection and Competition Act of 1992....... 222 Federal Regulation..................................................... 222 Copyright Regulation................................................... 230 State and Local Regulations............................................ 231 Regulation of Telecommunications Activities............................ 232 RIGHTS OF DISSENTING STOCKHOLDERS........................................ 232 Continental............................................................ 232 Providence Journal..................................................... 235 PAYMENT AND DISTRIBUTION TO STOCKHOLDERS................................. 237 LEGAL MATTERS............................................................ 238 EXPERTS.................................................................. 238 INDEX TO FINANCIAL STATEMENTS............................................ F-1 ANNEXES: Annex I-- Amended and Restated Agreement and Plan of Merger............ I-1 Annex II-- Plan of Reorganization...................................... II-1 Annex III-- Opinion of Financial Advisor to Providence Journal......... III-1 Annex IV-- Section 262 of the Delaware General Corporation Law......... IV-1 Annex V-- Sections 7-1.1-73 and 7-1.1-74 of the Rhode Island Business Corporations Act...................................................... V-1 Annex VI-- Providence Journal Cable Division Sale Bonus Plan........... VI-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............................................................... 176 1984 Cable Act............................................................. 129 1992 Cable Act............................................................. 39 1994 Credit Facility....................................................... 170 401K Plan.................................................................. 62 ABC........................................................................ 44 Accreted Value............................................................. 197 Aliens..................................................................... 84 Allowed Transferee......................................................... 198 American................................................................... 165 American Partnerships...................................................... 165 ASCAP...................................................................... 231 Assumed Awards............................................................. 45 Assumed Options............................................................ 45 ATV........................................................................ 87 Audit Bureau............................................................... 72 Base Price................................................................. 203 BBT........................................................................ 141 Bear Stearns............................................................... 9 BED Partnerships........................................................... 173 BMI........................................................................ 231 Boston Ventures Investors.................................................. 183 Break-Up Fee............................................................... 12 BV Co. III................................................................. 28 BV Co. IV.................................................................. 28 Cable Employees............................................................ 62 CableLabs.................................................................. 157 Cable Partners............................................................. 156 Callable Notes and Debentures.............................................. 212 Capital Cities............................................................. 151 Caps....................................................................... 171 CBS........................................................................ 44 Class B Holder............................................................. 195 Class A Right.............................................................. 123 Class B Right.............................................................. 123 Closing.................................................................... 53 Closing Date............................................................... 43 CNN........................................................................ 125 Code....................................................................... 12 Co-Investment Agreement.................................................... 28 Colony..................................................................... 48 Colony Cablevision......................................................... 34 Combined Company........................................................... 36 Comcast.................................................................... 36 Commission................................................................. 1 Communications Act......................................................... 44
DEFINED TERM PAGE - ------------ ---- Comparable Cable Companies................................................ 37 Consolidated Operating Income............................................. 211 Consolidated Total Debt................................................... 211 ContCable................................................................. 28 Continental............................................................... (i) Continental ByLaws........................................................ 14 Continental Class A Common Stock.......................................... (ii) Continental Class B Common Stock.......................................... (ii) Continental Common Stock.................................................. (ii) Continental Merger Stock.................................................. (iv) Continental Named Executive Officer....................................... 170 Continental Preferred Stock............................................... (ii) Continental Preferred Stock Investors..................................... 183 Continental Proposals..................................................... (ii) Continental Proposed Transaction.......................................... 36 Continental Recapitalization Amendment.................................... (ii) Continental Record Date................................................... 3 Continental Redeemable Common Stock....................................... 173 Continental Registration Statement........................................ 41 Continental Restated Certificate.......................................... 14 Continental Retirement Plan............................................... 188 Continental Rightsholders................................................. 209 Continental Series A Preferred Stock...................................... (ii) Continental Series B Preferred Stock...................................... (ii) Continental Special Meeting............................................... (ii) Continental Stock Split................................................... 4 Continental Voting Stock.................................................. (ii) Contribution.............................................................. (iii) Contribution and Assumption Agreement..................................... 6 Corporate Advisors........................................................ 27 Corporate Offshore Partners............................................... 28 Corporate Partners........................................................ 28 Cox....................................................................... 156 CPS....................................................................... 142 Credit Agreement Lenders.................................................. 210 CTAM...................................................................... 144 CTPAA..................................................................... 145 C-SPAN.................................................................... 125 Current Market Price...................................................... 203 DBS....................................................................... 2 Delaware Court............................................................ 232 DGCL or Delaware Law...................................................... 5 DMA....................................................................... 76 Digital Cable Radio....................................................... 159 Directors Upon Default.................................................... 197 Distribution.............................................................. (iii)
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DEFINED TERM PAGE - ------------ ---- E!........................................................................ 147 EEO....................................................................... 229 Effective Time............................................................ (iv) ERISA Affiliates.......................................................... 62 ESPN...................................................................... 125 Eurodollar................................................................ 211 Exchange Act.............................................................. 1 Exchange Agent............................................................ 237 FASB...................................................................... 99 FCC....................................................................... 39 Fintelco.................................................................. 154 Floating Rate Debentures.................................................. 212 Fox....................................................................... 44 FPGT...................................................................... 28 GAAP...................................................................... 18 HBO....................................................................... 125 Hearst.................................................................... 151 Homes..................................................................... 2 Hospital Trust............................................................ 30 HSN....................................................................... 145 HSR Act................................................................... 10 Issue Date................................................................ 200 IUP....................................................................... 110 IXC....................................................................... 157 Joint Proxy Statement-Prospectus.......................................... (i) Journal................................................................... 72 Journal 410(k) Plan....................................................... 112 Junior Stock.............................................................. 200 KBC....................................................................... (ii) Kelso Buyout.............................................................. 5 Kelso Partnerships........................................................ 5 KHC....................................................................... (ii) King Videocable........................................................... 48 Lazard.................................................................... 189 LEC....................................................................... 156 LMA....................................................................... 83 Losses and Expenses....................................................... 53 Lowell Sun Companies...................................................... 74 Management Group.......................................................... 212 Mandatory Tender Offer.................................................... 173 Maximum Amount............................................................ 7 Maximum Severance......................................................... 113 Merger.................................................................... (iii) Merger Agreement.......................................................... (ii) MMDS...................................................................... 39 MTA....................................................................... 157 MTV....................................................................... 125 NASDAQ.................................................................... (v) NBC....................................................................... 44 NCA....................................................................... 145 NCC....................................................................... 168
DEFINED TERM PAGE - ------------ ---- NCOM...................................................................... 148 NCTA...................................................................... 183 NEA....................................................................... 145 New Cable Indebtedness.................................................... 5 New Providence Journal.................................................... (ii) New Providence Journal ByLaws............................................. 14 New Providence Journal Certificate........................................ 14 New Providence Journal Class A Common Stock............................... (iii) New Providence Journal Class B Common Stock............................... (iii) New Providence Journal Common Stock....................................... (iii) Nielsen................................................................... 76 Non-Callable Notes and Debentures......................................... 212 Noncompetition Agreement.................................................. 14 Notes and Debentures...................................................... 212 NPJ New Indebtedness...................................................... 5 NPJ Rights Agreement...................................................... 14 NPT....................................................................... 142 Offering.................................................................. 11 Optus..................................................................... 155 Palmer.................................................................... 67 Palm Springs System....................................................... 64 Parity Stock.............................................................. 200 PCS....................................................................... 157 Permitted Class B Transferee.............................................. 195 PJC Broadcasting Business................................................. 2 PJC Cable Business........................................................ (iii) PJC Cable Subsidiaries.................................................... (iv) PJC Non-Cable Business.................................................... (iii) PJC Outstanding Shares.................................................... 7 PJC Publishing Business................................................... 2 PJC Spin-Off.............................................................. (v) Plan of Reorganization.................................................... (ii) PPVN...................................................................... 159 Precedent CATV Transactions............................................... 36 Preferred Stock Election.................................................. 8 Preferred Stock Election Form............................................. 51 PrimeStar................................................................. 157 Providence Journal........................................................ (i) Providence Journal Business Combination................................... 214 Providence Journal ByLaws................................................. 14 Providence Journal Cable.................................................. 17 Providence Journal Charter................................................ 14 Providence Journal Class A Common Stock................................... (iii) Providence Journal Class B Common Stock................................... (iii) Providence Journal Common Stock........................................... (iii) Providence Journal Named Executive Officers................................................................. 109 Providence Journal Nominees............................................... 12 Providence Journal Option Plans........................................... 45
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DEFINED TERM PAGE - ------------ ---- Providence Journal Pension Plan........................................... 112 Providence Journal Proposals.............................................. (iii) Providence Journal Record Date............................................ 3 Providence Journal Retirement Plans....................................... 45 Providence Journal Special Meeting........................................ (ii) Providence Journal Stock Incentive Plans.................................. 45 Providence Journal Transactions........................................... 9 Prudential Notes.......................................................... 171 PSN....................................................................... 82 PTAR...................................................................... 86 QVC....................................................................... 145 RBOC...................................................................... 156 Redemption Notice......................................................... 202 Redemption Price.......................................................... 202 Registrable Shares........................................................ 209 Registration Agreements................................................... 209 Registration Effective Date............................................... 41 Registration Rights Holders............................................... 11 Requested Rulings......................................................... 67 Restricted Business....................................................... 14 Restricted Group.......................................................... 210 Restricted Subsidiaries................................................... 210 Restructured PJC.......................................................... (ii) Restructured PJC Class A Common Stock..................................... (iii) Restructured PJC Class B Common Stock..................................... (iii) Restructured PJC Common Stock............................................. (iii) Restructuring............................................................. (ii) RFP....................................................................... 157 RIBCA or Rhode Island Law................................................. (iii) Rights.................................................................... 123 Rights Agreement.......................................................... 54 RIHTNB.................................................................... 106 RSPA III.................................................................. 187 RSPA Offer................................................................ 187 SBA....................................................................... 28 SCV....................................................................... 154 Section 16(b) Period...................................................... 115 Section 74................................................................ 13 Section 262............................................................... 13
DEFINED TERM PAGE - ------------ ---- Securities Act............................................................ 1 Selling Stockholders...................................................... 173 Series A Certificate of Designation....................................... 196 Series B Certificate of Designation....................................... 194 SERP...................................................................... 187 Service................................................................... 10 SFAS 109.................................................................. 40 SFAS 114.................................................................. 99 SFAS 115.................................................................. 99 SFAS 119.................................................................. 99 Shortfall Amount.......................................................... 51 SMATV..................................................................... 131 Special Meetings.......................................................... (i) Stated Amount............................................................. 201 Stations.................................................................. 75 Stock For Loan Exchange................................................... 187 Stock Liquidation Agreement............................................... 173 Subject Stockholders...................................................... 173 Summary Compensation Table................................................ 185 Superior Proposal......................................................... 60 Swaps..................................................................... 171 TCG....................................................................... 156 TCI....................................................................... 37 Termination Date.......................................................... 63 The Sunshine Network...................................................... 159 Transaction Consideration................................................. 237 Trust..................................................................... 13 Turner.................................................................... 147 UHF....................................................................... 74 Unrestricted Subsidiaries................................................. 210 USA....................................................................... 125 VCC....................................................................... 154 VCR....................................................................... 44 Vencap.................................................................... 28 VHF....................................................................... 74 Voting Agreement.......................................................... 13 Westerly.................................................................. 48 Working Capital........................................................... 8 Zing...................................................................... 159
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 and Continental Series B Preferred 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 Continental Series B Preferred 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 fourth largest cable television system operator in the United States. Continental's six management regions operate cable television systems in 16 states, principally in suburban areas and mid-sized cities. As of September 30, 1994, Continental's systems and those of its domestic affiliates passed approximately 5,311,000 occupied dwelling units ("Homes") and provided cable service to approximately 3,009,000 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 6,982,000 Homes and serving approximately 3,988,000 basic subscribers in 20 states. Continental also participates in cable television ventures outside of the United States. Continental has acquired, subject to receipt of regulatory approvals, an approximate 50% interest in one of the largest cable television system operators 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 is pursuing other international cable television and telecommunications investments, including a joint venture in Australia, which will construct a network to provide cable television, local telephone and a variety of advanced broadband interactive services to business and residential customers. In addition, Continental has made investments in the telecommunications and technology industries, including companies offering competitive access telephony and direct broadcast satellite ("DBS") service, 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, which are among the fifty largest domestic television markets (the "PJC Broadcasting Business"). As of September 30, 1994, Providence Journal's owned or partially owned cable television operations included systems passing approximately 1,249,000 Homes and serving approximately 753,000 basic subscribers in nine states, making Providence Journal the 16th largest multiple cable system operator in the United States. Providence Journal was the 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 2 Providence Journal Proposals are approved by the required vote of stockholders of Providence Journal, 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 as relating to the PJC 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 April , 1995, beginning at local time. The purpose of the Continental Special Meeting is to consider and vote upon the Continental Proposals. (See "The Special Meetings--Matters to Be Discussed at the Special Meetings-- Continental".) The record date for the Continental Special Meeting is March , 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. 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 April , 1995, beginning at 11:00 a.m. local time. The purpose of the Providence Journal Special Meeting is to consider and vote upon the Providence Journal Proposals, including the approval and adoption of the Plan of Reorganization (which provides for the Restructuring and the PJC Spin-Off), the Merger Agreement and each of the transactions contemplated thereby, including the Merger, and the approval and adoption of the Providence Journal 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 March , 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. The Plan of Reorganization must be approved by the holders of a majority of the shares of both Providence Journal Class A Common Stock and Providence Journal Class B Common Stock, with each class 3 voting separately. 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 Providence Journal Common Stock, voting as a single class. The affirmative vote or action by written consent 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 Providence Journal Cable Division Sale Bonus Plan. 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 Providence Journal Cable Division Sale Bonus Plan being non-deductible for federal income tax purposes to the Providence Journal and in the imposition of an 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 January 15, 1995, Directors and executive officers of Continental and their respective affiliates may be deemed to be the beneficial owners of 91,198,200 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 65.5% 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".) PROVIDENCE JOURNAL. As of January 15, 1995, Directors and executive officers of Providence Journal and their affiliates may be deemed to be the beneficial owners of 4,194 shares of the outstanding Providence Journal Class A Common Stock and 4,612 shares of the outstanding Providence Journal Class B Common Stock, which constitutes in the aggregate approximately 10% 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 Providence Journal 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, 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 and, upon consummation of the Merger, of which 4,987,113 will be designated as Continental Series B 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 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 4 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 Restructuring described below, Providence Journal or one or more of the PJC Cable Subsidiaries will incur indebtedness in a minimum principal amount of $755,000,000 (the "New Cable Indebtedness"). Immediately prior to the Contribution, Providence Journal will draw down $755,000,000 of the New Cable Indebtedness in order to consummate the Kelso Buyout (as defined below), to purchase minority interests in certain PJC Cable Subsidiaries not presently wholly owned by Providence Journal or KHC, to pay costs associated with the Merger and certain deferred compensation totalling $75 million and to repay existing indebtedness. Additional indebtedness required to meet the foregoing obligations among others, will be incurred by New Providence Journal in a minimum principal amount of approximately $200,000,000 (the "NPJ Indebtedness"). 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".) 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 and control 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 to acquire all shares of capital stock of KHC owned and controlled by the Kelso Partnerships for a purchase price of $260,000,000 excluding 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".) PLAN OF REORGANIZATION. In order to protect the tax-free nature of the Merger to the holders of Providence Journal Common Stock, the Plan of Reorganization provides, and the Merger Agreement requires, that Providence Journal reorganize its corporate structure. The actions described in clauses (i) through (iii) below together constitute the Restructuring. (As used in the Joint Proxy Statement-Prospectus, the term "KBC" shall mean King Broadcasting Company before the Restructuring and the term "Restructured PJC" shall mean King Broadcasting Company after the Restructuring.) Consequently, on or prior to the Effective Time each of the following transactions will occur in immediate succession: (i) KHC will contribute all of its assets (consisting solely of 100% of the outstanding capital stock of KBC) to KBC in exchange for KBC's assumption of all KHC's liabilities and obligations and for shares of common stock of KBC, which will be distributed to Providence Journal in exchange for and in redemption of all of KHC's outstanding capital stock. KHC will then be dissolved pursuant to the General Corporation Law of the State of Delaware (the "DGCL" or "Delaware Law"). As a result, KBC will become a direct wholly owned subsidiary of Providence Journal. (ii) Providence Journal will contribute all of its businesses and assets to KBC, hereinafter referred to in clauses (iii) through (v) below as "Restructured PJC", in exchange for shares of Restructured PJC Common Stock, and KBC will assume all of the obligations and liabilities of Providence Journal. (iii) Providence Journal will commence dissolution proceedings under applicable Rhode Island Law, and the Restructured PJC Common Stock, which shall then be the sole remaining asset of Providence Journal, will be distributed to the holders of Providence Journal Common Stock in proportion to the class and number of shares of Providence Journal Common Stock so owned by such holders. As a result, each holder of Providence Journal Common Stock immediately prior to the Restructuring will own the same number and class of shares of Restructured PJC Common Stock as such holder owned in Providence Journal. 5 (iv) Pursuant to the Contribution, Restructured PJC will contribute all of the PJC Non-Cable Business and the liabilities related thereto to New Providence Journal, its wholly owned subsidiary. In exchange for such contribution, New Providence Journal will issue to Restructured PJC 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 Restructured PJC Class A Common Stock and Restructured PJC Class B Common Stock, respectively. (v) Pursuant to the Distribution, Restructured PJC will distribute one share of New Providence Journal Class A Common Stock to the holder of each share of Restructured PJC Class A Common Stock and one share of New Providence Journal Class B Common Stock to the holder of each share of Restructured PJC 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 Restructuring 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 (the actions described in clauses (iv) and (v) above) 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 B 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 Restructured PJC harmless from all liabilities of Restructured PJC other than the New Cable Indebtedness and liabilities associated with the PJC Cable Business and Restructured PJC's obligations under the Contribution and Assumption Agreement. Restructured PJC 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 as 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 Restructuring 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 that such holders owned immediately prior to the Restructuring. (See "Rights of 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 Merger and approval by the Providence Journal stockholders of the Plan of Reorganization and the Merger and the satisfaction or waiver of certain other conditions, at the Effective 6 Time, Restructured PJC (which, at the time of the Merger, will own only the PJC Cable Business) will be merged with and into Continental, the separate existence of Restructured PJC will cease and Continental will continue as the surviving corporation. As a result of the Merger, Continental will acquire the PJC Cable Business and will assume the New Cable Indebtedness and substantially all of the liabilities of Restructured PJC relating to the PJC Cable Business. In the Merger, shares of Restructured PJC Common Stock outstanding immediately prior to the Merger shall be converted into shares of Continental Merger Stock. Giving effect to the Continental Stock Split, the number of shares of Continental Class A Common Stock and of Continental Series B Preferred Stock to be issued in exchange for each share of Restructured PJC Common Stock will be determined by the following formulas (subject to the effects of the Preferred Stock Elections described below): Class A Common Stock Formula: Maximum Amount --------------------------------------- $19.40 x PJC Outstanding Shares Series B Preferred Stock Formu- la: $96,750,000 --------------------------------------- $19.40 x PJC Outstanding Shares "Maximum Amount"............... means $548,250,000, 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 Restructured PJC does not, directly or indirectly, wholly own such PJC Cable Subsidiary at the Effective Time. Subsidiary Reduction ---------- --------- Copley/Colony, Inc. $42,610,000 Vision Cable Company of Rhode Island, Inc. $ 2,430,000 Dynamic Cablevision of Florida, Ltd. $11,300,000 California CATV Partners $ 1,490,000 "PJC Outstanding Shares"....... means the shares of Providence Journal Common Stock outstanding immediately prior to the Restructuring (other than shares owned directly or indirectly by Providence Journal as treasury stock or by any of its subsidiaries).
As of the date of this Joint Proxy Statement-Prospectus, (i) Providence Journal owns, directly or indirectly, the following percentage of equity interests in each of the following PJC Cable Subsidiaries: (a) 50% of Copley/Colony, Inc., (b) 93% of Vision Cable Company of Rhode Island, Inc. and (c) 90% of Dynamic Cablevision of Florida, Ltd. and (ii) KHC owns, indirectly, 50% of the equity interest in California CATV Partners. Providence Journal anticipates that as of the Effective Time it will have purchased the minority interests in each such subsidiary, and each such subsidiary will be wholly owned by Restructured PJC, although there can be no assurances in this regard. 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 Restructured PJC 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 Class A Common Stock or Continental Series B Preferred Stock, 7 as the case may be, to which such holder would otherwise be entitled (after taking into account all shares of Continental Class A Common Stock and/or Continental Series B Preferred 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 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of Continental Series B Preferred 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. CONTINENTAL SERIES B PREFERRED STOCK ELECTION If Continental Series B Preferred Stock is to be issued in connection with the Merger, each of the Providence Journal stockholders will have the option to elect, subject to certain limitations, the percentage of Continental Class A Common Stock and Continental Series B Preferred Stock that such holder shall be entitled to receive in respect of each share of Restructured PJC Common Stock held by such holder of Providence Journal Common Stock immediately prior to the Effective Time. For a more detailed discussion of the Preferred Stock Election, see "The Merger--General Provisions--Share Exchange". For a discussion of the terms of the Continental Series B Preferred Stock to be issued in the Merger, see "Description of Continental Capital Stock--Continental Series B Preferred Stock". The number of shares of Continental Class A Common Stock and Continental Series B Preferred Stock to be exchanged for each share of Restructured PJC Common Stock will be determined in accordance with the following procedure. Continental has reserved the right in the Merger Agreement not to issue any - --------------------------------------------------------------------------- shares of Continental Series B Preferred Stock to which the stockholders of - --------------------------------------------------------------------------- Restructured PJC otherwise would be entitled. If it elects not to issue - --------------------------------------------- Continental Series B Preferred Stock, the Maximum Amount will be increased by $96,750,000 (and the maximum number of shares of Continental Class A Common Stock to be issued in the Merger will be 33,247,422). The Merger Agreement -------------------- provides that no later than 30 days prior to the date of mailing of this Joint - ------------------------------------------------------------------------------ Proxy Statement-Prospectus to the holders of Providence Journal Common Stock, - ----------------------------------------------------------------------------- Continental will notify Providence Journal of its election to issue shares of - ----------------------------------------------------------------------------- Continental Series B Preferred Stock in connection with the Merger. - ------------------------------------------------------------------- PAYMENT FOR SHARES For a description of the method of delivery of shares of Continental Class A Common Stock and Continental Series B Preferred Stock to be issued in the Merger and New Providence Journal Common Stock to be issued in the PJC Spin-Off, see "Payment to Stockholders". STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. WORKING CAPITAL ADJUSTMENT Immediately prior to the Effective Time and after giving effect to the PJC Spin-Off, Restructured PJC will deliver to Continental a schedule setting forth Restructured PJC'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 schedule determines that Working Capital is greater than zero, Continental shall pay the excess to New 8 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), 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. 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 Restructured PJC Common Stock would own Continental Class A Common Stock constituting 16.2% 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 100% of the Continental Series B Preferred Stock. The Continental Merger Stock represents an aggregate of 2.3% 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, 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 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 "Certain Considerations Relating to the Transactions--Reasons for the Transactions; Recommendation of Boards of Directors--Continental".) PROVIDENCE JOURNAL. The Board of Directors of Providence Journal, by unanimous vote, has approved and adopted (i) the Restructuring, the PJC Spin- Off and the Merger Agreement and each of the transactions contemplated thereby relating to Providence Journal, including the Merger, and believes that such actions are in the best interests of Providence Journal and its stockholders and (ii) the Providence Journal 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 "Certain Considerations Relating to the Transactions--Reasons for the Transactions; Recommendation of Boards of Directors--Providence Journal".) OPINION OF FINANCIAL ADVISOR On November 15, 1994, Bear, Stearns & Co. Inc. ("Bear Stearns") rendered to the Board of Directors of Providence Journal its oral opinion (which was subsequently confirmed in writing) to the effect that, as of such date, the Merger, the PJC Spin-Off, the Kelso Buyout and certain related transactions (collectively, the "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 dated 1995, which sets forth assumptions made, matters considered and attendant limitations, is attached hereto as Annex III to this Joint Proxy Statement-Prospectus and is --------- incorporated herein by reference. Providence Journal 9 stockholders are urged to, and should, read such opinion carefully in its entirety. (See "Certain Considerations Relating to 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 Washington in accordance with applicable law, or at such later date as the certificate of merger and articles of merger may specify. 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 Kelso Buyout, the Restructuring and the PJC Spin-Off, (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act"), (iv) the consents and/or waivers from the relevant governmental entities under certain cable television franchises issued to Providence Journal and its subsidiaries, (v) 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, (vi) 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, (vii) the performance by each party to the Merger Agreement of its respective obligations thereunder and (viii) the approval for listing of Continental Merger Stock on NASDAQ or a national securities exchange. (See "The Merger--Conditions Precedent".) NASDAQ LISTING CONTINENTAL. Continental has agreed to list the Continental Merger Stock on NASDAQ or a national securities exchange on or prior to the time of issuance. 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. 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 10 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 mutually acceptable registration rights agreement relating to the Continental Class A Common Stock to be issued pursuant to the Merger. Such agreement will provide for 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 such registration rights in the manner requested 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) 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 an aggregate consideration of at least $1,000,000,000 pursuant to a binding agreement or agreements. The Merger Agreement further provides that if Continental has failed (i) to enter into such an agreement by the 180th day following the Effective Time or (ii) to commence the Offering prior to such date, Continental will file a registration statement with respect to such Offering with the Commission within 60 days of receipt of the written request of New Providence Journal, unless Continental's investment banker advises Continental in writing, following receipt of such written request, 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. TERMINATION OF THE MERGER AGREEMENT 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 Fees and Expenses; 11 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 at a purchase price of $68,500,000. (See "The Merger-- Termination".) 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 Effective Time will serve as officers and Directors of New Providence Journal 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 Providence Journal Cable Division Sale Bonus Plan, stockholders of Providence Journal should be aware that certain members of Providence Journal management and its Board of Directors have certain interests in the Merger that may present them with actual or potential conflicts of interest in connection with the Merger. (See "Certain Considerations Relating to the Transactions--Interests of Certain Persons in the Transactions".) CERTAIN FEDERAL INCOME TAX CONSIDERATIONS CONSUMMATION OF THE MERGER IS CONDITIONED ON THE RECEIPT OF A FAVORABLE PRIVATE LETTER RULING FROM THE SERVICE THAT THE RESTRUCTURING AND THE PJC SPIN- OFF WILL QUALIFY AS TAX-FREE REORGANIZATIONS AND DISSOLUTIONS UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (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".) 12 ACCOUNTING TREATMENT The Merger 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 Law, 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".) PROVIDENCE JOURNAL. Pursuant to Rhode Island Law, any holder of Providence Journal Common Stock (i) who files a written objection to the Plan of Reorganization and the Merger prior to or at the Providence Journal Special Meeting; (ii) who, within ten (10) 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 Plan of Reorganization and 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 Dissenting Stockholders-- Providence Journal" for a description of such rights, including a summary of the steps which must be taken to comply with Section 74 and "The Merger Agreement--General Provisions--Share Exchange" for a description of certain provisions of the Merger Agreement pertaining to Providence Journal's Stockholders' dissenters' rights.) 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 0.3% of the voting power of the outstanding Providence Journal Common Stock), and 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 30.89% 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 13 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, KBC and the PJC Cable Subsidiaries on the day prior to the date the PJC Spin-Off is effected other than the business of developing or creating programming (the "Restricted Business") 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 and the Charter ("Providence Journal Charter"), the By-Laws ("Providence Journal By-Laws") and the Rights Agreement of Providence Journal. 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 Amended and Restated By-Laws (the "Continental By-Laws"), the New Providence Journal Certificate of Incorporation (the "New Providence Journal Certificate") and the New Providence Journal By- Laws (the "New Providence Journal By-Laws") and the New Providence Journal Rights Agreement (the "NPJ Rights Agreement"). (See "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. The Continental Series B Preferred Stock is a new issue, and no trading market currently exists for it. 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".) 14 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 Restructuring, 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 below the rate currently paid with respect to the Providence Journal Common Stock. Although the initial dividend for New Providence Journal Common Stock has not yet been established, management's review of factors being considered in recommending a new dividend level would suggest that following the PJC Spin- Off it would be appropriate to reduce the dividend level significantly. The dividend reduction is intended to make additional funds available for investment in new business opportunities. PROVIDENCE JOURNAL CABLE DIVISION SALE BONUS PLAN The Board of Directors of Providence Journal is submitting to the stockholders for their approval, the Providence Journal Cable Division Sale Bonus Plan. The Providence Journal Cable Division Sale Bonus Plan is designed to retain Providence Journal's cable executives and to provide incentives to such executives to maximize operating performance of the 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 Providence Journal Cable Division Sale Bonus Plan. 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, 1991 through December 31, 1993 and the nine months ended September 30, 1993 and 1994 contained elsewhere herein. The unaudited summary consolidated financial data for the nine months ended September 30, 1993 and 1994 reflects 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 "Management's Discussion and Analaysis of Financial Condition and Results of Operations-- Discontinued Operations".) 15
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ---------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- ------------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues............... $175,028 $169,840 $167,008 $172,453 $179,499 $129,473 $138,531 Operating Loss......... (3,077) (16,437) (31,793) (10,899) (16,833) (6,661) (2,103) Other Income (Expense), net................... (13,590) (5,114) 28,790 30,094 (4,122) (995) (2,897) Income (Loss) from Continuing Operations Before Income Taxes... (16,667) (21,551) (3,003) 19,195 (20,955) (7,656) (5,000) Income (Loss) from Continuing Operations. (11,902) (13,248) (6,619) 7,358 (15,190) (6,653) (3,573) Income (Loss) Per Common Share from Continuing Operations. $(117.88) $(132.26) $ (75.38) $ 85.53 $(178.08) $ (77.97) $ (42.06) AS OF DECEMBER 31, AS OF ------------------------------------------------ SEPTEMBER 30, 1989 1990 1991 1992 1993 1994 -------- -------- -------- -------- -------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Total Assets(1)........ $446,340 $784,063 $594,098 $793,433 $775,685 $748,749 Net Assets of Discontinued Cable Operations............ 32,262 36,924 39,603 380,385 376,156 366,384 Long-term Debt......... 156,632 28,568 28,608 253,106 276,601 271,055 Stockholders' Equity... 205,153 460,321 399,938 391,967 359,575 343,257
- -------- (1) Includes amounts for discontinued operations. NEW PROVIDENCE JOURNAL SUMMARY PRO FORMA FINANCIAL DATA The following information has been derived from the pro forma condensed consolidated balance sheet and statements of operations of Providence Journal and KHC, after giving effect to the Restructuring, 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 statements of operations.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, 1993 SEPTEMBER 30, 1994 -------------------- -------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues............... $281,839 $218,956 Operating Income (Loss)................ (101) 12,457 Other Expense, Net..... (15,642) (15,525) Loss from Continuing Operations before Income Taxes.......... (15,743) (3,068) Loss from Continuing Operations............ $(13,054) $ (2,695) ======== ======== Loss Per Share from Continuing Operations. $(153.02) $ (31.73) ======== ======== AS OF SEPTEMBER 30, 1994 -------------------- (IN THOUSANDS) BALANCE SHEET DATA: Total Assets........... $543,560 Long-term Debt......... 221,905 Stockholders' Equity... 168,198
16 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 Cable Division ("Providence Journal Cable") which consists of Colony (wholly owned subsidiary of Providence Journal) Colony Cablevision (a division of Providence Journal), Copley/Colony, Inc. (50% owned joint venture of Colony), and King Videocable (50% owned joint venture of Providence Journal). The combined statement of operations data for the years ended December 31, 1992 and 1993 and the combined balance sheet data as of December 31, 1992 and 1993 have been derived from the audited combined financial statements of Providence Journal Cable. The combined statement of operations data for the year ended December 31, 1991 and the combined balance sheet data as of December 31, 1991 have been derived from the separate audited financial statements of Colony and Copley/Colony, Inc. The combined statement of operations data for the nine months ended September 30, 1993 and 1994 and the combined balance sheet data as of September 30, 1994 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 nine months ended September 30, 1994 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1994. (IN THOUSANDS, EXCEPT SUBSCRIBER DATA AND RATIOS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- COMBINED STATEMENT OF OP- ERATIONS DATA: Revenues................ $118,791 $199,684 $281,593 $209,442 $211,320 Operating, Selling, General and Administrative Expenses............... 77,505 121,703 166,083 122,670 129,362 Depreciation and Amortization........... 24,640 58,750 92,710 69,656 66,550 Allocation of Corporate Overhead(1)............ 7,751 6,513 9,651 5,806 5,636 -------- -------- -------- -------- -------- Operating Income........ 8,895 12,718 13,149 11,310 9,772 Interest Expense, net(2)................. (1,300) (19,600) (41,000) (31,900) (30,600) Loss on Abandonment of Assets................. -- -- (8,244) -- -- Other, Net.............. 4,766 3,675 (779) 1,649 1,622 -------- -------- -------- -------- -------- Income (loss) before Income Taxes and Cumulative Effect of change in Accounting Principle.............. 12,361 (3,207) (36,874) (18,941) (19,206) Provision for Income Taxes.................. 6,166 694 (11,219) (5,371) (4,995) -------- -------- -------- -------- -------- Income (loss) before change in Accounting Principle.............. 6,195 (3,901) (25,655) (13,570) (14,211) Cumulative Effect of change in Accounting Principle.............. -- 4,831 -- -- -- -------- -------- -------- -------- -------- Income (loss) before Minority Interests..... $ 6,195 $ 930 $(25,655) $(13,570) $(14,211) ======== ======== ======== ======== ======== AS OF DECEMBER 31, AS OF ---------------------------- SEPTEMBER 30, 1991 1992 1993 1994 -------- -------- -------- ------------- COMBINED BALANCE SHEET DATA: Total Assets............ $133,921 $867,150 $813,306 $784,488 Total Debt(3)........... 18,735 611,885 593,073 587,428 Group Equity............ 51,929 89,334 70,403 59,677 NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- FINANCIAL RATIOS AND OTHER DATA: EBITDA(4)............... $41,286 $77,981 $115,510 $86,772 $81,958 EBITDA as a % of Revenues............... 34.8% 39.1% 41.0% 41.4% 38.8% Net Cash Provided by Operating Activities... 28,932 53,736 67,261 53,435 44,421 Capital Expenditures.... $18,722 $27,374 $ 46,415 $31,282 $36,023
17 SUBSCRIBER DATA FOR PROVIDENCE JOURNAL CABLE SYSTEMS(5)
AS OF DECEMBER 31, AS OF ----------------------------- SEPTEMBER 30, 1991 1992 1993 1994 ------- --------- --------- ------------- Homes Passed by Cable(6).... 553,000 1,202,000 1,224,000 1,249,000 Number of Basic Subscribers(7)............. 303,000 722,000 738,000 753,000 Basic penetration(8)........ 54.9% 60.0% 60.3% 60.3% Number of Premium Subscriptions(9)........... 241,000 440,000 467,000 506,000 Premium Penetration(10)..... 79.4% 61.0% 63.3% 67.2% Monthly Subscriber Revenue per Average Basic Subscriber(11)........ $31.02 $30.78 $30.63 $29.81
- -------- (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 stated basic service rate. 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. (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 nine month period ended September 30, 1994. 18 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, 1991 through December 31, 1993 and the nine months ended September 30, 1993 and 1994 contained elsewhere herein. The unaudited summary historical financial information for the nine months ended September 30, 1993 and 1994 reflects all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of that information. (IN THOUSANDS, EXCEPT RATIOS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------- ------------------------ 1991 1992 1993 1993 1994 ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenues............... $ 1,039,163 $ 1,113,475 $ 1,177,163 $ 880,238 $ 885,636 Operating, Selling, General and Administrative Expenses.............. 594,455 625,145 649,571 485,293 495,978 Depreciation and Amortization.......... 269,363 279,403 284,563 210,950 210,728 Non-Cash Stock Compensation(1)....... 10,067 9,683 11,004 8,069 8,502 Operating Income....... 165,278 199,244 232,025 175,926 170,428 Interest Expense (Net). 323,123 289,479 276,698 201,936 223,580 Loss before Cumulative Effect of Accounting Change................ (161,642) (102,960) (25,774) (20,375) (40,592) Ratio of Earnings to Combined Fixed Charges and Preferred Dividends(2).......... -- -- -- -- -- AS OF DECEMBER 31, AS OF SEPTEMBER 30, ------------------------------------- ------------------------ 1991 1992 1993 1993 1994 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Total Assets........... $ 2,082,182 $ 2,003,196 $ 2,091,853 $ 2,169,566 $ 2,329,351 Total Debt............. 3,338,281 3,011,669 3,177,178 3,209,680 3,310,520 Redeemable Common Stock................. 445,463 223,716 213,548 230,764 227,844 Stockholders' Equity (Deficiency).......... (1,919,525) (1,486,231) (1,667,088) (1,690,824) (1,658,314) NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------- ------------------------ 1991 1992 1993 1993 1994 ----------- ----------- ----------- ----------- ----------- FINANCIAL RATIOS AND OTHER DATA: EBITDA(3).............. $ 444,708 $ 488,330 $ 527,592 $ 394,945 $ 389,658 EBITDA as a % of Revenues.............. 42.8% 43.9% 44.8% 44.9% 44.0% Total Debt to EBITDA(3)............. 7.51 6.17 6.02 6.10 6.37 EBITDA to Total Interest Expense...... 1.38 1.69 1.91 1.96 1.74 Net Cash Provided from Operating Activities.. $ 123,543 $ 215,045 $ 250,504 $ 167,288 $ 149,084 Capital Expenditures... 145,846 145,189 185,691 131,835 183,818
19 SUBSCRIBER DATA FOR DOMESTIC CABLE SYSTEMS (4)
AS OF DECEMBER 31, AS OF ----------------------------------------------------- SEPTEMBER 30, 1989 1990 1991 1992 1993 1994 --------- --------- --------- --------- --------- ------------- Homes Passed by Cable(5).............. 4,554,000 4,761,000 4,880,000 4,981,000 5,192,000 5,311,000 Number of Basic Subscribers(6)........ 2,550,000 2,690,000 2,784,000 2,856,000 2,895,000 3,009,000 Basic Penetration(7)... 56.0% 56.5% 57.0% 57.3% 55.8% 56.7% Number of Premium Subscriptions(8)...... 2,707,000 2,702,000 2,603,000 2,545,000 2,454,000 2,588,000 Premium Penetration(9). 106.2% 100.4% 93.5% 89.1% 84.8% 86.0% Monthly Revenue per Average Basic Subscriber(10)........ $29.41 $31.29 $32.98 $34.46 $35.76 $35.08
- -------- (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 periods presented. The actual deficiency of earnings to combined fixed charges and preferred dividends was $222,209,000, $253,735,000, $160,501,000, $107,425,000 and $53,729,000, respectively, for the years ended December 31, 1989, 1990, 1991, 1992 and 1993. The actual deficiency of earnings to combined fixed charges and preferred dividends was $36,814,000 and $53,089,000 for the nine months ended September 30, 1993 and 1994, respectively. (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 nine months ended September 30, 1994, 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 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. (7) Basic subscribers as a percentage of Homes passed by cable. Continental's basic penetration for the year ended December 31, 1993 and the nine months ended September 30, 1994, 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 each year presented and the nine month period ended September 30, 1994. 20 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 September 30, 1994, and gives effect to (i) the Merger and certain related transactions including the assumption of $755,000,000 of the New Cable Indebtedness; (ii) the closing of the 1994 Credit Facility and prepayment of an existing bank facility; (iii) the redemption of the 12 7/8% Senior Subordinated Debentures ("12 7/8% Debt") at a redemption price equal to 106.438%; and (iv) various other acquisitions of cable television systems completed and pending; in each instance as though each of such events had occurred as of September 30, 1994. The following unaudited Summary Pro Forma Statements of Operations Data for the nine months ended September 30, 1994 and year ended December 31, 1993 give effect to each of the foregoing as though each of such events had occurred at January 1, 1993. 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.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1993 1994 ------------ ------------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues........................................... $1,561,525 $1,174,033 Operating Income................................... 284,491 205,907 Interest Expense................................... 334,666 264,298 Income (loss) before Cumulative Effect of Account- ing Changes....................................... (38,832) (47,416)
AT SEPTEMBER 30, 1994 --------------------- (IN THOUSANDS) BALANCE SHEET DATA: Total Assets............................................ $ 4,619,778 Total Debt.............................................. 4,565,444 Stockholders' Equity (Deficiency)....................... (1,030,100)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1993 1994 ------------ ------------- (IN THOUSANDS) FINANCIAL RATIOS AND OTHER DATA: EBITDA(1).......................................... $683,567 $501,661 EBITDA to Total Interest Expense................... 2.04 1.90 Total Debt to EBITDA(1)............................ 6.48 6.83 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 nine months ended September 30, 1994, 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 ratios of earnings to combined fixed charges and preferred dividends are less than 1 to 1 for each of the periods presented. The pro forma deficiency of earnings to combined fixed charges and preferred dividends would have been $72,547,000 and $93,913,000 for the year ended December 31, 1993 and nine months ended September 30, 1994, respectively. Such pro forma ratio reflects the consummation of the Merger and the issuance of the Continental Series B Preferred Stock. 21 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 Restructured PJC 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, to increase 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 to increase 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 and, upon consummation of the Merger, 4,987,113 of which will be designated as Continental Series B Preferred Stock; (iii) the election of four 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 Providence Journal Proposals, which include the approval and adoption of (i) the Plan of Reorganization, which includes, among other things, the Restructuring and the PJC Spin-Off, (ii) the Merger Agreement and each of the transactions contemplated thereby, including the Merger, with Continental as the surviving corporation and (iii) the Providence Journal 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 PLAN OF REORGANIZATION, THE MERGER AGREEMENT AND THE PROVIDENCE JOURNAL CABLE DIVISION SALE BONUS PLAN AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE --- PLAN OF REORGANIZATION, FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR APPROVAL AND ADOPTION OF THE PROVIDENCE JOURNAL CABLE DIVISION SALE BONUS PLAN. 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 , 1995. Only holders of record of shares of Continental Voting Stock at the close of business on the Continental 22 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 8,640,100 shares of Continental Class A Common Stock, 109,264,675 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 393 holders of record. The presence in person or by proxy of shares representing a majority of votes (693,500,676 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 , 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 38,689 shares of Providence Journal Class A Common Stock (with one vote per share) and 46,961 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 (113,267 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 (693,500,676 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 and the Continental Restated Certificate and the Continental By-Laws. The affirmative vote or action by written consent of 66 2/3% of the votes (924,667,567 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 Continental Recapitalization Amendment. 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. 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 Plan of Reorganization. The affirmative vote or action by written consent 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. The affirmative vote or action by written consent 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 and adopt the Providence Journal Cable Division Sale Bonus Plan. Providence Journal is seeking the approval of 75% of such votes 23 because failure to obtain such 75% approval could result in some or all of the payments under the Providence Journal Cable Division Sale Bonus Plan being non- deductible for federal income tax purposes to the 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. All matters to come before the Providence Journal Special Meeting shall be voted upon separately, including the separate elements of the Providence Journal Proposals. However, failure of the stockholders of Providence Journal to approve either the Plan of Reorganization or the Merger will result in the abandonment by Providence Journal of both the Plan of Reorganization and the Merger. 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, 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 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 24 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 Providence Journal 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 January 15, 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 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 January 15, 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. 25
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% -- -- 32.64% 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% 20.60 Robert B. Luick(7)........ 233,625 * -- -- * Henry F. McCance(8)....... 258,125 * -- -- * Lester Pollack(6)......... 28,571,450 19.51 1,142,858 100.00 20.60 Vincent J. Ryan(9)........ 5,719,825 4.85 -- -- 4.12 William T. Schleyer....... 766,200 * -- -- * Jeffrey T. Delorme........ 391,525 * -- -- * Nancy Hawthorne........... 209,325 * -- -- * Directors and Executive Officers as a Group (12 persons)(6).............. 91,198,200 62.26 1,142,858 100.00 65.45 H. Irving Grousbeck(10)... 10,033,000 8.51 -- -- 7.23 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 -- -- 1.39 Boston Ventures Limited Partnership IVA(11).... 1,298,000 1.10 -- -- * ---------- ----- ----- Total as a group...... 7,514,075 6.37 -- -- 5.09 LFCP Corp. and Corporate Advisors, L.P.(12) Corporate Partners, L.P.(12)............... 18,223,825 13.39 728,953 63.78 13.14 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 1.10 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% 20.60
- -------- *Less than 1% of class. (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 January 15, 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 26 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 7.47% 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 greater than or equal to a 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 Venture 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 Freres & Co. Mr. Pollack and Mr. Kagan are both general partners of Lazard Freres & Co. 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 73,350 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. 27 (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 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) FPGT is a trustee for certain pension plans and has sole voting and dispositive power with respect to the shares held by it. Pursuant to the Co-Investment Agreement, FPGT has agreed, 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. 28 OWNERSHIP OF PROVIDENCE JOURNAL SECURITIES The following table sets forth information as of December 31, 1994 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 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.
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 24.9% 12,886 27.4% 27.0% One Hospital Trust Tower Providence, RI 02903 Fiduciary Trust Company International (2)...... 2,494 6.6% 3,124 6.7% 6.6% 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% 5.0% c/o Manasett Corpora- tion 127 Dorrance Street Providence, RI 02903 Murray S. Danforth, III (4).................... 2,428 6.4% 2,308 4.9% 5.2% c/o Manasett Corpora- tion 127 Dorrance Street Providence, RI 02903 Esther E. M. Mauran (5). 2,660 7.1% 2,402 5.1% 5.4% c/o Manasett Corpora- tion 127 Dorrance Street Providence, RI 02903 Frank Mauran, III (6)... 4,414 11.7% 4,700 10.0% 10.3% c/o Manasett Corpora- tion 127 Dorrance Street Providence, RI 02903
29
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 ------------------- ------------ ------------- ------------ ------------- ------------ Pauline C. Metcalf (7). 3,020 8.0% 2,839 6.0% 6.4% c/o Manasett Corpora- tion 127 Dorrance Street Providence, RI 02903 Jane P. Watkins (8).... 2,353 6.2% 2,476 5.3% 5.4% c/o Manasett Corpora- tion 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).................. 2,600 6.9% 3,308 7.0% 7.0% John W. Wall........... 102 0.2% 8 0% 0.1% Patrick R. Wilmerding (13).................. 550 1.5% 300 .06% 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).......... 4,194 10.9% 4,612 9.8% 10.0%
- -------- (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, III, 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 authority. 30 (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, III, the husband of Esther E. M. Mauran, owns outright 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 outright 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 with Mr. Howland 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 Units Plan and rights to acquire shares under Providence Journal's Restricted Stock Unit Plan. (10) Fanchon B. Burnham owns outright 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. 31 (11) In addition to the shares shown in the Table, the shares indicated as beneficially owned by Fiduciary Trust Company International in the above table are held by trusts for the benefit of Mr. Sharpe and members of his family. (12) W. Nicholas Thorndike owns outright 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 and her children holding 2,482 shares of Providence Journal Class A Common Stock and 3,156 shares of Providence Journal Class B Common Stock. (13) Patrick R. Wilmerding has shared voting and investment power as to 150 shares of Providence Journal Class A Common Stock and [ ] shares of Providence Journal Class B Common Stock held by his mother's estate and sole voting and investment power as to the balance of his shares. 32 CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTIONS REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF BOARDS OF DIRECTORS CONTINENTAL. 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 a number of factors, including without limitation, the following: (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, earnings and prospects of the PJC Cable Business, and the enhanced opportunities for growth that the Merger makes possible; (iii) a variety of factors affecting and relating to the overall strategic focus of Continental, including without limitation, an increased subscriber base and growth in assets and operating income (iv) the anticipated cost savings and efficiencies available from the Merger; (v) other opportunities available to Continental; and (vi) the terms of the Merger Agreement. In view of the wide variety of factors considered by the Continental Board of Directors, the Continental Board did not find it practicable to quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. Consequently, the Continental Board did not quantify the assumptions and results of its analyses in reaching its determination that the Merger is fair to, and in the best interests of, Continental and its stockholders. However, as a general matter, the Continental Board believed that the factors in items (i) through (vi) above supported its determination. 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. At the meeting of the Board of Directors of Providence Journal held on November 15, 1994, the Providence Journal Board received a presentation by members of Providence Journal management and its financial and legal advisors regarding, and reviewed the terms of, the Merger Agreement and the transactions contemplated thereby. By unanimous vote of Directors, the Providence Journal Board determined that the Merger is fair to, and in the best interests of, Providence Journal and its stockholders, approved the Merger and resolved to recommend that stockholders of Providence Journal vote FOR approval and adoption of the Merger Agreement and each of the transactions contemplated thereby. In reaching its determination, the members of the Providence Journal Board considered a number of factors, including without limitation, the following: (i) the Providence Journal Board's familiarity with and review of Providence Journal's business, operations, financial condition, earnings and prospects; (ii) 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 Merger makes possible; (iii) the value of the Continental securities to be received by the stockholders of Providence Journal in the Merger, as determined through comparison of selected precedent cable television transactions and various other financial analyses; (iv) other possible transactions available to Providence Journal; (v) the terms of the Merger Agreement, and (vi) the opinion of Bear Stearns that the Providence Journal Transactions in the aggregate were fair, from a financial point of view, to the stockholders of Providence Journal. 33 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 weights to the specific factors considered in making its determination. Consequently, the Providence Journal Board did not quantify the assumptions and results of its analyses in reaching its determination that 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 the factors in items (i) through (vi) above supported its determination. THE BOARD OF DIRECTORS OF PROVIDENCE JOURNAL UNANIMOUSLY RECOMMENDS THAT PROVIDENCE JOURNAL STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER --- AGREEMENT, FOR APPROVAL AND ADOPTION OF THE PLAN OF REORGANIZATION AND FOR --- --- APPROVAL AND ADOPTION OF THE PROVIDENCE JOURNAL 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 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 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 dated , 1995, is attached as Annex III 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 Plan of Reorganization, the Merger Agreement (including the terms of the Continental Merger Stock), the Contribution and Assumption Agreement, the Registration Rights Agreement, the Kelso Stock Purchase Agreement, the Minority Interest Purchase Agreements and the related schedules of such agreements; (iii) reviewed certain audited and unaudited financial statements of Providence Journal, Colony, Copley/Colony, Inc., the Colony Cablevision division ("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 1993 and its unaudited financial statements for the nine months ended September 30, 1994; (vi) reviewed certain operating and financial information of Continental, including projections, provided to Bear Stearns by Continental's management; (vii) met with certain 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 volume of Continental's privately-held common stock issued or traded in 34 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 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 of the PJC Cable Business, KBC and Continental that were furnished to Bear Stearns, Bear Stearns assumed that such financial projections 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 management 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. 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. 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. Bear Stearns analyzed the Merger based on the consideration to be received by Providence Journal stockholders (taking into account both the Continental Merger Stock and the New 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 Providence Journal Transactions. VALUATION OF CONTINENTAL PROPOSAL. The transactions contemplated by the Merger Agreement include, among other things, (i) the merger of Restructured PJC, which will own the PJC Cable Business, with and into Continental in a tax- free reorganization, (ii) Continental's assumption of the New Cable Indebtedness, and (iii) the issuance of the Continental Merger Stock, comprised of 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 33,247,422 shares of Continental Class A Common Stock having a nominal value of $645,000,000 if Continental elects not to issue Continental Series B Preferred 35 Stock), in exchange for all of the outstanding shares of Restructured PJC 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 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 New 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 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 [ ] to [ ] 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 [$ ] to [$ ] per share and the Continental Series B Preferred Stock had a fully distributed public market trading value of [$ ] 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 Continental Merger Stock would trade subsequent to the consummation of the Merger. Based on Bear Stearns' estimated public market valuation of the Continental Merger Stock (i.e., the Continental Class A Common Stock and Continental Series B Preferred Stock), and taking into account the New 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 [$ ] million to [$ ] million (or [$ ] million to [$ ] million if no shares of Continental Series B Preferred 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 [$ ] million, or [$ ] 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 [$ ] million to [$ ] million (or [$ ] million to [$ ] million if no shares of Continental Series B Preferred Stock were issued), or [$ ] to [$ ] (or [$ ] to [$ ] if no shares of Continental Series B Preferred Stock were issued) per share of Providence Journal Common Stock. 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 Merger, and compared the financial terms of such transactions to those of the Merger for purposes of this analysis. The five transactions were (i) the pending acquisition of the cable television assets of The Times Mirror Company by Cox Cable Communications, Inc.; (ii) the then pending acquisition of domestic cable television assets of Maclean Hunter Limited from Rogers Communications by Comcast Corporation ("Comcast"); (iii) the then pending acquisition of the Wisconsin and Alabama cable television assets of the Crown Media subsidiary of Hallmark Cards, Inc. by Marcus Cable Co.; (iv) the then pending acquisition of Wometco Cable (excluding Georgia Cable) by US West Inc.; and (v) the then pending acquisition of TeleCable Corporation by Tele-Communications, Inc. (collectively, the "Precedent CATV Transactions"). Bear Stearns reviewed the prices paid (or to be paid) in the Precedent CATV Transactions and analyzed various operating and financial 36 information and implied valuation multiples and ratios. Bear Stearns noted that none of the Precedent CATV Transactions was identical to the 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 [ ] to [ ] with a harmonic mean of [ ], as compared to a range of imputed enterprise value to EBITDA multiples for the PJC Cable Business of [ ] to [ ] 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. 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 Tele-Communications, Inc. ("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 [ ] to [ ] with a harmonic mean of [ ] and (ii) certain of the Comparable Cable Companies, which, in Bear Stearns' 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 [ ] to [ ] with a harmonic mean of [ ]. This compared to a range of imputed enterprise value to EBITDA multiples for the PJC Cable Business of [ ] to [ ] 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. 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 [ ] to [ ]) and blended terminal value multiples of EBITDA ranging from [ ] to [ ]. Based on these calculations, Bear Stearns derived a theoretical enterprise value for the PJC Cable Business ranging from [$ ] million to [$ ] million, as compared to Bear Stearns' estimate of the enterprise value of the PJC Cable Business under the Continental Proposed Transaction of [$ ] million to [$ ] 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 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 37 contribute approximately [ %], [ %] and [ %] 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., [ %]) and the fully diluted percentage of the Combined Company's equity securities to be owned by Providence Journal stockholders after the Merger (i.e., [ %]) compared reasonably 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 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 $7.0 million, 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. CERTAIN CONSIDERATIONS RELATED TO THE CONTINENTAL MERGER STOCK NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the consummation of the Merger, there has been no public market for the Continental Merger Stock. Although it is a condition to the consummation of the Merger that the Continental Class A Common Stock and the Continental Series B Preferred Stock will be accepted for listing on the NASDAQ or a national securities exchange, there can be no assurance that a significant public market for the Continental Class A Common Stock or Continental Series B Preferred Stock will develop or be sustained or that, if such market develops, the market price for the Continental Class A Common Stock or Continental Series B Preferred 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 and Continental Series B Preferred Stock. (See "The Merger-- Certain Covenants--Registration Rights" and "The Merger--Certain Covenants-- Undertakings Regarding Public Offering".) 38 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, including the Continental Series B Preferred 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 Cable Television Consumer Protection and Competition Act of 1992 (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. While Continental is currently unable to predict the ultimate effect of this legislation, Continental believes that a number of provisions in the 1992 Cable Act relating to, among other things, rate regulation, are likely to have an adverse effect, potentially material, on the cable television industry and on Continental's business in the future. 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, will limit Continental'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. Various cable operators have initiated litigation challenging certain aspects of the 1992 Cable Act. The outcome of this litigation cannot be predicted. Further, 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", "Description of Continental--Competition" and "Legislation and Regulation".) 39 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 September 30, 1994, Continental's aggregate debt was $3,310,520,000. After giving effect to the Merger and certain other acquisitions described herein, as of September 30, 1994, Continental's aggregate debt on a pro forma basis would have been $4,565,444,000. 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-- 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 $1,658,314,000 as of September 30, 1994. Continental reported net losses from continuing operations, before the cumulative effect of the change in accounting for income taxes, of $25,774,000 and $40,592,000 for the year ended December 31, 1993 and the nine months ended September 30, 1994, respectively. After giving effect to the Merger and certain other acquisitions described herein, Continental would have reported net losses from continuing operations, before the cumulative effect of the change in accounting for income taxes, of $38,832,000 and $47,416,000 for the year ended December 31, 1993 and for the nine months ended September 30, 1994, 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" and "Description 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, 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 assurance in this regard or that the terms available for such financing would be favorable to Continental 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 or the Continental Series B Preferred Stock under the terms of the Merger Agreement. (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, 40 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 (including the Continental Series B 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 36,900,400 shares of Continental Class A Common Stock, 109,264,675 shares of Continental Class B Common Stock, 1,142,858 shares of Continental Series A Preferred Stock and 4,987,113 shares of Continental Series B Preferred Stock outstanding. Of such shares, the 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of Continental Series B Preferred Stock to be issued to Providence Journal stockholders pursuant to the Merger will be freely tradeable 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 are currently outstanding and are "restricted securities" as they have not been registered under the Securities Act. Only the Continental Class A Common Stock and the Continental Series B Preferred 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 143,449,675 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"), 44,916,875 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, 94,381,775 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 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 or the Continental Series B Preferred Stock prevailing from time to time. Sales of substantial amounts of shares of Continental Class A Common Stock or Continental Series B Preferred Stock in the public market could adversely affect the market price of the Continental Class A Common Stock or the Continental Series B Preferred Stock. DISPARATE VOTING RIGHTS; DILUTION. The Continental Class A Common Stock and Continental Series B Preferred Stock entitle their 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 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".) 41 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. The most significant of these is the disparate voting rights of the Continental Class B Common 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 to designate nominees to stand for election to Continental's Board of Directors. 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. (See "Description of Continental--Directors, Executive Officers and Other Officers of Continental".) 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. 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. CERTAIN CONSIDERATIONS 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 Restructuring, 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".) REDUCTION IN COMMON STOCK DIVIDEND PAYMENT. Following completion of the Restructuring, 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 below the rate currently paid with respect to Providence Journal Common Stock. Although the initial dividend for New Providence Journal has not yet been established, management's review of factors being considered in recommending a new dividend level would suggest that following the Merger it would be appropriate to reduce the dividend level significantly. The dividend reduction is intended to provide additional funds for investment in new business opportunities. 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. INDEMNIFICATION 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 Merger, the Restructuring, 42 and the PJC Spin-Off 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. (See "Certain Federal Income Tax Considerations".) 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 will be outside of New Providence Journal's control. RELIANCE ON KEY PERSONNEL. Providence Journal's success is 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. LEVERAGE. After completion of the Restructuring, the PJC Spin-Off and the Merger, New Providence Journal will have consolidated indebtedness of approximately $222 million, 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 as well as 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 were to require 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 PUBLIC MARKET FOR COMMON STOCK. Prior to the consummation of the Restructuring, the PJC Spin-Off and the Merger, there has been no public market for the 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 completion of the Restructuring, the PJC Spin-Off and the Merger. 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. 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. NEWSPRINT COSTS. Newsprint costs have historically accounted for between 16% and 24% of the total direct expenses of Providence Journal's newspapers. Newsprint prices move in cycles associated with the 43 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 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, 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. 44 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) and Linkatel Pacific, L.P. (an alternate access telephone company), 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. Effective 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 Restructuring and 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 Restructuring, 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. 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. TREATMENT OF OUTSTANDING RESTRICTED STOCK. In connection with the Restructuring and 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. The vesting schedule of Assumed Awards will not be affected by the Restructuring, 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 Company 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 Providence Journal Qualified Compensation Deferral Plan (collectively, the "Providence Journal Retirement Plans"). The foregoing plans cover the 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 Restructuring, 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 45 eligibility, benefits and vesting under the Providence Journal Retirement Plans when assumed by New Providence Journal. TREATMENT OF PROVIDENCE JOURNAL CABLE DIVISION EMPLOYEES. The Providence Journal Cable Division Sale Bonus Plan is designed to retain 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 Providence Journal 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. 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 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 Providence Journal 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. PRE-MERGER TRANSACTIONS Prior to and as a condition to the Merger, certain transactions, including those that make up the Plan of Reorganization of Providence Journal, must be consummated. Several of the steps stipulated in the Plan of Reorganization are mechanical in nature and are designed to meet conditions imposed in the Merger Agreement or to properly position Providence Journal and its subsidiaries to take advantage of favorable tax treatment. NEW INDEBTEDNESS Prior to the Restructuring described below, Providence Journal or one or more of the PJC Cable Subsidiaries will incur the New Cable Indebtedness in a minimum principal amount of $755 million. Providence Journal anticipates that the proceeds of the New Cable Indebtedness will be used as follows: approximately $257 million will be applied to discharge existing indebtedness of Providence Journal, approximately $298 million will be applied to discharge existing indebtedness of KBC, approximately $265 million (including transaction costs) will be used to consummate the Kelso Buyout, approximately $65 million will be used to purchase the interests in certain PJC Cable Subsidiaries not presently wholly owned by Providence Journal or KHC and to pay costs associated with the Merger and certain deferred compensation totalling $75 million. (See "The Merger--General Provisions--Share Exchange".) In addition, New Providence Journal will incur the NPJ Indebtedness in the amount of approximately $200 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. KELSO BUYOUT The Kelso Partnerships presently own and control 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 of the proceeds of the New Cable Indebtedness to consummate the Kelso Buyout. Following the Kelso Buyout, KHC will be a wholly owned subsidiary of Providence Journal. PLAN OF REORGANIZATION The description below is qualified in its entirety by reference to the complete text of the Plan of Reorganization, a copy of which is attached hereto as Annex II and incorporated herein by reference. -------- 46 RESTRUCTURING. In order to protect the tax-free nature of the Merger to the holders of Providence Journal Common Stock, the Plan of Reorganization provides, and the Merger Agreement requires, that Providence Journal reorganize its corporate structure. The actions described in clauses (i) through (iii) below together constitute the Restructuring. (As used in this Joint Proxy Statement-Prospectus, the term "KBC" shall mean King Broadcasting Company before the Restructuring, and the term "Restructured PJC" shall mean King Broadcasting Company after the Restructuring.) Consequently, on or prior to the Effective Time, each of the following transactions will occur in immediate succession: (i) KHC will contribute all of its assets (consisting solely of 100% of the outstanding capital stock of KBC) to KBC in exchange for KBC's assumption of all liabilities and obligations and for shares of common stock of KBC, which shall be distributed to Providence Journal in exchange for and in redemption of all of KHC's outstanding capital stock. KHC will then be dissolved pursuant to the DGCL. As a result, KBC will become a direct wholly owned subsidiary of Providence Journal; (ii) Providence Journal will contribute all of its businesses and assets to KBC in exchange for shares of Restructured PJC Common Stock and KBC will assume all of the obligations and liabilities of Providence Journal; and (iii) Providence Journal will commence dissolution proceedings under applicable Rhode Island Law, and the Restructured PJC Common Stock, which shall then be the sole remaining asset of Providence Journal, will be distributed to the holders of Providence Journal Common Stock in proportion to the class and number of shares of Providence Journal Common Stock so owned by such holders. As a result, subject to exercise by such holders of their right to appraisal under Rhode Island Law, each holder of Providence Journal Common Stock immediately prior to the Restructuring will own the same number and class of shares of Restructured PJC Common Stock as such holder owned in Providence Journal. (See "Rights of Dissenting Stockholders".) PJC SPIN-OFF. New Providence Journal, which currently is a wholly owned subsidiary of Providence Journal and, after giving effect to the Restructuring, will be a wholly owned subsidiary of Restructured PJC, was recently organized for purposes of the transactions contemplated by the Plan of Reorganization and the Merger Agreement. Before the Restructuring, New Providence Journal will own no assets and will not conduct any business activities other than in connection with the transactions contemplated by the Plan of Reorganization and the Merger Agreement. Immediately after the Restructuring and prior to the Merger (pursuant to the Contribution), Restructured PJC will transfer to New Providence Journal as a capital contribution all of Restructured PJC's right, title and interest in the PJC Non-Cable Business and all other assets of Restructured PJC, but excluding (i) the PJC Cable Business, (ii) sufficient cash to pay Restructured PJC's expenses relating to the transactions contemplated by the Merger Agreement and the Providence Journal Cable Division Sale Bonus Plan and (iii) Restructured PJC's rights under the Contribution and Assumption Agreement. In exchange, New Providence Journal will issue to Restructured PJC (a) a number of shares of New Providence Journal Class A Common Stock equal to the number of shares of Restructured PJC 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 Restructured PJC Class B Common Stock then outstanding. New Providence Journal will assume and hold Restructured PJC and its subsidiaries, officers and Directors harmless from all debts, liabilities and all other obligations of Restructured PJC, excluding the New Cable Indebtedness, substantially all of the liabilities associated with the PJC Cable Business and Restructured PJC's rights 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 as a sale on a private market, going concern basis, free 47 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 which 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, Restructured PJC will agree to hold New Providence Journal and its subsidiaries, officers and Directors harmless from substantially all debts, liabilities or obligations of Restructured PJC, 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, 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. (See "The Merger--Certain Employee Matters".) Immediately after the Contribution, Restructured PJC will distribute one share of New Providence Journal Class A Common Stock to the holder of each share of Restructured PJC Class A Common Stock and one share of New Providence Journal Class B Common Stock to the holder of each share of Restructured PJC 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 Restructuring will own the same number and class of shares in New Providence Journal as such holder owned in Providence Journal immediately prior to the Distribution. The Contribution, the Distribution and the assumption of liabilities by New Providence Journal and Restructured PJC in connection with the Contribution collectively constitute the PJC Spin-Off. The terms of the PJC Spin-Off are set forth in the Plan of Reorganization and, in addition, are to be governed by the Contribution and Assumption Agreement, a copy of which is attached as Exhibit B 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 to Stockholders". In order to facilitate a streamlined exchange of certificates in connection with the PJC Spin-Off and the Merger and to avoid requiring that certificates representing shares of Providence Journal Common Stock be exchanged for certificates representing shares of Restructured PJC Common Stock prior to the PJC Spin-Off and the Merger, the certificates representing shares of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock immediately prior to the dissolution of Providence Journal shall be deemed, without any action on the part of Restructured PJC or its stockholders, to represent the equivalent number of shares of Restructured PJC Class A Common Stock and Restructured PJC Class B Common Stock issued in connection with such dissolution. 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) all of Providence Journal's systems and the stock of King Videocable Company ("King Videocable") shall be contributed to Colony Communications, Inc., a wholly owned subsidiary of Providence Journal ("Colony"), 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) all of Providence Journal's systems will be retained by Restructured PJC and (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. 48 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 approval by Providence Journal's stockholders of the Plan of Reorganization and the Merger and certain related transactions and the satisfaction or waiver of certain other conditions, at the Effective Time, Restructured PJC (which, at the time of the Merger, will own only the PJC Cable Business) will be merged with and into Continental, the separate existence of Restructured PJC will cease, and Continental will continue as the surviving corporation. As a result of the Merger, Continental will acquire the PJC Cable Business and will assume the New Cable Indebtedness and substantially all of the liabilities of Restructured PJC relating to the PJC Cable Business, and shares of Restructured PJC 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 Restructured PJC issued and outstanding immediately prior to the Merger and owned directly or indirectly by Restructured PJC 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 (iii) Each share of Restructured PJC 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 and the number of fully paid and nonassessable shares of Continental Series B Preferred Stock determined in accordance with the following formulas (subject to the effects of the Preferred Stock Elections described below): Class A Common Stock Formula: Maximum Amount ------------------------------- $19.40 x PJC Outstanding Shares Series B Preferred Stock Formula: $96,750,000 ------------------------------- $19.40 x PJC Outstanding Shares
"Maximum Amount"........ means $548,250,000, 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 Restructured PJC does not, directly or indirectly, wholly own such PJC Cable Subsidiary at the Effective Time:
SUBSIDIARY REDUCTION ---------- ----------- Copley/Colony, Inc. $42,610,000 Vision Cable Company of Rhode Island, Inc. $ 2,430,000 Dynamic Cablevision of Florida, Ltd. $11,300,000 California CATV Partners $ 1,490,000
"PJC Outstanding Shares"................ means the shares of Providence Journal Common Stock outstanding immediately prior to the Restructuring (other than shares owned directly or indirectly by Providence Journal as treasury stock or by any of its subsidiaries). 49 As of the date of this Joint Proxy Statement-Prospectus, (i) Providence Journal owns, directly or indirectly, the following approximate percentage of equity interests in each of the following PJC Cable Subsidiaries: (a) 50% of Copley/Colony, Inc., (b) 93% of Vision Cable Company of Rhode Island, Inc. and (c) 90% of Dynamic Cablevision of Florida, Ltd. and (ii) KHC owns, indirectly, 50% of the equity interest in California CATV Partners. Providence Journal anticipates that, as of the Effective Time it will have purchased the minority interests in each such subsidiary, and each such subsidiary will be wholly owned by Restructured PJC, although there can be no assurances in this regard. The holder of any shares of Providence Journal Common Stock outstanding immediately prior to the Distribution which 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 appraisal rights, shares of Restructured PJC Common Stock or, in turn, 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 New Providence Journal Common Stock such holder would have been entitled to had such holder not exercised appraisal rights. Providence Journal, Continental and New Providence Journal have reached certain agreements relating to any such exercise of appraisal 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 the 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 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 appraisal, 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 Restructured PJC 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 Class A Common Stock or Continental Series B Preferred Stock, as the case may be, to which such holder would otherwise be entitled (after taking into account all shares of Continental Class A Common Stock and Continental Series B Preferred 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 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of Continental Series B Preferred 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, Continental Series B Preferred 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. Continental has reserved the right in the Merger Agreement not to issue any shares of Continental Series B Preferred Stock to which the stockholders of Restructured PJC would otherwise be entitled. If it elects not to issue Continental Series B Preferred Stock, the Maximum Amount will be increased by $96,750,000 (and the maximum number of shares of Continental Class A Common Stock to be issued in the Merger would be 50 33,247,422). The Merger Agreement provides that no later than 30 days prior to the date of mailing of this Joint Proxy Statement-Prospectus to the stockholders of Providence Journal, Continental will notify Providence Journal of its election to issue shares of Continental Series B Preferred Stock in connection with the Merger. (See "Ancillary Agreements--Certain Effects of Voting Agreement" for a description of certain agreements between Continental and Providence Journal affecting the Voting Agreement if Continental elects to issue Continental Series B Preferred Stock pursuant to the Merger.) The number of shares of Continental Class A Common Stock and Continental Series B Preferred Stock to be exchanged for each share of Restructured PJC Common Stock will be determined in accordance with the procedure described below. If Continental Series B Preferred Stock is to be issued in connection with the Merger, accompanying this Joint Proxy Statement-Prospectus to Providence Journals' stockholders will be a form of election (the "Preferred Stock Election Form") to be completed and returned to Providence Journal by each such stockholder on or prior to the date of the Providence Journal Special Meeting. The Preferred Stock Election Form will permit each holder of Providence Journal Common Stock to elect between the percentage of Continental Class A Common Stock and Continental Series B Preferred Stock that such holder of Providence Journal Common Stock shall be entitled to receive pursuant to the Merger in respect of each share of Restructured PJC Common Stock held by such holder of Providence Journal Common Stock. For example, a holder of Providence Journal Common Stock may elect to receive 100% Continental Class A Common Stock or 100% Continental Series B Preferred Stock in respect of each share of Providence Journal Common Stock owned by such holder on the date of the Providence Journal Special Meeting. Any holder of Providence Journal Common Stock who fails to complete the Preferred Stock Election Form will be deemed to have elected to receive 100% Continental Class A Common Stock in respect of each share of Providence Journal Common Stock held by such holder. The amount of Continental Class A Common Stock and Continental Series B Preferred Stock which would otherwise be issued to each holder of Providence Journal Common Stock in accordance with the formula described above shall be adjusted to give effect to the election by such holder (which election shall be irrevocable and binding upon any and all subsequent transferees of such shares and the holder of the shares of Restructured PJC Common Stock issued in respect of such share) and the other holders of Providence Journal Common Stock; provided, however, (i) if the holders of Providence Journal Common Stock elect to receive less than 4,987,113 shares of Continental Series B Preferred Stock (the difference between such amounts being referred to herein as the "Shortfall Amount"), then, in addition to any shares of Continental Series B Preferred Stock issued to each such stockholder as a result of such stockholder's election, shares of Continental Series B Preferred Stock equal to the Shortfall Amount shall be issued to all holders of Restructured PJC Common Stock, pro rata in accordance with the percentage of Restructured PJC Common Stock held by each such holder at the Effective Time, and (ii) the maximum amount of shares of Continental Series B Preferred Stock to be issued by Continental pursuant to the Merger shall in no event exceed 4,987,113, so that if the holders of Providence Journal Common Stock elect to receive in excess of 4,987,113 shares of Continental Series B Preferred Stock, then the shares of Series B Preferred Stock a holder of Providence Journal Common Stock will receive in the Merger shall be reduced proportionately (based upon the amount of Continental Series B Preferred Stock elected by such stockholder as compared to the amount of Continental Series B Preferred Stock elected by all holders of Providence Journal Common Stock) and the shares of Continental Class A Common Stock such stockholder shall receive shall be correspondingly increased. For a description of the method of delivery of shares of Continental Class A Common Stock and Continental Series B Preferred Stock to be issued in the Merger and New Providence Journal Common Stock to be issued in the Distribution, see "Payments to Stockholders". PROVIDENCE JOURNAL STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. WORKING CAPITAL ADJUSTMENT. Immediately prior to the Effective Time and after giving effect to the PJC Spin-Off, Restructured PJC will deliver to Continental a schedule setting forth Restructured PJC'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 51 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), 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. 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 Washington 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, KHC 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; (ii) the Continental Proposals shall have been approved and adopted by the stockholders of Continental; (iii) the New Cable Indebtedness shall have been incurred by Providence Journal or one or more of the PJC Cable Subsidiaries; the NPJ Indebtedness shall have been incurred; the Restructuring and the PJC Spin-Off 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) any waiting period applicable to the consummation of the transactions contemplated by the Merger Agreement under the HSR Act shall have expired or been terminated and 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) which remains in 52 effect and which has the effect of making the transactions contemplated by the Merger Agreement illegal or otherwise prohibiting such transactions, or which questions the validity or the legality of the transactions contemplated by the Merger Agreement and which 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 transactions constituting the Restructuring will qualify as tax-free reorganizations and dissolutions under the applicable Sections of the Code and 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, KHC AND KBC. The obligations of Providence Journal, New Providence Journal, KHC 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; (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; and (iv) the Continental Class A Common Stock and Continental Series B Preferred Stock shall have been approved for listing on NASDAQ or a national securities exchange, subject to official notice of issuance. 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, KHC 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. 53 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) Restructured PJC shall have no assets except (a) all of the capital stock of the PJC Cable Subsidiaries, (b) the contract rights created under the Contribution and Assumption Agreement, (c) cash sufficient to pay Providence Journal's, KHC's and KBC's expenses related to the transactions contemplated by the Merger Agreement, (d) Providence Journal's systems and the assets of Westerly or Colony to the extent that the second alternative under "Certain Covenants--Certain Intercompany Transactions" is consummated, and (e) other immaterial assets related to the PJC Cable Business; (iv) Restructured PJC shall have no liabilities except (a) liabilities associated with the operations of the PJC Cable Subsidiaries or the cable operations of Restructured PJC, (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) Restructured PJC and New Providence Journal shall have entered into the Noncompetition Agreement with Continental; (viii) New 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) Neither Restructured PJC nor Continental shall be required to assume or otherwise be liable for any obligation or duty of Providence Journal under the Rights Agreement between Providence Journal and The First National Bank of Boston, as Rights Agent, (the "Rights Agreement") and the holders of the rights thereunder shall not have any rights to acquire any shares of Restructured PJC Common Stock or 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 which 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. 54 CERTAIN COVENANTS INTERIM OPERATIONS OF PROVIDENCE JOURNAL, KHC AND KBC. Pursuant to the Merger Agreement, Providence Journal has agreed, among other things, that from the date thereof to the Effective Time (except as contemplated by the Merger Agreement and except for Providence Journal's operation of the Providence Journal Systems, which is governed by the provisions relating to the operation of the PJC Cable Subsidiaries described below) none of Providence Journal, KHC or KBC will, without the prior written consent of Continental: (i) amend the Providence Journal Charter, the Providence Journal By-Laws, the Rights Agreement, KHC's Certificate of Incorporation or By-laws or KBC's Articles of Incorporation or By-laws; (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 (A) on the part of Providence Journal, 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 and (B) KHC and KBC may declare cash dividends to their respective stockholders; provided, however, that if Continental elects to issue Continental Series B Preferred Stock pursuant to the Merger, then no such redemption or acquisition may be made after the Preferred Stock Election; (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 any class or any other equity securities or amend any of the terms of any such securities or agreements outstanding on the date of the Merger Agreement; 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 respecting the assets or the liabilities retained by Restructured PJC or affecting the rights or obligations of Restructured PJC 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. 55 INTERIM OPERATIONS OF PJC CABLE SUBSIDIARIES. Pursuant to the Merger Agreement, Providence Journal has agreed that, except as contemplated by the Merger Agreement, from the date thereof to the Effective Time it will conduct its operation of Providence Journal's systems, 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, 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 the date of the Merger Agreement; (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; (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 the date of the Merger Agreement, 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 the date of the Merger Agreement, 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; 56 (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 existing benefit, severance, pension or employment plans, agreements or arrangements as in effect on the date of the Merger Agreement to any such Director, officer or key employee, whether past or present, (c) enter into any new or materially amend any existing employment agreement 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 existing severance agreement with any such Director, officer or key employee 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 the date of the Merger Agreement, or amend any such plan or arrangement in existence on the date of the Merger Agreement, 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 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 the date thereof 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 57 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 Restructuring. 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 subsidiaries of assets having a fair market value of more than $500,000,000 which, 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, as promptly as practicable after the date thereof, Providence Journal, New Providence Journal and Continental shall 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 mutually acceptable registration rights agreement relating to the Continental Class A Common Stock to be issued pursuant to the Merger. Such agreement will provide for 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, 58 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 such registration rights in the manner requested without violation of the registration requirements of the Securities Act. Registration Rights Holders shall not be entitled to assign their rights under such registration rights agreement. 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 an aggregate consideration of at least $1,000,000,000 pursuant to a binding agreement or agreements. The Merger Agreement further provides that if Continental has failed (i) to enter into such an agreement by the 180th day following the Effective Time or (ii) to commence the Offering prior to such date, Continental will file a registration statement with respect to such Offering with the Commission within 60 days of receipt of the written request of New Providence Journal, unless Continental's investment banker advises Continental in writing, following receipt of such written request, 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. 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 Restructuring, the PJC Spin-Off and the Merger) are not events which 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 Restructuring, 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. 59 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 shall survive indefinitely. 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 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 60 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 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 New 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 Continental, provided that New Providence Journal or Providence Journal was responsible for such statement or omission; (c) Restructured PJC 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 Restructured PJC 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 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 (i) any holder of any of the equity securities of the PJC Cable Subsidiaries, or (ii) any holder of any of the equity securities of KHC or KBC, 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. 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 failure of the Merger, the Restructuring, and the PJC Spin- Off 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, New Providence Journal or Restructured PJC, as applicable, have agreed to continue coverage of employees thereof under existing group health plans through the Effective Time and to 61 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 Restructured PJC 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 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, arrangements providing for termination allowance, severance, and similar benefits, equity compensation plans, deferred compensation plans, and compensation policies and practices 62 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 (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 Employees 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 Providence Journal or Continental 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 63 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 (as defined below) 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 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 Providence Journal System operated in Palm Springs, California and the surrounding communities, together with all associated assets (the "Palm Springs System"), free and clear of all liabilities and obligations of Providence Journal and its subsidiaries. The purchase price 64 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. Notwithstanding the foregoing, in certain circumstances Continental's right to a Break-Up Fee and to purchase the Palm Springs System will be deemed void and of no force or effect, subject to reinstatement ab initio if certain other events occur. (See "Ancillary Agreements--Certain Effects of Voting Agreement" below.) REGULATORY AND OTHER THIRD PARTY APPROVALS Consummation of the Merger requires (a) notification pursuant to, and expiration or termination of the waiting period under, the HSR Act, (b) consents and/or waivers from the relevant governmental authorities under certain franchises issued to Providence Journal and its subsidiaries and (c) 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 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 Restructured PJC 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 the trustees of the Trust entitled to exercise voting power with respect to an 65 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: 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. 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. CERTAIN EFFECTS OF VOTING AGREEMENT. The Merger Agreement further provides that, if Continental elects to issue shares of Continental Series B Preferred Stock in connection with the Merger, then after the Registration Statement of which this Joint Proxy Statement-Prospectus forms a part becomes effective, Providence Journal will use its best efforts to cause the holders of not less than an aggregate of 66 2/3% of the voting power of each class of Providence Journal Common Stock to agree to be bound by the terms of the Voting Agreement. If (a) Providence Journal is successful in obtaining such agreements and (b) stockholders of Continental holding not less than an aggregate of 50.1% of the combined voting power of Continental Voting Stock have agreed to be bound by the terms of the Voting Agreement then, from and after such date, the provisions of the Merger Agreement described above under the caption "Termination--Termination Fees and Expenses; Option to Purchase Palm Springs System" shall be deemed null and void and of no further force and effect, provided, however, that if, at any time prior to the approval by Providence Journal's stockholders of the Providence Journal Proposals, (i) the enforceability of the Voting Agreement or any of the joinder agreements thereto by any of the Providence Journal stockholders is challenged in any respect, (ii) any provision of any such agreement is breached in any respect, or (iii) such agreements, taken in the aggregate, cease to represent the obligations of the holders of at least 50.1% of the voting power of each class of Providence Journal Common Stock, then such provisions shall be reinstated ab initio into the Merger 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 Restructured PJC Common Stock would own Continental 66 Class A Common Stock constituting 16.2% 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 100% of the Continental Series B Preferred Stock, representing an aggregate of 2.3% 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 PJC Spin-Off and the Merger, holders of shares of Providence Journal Common Stock immediately prior to the Restructuring 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 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 Restructuring, 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 Restructuring, 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. 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 all assets of KHC to KBC in exchange for stock of KBC, followed by the dissolution of KHC (so that Providence Journal will own all of the stock of KBC), will be a reorganization described in Code Section 368(a)(1)(D). (2) The transfer of all assets of Providence Journal to KBC in exchange for stock of KBC, followed by the dissolution of Providence Journal (so that former Providence Journal stockholders will own shares of Restructured PJC), will be a reorganization described in Code Section 368(a)(1)(C) or (D). (3) The transfer of the Palmer Systems and the stock of King Videocable to Colony will be a transaction described in Code Section 351. (4) The Contribution from Restructured PJC to New Providence Journal and the Distribution will be a reorganization described in Code Sections 368(a)(1)(D) and 355. (5) 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 Providence Journal shares between the New Providence Journal shares and Restructured PJC 67 shares received in proportion to their relative fair market values. The holding period for New Providence Journal shares and Restructured PJC 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. (6) No gain or loss will be recognized by Providence Journal, KHC, KBC, Westerly, New Providence Journal or Colony in the transactions described above. 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 (3) 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 Restructuring, 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 Class A Common Stock or Continental Series B Preferred Stock in the Merger. (iii) A stockholder's tax basis for shares of Continental Class A Common Stock and Continental Series B Preferred Stock received in the Merger, 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 shares of Continental Class A Common Stock and Continental Series B Preferred Stock received in the Merger, 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 Merger, the Restructuring and the PJC Spin-Off 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, Restructured PJC would recognize gain equal to the excess of the fair market value of the New Providence Journal Common Stock distributed to its stockholders over Restructured PJC'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 Restructured PJC. New Providence Journal has agreed to indemnify Continental for such tax 68 liability unless the failure of the Merger and the PJC Spin-Off to qualify under those sections of the Code is the result of Continental's breach of the covenants referred to in the preceding paragraph. In addition, if the Merger and the PJC Spin-Off fail to qualify under those sections of the Code, each Restructured PJC 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 Restructured PJC 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 Restructured PJC Common Stock surrendered. 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. 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 four persons to serve a three-year term as Class C Directors in accordance with the Continental Restated Certificate and the Continental 69 Restated 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., Henry F. McCance, Lester Pollack and Roy F. Coppedge, III as the Class C Directors. Messrs. Hostetter, McCance, Pollack and Coppedge 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 public accountants 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. PROPOSAL TO APPROVE AND ADOPT THE PROVIDENCE JOURNAL CABLE DIVISION SALE BONUS PLAN The Board of Directors of Providence Journal is submitting to the stockholders for their approval, the Providence Journal Cable Division Sale Bonus Plan. The Providence Journal Cable Division Sale Bonus Plan was designed to retain 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 Providence Journal Cable Division Sale Bonus Plan is an officer of Providence Journal. A text of the Providence Journal Cable Division Sale Bonus Plan is annexed hereto as Annex VI and the following -------- summary is qualified in its entirety by the actual provisions of the Providence Journal Cable Division Sale Bonus Plan. New Providence Journal will be responsible for all payments required to be made under the Providence Journal Cable Division Sale Bonus Plan. ADMINISTRATION The Providence Journal 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 Providence Journal 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 Providence Journal Cable Division Sale Bonus Plan. The administrator, with the concurrence of the Chief Executive Officer, shall make recommendations for awards under the Providence Journal Cable Division Sale Bonus Plan to the Executive Committee. 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. 70 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 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 January 15, 1995, 14 persons were eligible to receive awards under the Cable Division Sale Bonus Plan. 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 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 the 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 Providence Journal 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 1994 and 1995 objectives. (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 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. 71 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 Restructuring, the PJC Spin-Off, the Merger and the transactions contemplated thereby are consummated. GENERAL Providence Journal publishes (i) Monday through Friday, the morning Providence Journal and The Evening Bulletin, (ii) the Saturday Providence Journal-Bulletin, and (iii) 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 morning 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. 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, and as estimated by the Journal for the six-month period ended September 30, 1994 (for which period the Journal has provided a preliminary statement to the Audit Bureau, which has not been audited as of the date of this Registration Statement).
AVERAGE NET PAID CIRCULATION ------------------------------ DAILY SATURDAY SUNDAY --------- ---------- --------- 1990.................. 203,600 189,700 264,700 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 April 1, 1994-Sept. 30, 1994............. 186,500 178,900 268,600
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 "Certain Considerations Relating to the Transactions--Certain Considerations Related to New Providence Journal Common Stock".) The suggested newsstand price of the Journal is $.50 on weekdays and Saturday and $1.75 on Sunday. The rate charged to subscribers for home delivery of the daily and Sunday newspapers is $3.60 per week. ADVERTISING Approximately three-quarters of the revenue of the Journal is derived from the sale of advertising (historically between 70% and 78% of the Journal's revenues). 72 The following table sets forth the Journal's advertising linage for calendar 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 62%, classified advertising 29%, and national advertising 9% 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 20% of the total Journal advertising revenue in calendar year 1994. The Journal increased advertising rates for most categories of retail and classified advertising by approximately 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 consist primarily of newsprint costs, which have historically accounted for between 16% to 24% of the Journal's total direct expenses. In 1994, the Journal used approximately 33,000 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 20% 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. The Journal has reduced its newsprint inventory by approximately 50% over the past three years and improved newsprint quality. 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 "Certain Considerations Relating to the Transactions--Certain Considerations Relating to the New Providence Journal Common Stock".) 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 73 communities of 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. The warrant is exercisable by Providence Journal during a two year period, which commenced September 28, 1993. The warrant exercise price is determined by a formula based upon the outstanding amount of the financing as a percentage of the valuation of the Lowell Sun Companies. Providence Journal's management has made no determination as to whether it will 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 is scheduled to begin operation 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. 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 1993 and the percentage such Rhode Island circulation represents of each newspaper's total circulation, based on information supplied by the Audit Bureau.
RHODE ISLAND NEWSPAPERS 1993 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 ............ 170,400 92% 242,600 91% Providence, RI The Times............... 20,700 92% N/A Pawtucket, RI Woonsocket Call......... 20,100 78% 19,800 78% Woonsocket, RI Daily News.............. 15,100 100% 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
74 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 The Journal employs 821 persons on a full time basis and 670 on a part-time and/or temporary basis, the equivalent of 1,214 full time persons. Approximately 40% of such employees are represented by labor unions under collective bargaining agreements. The collective bargaining agreement with one of these unions, the Providence Newspaper Guild, expired in 1993. Negotiations on a new agreement are ongoing. The Newspaper Printing Pressman's Union is in the third year of a ten year contract. The Providence Typographical Union is in the eighth 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. 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 Restructuring, the PJC Spin-Off, 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, 1993, Providence Journal had net revenues from its broadcast operations of $147 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, 75 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 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 210 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. A. C. Nielsen Company, a national audience measuring service ("Nielsen"), 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"). Nielsen 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 Nielsen. 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 76 affiliation agreement with ABC for five of its stations, including two of its UHF stations in markets which 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 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 Providence Journal's Stations) for seven years. This re-alignment 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 July 1994 Nielsen audience surveys, except as otherwise provided below. 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) (IN STATION/MARKET AREA AFFILIATION FREQUENCY RANK(1) MARKET(2) MARKET(3) SHARE(4) THOUSANDS) - ------------------- ----------- --------- ------- ------------- --------- -------- -------------- KING*................... NBC 5/VHF 12 10 1 23 $213,831 Seattle, WA KGW*.................... NBC 8/VHF 25 7 3 18 117,020 Portland, OR WCNC.................... NBC 36/UHF 28 6 3 9 92,267 Charlotte, NC WHAS.................... ABC 11/VHF 50 5 1 22 66,829 Louisville, KY KHNL*................... Fox 13/VHF 69 9 3 10 56,912 Honolulu, HI KASA.................... Fox 2/VHF 49 10 4 8 56,246 Albuquerque, NM KMSB.................... Fox 11/VHF 81 6 1 9 39,975 Tucson, AZ KREM*................... CBS 2/VHF 75 4 1 22 36,930 Spokane, WA KTVB*................... NBC 7/VHF 125 5 1 27 $ 19,762 Boise, ID
- -------- * These Stations are owned 50% by the Kelso Partnerships, whose interest 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 station Nielsen share. (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 7:00 a.m.-1:00 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 Nielsen. 77 KING-SEATTLE, WA. KING operates in the Seattle/Tacoma market, the twelfth largest television market in the United States, with approximately 1.43 million television households and a population of approximately 3.7 million. In 1993, the Seattle/Tacoma market totaled approximately $31 billion in retail sales. There are ten licensed commercial television stations in Seattle/Tacoma (five VHF stations and five UHF stations) and two public stations. Three network affiliates are VHF (including KING), one network affiliate is UHF, 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 900,000 television households and a population of approximately 2.3 million. In 1993, the Portland market totaled approximately $19 billion in retail sales. There are seven licensed commercial television stations in the Portland market (four VHF stations and three 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 two 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, and the Station's coverage of the Portland Rose Festival is distributed to stations throughout the West. The Station's tradition of community service has resulted in the receipt of numerous awards. In 1994, KGW's "News 8" captured five first place honors at the Oregon Associated Press Broadcasters Awards, making it the most honored television news station in its division. 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 775,000 television households and a population of approximately 2 million. In 1993, the Charlotte market totaled approximately $14.7 billion in retail sales. There are six licensed commercial television stations in Charlotte (two VHF and four UHF stations) and one public station. Two network affiliates are VHF stations, two network affiliates are UHF stations (including WCNC), and two 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. 78 WHAS-LOUISVILLE, KY. WHAS operates in the Louisville market, the fiftieth largest television market in the United States, with approximately 533,000 television households and a population of approximately 1.4 million. In 1993, the Louisville market totaled approximately $10.2 billion in retail sales. There are five licensed commercial television stations in Louisville (two VHF and three UHF stations) and one public station. Two network stations are VHF (including WHAS), two network stations are UHF and the one independent station is UHF. WHAS has been an ABC affiliate since 1990, and its current affiliation agreement expires in September, 1995. WHAS is the 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. Unemployment is at 4.2%, or 1.5% lower than the national average. 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 374,000 television households and a population of approximately 1.1 million. In 1993, the Honolulu market totaled approximately $12.1 billion in retail sales. There are nine licensed commercial television stations in Honolulu (four VHF stations and five UHF stations) and one public station. Three network stations are VHF and one network station is UHF. One independent station is VHF (KHNL) and four independent stations are UHF. KHNL has been a Fox affiliate since 1987 but will become an NBC affiliate in 1995, and its affiliation agreement with NBC expires in 2002. KHNL 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. KHNL currently carries no local news but 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. In 1993 more than 6.1 million visitors spent approximately $8.7 billion dollars in Hawaii. 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 530,000 television households and a population of 1.5 million. In 1993, the Albuquerque/Santa Fe market totaled approximately $10.4 billion in retail sales. There are nine licensed commercial television stations in Albuquerque/Santa Fe (four VHF stations and five UHF stations) and three public stations. Three network affiliates are VHF stations (including KASA), two network affiliates are UHF stations, one independent is a VHF station and three independents are UHF stations. KASA has been a Fox affiliate since 1986, and its current affiliation agreement expires in 1998. KASA is the local sports and movie station, carrying on an exclusive basis University of New Mexico football and basketball as well as Western Athletic Conference football and New Mexico State University basketball. KASA received the award for "Promotion Affiliate of the Year" from the Fox network for the 1993-94 broadcast year. 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, which was recently expanded to two million square feet. Tourism is also important to the economy, particularly in Santa Fe. 79 KMSB-TUCSON, AZ. KMSB operates in the Tucson market, the eighty-first largest television market in the United States, with approximately 323,000 television households and a population of approximately 830,000. In 1993, the Tucson market totaled approximately $6.2 billion in retail sales. There are six licensed commercial television stations in Tucson (three VHF stations and three UHF stations) and two public stations. Three network affiliates are VHF stations (including KMSB), two network affiliates are UHF stations, and one independent station is a UHF station. KMSB has been a Fox affiliate since 1986, and its current affiliation agreement expires in 1998. KMSB has positioned itself as the local sports and movie station. The station has a contract with the University of Arizona to telecast its athletic events, including football, basketball, baseball and certain other sports. KMSB is also active in community service. In October 1994, the Station was honored by "Time for Tucson" for producing and airing a telethon which raised pledges from companies and individuals to commit 650,000 hours of their time in support of activities that 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 342,000 television households and a population of approximately 890,000. In 1993, the Spokane market totaled approximately $6.5 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 Empire. KREM is Spokane's news leader and presents the market's only local early morning and noon newscasts. 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 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 167,000 television households and a population of 452,000. In 1993, the Boise market totaled approximately $3.1 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 more than double those of its nearest competitor as reported by Nielsen. 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 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. 80 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 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 81 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 highly 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 early 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 Broadcasting and River City Broadcasting. 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 September 30, 1994, Providence Journal's total commitment, consisting of amounts paid to date and current obligations, with respect to PSN, was approximately $1 million. While the amount of its investments in programming joint ventures has not been significant to date, Providence Journal anticipates that its overall commitment to the production of television programming will increase in the future. 82 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 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 but retains all remaining revenue. 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 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. 83 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 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".) 84 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. 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, 85 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. The FCC has commenced a rule-making proceeding to modify the PTAR so as to permit the broadcast, during prime time, of programs originally broadcast by television networks. The FCC has not yet decided whether it will modify the PTAR. Providence Journal cannot predict whether the PTAR will be modified or eliminated 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 86 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. Several bills previously introduced in Congress have proposed 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 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. 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 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 87 facilities necessary to pass along an ATV signal. The conversion of a Station's equipment enabling it, for example, 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 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. 88 EMPLOYEES As of September 30, 1994, the operations of the PJC Broadcasting Business had approximately 957 full-time employees and 113 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-five 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. 89 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, 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 Restructuring, the PJC Spin-Off, the Merger and the transactions contemplated thereby are consummated. 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. 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 September 30, 1994 after giving effect to the Restructuring, the PJC Spin-Off, the Merger and the transactions contemplated thereby described in the Notes to the Pro Forma Condensed Consolidated Balance Sheet and Statements 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.
SEPTEMBER 30, 1994 --------------------------------- NEW PROVIDENCE PROVIDENCE JOURNAL JOURNAL HISTORICAL PRO FORMA ------------------ -------------- (IN THOUSANDS) Debt, including current installments......... $274,553 $222,903 Stockholders' Equity: Providence Journal Common Stock: Class A Common Stock, par value $2.50 per share; authorized 600,000 shares; issued 38,369 shares............................. 96 Class B Common Stock, par value $2.50 per share; authorized 300,000 shares; issued 47,281 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 37,728 shares............................. 38 Class B Common Stock, par value $1.00 per share; authorized 300,000 shares; issued 46,961.................................... 47 Additional Capital......................... 1,225 1,354 Retained Earnings.......................... 346,944 164,437 Unrealized Gain on Securities held for sale, net................................. 2,322 2,322 -------- -------- Total Stockholders' Equity............... 343,257 168,198 -------- -------- Total Capitalization................... $617,810 $391,101 ======== ========
90 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, 1989, 1990, 1991, 1992 and 1993 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 nine months ended September 30, 1993 and September 30, 1994 and the balance sheet data as of September 30, 1994 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 nine months ended September 30, 1994 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1994.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 ------------------------------------------------ ------------------ 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues............... $175,028 $169,840 $167,008 $172,453 $179,499 $129,473 $138,531 Operating Loss......... (3,077) (16,437) (31,793) (10,899) (16,833) (6,661) (2,103) Interest, Fees and Other Income.......... 3,969 11,900 38,964 47,877 5,806 4,135 3,959 Interest Expense....... (16,856) (15,701) (10,102) (6,455) (2,578) (1,947) (2,038) Equity in Loss of Affiliates............ (703) (1,313) (72) (11,328) (7,350) (3,183) (4,818) Income (Loss) from Continuing Operations before Income Taxes... (16,667) (21,551) (3,003) 19,195 (20,955) (7,656) (5,000) Income (Loss) from Continuing Operations. (11,902) (13,248) (6,619) 7,358 (15,190) (6,653) (3,573) Income (Loss) Per Common Share From Continuing Operations. $(117.88) $(132.26) $ (75.38) $ 85.53 $(178.08) $ (77.97) $ (42.06) Cash Dividends Paid Per Common Share.......... $ 23.25 $ 39.00 $ 86.00 $ 94.60 $ 104.00 $ 78.00 $ 85.80
DECEMBER 31 SEPTEMBER 30 -------------------------------------------- ------------ 1989 1990 1991 1992 1993 1994 -------- -------- -------- -------- -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Total Assets........... $446,340 $784,063 $594,098 $793,433 $775,685 $748,749 Net assets of discontinued cable television operations included in Total Assets................ 32,262 36,924 39,603 380,385 376,156 366,384 Long-term Debt......... 156,632 28,568 28,608 253,106 276,601 271,055 Stockholders' Equity... 205,153 460,321 399,938 391,967 359,575 343,257
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 186,500 and 268,600, 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".) In November 1994, Providence Journal announced a definitive agreement, pursuant to which it agreed to consummate the Merger with Continental in a tax- free transaction valued at approximately $1.4 billion. The Merger, which requires various regulatory approvals, is expected to be completed in the second half of 91 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 "Summary--Pre-Merger Transactions" and "Pre-Merger Transactions-- Kelso Buyout".) Control of KHC's cable systems will then be transferred to Continental in the Merger, and KHC's broadcast stations will be owned entirely by New Providence Journal. The unaudited pro forma condensed consolidated statements of operations for New Providence Journal contained herein have been prepared assuming these transactions occurred on January 1, 1993 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 20.9% interest in Television Food Network, which develops cable television programming related to food, its preparation and related topics; a 40.33% interest in Linkatel Pacific, L.P., formed to pursue the development of alternative access networks; a 16% interest in Partners Stations Network, L.P. formed in 1994 to develop and produce television programming; and a 50% interest in Copley/Colony, Inc., engaged in cable television operations. Providence Journal's 50% interest in Copley/Colony, Inc. will be transferred to Continental in the Merger. These investments have been accounted for using the equity method and, combined with Providence Journal's 50% interest in KHC, represented a combined investment of $100.6 million as of September 30, 1994. 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 losses of KHC's and Copley/Colony's cable businesses, are therefore reported as a discontinued operation for all periods presented. 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 $812,000 net of tax. Income (loss) from these businesses as well as the gain on the sale of this cellular business and paging business are reported as discontinued operations. Operating results of these discontinued operations were as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 ------------------------- ------------------ 1991 1992 1993 1993 1994 ------- -------- -------- -------- -------- (IN THOUSANDS) Revenues..................... $98,018 $112,334 $177,417 $132,253 $132,340 Income (Loss) Before Income Taxes....................... 19,319 4,510 (8,581) (4,081) (2,347) Income Taxes (Benefits)...... 8,506 2,955 (1,087) 146 1,140 Income (Loss) from Discontinued Operations..... $10,813 $ 1,555 $ (7,494) $ (4,228) $ (3,486) ======= ======== ======== ======== ========
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 collateralized by all the assets of the Lowell Sun Companies and an interest in 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 made no determination as to whether it will exercise this warrant. Providence Journal also owns 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 September 30, 1994. 92 CONSOLIDATED RESULTS OF OPERATIONS. The following table summarizes Providence Journal's financial results.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 ---------------------------- -------------------- 1991 1992 1993 1993 1994 -------- -------- -------- --------- --------- (IN THOUSANDS) Revenues: Publishing................. $118,169 $120,515 $124,914 $ 89,975 $ 92,933 Broadcast Television (1) .. 39,381 42,156 44,532 32,112 37,901 Other...................... 9,458 9,782 10,053 7,386 7,697 -------- -------- -------- --------- --------- 167,008 172,453 179,499 129,473 138,531 Operating Income (Loss): Publishing................. 3,919 10,590 9,891 6,962 5,785 Broadcast Television (1) .. (11,020) (6,401) (3,188) (2,860) 2,796 Other...................... (6,455) (647) (2,650) 409 717 Corporate.................. (18,237) (14,441) (20,886) (11,172) (11,401) -------- -------- -------- --------- --------- (31,793) (10,899) (16,833) (6,661) (2,103) Other Income (Expense): Interest, Fees and Other Income.................... 38,964 47,877 5,806 4,135 3,959 Interest Expense........... (10,102) (6,455) (2,578) (1,947) (2,038) Equity in Loss of Affiliates................ (72) (11,328) (7,350) (3,183) (4,818) -------- -------- -------- --------- --------- 28,790 30,094 (4,122) (995) (2,897) Income (Loss) from Continuing Operations Before Income Taxes....... (3,003) 19,195 (20,955) (7,656) (5,000) Income Taxes (Benefits).... 3,616 11,837 (5,765) (1,003) (1,427) -------- -------- -------- --------- --------- Income (Loss) from Continuing Operations..... (6,619) 7,358 (15,190) (6,653) (3,573) Income (Loss) from Discontinued Operations, Net of Tax................ 10,813 1,555 (7,494) (4,228) (3,486) -------- -------- -------- --------- --------- Income (Loss) Before Extraordinary Item and Changes in Accounting Methods................... 4,194 8,913 (22,684) (10,881) (7,059) Extraordinary Item, Net of Tax ...................... -- -- 1,551 1,551 -- Cumulative Effect of Changes in Accounting Methods, Net of Tax....... (2,974) 1,257 -- -- -- -------- -------- -------- --------- --------- Net Income (Loss).......... $ 1,220 $ 10,170 $(21,133) $ (9,330) $ (7,059) ======== ======== ======== ========= =========
- -------- (1) Includes only those subsidiaries which are majority 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 Nine Months 1994 Compared with First Nine Months 1993. Providence Journal's revenues increased 7% for the first nine months of 1994, while operating loss was down 68.4%. Significant improvements in the PJC Broadcasting Business were partially offset by a decrease in operating profit for the 93 PJC Publishing Business. Corporate expenses were flat for the first nine months of 1994. Overall operating loss decreased from $(6.7) million in the first nine months of 1993 to $(2.1) million in 1994. For the first nine months, loss from continuing operations decreased from $(6.7) million in 1993 to $(3.6) million in 1994, reflecting the improved operating results offset by a $(1.6) million increase in equity in loss of affiliates. During 1994's first nine months, equity in loss of affiliates of $(4.8) million included losses from two development operations, Television Food Network and Linkatel, L.P. Providence Journal's share of these losses totaled $(3.5) million in first nine months of 1994 as compared to no losses for the comparable prior year period. These start-up businesses are expected to be unprofitable for the foreseeable future. Offsetting these losses from affiliated start-up businesses was a decrease of $1.7 million in Providence Journal's 50% share of losses from KHC and Copley/Colony which have been accounted for using the equity method in the accompanying financial statements. In January 1993, Providence Journal retired an industrial revenue bond with a face value of $9.5 million for $7.2 million. The gain resulting from this transaction, totaling $1.6 million net of tax, has been presented as an extraordinary item in the nine months ended September 30, 1993 and the year ended December 31, 1993. 1993 Compared with 1992. Revenues grew 4.1% between years showing modest growth in both the PJC Publishing Business and the PJC Broadcasting Business. Operating loss increased 54.4% from $(10.9) to $(16.8) million. The PJC Broadcasting Business showed a substantial decrease in operating loss, from $(6.4) million in 1992 to $(3.2) 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 1993 valuation adjustments were recorded in the fourth quarter totaling $(2.7) million 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. Additionally, the appraised value of the Providence Journal Class A Common Stock and the Providence Journal Class B Common Stock increased from $7,191 per share in November 1992 to $8,745 per share in November 1993, resulting in additional deferred compensation associated with an Incentive Unit Plan for senior executives. Interest, fees and other income decreased $42.1 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 Communications. This note was settled in full in connection with the acquisition of Palmer's cable television assets 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 in 1993 as a result of decreased management fees paid to Providence Journal by Palmer and KHC. Equity in loss of affiliates decreased from $(11.3) million in 1992 to $(7.4) 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 cable subsidiaries acquisitions. Such debt is intended to be repaid as part of the transactions contemplated herein. Loss from continuing operations was $(15.2) million in 1993 as compared to income of $7.4 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 94 from a tax rate of 61.7% in 1992 compared to a benefit rate of 27.5% 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 consists of the operating results of the majority owned cable businesses, which are expected to be acquired by Continental in the Merger, and the remaining investments in its cellular system and paging subsidiary, which were sold in 1994, resulting in a gain of $0.8 million, net of tax. The significant decrease from income of $1.6 million in 1992 to loss of $(7.5) million in 1993 results from the acquisition of the Palmer cable 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. 1992 Compared with 1991. Consolidated 1992 revenues of $172.5 million increased 3.3% compared with 1991. Operating loss decreased significantly from $(31.8) million in 1991 to $(10.9) million in 1992, reflecting the effect of the improving economy on both the PJC Publishing Business and the PJC Broadcasting Business. In 1991, the PJC Publishing Business was particularly hurt by the Rhode Island credit union crises and its impact on the local economy. The Providence Journal recorded valuation adjustments in 1991 which totaled $(6.0) million relating to the Omni Biltmore Hotel. Corporate overhead expense decreased from $18.2 million in 1991 to $14.4 million in 1992, reflecting lower deferred compensation associated with Providence Journal's Incentive Unit Plan. Interest, fees and other income increased $8.9 million in 1992 as compared to 1991 primarily as a result of management fee income received in 1992 from KHC as previously mentioned. Equity in loss of affiliates was only $(.1) million in 1991 compared to $(11.3) million in 1992. In February 1992, Providence Journal acquired 50% of KHC for $105 million. Providence Journal's 50% share of operations in KHC has been accounted for under the equity method in 1992 and amounted to $(12.6) million. Net income of $1.2 million for 1991 includes a $(3.0) million charge for the cumulative effect of change in accounting method, net of tax for the amortization of program rights. ANALYSIS BY SEGMENT Publishing Segment. The following table sets forth certain operating and other data for the nine month periods ended September 30, 1993 and 1994 and the years ended December 31, 1991, 1992 and 1993.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 -------------------------- ------------------ 1991 1992 1993 1993 1994 -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT CIRCULATION) Revenues: Advertising.................... $ 85,500 $ 88,047 $ 93,087 $ 66,406 $ 68,592 Circulation.................... 32,431 32,328 31,028 23,084 23,018 Other.......................... 238 140 799 485 1,323 -------- -------- -------- -------- --------- 118,169 120,515 124,914 89,975 92,933 Operating Expense................ 105,170 99,538 103,597 74,437 78,609 Depreciation & Amortization...... 9,080 10,387 11,426 8,576 8,539 -------- -------- -------- -------- --------- Operating Income................. $ 3,919 $ 10,590 $ 9,891 $ 6,962 $ 5,785 ======== ======== ======== ======== ========= Average Net Paid Circulation(1) Daily.......................... 202,200 197,100 192,500 -- 186,500 Sunday......................... 265,000 268,100 269,100 -- 268,600
- -------- (1) See "Description of Providence Journal Publishing Business--Circulation and Pricing" for description of Average Net Paid Circulation. 95 The PJC Publishing Business publishes seven days a week: the Providence Journal and The Evening Bulletin Monday through Friday; the Providence Journal- Bulletin on Saturday; and The Providence Sunday Journal on Sunday. Advertising revenue represents 72% to 75% of total revenue for the PJC Publishing Business, including retail and classified advertising. Advertising revenues have increased an average of 4% annually over the last three years, mostly due to price increases. Advertising revenue for fiscal 1994 is expected to increase approximately 3% over 1993. Average net paid daily circulation has declined 8% since 1991. 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 is scheduled to begin operation 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 telemarketing. Revenue from these new development efforts has increased to $1.3 million for the first nine months of 1994 as compared to $.5 million in the comparable prior year period. Operating expenses increased 5.6% in the first nine months of 1994 as compared with the comparable prior year period, 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 rising price increases. Operating expenses decreased 5.4% in 1992 as compared to 1991. In 1991, the Journal restructured its distribution operations from individual circulation offices to regional circulation centers. Management estimates this restructuring represented a savings of $3 million annually, primarily from a reduction in headcount of 69 employees. The cost of implementing this restructuring was $5.7 million, of which $3.4 million was charged to operations in 1991 and $2.3 million in 1992. Depreciation and amortization has steadily increased over the last three years, 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. Operating income has fluctuated over the last three years with operating expense increases greater than revenue increases in all years except 1992. Publishing Outlook. Publishing results in 1995 are expected to be impacted by two critical factors: The timing and extent of economic recovery in Rhode Island 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. Modest newsprint price increases over the prior year began in the third quarter of 1994 but are not expected to significantly impact fourth quarter results. Newsprint price increases could limit profitability improvement 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. 96 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. Broadcast cashflow is considered a good indicator in evaluating performance. It represents operating income or loss plus depreciation and amortization, amortization of non-barter program rights, and corporate expenses, less cash payments for programming. Broadcast cashflow 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. The following table sets forth certain operating and other data for the nine month periods ended September 30, 1993 and 1994 and the years ended December 31, 1991, 1992 and 1993. The actual results for all periods presented represent the operating data for the four wholly owned Stations. Pro forma results for the nine months ended September 30, 1993 and 1994 and the year ended December 31, 1993 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, 1993.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ PROFOMA PROFORMA 1993 1994 1993 1994 ------- ------- -------- -------- (AMOUNTS IN THOUSANDS) OPERATING DATA: Revenues: National Revenues....... $13,552 $17,062 $ 52,341 $ 61,071 Local and Regional Reve- nues................... 19,015 23,009 56,439 66,094 Other Revenue........... 4,195 3,616 9,363 9,306 Agency Commissions...... (4,650) (5,786) (15,402) (18,145) ------- ------- -------- -------- Net Revenues............ 32,112 37,901 102,741 118,326 Operating and Administrative Expenses............... 28,018 29,211 77,784 84,493 Depreciation and Amortization........... 6,954 5,894 17,662 16,245 ------- ------- -------- -------- Total Operating Ex- penses................. 34,972 35,105 95,446 100,738 ------- ------- -------- -------- Operating Income (Loss). $(2,860) $ 2,796 $ 7,295 $ 17,588 ======= ======= ======== ======== OTHER DATA: Broadcast Cashflow...... $ 5,051 $ 9,613 $ 25,536 $ 35,721 ======= ======= ======== ========
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1991 1992 1993 PRO FORMA -------- ------- ------- --------- (AMOUNTS IN THOUSANDS) OPERATING DATA: Revenues: National Revenues..................... $ 19,109 $20,181 $19,475 $ 74,503 Local and Regional Revenues........... 20,996 23,827 27,180 82,657 Other Revenue......................... 4,936 4,463 4,536 11,998 Agency Commissions.................... (5,660) (6,315) (6,659) (22,286) -------- ------- ------- -------- Net Revenues.......................... 39,381 42,156 44,532 146,872 Operating and Administrative Expenses. 38,872 38,395 39,038 109,620 Depreciation and Amortization......... 11,829 10,162 8,682 23,379 -------- ------- ------- -------- Total Operating Expenses.............. 50,401 48,557 47,720 132,999 -------- ------- ------- -------- Operating Income (Loss)............... $(11,020) $(6,401) $(3,188) $ 13,873 ======== ======= ======= ======== OTHER DATA: Broadcast Cashflow.................... $ 3,609 $ 4,298 $ 7,352 $ 39,688 ======== ======= ======= ========
97 Nine Months Ended September 30, 1993 Compared to Nine Months Ended September 30, 1994 (actual and pro forma). General improvement in the local and national economies and increased retail spending were the major factors in increasing net revenues for the period ended September 30, 1994, as compared with the same period in 1993, on both an actual and pro forma basis. Total pro forma net revenues were $118.3 million for the nine months ended September 30, 1994, as compared to pro forma net revenues of $102.7 million for the same period in 1993, an increase of $15.6 million or 15.2%. Actual net revenues were $37.9 million for the period ended September 30, 1994, as compared with actual net revenues of $32.1 million for the same period in 1993, an increase of $5.8 million or 18%. 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 periods 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 $29.2 million for the nine months ended September 30, 1994, as compared to $28.0 million for the same period in 1993, an increase of $1.2 million or 4.3%. Total pro forma operating and administrative expenses were $84.5 million for the nine months ended September 30, 1994, as compared to $77.8 million for the same period in 1993, an increase of $6.7 million or 8.6%. Pro forma operating expenses for the first nine months of 1994 were affected by the cost associated with increased news and entertainment programming as well as a new local marketing agreement in Honolulu. The decrease in depreciation and amortization on both a pro forma and actual basis reflects management's effort to control capital spending. The combined effect of these factors resulted in pro forma operating income of $17.6 million for the nine month period ended September 30, 1994, as compared to $7.3 million, for the same period in 1993, an increase of $10.3 million. Actual operating income was $2.8 million for the nine month period ended September 30, 1994, as compared to an operating loss of $(2.9) million for the same period in 1993, an increase of $5.7 million. Years Ended December 31, 1991, 1992 and 1993. Increases in net revenue for these periods were modest, as reflected by the 7.0% and 5.6% increases from 1991 to 1992 and from 1992 to 1993, respectively. Local and regional revenues experienced increases of 13.5% and 14.1% over the same years, respectively, while national revenues were relatively flat or 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 small or no increases in operating and administrative expenses which totaled $38.6, $38.4 and $39.0 million for the years ended December 31, 1991, 1992 and 1993, respectively. Excess overhead was eliminated, procedures were centralized, and the programming purchasing strategy of the PJC Broadcasting Business was revised. Depreciation and amortization expense decreased 14.1% to $10.2 million from 1991 to 1992. It decreased 14.6% to $8.7 million from 1992 to 1993. This is a direct reflection of management's effort to control capital expenditures. The operating losses for the years ended December 31, 1991, 1992 and 1993 totaled $(11.0), $(6.4) and $(3.2) million, respectively. 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 98 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. The television 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 FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for 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 operation. 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". 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 September 30, 1994, stockholders' equity has been increased by $2.3 million, net of taxes, resulting from the adoption of this standard. In October 1994, the FASB issued Statement of Financial Accounting Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("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. 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 $82.7 million was available at September 30, 1994. Providence Journal also has a $240 million term loan facility amortizing in varying amounts through 2001. 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. 99 Cash Flow. During 1993, Providence Journal generated $23.4 million in cash from continuing operations, compared with $19.3 million in 1992. During the first nine months of 1994, Providence Journal generated $18.6 million in cash from continuing operations, compared with $16.5 million for the same period in 1993. The increase results primarily from improved operating results. Cash used in investing activities of continuing operations during 1993 totaled $(15.8) million as compared to $(103.4) million in 1992. The Providence Journal's 50% investment in KHC totaled $105 million in 1992. Cash used in investing activities of continuing operations in the first nine months of 1994 totaled $(4.5) million compared to a use of $(9.1) million in 1993's comparable period reflecting primarily a decrease in capital expenditures and investments in affiliates. Cash used for financing activities was $(14.7) million in 1993 as compared to cash provided of $152.1 million in 1992 reflecting proceeds of $234.1 million from a revolving credit and loan facility used for the 50% purchase of KHC and purchase of cable television systems from Palmer Communications. Providence Journal paid dividends to stockholders of $8.9 million and $8.1 million in 1993 and 1992, respectively. During the first nine months of 1994, cash used in financing activities was $(22.2) million as compared with $(18.5) million in the prior year comparable period, the increase resulting partially from an increase in treasury stock purchases. Dividends to stockholders of $7.3 million were paid during the first nine months of 1994. As discussed elsewhere herein, the proposed recapitalization of Providence Journal is expected to reduce future dividends payable on common shares of New Providence Journal. Future cash flow from operating activities of New Providence Journal is expected to be sufficient to meet capital investment and debt repayment requirements. However, future cash flow from operating activities is not expected to be sufficient to pay dividends or repurchase outstanding stock at historical levels. 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 and Plan of Merger has been superseded by the Merger Agreement, which amended and restated the former agreement. In order to facilitate the tax-free nature of the Merger, Providence Journal will reorganize its corporate structure in a series of transactions, the end result of which will be the PJC Spin-Off. Upon completion of the PJC Spin-Off, stockholders of Providence Journal will also own the equivalent number and class of common shares of New Providence Journal. For a description of the internal transactions that will occur before the Merger can be consummated, see "Summary--The Pre-Merger Transactions" and "Pre-Merger Transactions". Prior to the Restructuring described below, Providence Journal or one or more of the PJC Cable Subsidiaries will incur the New Cable Indebtedness in the principal amount of $755 million. Providence Journal anticipates that the proceeds of the New Cable Indebtedness will be used as follows: approximately $257 million will be applied to discharge existing indebtedness of Providence Journal, approximately $289 million will be applied to discharge existing indebtedness of KBC, approximately $265 million (including transaction costs) will be used to consummate the Kelso Buyout, approximately $65 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 costs associated with the Merger and certain deferred compensation totalling $75 million. In addition New Providence Journal will incur the NPJ Indebtedness in the principal amount of approximately $200 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. 100 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 Restructuring, 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 September 30, 1994. 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, 1993 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 September 30, 1994. 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, 1993. The pro forma condensed consolidated statements 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, 1993 included herein. The pro forma condensed consolidated statements of operations are 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, 1993. 101 PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1994 --------------------------- 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.......... $ 1,400 $ 3,003 $ 960,695(1) 265,000(2) $ 4,403 257,345(3) 298,350(3) 65,000(5) 45,000(6) 30,000(7) Accounts Receivable, Net.................. 21,265 21,700 42,965 Inventories........... 864 864 Television Program Rights............... 5,164 8,060 13,224 Prepaid Expenses and Other Current Assets. 12,097 1,312 13,409 ------------ ------------ -------- Total Current Assets. 40,790 34,075 74,865 ------------ ------------ -------- Investments in Affiliated Companies... 100,560 265,000(2) 347,444(4) 8,696 9,420(5) Notes Receivable........ 20,239 20,239 Television Program Rights, Net............ 3,817 4,599 8,416 Property and Equipment, at Cost Less Accumulated Depreciation........... 133,590 56,300 189,890 Intangible Assets and Goodwill, Net.......... 49,025 125,788 34,100(4) 208,913 Other Assets............ 34,344 14,197 16,000(6) 32,541 Net Assets of Discontinued Cable Operations............. 366,384 271,215 157,040(4) 869,059(9) -- 9,420(5) 65,000(5) ------------ ------------ -------- $ 748,749 $ 506,174 $543,560 ============ ============ ======== LIABILITIES AND STOCK- HOLDERS' EQUITY Current Liabilities Accounts Payable and Accrued Expenses...... 25,667 5,948 31,615 Current Installments of Long-term Debt..... 3,498 26,405 2,500(3) 998 26,405(3) Current Portion of Television Program Rights Payable........ 5,895 7,179 13,074 ------------ ------------ -------- Total Current Liabil- ities............... 35,060 39,532 45,687 ------------ ------------ -------- Long-term Debt.......... 271,055 271,945 254,845(3) 960,695(1) 221,905 271,945(3) 755,000(9) Television Program Rights Payable......... 2,413 5,233 7,646 Other Liabilities and Deferrals.............. 96,964 24,160 30,000(7) 9,000(4) 100,124 ------------ ------------ -------- Total Liabilities.... 405,492 340,870 375,362 ------------ ------------ -------- Continental Class A Com- mon Stock and Series B Preferred Stock........ 645,000(9) 645,000(10) 0 Stockholders' Equity: Class A Common Stock.. 96 58(10) 38 Class B Common Stock.. 118 21 71(10) 47 21(4) Additional Paid-in Capital.............. 1,225 210,314 210,314(4) 129(10) 1,354 Retained Earnings (Deficit)............ 346,944 (45,031) 45,000(6) 45,031(4) 164,437 645,000(10) 530,941(9) 7,448(8) 16,000(6) Unrealized Gain on Se- curities held for Sale, Net............ 2,322 2,322 Treasury Stock........ (7,448) 7,448(8) -- ------------ ------------ -------- Total Stockholders' Equity.............. 343,257 165,304 168,198 ------------ ------------ -------- Total Liabilities and Stockholders' Equi- ty.................. $ 748,749 $ 506,174 $543,560 ============ ============ ========
See accompanying notes to pro forma financial statements 102 PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993 --------------------------------------------------------------- KING NEW PROVIDENCE HOLDING PRO FORMA ADJUSTMENTS PROVIDENCE JOURNAL CORP. --------------------- JOURNAL HISTORICAL HISTORICAL DEBIT CREDIT PRO FORMA ---------- ---------- ---------- ----------- ---------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Revenues................ $179,499 $102,340 -- -- $ 281,839 Selling, General, and Administrative......... 174,920 71,272 -- 2,034(11) 244,158 Depreciation and Amortization........... 21,412 14,697 1,673(12) -- 37,782 -------- -------- --------- Operating Income (Loss). (16,833) 16,371 -- -- (101) Interest Expense........ (2,578) (8,972) 7,608(13) -- (19,158) Other Income, Net....... 5,806 288 2,034(11) -- 4,060 Equity in Loss of Affiliates............. (7,350) -- 6,806(11) (544) -------- -------- --------- Income (Loss) from Continuing Operations, before Income Taxes (Benefits)............. (20,955) 7,687 -- -- (15,743) Income Taxes (Benefits). (5,765) 6,787 -- 669(12) (2,690) -- 3,043(13) -------- -------- --------- Income (Loss) from Continuing Operations.. $(15,190) $ 900 (13,053) ======== ======== ========= Loss Per Share from Continuing Operations.. $(178.08) -- -- $ (153.02) ======== ========= Weighted Average shares outstanding............ 85,302 85,302 ======== ========= NINE MONTHS ENDED SEPTEMBER 30, 1994 --------------------------------------------------------------- KING NEW PROVIDENCE HOLDING PRO FORMA ADJUSTMENTS PROVIDENCE JOURNAL CORP. --------------------- JOURNAL HISTORICAL HISTORICAL DEBIT CREDIT PRO FORMA ---------- ---------- ---------- ----------- ---------- Revenues................ $138,531 $ 80,425 -- -- $ 218,956 Selling, General, and Administrative......... 124,960 55,785 -- 1,526(11) 179,219 Depreciation and Amortization........... 15,674 10,351 1,255(12) -- 27,280 -------- -------- --------- Operating Income (Loss). (2,103) 14,289 -- -- 12,457 Interest Expense........ (2,038) (6,443) 7,124(13) -- (15,605) Other Income, Net....... 3,959 281 1,526(11) -- 2,714 Equity in Loss of Affiliates............. (4,818) -- 2,184(11) (2,634) -------- -------- --------- Income (Loss) from Continuing Operations, before Income Taxes (Benefits)............. (5,000) 8,127 -- -- (3,068) Income Taxes (Benefits). (1,427) 4,406 -- 502(12) (373) -- 2,850(13) -------- -------- --------- Income (Loss) from Continuing Operations.. $ (3,573) $ 3,721 -- -- $ (2,695) ======== ======== ========= Loss Per Share from Continuing Operations.. $ (42.06) -- -- $ (31.73) ======== ========= Weighted Average Shares Outstanding............ 84,947 84,947 ======== =========
See accompanying notes to pro forma financial statements 103 NOTES TO PRO FORMA CONDENSED BALANCE SHEET AND STATEMENTS OF OPERATIONS (1) To record the incurrence by Providence Journal prior to the Merger of the New Cable Indebtedness and the NPJ Indebtedness in the amounts of $755 million and $205.7 million, respectively. (2) To record the purchase by Providence Journal of the minority 50% ownership in KHC for $265 million (including transaction expenses). (3) To record the repayment of outstanding borrowings of $257.3 million and $298.3 million under the Providence Journal and KHC revolving credit and term loan facilities, respectively. (4) To record eliminating entries for the consolidation of KHC into Providence Journal and allocation of the excess of the purchase price over book value for KHC as follows: $25.1 million has been allocated to the PJC Broadcasting Business; and $157 million has been allocated to the discontinued cable operations. Also, to adjust deferred taxes associated with the purchase of KHC. (5) To record the purchase by Providence Journal of the minority interests in various cable entities for an aggregate of $65 million and record the reclassification of investments in affiliates to net assets of discontinued cable operations. (6) To record expenditures incurred in connection with the transactions, which are estimated at approximately $45 million consisting of the working capital adjustment, legal, accounting, investment banking and severance. Also to record the write-off of unamortized deferred financing costs amounting, to $16 million associated with debt of Providence Journal and KHC to be repaid with the proceeds of the New Cable Indebtedness and the NPJ Indebtedess. These amounts have been recorded as reductions to retained earnings. (7) To record the payment of deferred compensation for $30 million, which is an estimate of the amount to be paid in cash in 1995. (8) To retire treasury stock outstanding as of the Effective Time. (9) To record the disposition of Providence Journal Cable. Proceeds of $1.4 billion are comprised of approximately $645 million of Continental Class A Common Stock and Continental Series B Preferred Stock to be received by Providence Journal stockholders, and the assumption of $755 million of the New Cable Indebtedness by Continental. The gain is estimated to be approximately $530.9 million. This gain is not reflected in the pro forma Statements of Operations. (10) To reflect the deemed distribution of approximately $645 million of the proceeds from the sale of Providence Journal Cable and the PJC Spin-Off. Proceeds of $645 million are in the form of Continental Class A Common Stock and Continental Series B Preferred Stock to be distributed by Continental directly to Providence Journal stockholders in the Merger. 37,728 shares of New Providence Journal Class A Common Stock and 46,961 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 goodwill resulting from the purchase of KHC. (13) To increase interest expense as a result of additional indebtedness incurred upon the purchase of the KHC 50% minority interest and 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 $222 million at the beginning of the period, carrying an effective interest rate of 8.7%. 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 December 31, 1994, there were approximately 424 holders of record of Providence Journal Class A Common Stock and 256 holders of record of Providence Journal Class B Common Stock. Since a number of individuals own shares of both Providence Journal Class A Common Stock and Providence Journal Class B Common Stock, the number of Providence Journal shareholders is approximately 470. Following completion of the Restructuring, 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 below the rate currently paid with respect to Providence Journal Common Stock. Although the initial dividend for New Providence Journal has not yet been established, management's review of factors being considered in recommending a new dividend level would suggest that following the Merger it would be appropriate to reduce the dividend level significantly. The dividend reduction is intended to provide additional funds for investment in new business opportunities. 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. 104 EXECUTIVE OFFICERS AND DIRECTORS OF PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL The executive officers and Directors of New Providence Journal following the Restructuring and the PJC Spin-Off will be identical to the executive officers and Directors of Providence Journal prior to the Restructuring and the PJC Spin-Off. It is expected that, immediately prior to the Restructuring and 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 Restructuring and 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 T. 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 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. 105 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, President and Chief Operating Officer before assuming his current positions. He has been a Director of Providence Journal since 1987. 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. 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, 65, is the President and Chief Executive Officer of B. A. Ballou & Co., Inc. a jewelry manufacturing company and has been since 19 . 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 of the following Scudder, Stevens & Clark investment companies: Scudder Cash Investment Trust; Scudder California Tax Free Trust; Scudder Portfolio Trust; Scudder Investment Trust; Scudder Municipal Trust; and Scudder State Tax Free 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, 62, 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, a trustee of Eastern Utilities Associates, as well as a trustee or director of the following ten 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 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. 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. 106 Henry D. Sharpe, Jr., 71, 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 19 to 19 Mr. Sharpe was the Chief Executive Officer of Brown & Sharpe Manufacturing Company. W. Nicholas Thorndike, 61, 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, 51, has been a Director of Providence Journal since 1979 and a member of the Executive Committee since 1989. 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. James F. Stack, 55, 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. 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, 48, 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. Joanne L. Yestramski, 41, 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, 44, 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 and has been since 1989. Harry Dyson, 58, is currently Treasurer and Secretary and has been 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. 107 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 the 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 . 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 Compensation Committee and Nominating Committee of the New Providence Journal Board of Directors will receive an annual retainer of $3,000, $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. 108 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 Chairman, Chief 1993 $600,000 $360,000 $71,386 $1,013,800 $30,702 Executive Officer 1992 600,000 300,000 -- -- 702 and Publisher Trygve E. Myhren........ 1994 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 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 Vice President-- 1993 260,000 156,000 -- 407,000 702 Broadcast and Cable 1992 240,000 120,000 -- -- 702 Television John A. Bowers.......... 1994 Vice President-- 1993 180,000 108,000 14,180 273,800 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. During 1993 Mr. Hamblett, Mr. Myhren and Mr. Stack were granted allowances to purchase vehicles including tax reimbursement for $20,229, $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. According to a May, 1994 appraisal, each unit is valued at $7,300. 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 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 $9,000, respectively. The remaining amounts shown in the table are amounts contributed under the employer 401(k) plan. 109 OPTION/SAR GRANTS IN FISCAL YEAR 1994
INDIVIDUAL GRANTS - ------------------------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK PRICE SECURITIES TOTAL OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------------------- NAME GRANTED(1) FISCAL YEAR PRICE($/SH) 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 $19,972 and $23,542, respectively. PROVIDENCE JOURNAL INCENTIVE STOCK UNIT PLAN. The following table relates to the Providence Journal Incentive Stock Unit Plan (the "IUP"), created in 1971. The IUP provides incentive compensation to key officers and members of the Board of Providence Journal. The purpose of the IUP is to attract and retain persons of outstanding competence and 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 common stock of Providence Journal 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. 110 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. 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 in mid-1995, but in any event, prior to the Closing of the Merger. Such liquidation will be paid 2/3 in cash and 1/3 in stock net of taxes. Providence Journal management estimates the cash payout upon termination of the IUP will be $30 million. Such estimate has been included as a pro forma adjustment in the Providence Journal Pro Forma Condensed Balance Sheet included herein. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES
APPRECIATED VALUE OF IUP ACCUMULATED UNITS AT FISCAL YEAR-END NAME VESTED/NON-VESTED VESTED/NON-VESTED ---- ----------------- ---------------------- Stephen Hamblett...................... 2,016/ 55 $13,027,691/$ 581,409 Trygve E. Myhren...................... 636/176 $ 2,139,954/$ 741,727 Jack C. Clifford...................... 505/ 15 $ 2,744,220/$ 160,603 James F. Stack........................ 182/125 $ 445,703/$ 356,975 John A. Bowers........................ 73/111 $ 77,239/$ 144,636 --------- ---------------------- 3,412/482 $18,434,807/$1,985,350
RETIREMENT BENEFITS. The following table illustrates the maximum annual benefits payable as a single life annuity under the basic benefit formula in the 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
111 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, 14 years. However, for purposes of calculating their retirement benefit 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 Retirement 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 five 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 Internal Revenue Code. Participants will be vested under the Excess Benefit Plan under 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 five Providence Journal Named Executive Officers provides a three-year term of employment with responsibilities, compensation and benefits at least commensurate with those experienced by 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 112 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. Also on October 11, 1993, Providence Journal agreed to pay the Maximum Severance in the event any of the above officers was involuntarily terminated as a result of a corporate restructuring, even if prior to a change of control. The agreement specifies that if Providence Journal seeks to retain the officer subsequent to the restructuring, even with diminished responsibilities, and such executive declines, a severance payment from Providence Journal to the officer 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. Mr. Hamblett, the Chairman of the Board and Chief Executive Officer of Providence Journal, served as a member of the Executive Committee during 1993. STOCK INCENTIVE PLANS OF PROVIDENCE JOURNAL ASSUMED BY NEW PROVIDENCE JOURNAL Providence Journal maintains the following Stock Incentive Plans that 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. In connection with the Plan of Reorganization and the Merger, New Providence Journal will assume the 1994 Employee Stock Option Plan, the 1994 Non-Employee Director Stock Option Plan and the Restricted Stock Unit Plan and the options and awards outstanding under such plans. 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 April, 1995. If such approval has not occurred by June 30, 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 June 30, 1995, and assuming stockholder approval of the Plan of Reorganization and the Merger at the Providence Journal Special Meeting, the 1994 Employee Stock Option Plan shall remain in effect until the earlier of five (5) years from October 1, 1994 or termination of the 1994 Employee Stock Option Plan by the Board of Directors of New 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 113 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 Committee shall have discretion in determining the number of options and shares subject to such options. 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. 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 option to acquire stock is generally not a 114 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 the 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 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. Rules 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 the Providence Journal at its Annual Meeting in April, 1995. If such approval has not occurred by June 30, 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 June 30, 1995, and assuming stockholder approval of the Restructuring, 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 (5) 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. 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. 115 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 250 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 (5) shares of Providence Journal Class A Common Stock on October 1, 1994 and 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 vested and exercisable, irrespective of the original vesting schedule or any attempt by the Executive Committee to alter this right of immediate vesting. 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 the 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 that 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. 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 116 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 Non-Employee Director Stock Option Plan is designed to comply with 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 and 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. Participation. Shares under the Restricted 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 its will be paid out, net of withholding, in actual shares of 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. 117 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Providence Journal's compensation of senior executives is administered by the five (5) member Executive Committee of the Board of Directors. Four (4) 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. 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 1993 and 1994, 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 and 1994. 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. e. in 1994, implementation of non-qualified stock option plans as a more relevant and competitive long-term incentive. The plans will replace the ISU. 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 118 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 have been based upon an annual fair market appraisal of an independent appraisal firm. The peer group includes Meredith Corporation, Multimedia Corporation, The New York Times Company, Times Mirror Company, Tribune Company and The Washington Post Company. [GRAPH APPEARS HERE]
YEAR-END PJC PEER GROUP S&P -------- -------- ---------- -------- 1988 $ 100.00 $ 100.00 $ 100.00 1989 $ 162.96 $ 118.24 $ 131.49 1990 $ 167.14 $ 89.48 $ 127.32 1991 $ 214.03 $ 101.36 $ 166.22 1992 $ 207.14 $ 116.39 $ 178.97 1993 $ 254.90 $ 133.46 $ 196.85
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. 119 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 NEW PROVIDENCE JOURNAL CAPITAL STOCK Following the PJC Spin-Off and the Merger, holders of shares of Providence Journal Common Stock immediately prior to the Restructuring 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. (See "Ownership of Providence Journal Capital Stock".) 120 DESCRIPTION OF NEW PROVIDENCE JOURNAL COMMON STOCK Immediately prior to the PJC Spin-Off, New Providence Journal will be authorized to issue 900,000 shares of capital stock consisting of: (i) 600,000 shares of New Providence Journal Class A Common Stock, 38,689 of which will be issued pursuant to the PJC Spin-Off and the Merger and 450,000 shares of which may be issued upon the exercise of rights issued pursuant to a Rights Agreement dated as of February 1, 1995 (the "NPJ Rights Agreement") (See "NPJ Rights Agreement") and (ii) 300,000 shares of New Providence Journal Class B Common Stock, 46,961 of which will be issued pursuant to the PJC Spin-Off and the Merger and 225,000 of which may be issued upon the exercise of rights issued pursuant to the NPJ Rights Agreement. NEW PROVIDENCE JOURNAL COMMON STOCK GENERAL. The New Providence Journal Certificate is set forth as Exhibit I to the Plan of Reorganization, which is Annex II hereto and is identical in all -------- material 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 respects to the rights, privileges and preferences of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock, respectively. 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. New Providence Journal Class A Common Stock is freely transferable, subject to New Providence Journal's right of first refusal. (See "Right of First Refusal".) 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. 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. The New Providence Journal Class B Common Stock is, however, 121 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. PREEMPTIVE RIGHTS. Stockholders of New Providence Journal will have preemptive rights to acquire authorized but unissued shares or securities convertible into shares or carrying a right to subscribe to or acquire shares to the extent provided in, and as limited by, the DGCL and the New Providence Journal Certificate, as in effect from time to time, but in no event shall stockholders (i) have preemptive rights to acquire treasury shares of New Providence Journal upon their reissuance, (ii) have any rights to acquire New Providence Journal Class A Common Stock issued upon conversion of New Providence Journal Class B Common Stock as discussed above, or (iii) have rights to acquire shares which are contrary to the provisions of the NPJ Rights Agreement, or another agreement which New Providence Journal's Board of Directors determines to be substantially similar to the NPJ Rights Agreement. RIGHT OF FIRST REFUSAL. The sale of any New Providence Journal Common Stock, or the sale of securities convertible into, or which carry a right to subscribe to or acquire, shares of New Providence Journal Common Stock, is subject to New Providence Journal's right of first refusal to purchase the shares or securities at the lowest price at which the stockholder is willing to sell such stock. CERTAIN PROVISIONS IN THE NEW PROVIDENCE JOURNAL CERTIFICATE The New Providence Journal Certificate and the New Providence Journal By-Laws are substantially identical to the Providence Journal Charter and the Providence Journal By-Laws, 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 (12) 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. 122 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 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 New Providence Journal is a party to the NPJ Rights Agreement with The First National Bank of Boston, as rights Agent, dated as of February 1, 1995 pursuant to which the Board of Directors of New Providence Journal authorized 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 the Distribution Date or the Expiration Date (both as defined in the NPJ Rights Agreement). The Class A Rights and the Class B Rights (collectively, the "Rights") can be transferred only in connection with the transfer of the New Providence Journal Common Stock. The Rights are not exercisable until after the date on which New Providence Journal's right to redeem has expired. The Rights expire on January 31, 2005, unless earlier redeemed by New Providence Journal in accordance with the NPJ Rights Agreement. 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 except to a "Permitted Transferee". Any purported transfer of Class B Rights other than to a 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 of such holder to Class A Rights. New Providence Journal shall have the right of first refusal to purchase any Rights at the lowest price said holder is willing to sell before the same shall be sold by such party to another party. 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 adjustments from time to time as provided in 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. If at any time after a Stock Acquisition Date (as defined in the NPJ Rights Agreement), New Providence Journal is acquired in a merger, each holder of a Right shall have the right to receive stock in the acquiring company based on an allocation as set forth in the NPJ Rights Agreement. 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 set aside for issuance under the NPJ Rights Agreement. 123 COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND NEW PROVIDENCE JOURNAL If the PJC Spin-Off contemplated by the Plan of Reorganization 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 rights under the NPJ Rights Agreement. The New Providence Journal Certificate will be identical in all material 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 will be identical in all respects to the rights, privileges and preferences of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock, respectively. 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". 124 DESCRIPTION OF PROVIDENCE JOURNAL CABLE TELEVISION BUSINESS BUSINESS As measured by basic cable subscribers, Providence Journal Cable is currently the 16th largest multiple cable system operator in the United States. As of September 30, 1994, Providence Journal Cable owned and managed cable television systems passing approximately 1,249,000 Homes and serving approximately 753,000 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 basic service, which includes 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 basic service revenues by the stated basic service rate. Basic service revenues include charges for basic programming, bulk and commercial accounts and non-premium cable programming services, but exclude premium per-event and digital audio services. 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. 125 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 which 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 September 30, 1994, Providence Journal Cable's monthly rates for basic cable service averaged $9.63 company-wide with a low of $7.06 and a high of $16.78, second tier cable programming service rates averaged $7.59 with a range of $2.48 to $14.86, a la carte rates averaged $0.68 per channel with a low of $0.30 and a high of $1.25, 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 $14.0 million in 1993, representing a compound growth rate of 10%. 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 32% to $4.9 million during 1993. 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. 126 The following table summarizes the growth of Providence Journal Cable since December 31, 1991.
AS OF DECEMBER 31 AS OF -------------------------------- SEPTEMBER 30 1991 1992 1993 1994 -------- ---------- ---------- ------------ Homes Passed by Cable(1)........ 553,000 1,202,000 1,224,000 1,249,000 Number of Basic Subscribers(2).. 303,000 722,000 738,000 753,000 Basic penetration(3)............ 54.9% 60.0% 60.3% 60.3% Number of Premium Subscriptions(4)............... 241,000 440,000 467,000 506,000 Premium Penetration(5).......... 79.4% 61.0% 63.3% 67.2% Monthly Revenue per Average Basic Subscriber(6)............ $31.02 $30.78 $30.63 $29.81
- -------- (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 stated basic service rate. 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 added to the bulk equivalent to determine the total subscriber number. (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 nine month period ended September 30, 1994. 127 PROVIDENCE JOURNAL CABLE'S SYSTEMS The following table sets forth information relating to Providence Journal Cable's systems as of September 30, 1994. COMBINED SUMMARY SUBSCRIBER DATA SEPTEMBER 1994
NUMBER OF NUMBER OF HOMES PASSED BASIC BASIC PREMIUM PREMIUM BY CABLE SUBSCRIBERS PENETRATION SUBSCRIPTIONS PENETRATION ------------ ----------- ----------- ------------- ----------- COLONY: Southeastern, MA........ 99,460 62,375 62.7% 41,702 66.9% Lowell, MA.............. 67,611 43,616 64.5% 36,221 83.0% Pawtucket, RI........... 33,063 17,722 53.6% 13,807 77.9% Westerly, RI............ 24,506 15,122 61.7% 9,426 62.3% New York................ 67,507 58,228 86.3% 45,683 78.5% Florida................. 142,911 76,711 53.7% 51,222 66.8% Lakewood, CA............ 27,576 14,028 50.9% 12,251 87.3% --------- ------- ----- ------- ------ TOTAL COLONY............ 462,634 287,802 62.2% 210,312 73.1% --------- ------- ----- ------- ------ COLONY CABLEVISION: Naples, FL.............. 171,638 104,338 60.8% 54,194 51.9% Palm Desert, CA......... 105,404 65,887 62.5% 44,744 67.9% --------- ------- ----- ------- ------ TOTAL COLONY CABLEVI- SION................... 277,042 170,225 61.4% 98,938 58.1% --------- ------- ----- ------- ------ COPLEY/COLONY(1): Costa Mesa, CA.......... 40,290 21,605 53.6% 20,583 95.3% Harbor, CA.............. 53,668 21,473 40.0% 26,336 122.6% Cypress, CA............. 19,725 10,862 55.1% 10,416 95.9% --------- ------- ----- ------- ------ TOTAL COPLEY/COLONY..... 113,683 53,940 47.4% 57,335 106.3% --------- ------- ----- ------- ------ KING VIDEOCABLE(2): Tujunga, CA............. 44,222 31,421 71.1% 16,435 52.3% Santa Clarita, CA....... 33,476 27,570 82.4% 15,731 57.1% Riverside, CA........... 35,624 23,389 65.7% 16,644 71.2% Placerville, CA......... 26,449 17,854 67.5% 11,196 62.7% Lodi, CA................ 26,519 14,166 53.4% 9,710 68.5% San Andreas, CA......... 17,039 11,167 65.5% 4,208 37.7% Mammoth Lakes, CA....... 8,486 7,350 86.6% 2,703 36.8% Mt. Shasta, CA.......... 8,267 5,553 67.2% 2,758 49.7% Menifee, CA............. 1,950 1,721 88.3% 1,016 59.0% Ellensburg, WA.......... 9,080 5,670 62.4% 2,228 39.3% Twin Falls, ID.......... 23,507 14,875 63.3% 7,796 52.4% American Falls, ID...... 2,287 1,119 48.9% 570 50.9% Brooklyn Park, MN....... 107,359 52,595 49.0% 31,571 60.0% St. Croix, MN........... 51,159 26,736 52.3% 16,997 63.6% --------- ------- ----- ------- ------ TOTAL KING.............. 395,424 241,186 61.0% 139,563 57.9% --------- ------- ----- ------- ------ TOTAL PROVIDENCE JOURNAL CABLE.................. 1,248,783 753,153 60.3% 506,148 67.2% ========= ======= ===== ======= ======
- -------- (1) Copley/Colony is presently owned 50% by Colony and 50% by Copley Press Electronics Company. The information provided includes all of Copley/Colony, which Providence Journal anticipates will be wholly owned at the Effective Time. (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. 128 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 subscribers 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 subscribers 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 subscribers have addressable capability. KING VIDEOCABLE COMPANY. King Videocable consists of fourteen systems, representing seventy-three franchise areas serving subscribers in Minnesota, Wisconsin, California, Washington and Idaho. Approximately 87% of King Videocable's basic subscribers are served by systems with at least 54-channel capacity. Approximately 68% of the King Videocable subscribers 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, including lower per mile rebuild costs due to a reduction in the number of required amplifiers, the elimination of headends, lower ongoing maintenance and utility costs and improved picture quality and reliability. As of September 30, 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 129 amended. (See "Legislation and Regulation--Cable Communications Policy Act of 1984" and "Federal Regulation".) As of September 30, 1994, 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 from 0% 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 141,311 basic subscribers (approximately 18.8% of basic subscribers of Providence Journal Cable as of September 30, 1994) 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 130 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, DBS may offer substantial competition to cable television operators. 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. 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. 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 131 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. Other decisions have been appealed or will be appealed. Similar lawsuits have been filed by telephone companies in other states. Legislation proposed in the last Congress, but not enacted, that would have allowed nationwide entry by telephone companies into video program delivery, is likely to be reintroduced in the current Congress. 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 than 12 channels of 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. 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 leases 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. 132 EMPLOYEES At September 30, 1994, Providence Journal Cable had 1,278 full-time and 206 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 Providence Journal Cable is a party to various legal proceedings that are ordinary and incidental to its business. Management does not believe that any legal proceedings currently pending will have a material adverse effect on the combined financial condition or results of operation of Providence Journal Cable. SELECTED COMBINED FINANCIAL DATA OF PROVIDENCE JOURNAL CABLE The following selected combined financial information for the Providence Journal Company'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 Company), Colony Cablevision (a wholly owned division of Providence Journal Company since December 1992), Copley/Colony, Inc., (a 50% owned joint venture of Colony), and King Videocable (a 50% owned joint venture of Providence Journal Company 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 and 1993 and the combined balance sheet data as of December 31, 1992 and 1993 have been derived from the audited combined financial statements of Providence Journal Cable. The combined statement of operations data for the three years ended December 31, 1989, 1990 and 1991 and the combined balance sheet data as of December 31, 1989, 1990 and 1991 have been derived from the separate audited financial statements of Colony and Copley/Colony, Inc. The combined statement of operations data for the nine months ended September 30, 1993 and 1994 and the combined balance sheet data as of September 30, 1994 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 nine months ended September 30, 1994 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1994. 133
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ -------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT RATIOS) STATEMENT OF OPERATIONS DATA: Total Revenue........... $103,979 $114,937 $118,791 $199,684 $281,593 $ 209,442 $ 211,320 Operating expenses...... 45,140 50,049 48,554 76,523 103,637 77,590 85,459 Selling, general and administrative expenses............... 25,586 27,396 28,951 45,180 62,446 45,080 43,903 Depreciation and amortization........... 22,536 23,179 24,640 58,750 92,710 69,656 66,550 Allocation of corporate overhead (1)........... 3,596 5,947 7,751 6,513 9,651 5,806 5,636 -------- -------- -------- -------- -------- --------- --------- Operating income........ 7,121 8,366 8,895 12,718 13,149 11,310 9,772 Interest expense, net (2).................... (1,451) (1,139) (1,300) (19,600) (41,000) (31,900) (30,600) Loss on abandonment of assets................. -- -- -- -- (8,244) -- -- Other, net.............. -- -- 4,766 3,675 (779) 1,649 1,622 -------- -------- -------- -------- -------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle.............. 5,670 7,227 12,361 (3,207) (36,874) (18,941) (19,206) Provision for income taxes.................. 2,441 3,648 6,166 694 (11,219) (5,371) (4,995) -------- -------- -------- -------- -------- --------- --------- Income (loss) before change in accounting principle and extraordinary loss..... 3,229 3,579 6,195 (3,901) (25,655) (13,570) (14,211) Cumulative effect of change in accounting principle.............. -- -- -- 4,831 -- -- -- Extraordinary loss, net of tax benefit......... (249) -- -- -- -- -- -- -------- -------- -------- -------- -------- --------- --------- Income (loss) before minority interests..... $ 2,980 $ 3,579 $ 6,195 $ 930 $(25,655) $ (13,570) $ (14,211) ======== ======== ======== ======== ======== ========= ========= AS OF DECEMBER 31, ------------------------------------------------ AS OF 1989 1990 1991 1992 1993 SEPTEMBER 30, 1994 -------- -------- -------- -------- -------- ------------------ BALANCE SHEET DATA: Total assets............ $138,301 $140,747 $133,921 $867,150 $813,306 $ 784,488 Long term debt.......... 25,583 22,500 17,500 15,000 -- -- Amounts due to parent companies.............. 3,097 5,915 1,235 596,885 593,073 587,428 Group equity............ $ 44,172 $ 45,662 $ 51,929 $ 89,334 $ 70,403 $ 59,677 NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ -------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- --------- --------- FINANCIAL RATIOS AND OTHER DATA: EBITDA (3).............. $ 33,253 $ 37,492 $ 41,286 $ 77,981 $115,510 $ 86,772 $ 81,958 EBITDA as a Percentage of Revenue............. 32.0% 32.6% 34.8% 39.1% 41.0% 41.4% 38.8% Net Cash Provided by Operating Activities... $ 24,534 $ 20,741 $ 28,932 $ 53,736 $ 67,261 $ 53,435 $ 44,421 Capital Expenditures.... $ 22,435 $ 22,605 $ 18,722 $ 27,374 $ 46,415 $ 31,282 $ 36,023
- -------- (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) Includes 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. 134 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PROVIDENCE JOURNAL CABLE Four cable entities encompass 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, Inc. (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. 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 previously owned by Palmer Communications, Inc. 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 and unaudited 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 which would have existed had Providence Journal Cable been an independent company. 135 The following table summarizes Providence Journal Cable's financial results:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- -------------------- 1991 1992 1993 1993 1994 -------- -------- -------- --------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DA- TA: Revenues: Basic cable service........ $ 78,590 $141,262 $205,846 $ 156,161 $ 151,444 Premium cable service...... 27,005 38,193 44,643 32,655 33,944 Advertising sales.......... 6,998 9,946 14,042 9,915 11,760 Pay-per-view............... 2,748 3,727 4,887 3,661 3,889 Other...................... 3,450 6,556 12,175 7,050 10,283 -------- -------- -------- --------- --------- Total Revenues........... 118,791 199,684 281,593 209,442 211,320 Operating expenses......... 48,554 76,523 103,637 77,590 85,459 Selling, general and administrative expenses... 28,951 45,180 62,446 45,080 43,903 Depreciation and amortization.............. 24,640 58,750 92,710 69,656 66,550 Allocation of corporate overhead.................. 7,751 6,513 9,651 5,806 5,636 -------- -------- -------- --------- --------- Operating income......... 8,895 12,718 13,149 11,310 9,772 Interest expense, net...... (1,300) (19,600) (41,000) (31,900) (30,600) Loss on abandonment of assets.................... -- -- (8,244) -- -- Other, net................. 4,766 3,675 (779) 1,649 1,622 -------- -------- -------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle...... 12,361 (3,207) (36,874) (18,941) (19,206) Provision for income taxes. 6,166 694 (11,219) (5,371) (4,995) -------- -------- -------- --------- --------- Income (loss) before change in accounting principle... 6,195 (3,901) (25,655) (13,570) (14,211) Cumulative effect of change in accounting principle... -- 4,831 -- -- -- -------- -------- -------- --------- --------- Income (loss) before minority interests........ $ 6,195 $ 930 $(25,655) $(13,570) $(14,211) ======== ======== ======== ========= ========= AS OF DECEMBER 31, AS OF SEPTEMBER 30, ---------------------------- -------------------- 1991 1992 1993 1993 1994 -------- -------- -------- --------- --------- SUBSCRIBER INFORMATION: Basic Subscribers.......... 303,000 722,000 738,000 722,000 753,000 Premium Subscriptions...... 241,000 440,000 467,000 459,000 506,000 Premium Penetration........ 79.4% 61.0% 63.3% 63.6% 67.2% Monthly Revenue per Average Basic Subscriber.......... $ 31.02 $ 30.78 $ 30.63 $ 30.79 $ 29.81 Average Monthly Premium Revenue per Subscription.. $ 9.13 $ 8.80 $ 8.22 $ 8.09 $ 7.77
Nine months ended September 30, 1994 compared with nine months ended September 30, 1993. Revenues rose 1% in the first nine months of 1994 compared with the same period in 1993, reflecting higher basic subscriber levels. Basic subscribers were up 2% in the first nine months to 753,000 from the December 31, 1993 level with the highest growth in basic subscribers in Hialeah, Florida, Los Angeles, California and Minneapolis, Minnesota. Monthly revenue per average basic subscriber was $29.81 in the first nine months of 1994 compared with $30.79 in the comparable period of 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 3.9% while premium subscriptions increased from 459,000 at September 30, 1993 to 506,000 as of September 30, 1994. The 506,000 premium subscriptions represent 136 an 8.4% increase from the December 31, 1993 level, as new promotional programs attracted more subscribers. The premium penetration percentage increased from 63.6% to 67.2% during the twelve months ended September 30, 1994. Average monthly premium revenue per subscription was $8.09 in last year's first nine months compared with $7.77 in 1994's first nine months. This decline is due to promotional programs used to attract new premium subscribers at discounted rates. First nine months' operating, selling, general and administrative expenses in 1994, excluding depreciation and amortization and allocated corporate overhead, rose 5.5%. 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 over the prior year's nine months, reflecting this change in capitalization policy as well as full amortization of certain intangible assets associated with the King Videocable acquisition. Operating income and loss before minority interests both declined due to the effects of the mandated rate freeze and higher operating expenses. 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 with the Company's purchase of the Naples, Florida area system on November 30, 1992 and Palm Desert, California area system on December 31, 1992. Providence Journal's investment in King Videocable added approximately 222,000 basic subscribers to Providence Journal Cable as of February 25, 1992. 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. Further internal growth advanced basic subscribers 2.2% to 738,000 at the end of 1993. 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 at cable systems deemed to face effective competition by the FCC. The impact of adjusting rates to the FCC benchmark was a reduction in revenues for Providence Journal Cable of approximately $4.9 million 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% between years. 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 36.5%, consistent with the 41.0% increase in revenue and reflecting the full year impact of Providence Journal's cable system acquisitions. Significantly higher depreciation and amortization expense, which rose 57.8% in 1993, to $92.7 million, reflected increased capital spending levels in 1992 and 1993 and a full year of depreciation and amortization from the acquisitions. Operating income increased by 3.4% 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 $41.0 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. Also, negatively impacting the fourth quarter 137 of 1993 was an $8.2 million loss on abandonment of assets. Due to the provisions of the 1992 Cable Act, which effectively transferred to cable customers ownership of wiring and additional outlets located in cable customer's homes, Providence Journal Cable expensed the remaining undepreciated costs of these assets. 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. 1992 Compared with 1991. Revenues increased 68.1% reflecting ten months of activity for King Videocable's combined financial results as of the purchase date, February 25, 1992, and one month of activity for Colony Cablevision's combined financial results as of the purchase date, November 30, 1992 (the Naples, Florida system only). Additionally, Providence Journal Cable acquired Lakewood Cable, Inc. in January 1992, adding approximately 14,000 subscribers. Basic subscribers increased from 303,000 in 1991 to 722,000 in 1992 as a result of these acquisitions. Monthly revenue per average basic subscriber declined from $31.02 in 1991 to $30.78 in 1992, reflecting lower subscriber rates and premium penetration in acquired businesses. Premium subscriptions grew 82.6% to 440,000. The premium penetration percentage was 61.0% in 1992, down from 79.4% in 1991. This decline in premium penetration results primarily from a low penetration of 54.7% within the King Videocable subscriber base acquired in February, 1992. Average monthly premium revenue per subscription decreased from $9.13 in 1991 to $8.80 in 1992. Operating and selling, general and administrative expenses grew 57.0%, somewhat less than the 68.1% increase in revenue. Depreciation and amortization more than doubled to $58.8 million in 1992 reflecting the impact of the acquisitions. Operating income increased 43.0% to $12.7 million in 1992 as a result of the expansion of the PJC Cable Business. Income before minority interests in 1992 was $0.9 million as compared to income before minority interests in 1991 of $6.2 million. This significant decrease reflects allocated intercompany interest expense in 1992 totaling $16.5 million on intercompany debt related to acquisition financings. Offsetting the increase in interest in 1992 was a $4.8 million cumulative benefit for 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 $587.4 million at December 31, 1993 and September 30, 1994, respectively. Net cash from operations in 1993 increased $13.5 million from the prior year resulting from the expansion of the PJC Cable Business through the acquisitions previously discussed. Net cash from operations in the first nine months of 1994 decreased by $9.0 million compared to the same period in 1993 because of subscriber rate reductions and increased operating expenses. At December 31, 1992, Providence Journal Cable had a note payable for $15 million payable in annual installments of $2.5 million. In December 1993, Providence Journal Cable settled this note payable and incurred a prepayment penalty equal to $546,000 (included with interest expense). Providence Journal Cable invests heavily in its cable plant, continually replacing and modernizing its technology by rebuilding and upgrading its systems with fiber-optic cable. Capital expenditures increased 69.6% in 1993 to $46.4 million as compared to $27.4 million in 1992, continuing a substantial upward trend that began in 1992 and reflecting the expansion of the PJC Cable Business. 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 November 1994 and the closing of the Merger. 138 During 1992, Providence Journal Cable acquired cable television systems with 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):
YEARS ENDED NINE MONTHS ENDED DECEMBER 31 SEPTEMBER 30 ------------------ ------------------ 1992 1993 1993 1994 -------- -------- -------- -------- Net cash provided by operating activities............................ $ 53,736 $ 67,261 $ 53,435 $ 44,421 Capital expenditures................... (27,374) (46,415) (31,282) (36,023) 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 and the nine months ended September 30, 1994 were as follows:
EBITDA % EBITDA (MILLIONS) INCREASE MARGIN ---------- -------- ------ 1991............................................ $ 41.3 10.1% 34.8% 1992............................................ $ 78.0 88.9% 39.1% 1993............................................ $115.5 48.1% 41.0% Nine Months ended September 30, 1994............ $ 82.0 38.8%
EBITDA has increased each year from 1988 to 1993. EBITDA's substantial increases in 1992 and 1993 were aided by the 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 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- 139 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. In connection with the rate regulations, Providence Journal Cable answered an FCC inquiry about a la carte pricing and packaging and has not yet received a final determination on that inquiry from the FCC. 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. 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. 140 DESCRIPTION OF CONTINENTAL BUSINESS Continental is currently the fourth largest cable television system operator in the United States. Continental's six management regions operate cable television systems/1/ in 16 states, principally in suburban areas and mid- sized cities. As of September 30, 1994, Continental's systems and those of its domestic affiliates passed approximately 5,311,000 Homes and provided cable service to approximately 3,009,000 basic subscribers./2/ 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 6,982,000 Homes and serving approximately 3,988,000 basic subscribers in 20 states. Continental also participates in cable television ventures outside of the United States. Continental owns an approximate 50% interest in one of the largest cable television operators 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 is pursuing other international cable television and telecommunications investments, including a joint venture in Australia, which will construct a network to provide cable television, local telephony and a variety of advanced broadband interactive services to business and residential customers. In addition, Continental has made investments in (i) the telecommunications and technology industries, including companies offering competitive access telephony and DBS service, 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".) 141 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 on a limited basis 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 locally available 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 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. 142 As of September 30, 1994, Continental's systems and those of its domestic affiliates served approximately 3,009,000 basic subscribers and passed approximately 5,311,000 Homes, making it the fourth largest cable television company in the United States. Giving effect to the Merger and the other pending acquisitions described herein, Continental anticipates that it will become the third largest cable television operator in the United States, passing approximately 6,982,000 Homes and serving approximately 3,988,000 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 $34,600/1/. Continental's systems are located in 16 states and are divided into six 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, 13 years of experience with Continental and 16 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, 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. As of September 30, 1994, Continental provided at least 54-channel capacity in systems serving approximately 78% of its basic subscribers. In addition, Continental has addressable technology in systems serving approximately 83% of its basic subscribers. - -------- /1/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 six 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). 143 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 approximately 20% 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 anticipates 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, 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 September 30, 1994, Continental's 86.0% 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 $35.08 as of September 30, 1994, 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, 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 20 Beacon Awards in the past two years, Continental has received more 144 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 subscribers and non- subscribers 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 certain 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 $53 million for the year ended December 31, 1993 (representing a 31% compound annual growth rate in advertising revenues) and accounted for 2.3% and 4.5% of total Company revenues for the years ended December 31, 1989 and 1993, respectively. Continental has increased its advertising sales through its participation in several regional cable advertising interconnects (an association 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 Advertising ("NCA"), 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 19% compound annual growth in pay-per-view revenues from December 31, 1989 to December 31, 1993; for the year ended December 31, 1993, pay-per-view revenues accounted for approximately 2% of total revenues of Continental. Continental experienced a 5% decline in pay-per-view revenues for the nine months ended September 30, 1994 as compared to the same period in 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 17% over the past two years. Continental believes that these and other services 145 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 may now be reduced by as much as 17% below their September 30, 1992 levels if they exceed the new per-channel benchmark. 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. 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. To date, local franchise authorities in systems representing approximately 45% of Continental's 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. Currently, complaints are pending before the FCC concerning CPS rates covering approximately 43% of Continental's subscriber base. Premium services such as HBO and Showtime, as well as pay-per-view channels, remain unregulated. In addition, systems serving approximately 3% 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. After extensive evaluation of cost-of-service principles and economic and legal analyses by experts in the rate regulation area, Continental is defending certain of its service rates using the FCC's benchmark methodology in regulated systems serving approximately 20% of its subscribers and is defending certain of its service rates using the cost-of-service methodology in regulated systems serving approximately 25% of its 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 has added the resources and availed itself of the expertise needed to support the filings both at the FCC and locally. 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 has recorded a revenue reserve in its financial statements for the nine months ended September 30, 1994. (See "Management's Discussion and Analysis of Financial Condition 146 and Results of Operations of Continental--Results of Operations".) If Continental is unsuccessful before the FCC or before local franchise authorities in its cost-of-service filings, it will consider seeking judicial relief. Once the rate for service has been established either by the benchmark or cost-of-service methodology, Continental will be able to pass through to its subscribers inflationary cost increases and increases in certain external costs, such as programming. 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 industry, including companies offering competitive access telephony and DBS service; (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!"), New England Cable News and QVC. (See "International Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Continental--Liquidity and Capital Resources".) The following table summarizes the growth of Continental and its affiliates within the United States since December 31, 1991.
DECEMBER 31, SEPTEMBER 30, ------------------------------- ------------- 1991 1992 1993 1994 --------- --------- --------- ------------- Homes Passed by Cable(1)........ 4,880,000 4,981,000 5,192,000 5,311,000 Number of Basic Subscribers(2).. 2,784,000 2,856,000 2,895,000 3,009,000 Basic Penetration(3)............ 57.0% 57.3% 55.8% 56.7% Number of Premium Subscriptions(4)............... 2,603,000 2,545,000 2,454,000 2,588,000 Premium Penetration(5).......... 93.5% 89.1% 84.8% 86.0% Monthly Revenue per Average Basic Subscriber(6)............ $32.98 $34.46 $35.76 $35.08
- -------- (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 the Continental 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 year ended December 31, 1993 and the nine months ended September 30, 1994, 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 nine month period ended September 30, 1994. 147 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 September 30, 1994.
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).. 357,791 236,634 66.1% 198,955 84.1% Southern New England (MA). 270,024 197,567 73.2% 168,685 85.4% Northern New England (NH, ME)...................... 225,067 168,269 74.8% 83,415 49.6% Western New England (MA, CT)...................... 218,949 146,129 66.7% 116,045 79.4% New York (Havistraw/Ossining)..... 76,765 58,291 75.9% 54,522 93.5% --------- --------- ---- --------- ----- Total................... 1,148,596 806,890 70.3% 621,622 77.0% ========= ========= ==== ========= ===== CALIFORNIA REGION Southern California....... 1,038,229 323,222 31.1% 428,861 132.7% Greater Metropolitan Fresno................... 271,681 144,610 53.2% 154,191 106.6% Greater Metropolitan Stockton................. 120,662 67,670 56.1% 58,255 86.1% Yuba City, California..... 43,468 31,840 73.2% 20,710 65.0% Reno, Nevada.............. 13,103 9,431 72.0% 6,465 68.6% --------- --------- ---- --------- ----- Total................... 1,487,143 576,773 38.8% 668,482 115.9% ========= ========= ==== ========= ===== SOUTHEAST REGION Jacksonville, Florida..... 355,578 207,047 58.2% 183,710 88.7% Pompano, Florida.......... 232,086 141,951 61.2% 96,404 67.9% Richmond, Virginia........ 240,052 152,846 63.7% 112,514 73.6% --------- --------- ---- --------- ----- Total................... 827,716 501,844 60.6% 392,628 78.2% ========= ========= ==== ========= ===== MIDWEST REGION Greater Metropolitan Chicago (West)........... 407,310 240,923 59.1% 252,850 105.0% St. Louis, Missouri....... 171,186 94,954 55.5% 107,275 113.0% St. Paul, Minnesota....... 146,604 61,512 42.0% 58,062 94.4% Southern Illinois......... 84,289 59,310 70.4% 32,737 55.2% --------- --------- ---- --------- ----- Total................... 809,389 456,699 56.4% 450,924 98.7% ========= ========= ==== ========= ===== OHIO REGION Greater Dayton............ 245,345 163,550 66.7% 93,579 57.2% Greater Metropolitan Cleveland................ 120,020 81,601 68.0% 57,546 70.5% North Central Ohio........ 118,420 81,049 68.4% 47,744 58.9% --------- --------- ---- --------- ----- Total................... 483,785 326,200 67.4% 198,869 61.0% ========= ========= ==== ========= ===== MICHIGAN REGION Greater Metropolitan Detroit.................. 173,731 119,001 68.5% 121,855 102.4% Lansing and Greater Metropolitan Lansing..... 124,404 83,892 67.4% 38,881 46.3% --------- --------- ---- --------- ----- Total................... 298,135 202,893 68.1% 160,736 79.2% ========= ========= ==== ========= ===== Affiliated Companies(1)..... 256,664 137,702 53.7% 94,355 68.5% --------- --------- ---- --------- ----- Total................... 5,311,428 3,009,001 56.7% 2,587,616 86.0% ========= ========= ==== ========= ===== SYSTEMS DESIGNATION: Consolidated Systems...... 5,054,764 2,871,299 56.8% 2,493,261 86.8% Affiliated Companies(1)... 256,664 137,702 53.7% 94,355 68.5% --------- --------- ---- --------- ----- Total................... 5,311,428 3,009,001 56.7% 2,587,616 86.0% ========= ========= ==== ========= =====
- -------- (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. 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 anticipates that in 1995 it will acquire the remaining partnership interests in N-COM and assume certain liabilities from the other partners. 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".) 148 MANAGEMENT REGIONS: A description of Continental's six 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 22% of Continental's total Homes passed and 27% of its total basic subscribers as of September 30, 1994. 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 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 bandwidth 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 25%, to more than 1,000,000 basic subscribers. California. The California region represents approximately 28% of Continental's total Homes passed and 19% of its total basic subscribers as of September 30, 1994. This region includes its systems in Los Angeles, where Continental is the largest cable operator, with over 80% of its basic subscribers clustered in geographically contiguous franchises served by two headends. This region also includes Continental's Northern California cluster, which includes the cities of Fresno, Visalia, Stockton, and Yuba City, as well as Reno, Nevada. An upgrade of the Los Angeles systems, that will bring its capacity to 750 MHz, is currently under way. The median household income for the communities served by Continental in the California region is approximately $34,500. Upon the consummation of the Merger, the California region's subscriber base will increase by 50%, to more than 860,000 basic subscribers. Southeast. The Southeast region represents approximately 16% of Continental's total Homes passed and 17% of its total basic subscribers as of September 30, 1994. 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 40%, to more than 700,000 basic subscribers. Midwest. The Midwest region represents approximately 15% of Continental's total Homes passed and 15% of its total basic subscribers as of September 30, 1994. 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 subscribers served by four headends. All of the Midwest 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 bandwidth capacity. The median household income for the communities served by Continental in the Midwest region is approximately $47,100. In January 1995, Continental reached agreement to purchase an existing cable television system in Chicago, which will increase the Midwest region's basic subscriber base by approximately 86,000 basic subscribers. These basic subscribers combined with those resulting from the Merger will increase this region's basic subscribers by 37% to more than 620,000 basic subscribers. 149 Ohio. The Ohio region represents approximately 9% of Continental's total Homes passed and 11% of its total basic subscribers as of September 30, 1994. This region includes systems in the greater Dayton and Cleveland communities, as well as several communities throughout North Central Ohio. By mid-1995, the Dayton systems will be entirely 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 Ohio region is approximately $36,200. Michigan. This region represents approximately 6% of Continental's total Homes passed and 7% of its total basic subscribers as of September 30, 1994. This region includes Continental's systems in greater metropolitan Detroit and Lansing, which includes the communities of Southfield, Dearborn Heights, Westland, Roseville, Lansing and Jackson. The median household income for the communities served by Continental in the Michigan region is approximately $43,400. 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 1,176,000 basic subscribers (approximately 39% of the basic subscribers of Continental and its domestic affiliates as of September 30, 1994) are scheduled to expire through 1998. 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".) 150 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. 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 nationwide 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: 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 cash 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 32,000 basic subscribers in Florida for a cash purchase price of approximately $67,000,000. These systems are in close proximity to Continental's existing systems in the region. 151 In January 1995, Continental entered into a purchase and sale agreement to acquire several cable television systems serving approximately 86,000 basic subscribers in the Chicago, Illinois area for a purchase price of approximately $168,500,000. This transaction is expected to close in 1995. These systems are in close proximity to Continental's existing systems in its Midwest 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 in cash. This acquisition is expected to close in 1995. Continental is also negotiating to acquire the remaining partnership interests of N-COM, a limited partnership that operates cable television systems serving approximately 53,000 basic subscribers in the Detroit suburbs. Continental currently owns a 33.77% limited partnership interest in such partnership. The Columbia and N-COM systems are in close proximity to Continental's existing systems in the Michigan region. There can be no assurances that the Columbia and N-COM transactions will be consummated. (See "Management's Discussion and Analysis of Financial Conditions 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.
SEPTEMBER 30, 1994 ------------- Homes Passed by Cable(1) Continental..................................................... 5,311,000 Providence Journal.............................................. 1,249,000 Other(2)........................................................ 422,000 --------- Total........................................................... 6,982,000 ========= Number of Basic Subscribers(3) Continental..................................................... 3,009,000 Providence Journal.............................................. 753,000 Other(2)........................................................ 226,000 --------- Total........................................................... 3,988,000 ========= Basic Penetration(4) Continental..................................................... 56.7% Providence Journal.............................................. 60.3% Other(2)........................................................ 53.6% --------- Total........................................................... 57.1% ========= Number of Premium Subscriptions(5) Continental..................................................... 2,588,000 Providence Journal.............................................. 506,000 Other(2)........................................................ 232,000 --------- Total........................................................... 3,326,000 ========= Premium Penetration(6) Continental..................................................... 86.0% Providence Journal.............................................. 67.2% Other(2)........................................................ 102.7% --------- Consolidated.................................................... 83.4% =========
152 - -------- (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 acquisitions of cable television systems in Florida in November 1994 and pending acquisitions in Michigan and Illinois 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 operating scale. As of September 30, 1994, through wholly owned subsidiaries, Continental held minority ownership positions in the following domestic cable companies.
SEPTEMBER 30, 1994 ------------------------------ HOMES TOTAL BASIC PERCENTAGE INVESTMENT PASSED SUBSCRIBERS OWNERSHIP ---------- ------- ----------- ---------- Insight Communications Company, L.P.............. 289,700 145,997 34.42% Meredith/New Heritage Strategic Partners, L.P.... 265,168 135,725 37.90% N-COM Limited Partnership II(1).................. 89,588 52,974 33.77% Prime Cable of Hickory, L.P...................... 50,004 34,159 33.30% Inland Bay Cable TV Associates................... 19,480 13,766 49.00% ------- ------- Total.......................................... 713,940 382,621 ======= =======
- -------- (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".) 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 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 environments. To date, Continental has made investments in cable television systems in Argentina and Singapore and has signed a letter of intent for a joint venture in Australia. Continental is pursuing other international opportunities principally in Latin America, Asia and the Pacific Rim. (See "Certain Considerations Relating to the Transactions--Certain Considerations Relating to the 153 Continental Merger Stock--International Investments".) Continental's international investments include the following: 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 one of the largest cable television operators in Argentina, with over 600,000 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 September 30, 1994, Fintelco had over 260,000 subscribers in the province of Buenos Aires, 188,000 subscribers in the province of Cordoba and 104,000 subscribers in the province of Santa Fe. Average rates for Fintelco's cable television services are approximately US$30 per month. 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 to grow through acquisitions in these regions. As of September 30, 1994, Continental had invested approximately US$108,300,000 in Fintelco and its subsidiaries and had committed to invest an additional US$26,365,000. 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. 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 is not currently 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 expects to activate its first subscribers in the middle of 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 154 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. Continental has currently made capital contributions of US$8.7 million and has committed to make additional capital contributions to SCV of approximately US$33.3 million (based upon exchange rates as of September 30, 1994) to be paid through 1996. In addition, Continental has made commitments to SCV to lend up to approximately US$42 million (based upon exchange rates at September 30, 1994) if third party debt financing cannot be obtained by SCV. 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 system, serves as President of SCV. AUSTRALIA. Continental has entered into a letter of intent with Optus Communications Private Ltd. ("Optus"), a provider of long-distance and cellular telephone services in Australia, to create a broadband communications network in Australia. The venture, to be called Optus Vision, is expected to be initially owned 47.5% by Continental, 47.5% by Optus and 5% by Publishing and Broadcasting Limited (a Kerry Packer-affiliated company). Publishing and Broadcasting Limited has an option to increase its shareholding to 20%. The option is exercisable at any time prior to July 1, 1997, at an exercise price approximating the market value of the venture at the time. 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. 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 will commence in 1995, and the venture's construction 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. 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. Optus Vision anticipates increasing the number of channels of video programming to 50 by mid-1997. 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 Network, an Australian broadcast network affiliated with Kerry Packer, will provide programming expertise to the sports channels. The joint venture will employ approximately 3,000 people, including several Continental employees. Frank Anthony, the former Senior Vice President and General Manager of Continental's New England region, will be the Chief Operating Officer of Optus Vision. Optus Vision anticipates that the required funding needs of the project will total approximately US$1.5 billion (based upon exchange rates as of December 31, 1994) through 1999, which will be provided by a combination of equity from the joint venture partners and third-party debt. No assurances can be given at this time as to the parties reaching a definitive agreement regarding this transaction, or, if an agreement is reached, as to the consummation of this transaction. STRATEGIC INVESTMENTS Continental's investments and potential investments include certain emerging businesses, such as telecommunications and technology, and programming. 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 155 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".) 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, Continental is a partner and a primary network provider for TCG. At September 30, 1994, there were approximately 2,525 buildings in service connected to TCG networks which span over 3,720 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 billion nationally, and switched access services for business represent approximately $45 billion of the $86.5 billion local telecommunications services market in the United States. Through September 30, 1994, Continental had invested $105.2 million in TCG and related joint ventures. In addition to these investments, Continental has made commitments to TCG to loan up to $46.8 million through 2003, of which $24 million was borrowed at September 30, 1994. In addition to Continental, the other partners in TCG currently include Cox Cable Communications, Inc., ("Cox"), TCI and Comcast, which have interests of 30%, 30% and 20%, respectively. The recently announced business arrangement between Sprint and TCI, Cox and Comcast (the "Cable Partners") may contemplate the contribution to the Sprint Venture of the Cable Partners' interest in TCG, in the local joint ventures between the Cable Partners and TCG, and in other competitive access assets owned by them. The contribution of the Cable Partners' interest 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, an Executive Vice President of Continental, and Nancy Hawthorne, a Senior Vice President and Chief Financial Officer of Continental, serve on the Board of Directors of TCG. 156 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 scale, large 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") in the 51 Major Trading Areas ("MTAs") of the United States. A partnership between Continental and Cablevision Systems Corporation has filed an application with the FCC to bid for PCS licenses in the Boston, Massachusetts and Cleveland, Ohio MTAs, and Continental independently has filed an application with the FCC to bid for broadband PCS licenses in other MTAs, which represent no more than 6.1 million people in the aggregate. Both the partnership and Continental submitted bids in the first round of the FCC auctions which began December 5, 1994. There can be no assurance that this partnership or Continental will be the high bidders in their respective MTAs. In addition to the direct ownership of these licenses, this partnership or Continental may invest in entities that are awarded broadband PCS licenses, may acquire PCS licenses after the auctions from the successful bidders, and may affiliate with the successful bidders. 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 188,000 subscribers nationwide as of November 30, 1994. 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. PrimeStar currently offers a wide range of programming, including 70 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, the first of which is expected to be operational by the third quarter of 1996. This new satellite will enable PrimeStar to offer approximately 150 channels of service. Continental has an investment of $11.9 million in PrimeStar as of September 30, 1994. In addition, a subsidiary of Continental has issued a $38.8 million standby letter of credit on behalf of PrimeStar to 157 guarantee a portion of the financing that PrimeStar is incurring to construct a successor satellite system. Jeffrey T. DeLorme, an Executive Vice President of Continental, serves on the Board of Directors 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):
1991 1992 1993 ---- ------ ------- Revenues............................................... $700 $5,200 $10,900 Growth Rate............................................ -- 643% 110% Subscribers............................................ 13.2 44.2 66.8 Growth Rate............................................ -- 235% 51%
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 $43 million in programming investments (excluding Turner, QVC and HSN). The following summarizes certain of Continental's programming investments: Turner Broadcasting System, QVC, Inc. and Home Shopping Network, Inc. Continental holds marketable equity securities of Turner, QVC and HSN. As of December 31, 1994, the approximate market values of Continental's investments in Turner, QVC and HSN were $92.5 million, $25.1 million and $4.9 million, respectively. Comcast and TCI have made a tender offer to purchase all outstanding QVC shares at $46 per share (which would value Continental's QVC investment at $27.4 million), and Continental intends to tender its QVC shares. 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 10.2% 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 June 30, 1994, was distributed to over 25 million customers, representing 44% of U.S. cable television subscribers. Continental's partners in E! are Comcast, Cox, Newhouse Broadcasting Corp. and TCI, each with a 10.2% interest, and Time Warner Cable, with a 49% 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):
1991 1992 1993 ------- ------- ------- Revenues........................................ $14,400 $22,100 $31,700 Growth Rate..................................... 73.5% 53.5% 43.4% Subscribers..................................... 18,600 20,200 23,800 Growth Rate..................................... 5.5% 8.1% 18.3%
National Cable Advertising. Continental has an 18.75% limited partnership interest in NCA, a partnership that represents cable television companies to advertisers. NCA 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 NCA are Cox, Time Warner Cable and Comcast, each with an 18.75% interest. 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 $2.6 million for the nine months ended September 30, 1994. William T. Schleyer, an Executive Vice President 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. 158 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, beginning in 1995, will provide 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 Board of Directors 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. 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. Michael J. Ritter, President and Director of Continental, serves on the Board of Directors of 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 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. 159 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 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 up to 77 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, DBS may offer substantial competition to cable television operators. (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. 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 160 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 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. Other decisions have been appealed or will be appealed. Similar lawsuits have been filed by telephone companies in other states. Legislation proposed in the last Congress, but not enacted, that would have allowed nationwide entry by telephone companies into video program delivery, is likely to be reintroduced in the current Congress. 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. 161 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. 162 CAPITALIZATION The following table sets forth Continental's actual and pro forma consolidated capitalization at September 30, 1994, after giving effect to the Merger, the Continental Recapitalization Amendment, and other pro forma transactions described in the Notes to Continental's Pro Forma Condensed Consolidated Balance Sheet and Statements of Income included elsewhere in this Joint Proxy Statement-Prospectus. The Continental Stock Split is reflected in both the actual and pro forma share information. 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 SEPTEMBER 30, 1994 ------------------------ ACTUAL PRO FORMA ----------- ----------- (IN THOUSANDS) Senior Debt: 8 1/2% Senior Notes................................ $ 200,000 $ 200,000 8 5/8% Senior Notes................................ 100,000 100,000 8 7/8% Senior Debentures........................... 275,000 275,000 9% Senior Debentures............................... 300,000 300,000 9 1/2% Senior Debentures........................... 525,000 525,000 1990 Credit Agreement(1)........................... 722,650 -- 1992 Credit Facility............................... 186,750 -- 1994 Credit Facility(1)............................ -- 1,734,324 New Cable Indebtedness............................. -- 755,000 Prudential Notes................................... 150,000 150,000 ----------- ----------- Total Senior Debt................................ 2,459,400 4,039,324 Subordinated Debt: 10 5/8% Senior Subordinated Notes.................. 100,000 100,000 11% Senior Subordinated Debentures................. 300,000 300,000 12 7/8% Senior Subordinated Debentures............. 325,000 -- Senior Subordinated Floating Rate Debentures....... 100,000 100,000 ----------- ----------- Total Subordinated Debt.......................... 825,000 500,000 ----------- ----------- Other Debt:.......................................... 26,120 26,120 ----------- ----------- Total Debt....................................... 3,310,520 4,565,444 ----------- ----------- Redeemable Common Stock, $.01 par value; 16,684,150 shares outstanding.................................. 227,844 227,844 ----------- ----------- Stockholders' Equity (Deficiency): Preferred Stock, $.01 par value; 193,870,042 authorized, none issued........................... -- -- Series A Convertible Preferred Stock, $.01 par value; 1,142,858 shares authorized and outstanding; liquidation preference of 478,301,000....................................... 11 11 Series B Preferred Stock, $.01 par value, 4,987,113 shares authorized, and outstanding................ -- 50 Class A Common Stock, $.01 par value; 425,000,000 shares authorized, 35,267,284 shares outstanding.. 3 353 Class B Common Stock, $.01 par value; 200,000,000 shares authorized, 90,297,750 shares outstanding.. 36 903 Additional Paid-In Capital......................... 557,424 1,201,156 Unearned Compensation.............................. (14,912) (14,911) Net Unrealized Holding Gain on Marketable Equity Securities........................................ 60,526 60,526 Deficit:........................................... (2,261,402) (2,278,188) ----------- ----------- Stockholders' Equity (Deficiency)................ (1,658,314) (1,030,100) ----------- ----------- Total Capitalization........................... $ 1,880,050 $ 3,763,188 =========== ===========
(1) The 1994 Credit Facility represents an amendment and restatement of the 1990 Credit Agreement. 163 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, 1991 through December 31, 1993 and the nine months ended September 30, 1993 and 1994 contained elsewhere herein. The unaudited selected historical financial information for the nine months ended September 30, 1993 and 1994 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 nine months ended September 30, 1993 and 1994 are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole.
NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, -------------------------------------------------------- ------------------- 1989(1) 1990 1991 1992 1993 1993 1994 --------- --------- ---------- ---------- ---------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues................ $ 780,610 $ 938,032 $1,039,163 $1,113,475 $1,177,163 $ 880,238 $885,636 Costs and Expenses: Operating.............. 257,737 316,199 347,469 365,513 382,195 286,903 300,077 Selling, General and Administrative........ 199,119 231,338 246,986 259,632 267,376 198,390 195,901 Depreciation and Amortization.......... 235,266 264,139 269,363 279,403 284,563 210,950 210,728 Non-Cash Stock Compensation(2)....... 4,354 6,903 10,067 9,683 11,004 8,069 8,502 --------- --------- ---------- ---------- ---------- --------- -------- Total................ 696,476 818,579 873,885 914,231 945,138 704,312 715,208 --------- --------- ---------- ---------- ---------- --------- -------- Operating Income........ 84,134 119,453 165,278 199,244 232,025 175,926 170,428 --------- --------- ---------- ---------- ---------- --------- -------- Interest (Net).......... 268,089 312,422 323,123 289,479 276,698 201,936 223,580 Other (Income) Expenses(3)............ (5,334) 1,000 1,936 11,071 (10,978) 3,773 12,192 --------- --------- ---------- ---------- ---------- --------- -------- Total................ 262,755 313,422 325,059 300,550 265,720 205,709 235,772 --------- --------- ---------- ---------- ---------- --------- -------- Loss before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Change................. (178,621) (193,969) (159,781) (101,306) (33,695) (29,783) (65,344) Benefit (Provision) for Income Taxes........... 3,984 (1,482) (1,861) (1,654) 7,921 9,408 24,752 --------- --------- ---------- ---------- ---------- --------- -------- Loss before Extraordinary Item and Cumulative Effect of Accounting Change...... (174,637) (195,451) (161,642) (102,960) (25,774) (20,375) (40,592) Extraordinary Item...... (18,169) -- -- -- -- -- -- --------- --------- ---------- ---------- ---------- --------- -------- Loss before Cumulative Effect of Accounting Change................. (192,806) (195,451) (161,642) (102,960) (25,774) (20,375) (40,592) Cumulative Effect of Accounting Change...... -- -- -- -- (184,996) (184,996) -- --------- --------- ---------- ---------- ---------- --------- -------- Net Loss................ (192,806) (195,451) (161,642) (102,960) (210,770) (205,371) (40,592) Preferred Stock Preferences............ (55,496) (61,102) (5,771) (16,861) (34,115) (25,355) (27,325) --------- --------- ---------- ---------- ---------- --------- -------- Loss Available for Common Stockholders.... $(248,302) $(256,553) $ (167,413) $ (119,821) $ (244,885) $(230,726) $(67,917) ========= ========= ========== ========== ========== ========= ======== Loss Per Common Share: Before Extraordinary Item and Cumulative Effect of Accounting Change................. $ (44.88) $ (54.80) $ (35.61) $ (25.06) $ (13.13) $ (10.04) $ (14.89) Extraordinary Item...... (3.54) -- -- -- -- -- -- Cumulative Effect of Accounting Change...... -- -- -- -- (40.55) (40.62) -- --------- --------- ---------- ---------- ---------- --------- -------- Net Loss................ $ (48.42) $ (54.80) $ (35.61) $ (25.06) $ (53.68) $ (50.66) $ (14.89) ========= ========= ========== ========== ========== ========= ========
164
AS OF AS OF DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------- ------------------------ 1989 1990 1991 1992 1993 1993 1994 ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Total Assets............ $ 2,200,636 $ 2,175,120 $ 2,082,182 $ 2,003,196 $ 2,091,853 $ 2,169,566 $ 2,329,351 Total Debt.............. 2,518,662 3,127,347 3,338,281 3,011,669 3,177,178 3,209,680 3,310,520 Redeemable Preferred Stock.................. 548,801 157,835 -- -- -- -- -- Redeemable Common Stock. 427,748 436,700 445,463 223,716 213,548 230,764 227,844 Stockholder's Equity (Deficiency)........... (1,500,869) (1,759,535) (1,919,525) (1,486,231) (1,667,088) (1,690,824) (1,658,314) NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, --------------------------------------------------------------- ------------------------ 1989(1) 1990 1991 1992 1993 1993 1994 ----------- ----------- ----------- ----------- ----------- ----------- ----------- FINANCIAL RATIOS AND OTHER DATA: EBITDA(4)............... $323,754 $390,495 $444,708 $488,330 $527,592 $394,945 $389,658 EBITDA to Revenues...... 41.5% 41.6% 42.8% 43.9% 44.8% 44.9% 44.0% Total Debt to EBITDA(4). 7.78 8.01 7.51 6.17 6.02 6.10 6.37 EBITDA to Total Interest Expense................ 1.21 1.25 1.38 1.69 1.91 1.96 1.74 Net Cash Provided From Operating Activities... 64,783 82,196 123,543 215,045 250,504 167,288 149,084 Capital Expenditures.... 182,688 166,938 145,846 145,189 185,691 131,835 183,818
- -------- (1) In July 1989, in four separate redemption transactions, Continental acquired all of the outstanding limited partnership interests of the American Partnerships, four partnerships managed by American Cablesystems Corporation ("American"), a subsidiary of Continental acquired in 1988 (the "American Partnerships"). The aggregate price paid with respect to the American Partnerships, including the retirement of substantially all outstanding debt of each of the American Partnerships (other than debt owing to American) and the payment of fees and expenses, was approximately $380,000,000. (2) 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.) (3) Includes equity in net income (loss) of affiliates, minority interest in net loss of subsidiaries, other non-operating income and expenses, gains on sale of marketable equity securities of $16,032,000 during 1989, and gains of ($10,253,000) and ($17,067,000) from Continental's sales of its investment in affiliates in 1992 and 1993, respectively (before post- closing adjustments). (See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Continental".) (4) 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 nine months ended September 30, 1993 and 1994, EBITDA has been annualized. 165 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.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30 ---------------------------------- ------------------- 1991 1992 1993 1993 1994 ---------- ---------- ---------- --------- -------- (IN THOUSANDS, EXCEPT PERCENTAGES) STATEMENT OF OPERATIONS DATA: Revenues: Basic Cable Service.... $ 714,425 $ 791,351 $ 846,538 $ 634,734 $633,053 Premium Cable Service.. 260,773 249,038 242,981 182,214 183,582 Advertising............ 31,468 43,392 52,618 37,257 40,435 Pay-Per-View........... 24,522 22,375 26,151 20,117 19,047 Other.................. 7,975 7,319 8,875 5,916 9,519 ---------- ---------- ---------- --------- -------- Total................. 1,039,163 1,113,475 1,177,163 880,238 885,636 Operating, Selling, General and Administrative Expenses............... 594,455 625,145 649,571 485,293 495,978 Depreciation and Amortization........... 269,363 279,403 284,563 210,950 210,728 Non-Cash Stock Compensation........... 10,067 9,683 11,004 8,069 8,502 ---------- ---------- ---------- --------- -------- Operating Income........ 165,278 199,244 232,025 175,926 170,428 Interest................ 323,123 289,479 276,698 201,936 223,580 Other (Income) Expenses. 1,936 11,071 (10,978) 3,773 12,192 ---------- ---------- ---------- --------- -------- Loss before Income Taxes and Cumulative Effect of Accounting Change...... (159,781) (101,306) (33,695) (29,783) (65,344) Benefit (Provision) for Income Taxes........... (1,861) (1,654) 7,921 9,408 24,752 ---------- ---------- ---------- --------- -------- Loss before Cumulative Effect of Accounting Change................. (161,642) (102,960) (25,774) (20,375) (40,592) Cumulative Effect of Change in Accounting Principle.............. -- -- (184,996) (184,996) -- ---------- ---------- ---------- --------- -------- Net Loss................ $ (161,642) $ (102,960) $ (210,770) $(205,371) $(40,592) ========== ========== ========== ========= ======== === OTHER DATA: EBITDA.................. $ 444,708 $ 488,330 $ 527,592 $ 394,945 $389,658 EBITDA as a % of Revenue................ 42.8% 43.9% 44.8% 44.9% 44.0%
- -------- (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) 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. 166 RESULTS OF OPERATIONS. Continental's operations mainly consist 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 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. 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 nine months ended September 30, 1994 increased only 0.6% over the same period in 1993 as a result of rate reductions and revenue reserves recorded in connection with the FCC rate regulations. The high level of depreciation and amortization associated with Continental's acquisitions and capital expenditures 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. 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. Nine Months Ended September 30, 1994 Compared to Nine Months Ended September 30, 1993--Revenues increased by 0.6% (or $5,398,000) to $885,636,000. The June 30, 1994 acquisition of a cable television system in Manchester, New Hampshire serving approximately 44,000 basic subscribers accounted for $3,018,000 of such increase. (See "Domestic Acquisitions and Investments--Domestic Acquisitions".) Excluding the effects of this acquisition, revenue increased by 0.3% (or $2,380,000) as a result of a 1.7% increase in basic subscribers and an increase in premium and certain other revenue, net of a decrease in monthly basic revenue per average basic subscriber from $25.73 to $25.13. The $.60 decrease reflected (i) a decrease of $.18 in basic revenues primarily due to rate reductions made in accordance with the FCC's rate regulations, offset by increases in installation revenues, and (ii) a decrease of $.42 due to a $10,500,000 non-cash revenue reserve recorded during the nine months ended September 30, 1994. (See "Liquidity and Capital Resources--Recent Legislation" and "Legislation and Regulation".) Revenues from premium cable services increased by $923,000 (excluding the acquisition of the cable system in Manchester, New Hampshire) due to an increase in premium subscriptions from 2,473,000 to 2,588,000. The increase in revenues was also due to a $3,178,000 increase in advertising revenue and a $3,603,000 increase in other revenue due to continued growth in home shopping revenue, net of a $1,070,000 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 2.2% to $495,978,000, primarily due to the Manchester acquisition and to increases in programming costs and wages. Depreciation and amortization expenses decreased 0.1% to $210,728,000. Non-cash stock compensation increased 5% to $8,502,000 due to the vesting of a greater percentage of shares issued under Continental's Restricted Stock Purchase Program as compared to the same period in 1993. Operating income decreased 3% to $170,428,000. Interest expense increased approximately 10.7% to $223,580,000 due to a 4% increase in average debt outstanding and an increase in the effective interest rate from 8.7% to 9.3%. Equity in net loss of affiliates increased from $7,812,000 to $14,413,000, primarily due to Continental recording its proportionate share of losses from TCG and its affiliates. 167 As a result of such factors, loss before the cumulative effect of the accounting change for the nine months ended September 30, 1994, compared to September 30, 1993, increased by $20,217,000 to $40,592,000, and net loss for the nine months ended September 30, 1994, compared to September 30, 1993, decreased from $205,371,000 to $40,592,000. 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. 1993 Compared to 1992--Revenues increased 6% to $1,177,163,000, as a result of a 1% increase in basic subscribers to 2,915,000 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% to $284,563,000. 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 16% to $232,025,000. Interest expense decreased 4% to $276,698,000 due to a reduction in the average debt outstanding and lower effective interest rates during 1993. 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 ("NCC"). 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 the American Partnerships, 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. 1992 Compared to 1991--Revenues increased 7% to $1,113,475,000 as a result of a 3% increase in basic subscribers to 2,876,000 and an increase in monthly revenue per average basic subscriber from $32.98 to $34.46. The $1.48 increase reflected primarily (i) an increase of $1.79 due to basic rate increases and revenue growth from other basic services, (ii) an increase of $.34 in advertising revenue, (iii) a decrease of $.08 in pay-per-view revenue due to the lack of availability of high-profile sporting events which could be offered as compared to 1991, a condition that prevailed industry-wide in 1992, and (iv) a decrease of $.57 168 in premium subscription revenue due to the decrease in the pay-to-basic percentage from 92.9% to 88.5%, again reflecting industry-wide trends. The total number of premium subscriptions decreased from 2,603,000 to 2,545,000 in 1992. Operating, selling, general and administrative expenses increased 5% to $625,145,000, a rate of growth less than that of revenues, reflecting continued operating efficiencies. Depreciation and amortization expenses increased 4% to $279,403,000 primarily as a result of the write-off of previously deferred financing costs. Non-cash stock compensation decreased 4% to $9,683,000 due to the vesting of a reduced percentage of shares issued under Continental's Restricted Stock Purchase Program as compared to 1991. Operating income increased 21% to $199,244,000. Interest expense decreased 10% to $289,479,000 due to a reduction in debt of $326,612,000 and lower effective interest rates during 1992. Other (income) expenses included a preliminary gain on the sale of Continental's interest in NCC of $10,253,000, before post-closing adjustments. Other (income) expenses also included a charge of $10,280,000 due to the litigation relating to the American Partnerships. As a result of such factors, 1992 net loss decreased $58,682,000 to $102,960,000. 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. EBITDA increased 8% to $527,592,000 and 10% to $488,330,000 during the years ended December 31, 1993 and 1992, respectively. The increases were a direct result of increases in revenue. EBITDA decreased 1% to $389,658,000 during the nine months ended September 30, 1994 compared to the nine months ended September 30, 1993 primarily as a result of rate reductions and the recording of revenue reserves in connection with the FCC's rate regulations. * * * * 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 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. LIQUIDITY AND CAPITAL RESOURCES. The cable television business requires substantial financing for 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 169 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.
NINE MONTHS ENDED SEPTEMBER 30, 1994 ----------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES............ $ 149,084 ========= NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES: Net Borrowings (Repayments).......................... $ 133,342 Stock Repurchased and Dividends Paid................. (4,755) Issuance of Stock.................................... -- Other................................................ 779 --------- Total.............................................. $ 129,366 ========= NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES: Acquisitions, Net of Liabilities Assumed and Cash Acquired............................................ $ (47,990) Property, Plant and Equipment........................ (183,818) Investments.......................................... (157,587) Other Assets......................................... (424) Purchase of Marketable Equity Securities............. -- Proceeds from Sale of Marketable Equity Securities... 17,553 Proceeds from Sale of Investments.................... -- --------- Total.............................................. $(372,266) =========
Recent Financing Activities. On October 17, 1994 Continental closed the 1994 Credit Facility, which represents an amendment and restatement of the 1990 Credit Agreement with a group of financial institutions. The 1994 Credit Facility is a reducing revolving credit facility with maximum credit availability of $2,200,000,000, a portion of which Continental borrowed at closing to refinance the 1992 Credit Facility (see "Description of Continental--Capitalization"). In connection with the closing of the 1994 Credit Facility, Continental paid approximately $18,800,000 in financing fees, which will be reflected in other assets for the year ended December 31, 1994. On November 16, 1994, Continental borrowed $345,923,000 under the 1994 Credit Facility in order to redeem the outstanding $325,000,000 of 12 7/8% Senior Subordinated Debentures plus accrued interest thereon. In connection with its redemption of the 12 7/8% Senior Subordinated Debentures, Continental recorded an extraordinary loss of $28,100,000, less income tax benefit of $11,314,000, representing the premium of $20,924,000 paid on the redemption of such debentures and the $7,176,000 non-cash write-off of unamortized deferred financing costs relating to the issuance of such debentures. Credit Arrangements of Continental. On September 30, 1994, taking into account the 1994 Credit Facility as if it were outstanding on September 30, 1994 and the application of certain borrowings thereunder to prepay and terminate the 1990 Credit Agreement and the 1992 Credit Facility and to redeem the 12 7/8% Senior Subordinated Debentures, Continental had the following credit arrangements: (i) the 1994 Credit Facility; (ii) $150,000,000 of 10.12% Senior Notes due 1999 to The Prudential Life Insurance Company (the 170 "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 $26,120,000 on September 30, 1994. As of January 15, 1995, Continental had credit availability of $780,580,000 under the 1994 Credit Facility. In addition, Continental has provided a standby letter of credit of $38,750,000 on behalf of PrimeStar, which guarantees a portion of the financing PrimeStar incurred to construct a successor satellite system. (See "Strategic Investments--Telecommunications and Technology Investments".) Continental anticipates that the obligations under such letter of credit will increase over the next two years up to a maximum of $70,625,000. The letter of credit is secured by certain marketable equity securities held by Continental. The annual maturities of Continental's indebtedness as of December 31, 1993 (giving effect to the closing of the 1994 Credit Facility and the refinancing of the 1992 Credit Facility with a portion of the proceeds from the 1994 Credit Facility) for the years ending December 31, 1994, 1995, 1996, 1997 and 1998 will be $21,526,000, $24,250,000, $27,250,000, $30,550,000 and $33,250,000, 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 September 30, 1994 Continental had Swaps pursuant to which it pays fixed interest rates averaging 9.1% on notional amounts of $800,000,000 (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 6.75%. . As of September 30, 1994, Continental had $600,000,000 of Interest Rate Cap Agreements ("Caps"), which limit 6-month LIBOR to approximately 7%. Continental amortizes the cost of its Caps over the life of the Cap agreement as an adjustment to interest expense. As of September 30, 1994, Continental's ratio of fixed interest rate debt (which factors in Swaps, Caps and debt fixed by its terms) to total debt was approximately 64%. 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. During the period presented in the table above, Continental committed capital resources for: (i) construction and expansion of its existing systems, (ii) routine replacement of cable television plant, (iii) an increase in the channel capacity of certain systems, (iv) an increase in the percentage of systems which are equipped with addressable technology and (v) acquisitions of domestic cable television systems. During the first nine months of 1994, capital expenditures, excluding acquisitions, totalled $183,818,000, and expenditures for the acquisition in Manchester, New Hampshire totalled $47,990,000 (subject to post-closing adjustments), respectively. Continental budgeted approximately $275,000,000 for capital expenditures for its systems during 1994 and anticipates that it will spend up to approximately $350,000,000 for capital expenditures for its systems during 1995. In addition, Continental anticipates spending approximately $65,000,000 for DBS home-premises equipment in connection with its role as a distributor for PrimeStar. However, Continental is continually reevaluating its capital expenditure plans due to, among other things, technological changes, the availability of capital and competitive pressures. As a result, no assurance can be given as to the future level of capital expenditures. The anticipated increase 171 in capital expenditures during 1995 as compared to 1994 is due principally to Continental's intention to further expand channel capacity and to deploy addressable technology more extensively in its systems. (See "Domestic Operating Strategy--Technologically Advanced Systems".) In November 1994, Continental purchased several cable television systems serving approximately 32,000 basic subscribers in Florida for approximately $67,000,000. Continental has entered into a purchase and sale agreement to purchase several cable television systems serving approximately 74,000 basic subscribers in Michigan for approximately $155,000,000. This acquisition is expected to close in 1995. In January 1995, Continental entered into a purchase and sale agreement to purchase several cable television systems serving approximately 86,000 basic subscribers near Chicago, Illinois, for approximately $168,500,000. This acquisition is expected to close in 1995. In addition, Continental anticipates that it will acquire a cable system serving approximately 12,000 basic subscribers in Northern California for approximately $17,000,000 in 1995. Continental is also negotiating to acquire the remaining ownership interests and assume certain liabilities of N-COM for total consideration of approximately $90,000,000. N-COM, through wholly owned subsidiaries, owns cable television systems serving approximately 53,000 basic subscribers in Michigan. For the most part, these cable television systems serve communities that are contiguous or in close proximity to existing Continental systems. Continental is continually reevaluating its acquisition plans, and there can be no assurances that all or any of these 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 $46,800,000 to TCG through 2003, of which $24,000,000 was advanced as of September 30, 1994. Continental has also invested $39,768,000 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. Continental also owns an approximate 10% partnership interest in PrimeStar and has an investment of $11,850,000 as of September 30, 1994. (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. International Investments. During the nine-month period ended September 30, 1994, Continental advanced US$108,300,000 to Fintelco, a company which owns and operates cable television systems serving over 600,000 subscribers in Argentina. Continental 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$26,365,000 to Fintelco in order to finance a portion of certain acquisitions of Argentine cable television systems. In September 1994, Continental acquired a 25% equity interest in SCV which will construct, own and operate an exclusive cable television system in Singapore. Continental has currently made US$8,700,000 in capital contributions and has committed to contribute up to US$33,300,000 (based on exchange rates at September 30, 1994) in additional capital through 1996. In addition, Continental has committed to lend up to approximately US$42,000,000 (based on exchange rates at September 30, 1994) if third-party debt financing is unavailable to SCV. (See "International Operations".) 172 Continental has entered into a letter of intent with Optus, a provider of long-distance and cellular telephone services in Australia, to enter into a joint venture to create a broadband communications network in Australia. The venture, to be called Optus Vision, is expected to be initially owned 47.5% by Continental, 47.5% by Optus and 5% by Publishing and Broadcasting Limited (a Kerry Packer-affiliated company), which has an option to increase its equity interest to 20%. The option is exercisable at any time prior to July 1, 1997, at an exercise price approximating the market value of the venture at that time. 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. Optus Vision anticipates that the required funding needs of the project will total approximately US$1.5 billion (based upon exchange rates at December 31, 1994) through 1999, which will be provided by a combination of equity from the joint venture partners and third-party debt. No assurances can be given at this time as to the parties reaching a definitive agreement regarding this transaction, or, if an agreement is reached, as to the consummation of this transaction. Other Investment Activities. During the nine months ended September 30, 1994, Continental sold all of its shares of common stock of International CableTel, Incorporated for approximately $17,553,000. 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 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 a private placement of Continental Class A Common Stock which occurred in November 1993. 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. 173 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 from 1,228,193 to 667,366 shares (30,704,825 and 16,684,150 shares, respectively, giving effect to the Continental Recapitalization Amendment and the Continental Stock Split) (representing approximately % 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's Common Stock (or securities convertible into or granting the right to purchase shares of 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. 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 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, 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 assurance in this regard or that the terms available for such financing would be favorable to Continental. 174 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. 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 may now be reduced by as much as 17% below their September 30, 1992 levels if they exceed the new per-channel benchmark. 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. 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. After extensive evaluation of cost-of-service principles and economic and legal analyses by experts in the rate regulation area, Continental is defending certain of its service rates using the FCC's benchmark methodology in regulated systems serving approximately 20% of its subscribers, and is defending certain of its service rates using the cost-of-service methodology in regulated systems serving approximately 25% of its subscribers. 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 has recorded a revenue reserve. Systems serving approximately 3% of Continental's subscribers are currently subject to effective competition as defined by the 1992 Cable Act and are thereby exempt from rate regulation. In addition, approximately 52% of Continental's basic subscribers are currently not subject to rate regulation because either a rate complaint has not been filed or a local franchising authority has not sought certification; however, systems serving such subscribers would become subject to rate regulation upon the occurrence of either such event. If Continental is not successful in its current and any future cost-of- service filings, the FCC rate regulations could have a material adverse impact on Continental's future results of operations. 175 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 September 30, 1994, and gives effect to (i) the Merger and certain related transactions, including the assumption of $755,000 of additional indebtedness; (ii) the closing of the 1994 Credit Facility (an amendment and restatement of the 1990 Credit Agreement) and prepayment of a previously existing bank facility; (iii) the redemption of the 12 7/8% Senior Subordinated Debentures ("12 7/8% Debt") at a redemption price equal to 106.438%; and (iv) various other acquisitions of domestic cable television systems (Columbia Cable of Michigan, Clay Cablevision, Cablevision of Chicago, and N-Com); and (v) the Continental Stock Split, in each instance as though each of such events had occurred as of September 30, 1994. The following unaudited Pro Forma Condensed Statements of Operations for the nine months ended September 30, 1994 and year ended December 31, 1993 give effect to each of the foregoing as though each of such events and the Manchester acquisition had occurred at January 1, 1993. 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 which would have been reported if the acquisitions described above had occurred as of the beginning of the respective periods 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. 176 PRO FORMA CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1994 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS PRO FORMA PROVIDENCE PROVIDENCE ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL ----------- ----------- ----------- ---------- ----------- ----------- ASSETS Cash.................... $ 28,824 $ 2,877 (1) $ 12,901 $ 168 $ $ 13,069 (18,800)(2) Accounts Receivable-- net.................... 47,414 1,121 (1) 48,535 23,837 -- 72,372 Prepaid Expenses and Other.................. 8,037 (1,500)(1) 6,537 4,625 -- 11,162 Supplies................ 48,821 -- 48,821 6,829 -- 55,650 Marketable Equity Securities............. 144,558 -- 144,558 -- -- 144,558 Investments............. 305,725 -- 305,725 -- -- 305,725 Property, Plant and Equipment--net......... 1,273,748 152,378 (1) 1,426,126 253,878 166,122 (4) 1,846,126 Intangible and Other Assets--net............ 472,224 349,737 (1) 833,585 495,151 842,380 (4) 2,171,116 11,624 (2) ----------- -------- ----------- -------- ---------- ----------- TOTAL................. $ 2,329,351 $497,437 $ 2,826,788 $784,488 $1,008,502 $ 4,619,778 =========== ======== =========== ======== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Accounts Payable........ $ 45,717 $ 441 (1) $ 46,158 $ 11,190 $ -- $ 57,348 Accrued Interest........ 62,849 -- 62,849 -- -- 62,849 Accrued and Other Liabilities............ 185,712 3,557 (1) 189,269 32,250 -- 221,519 Debt.................... 3,310,520 479,000 (1) 3,810,444 -- 755,000 (4) 4,565,444 20,924 (2) Due to Affiliate........ -- -- -- 587,428 (587,428)(4) -- Deferred Income Taxes... 152,110 21,615 (1) 162,411 66,589 282,961 (4) 511,961 (11,314)(2) Minority Interest in Subsidiaries........... 2,913 -- 2,913 27,354 (27,354)(4) 2,913 Redeemable Common Stock. 227,844 -- 227,844 -- -- 227,844 Stockholders' Equity (Deficiency): Series A Convertible Preferred Stock....... 11 -- 11 -- -- 11 Series B Convertible Preferred Stock....... -- -- -- -- 50 (4) 50 Common Stock........... 39 935 (3) 974 -- 282 (4) 1,256 Additional Paid-In Capital............... 557,424 (935)(3) 556,489 -- 644,668 (4) 1,201,157 Unearned Compensation.. (14,912) -- (14,912) -- -- (14,912) Net Unrealized Holding Gain on Marketable Equity Securities..... 60,526 -- 60,526 -- -- 60,526 Retained Earnings (Deficit)............. (2,261,402) (16,786)(2) (2,278,188) 59,677 (59,677)(4) (2,278,188) ----------- -------- ----------- -------- ---------- ----------- TOTAL................. $ 2,329,351 $497,437 $ 2,826,788 $784,488 $1,008,502 $ 4,619,778 =========== ======== =========== ======== ========== ===========
See Notes to Pro Forma Condensed Balance Sheets. 177 NOTES TO PRO FORMA CONDENSED BALANCE SHEETS The following adjustments are presented to reflect the effects of recording the acquisitions and applying purchase accounting to the accounts of the following cable systems; (i) Columbia Cable of Michigan, purchase price of approximately $155,000,000; (ii) Clay Cablevision, purchase price of approximately $67,000,000; (iii) Cablevision of Chicago, purchase price of approximately $168,500,000; and (iv) N-Com Limited Partnership II, 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......................... $409,403 Liabilities of Cable Television Systems assumed.................... 71,097 -------- Total $480,500 ======== Allocation of Purchase Price: Estimated Fair Value of Property, Plant and Equipment.............. $152,378 Estimated Fair Value of Acquired Franchises........................ 328,122 Deferred Taxes Related to Property, Plant and Equipment and Acquired Franchise Write-up ($480,500-$425,078) X 39%............. (21,615) -------- 458,885 -------- Excess of Purchase Price Over Property, Plant and Equipment and Acquired Franchises............................................... $ 21,615 ========
(1) To record the fair value of property, plant and equipment, franchise costs and certain current asset and current liabilities of the above cable television systems. Continental will borrow $479,000,000 in debt to finance the acquisitions and refinance liabilities assumed. As of September 30, 1994 a deposit of $1,500,000 was recorded relating to Clay Cablevision. The preliminary estimates of the fair value of property, plant and equipment and acquired franchises may change upon final appraisal. (2) To record (i) an increase in debt due to the payment of a premium of $20,924,000 for the redemption of the 12 7/8% Debt; (ii) a net increase of $11,624,000 to other assets as a result of the deferral of $18,800,000 in fees associated with the closing of the 1994 Credit Facility and the write- off of $7,176,000 relating to the 12 7/8% Debt; and (iii) deferred tax benefit as a result of the premium paid and unamortized costs written off. (3) To record the increase in Continental Common Stock due to the Continental Stock Split. 178 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....................... $ 645,000 New Cable Indebtedness of Providence Journal Cable Assumed........ 755,000 ---------- 1,400,000 Net Working Capital Deficit and Other Assets/Liabilities of Providence Journal Cable Assumed by Continental.................. 74,570 ---------- Total.......................................................... $1,474,570 ========== Allocation of Purchase Price: Estimated Fair Value of Property, Plant and Equipment............ $ 420,000 Estimated Fair Value of Acquired Franchises...................... 1,054,570 Deferred Taxes Related to Property, Plant and Equipment and Acquired Franchise Write-up ([$1,474,570--$749,029] X 39%).. (282,961) ---------- 1,191,609 ---------- Excess of Purchase Price Over Property, Plant and Equipment and Acquired Franchises......................................... $ 282,961 ==========
(4) To record $755,000,000 of New Cable Indebtedness which was borrowed to (i) repay Providence Journal and KHC's existing indebtedness, (ii) to purchase all of the remaining interests of the Kelso Partnerships in KHC and (iii) to purchase the minority interests in certain PJC Cable Subsidiaries. To record the estimated fair value of $645,000,000 for the 28,260,309 shares of Continental Class A Common Stock and 4,987,113 shares of the Continental Series B Preferred Shares to be issued to shareholders of Providence Journal Company in exchange for shares of Restructured PJC Common Stock. 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 PJ Cable. Such amount may change upon final appraisal. 179 PRO FORMA CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1993
PRO FORMA ADJUSTMENTS PRO FORMA PROVIDENCE PROVIDENCE ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL ----------- ----------- ----------- ---------- ----------- ---------- (IN THOUSANDS) Revenues................ $1,177,163 $102,769 (1) $1,279,932 $281,593 $ -- $1,561,525 Costs and Expenses: Operating.............. 382,195 42,441 (1) 424,636 103,637 -- 528,273 Selling, General and Administrative........ 267,376 19,863 (1) 287,239 62,446 -- 349,685 Allocated Corporate Overhead from Parent Companies............. 9,651 (9,651)(4) -- Restricted Stock Purchase Program...... 11,004 11,004 -- -- 11,004 1,371 (3) Depreciation and Amortization.......... 284,563 27,138 (1) 313,072 92,710 (17,710)(5) 388,072 ---------- -------- ---------- -------- ------- ---------- Total................ 945,138 90,813 1,035,951 268,444 (27,361) 1,277,034 ---------- -------- ---------- -------- ------- ---------- Operating Income........ 232,025 11,956 243,981 13,149 27,361 284,491 ---------- -------- ---------- -------- ------- ---------- Interest Expense--net... 276,698 (21,088)(2) 287,525 41,779 5,362 (6) 334,666 31,915 (1) Other Expenses--net..... (11,162) 2,477 (1) (8,685) 8,244 -- (441) Minority Interest....... 184 -- 184 -- -- 184 ---------- -------- ---------- -------- ------- ---------- Loss from Operations.... (33,695) (1,348) (35,043) (36,874) 21,999 (49,918) Income Tax Benefit...... (7,921) (525)(7) (8,446) (11,219) 8,579 (7) (11,086) ---------- -------- ---------- -------- ------- ---------- Net Loss................ $ (25,774) $ (823) $ (26,597) $(25,655) $13,420 $ (38,832) ========== ======== ========== ======== ======= ========== Pro Forma Per Share Data: Earnings Per Share..... $ (.59) ========== Average Common Shares Outstanding........... 142,315 (8) ==========
PRO FORMA CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1994
PRO FORMA ADJUSTMENTS PRO FORMA PROVIDENCE PROVIDENCE ADJUSTMENTS PRO FORMA JOURNAL JOURNAL PRO FORMA CONTINENTAL OTHER CONTINENTAL CABLE CABLE TOTAL ----------- ----------- ----------- ---------- ----------- ---------- (IN THOUSANDS) Revenues................ $885,636 $77,077 (1) $962,713 $211,320 $ -- $1,174,033 Costs and Expenses: Operating.............. 300,077 32,170 (1) 332,247 85,459 -- 417,706 Selling, General and Administrative........ 195,901 14,862 (1) 210,763 43,903 -- 254,666 Allocated Corporate Overhead from Parent Companies............. 5,636 (5,636)(4) -- Restricted Stock Purchase Program...... 8,502 8,502 -- -- 8,502 1,028 (3) Depreciation and Amortization.......... 210,728 19,246 (1) 231,002 66,550 (10,300)(5) 287,252 -------- ------- -------- -------- ------- ---------- Total................ 715,208 67,306 782,514 201,548 (15,936) 968,126 -------- ------- -------- -------- ------- ---------- Operating Income........ 170,428 9,771 180,199 9,772 15,936 205,907 -------- ------- -------- -------- ------- ---------- Interest Expense--net... 223,580 (19,359)(2) 229,208 28,978 6,112 (6) 264,298 24,987 (1) Other Expenses--net..... 12,275 1,857 (1) 14,132 -- 14,132 Minority Interest....... (83) -- (83) -- -- (83) -------- ------- -------- -------- ------- ---------- Loss from Operations.... (65,344) 2,286 (63,058) (19,206) 9,824 (72,440) Income Tax (Benefit).... (24,752) 892 (7) (23,860) (4,995) 3,831 (7) (25,024) -------- ------- -------- -------- ------- ---------- Net Loss................ $(40,592) $ 1,394 $(39,198) $(14,211) $ 5,993 $ (47,416) ======== ======= ======== ======== ======= ========== Pro Forma Per Share Data: Earnings Per Share..... $ (.58) ========== Average Common Shares Outstanding........... 142,319 (8) ==========
See Notes to Pro Forma Condensed Statement of Operations. 180 NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS (1) To record the results of operations for the cable television systems acquired or to be acquired. 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 also include an adjustment for interest expense as a result of the additional debt incurred to finance the acquisitions and an adjustment to depreciation and amortization to reflect the increased book value for property, plant and equipment and intangible 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 Merger are amortized over 40 years. Such depreciation and amortization may change upon final appraisal. (2) To record the decrease in interest expense as a result of the redemption of the $325,000,000 of 12 7/8% Debt. The incremental interest rate was 6% and 6 1/2% for the year ended December 31, 1993 and the nine months ended September 30, 1994, respectively. (3) To record the increase in amortization expense as a result of the net increase in other assets due to deferred financing costs (4) To reverse the PJC Cable Business' Allocated Corporate Overhead from Parent Companies. (5) To adjust depreciation and amortization expense relating to the increased book value for property, plant and equipment and intangible asset costs. 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 record additional interest expense due to the increase in debt as a result of the New Cable Indebtedness, net of repayment of the PJC Cable Business' intercompany debt. The incremental interest rate was 6% and 6 1/2% for the year ended December 31, 1993 and the nine months ended September 30, 1994, respectively. (7) To record the tax effect at an effective rate of 39%. (8) Represents mid-point in the range of shares to be outstanding upon the consummation of the Merger and the Continental Stock Split (each share of Common Stock shall become 25 shares of Common Stock). 181 MARKET PRICE OF CONTINENTAL COMMON STOCK AND DIVIDEND POLICY OF CONTINENTAL No established public trading market exists for the Continental Preferred Stock or the Continental Common Stock, and accordingly no high and low bid information or quotations are available with respect to the Continental Preferred Stock or the Continental Common Stock. As of January 1, 1995 there were 150 holders of record of the Continental Class A Common Stock and 268 holders of record of the Continental 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 President, Chief Operating Officer and 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 William T. Schleyer.............. 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................... Treasurer Nancy B. Larkin.................. Vice President--Community Relations 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 182 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, McCance, Pollack and Coppedge, 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 Accountants".) The term of the Class A Directors, Messrs. 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".) 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. 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. Michael J. Ritter (53) is the President and Chief Operating Officer of Continental. He has been a Director since 1991 and has been employed by Continental since 1980. 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. Mr. Ritter has announced his intention to retire as President and Chief Operating Officer of Continental, effective April 1995. 183 Roy F. Coppedge III (46) 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 (38) is Managing Director of Corporate Advisors, L.P. and, since 1987, has been a General Partner of Lazard Freres & Co. He has been associated with Lazard Freres & Co. 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 (51) has been general partner of the following venture capital 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. and Manugistics, Inc. 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 Freres & Co., as well as a General Partner of Lazard Freres & Co. 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 (58) 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. William T. Schleyer (43) is an Executive Vice President of Continental. 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 Cable Television Laboratories, Inc., the research and development arm of the cable industry, and TCG. He has been employed by Continental since 1978. Mr. Schleyer's appointment as President and Chief Operating Officer of Continental has been announced and will be effective in April 1995. 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. Nancy Hawthorne (43) 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 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. (52) 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. 184 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. 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 (48) 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 (45) 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 the Treasurer of Continental. Prior to December 1993, he was the Assistant Treasurer of Continental. He has been employed by Continental since January 1, 1990. He was formerly employed by The First National Bank of Boston since 1986. Mr. Krauss' appointment as a Vice President and the Treasurer of Continental has been announced and will be effective in April 1995. Nancy B. Larkin (43) 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. Lawrence F. Christofori (32) 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 (28) 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 (53) is an Assistant Secretary of Continental. He has been a partner of the law firm of Sullivan & Worcester since 1974. Patrick K. Miehe (46) 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 January 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. 185 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ----------------------------------------- ----------------------- OTHER ANNUAL RESTRICTED ALL OTHER COMPEN- STOCK AWARDS COMPENSA- NAME AND 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 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 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(5) -- 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 January 27, 1995, the amounts of the loans outstanding to certain of the Continental Named Executive Officers were as follows: William T. Schleyer ($466,508), Jeffrey T. DeLorme ($452,679) and Nancy Hawthorne ($362,055). 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. Mr. DeLorme has an additional loan from an Unrestricted Subsidiary of Continental of which the current amount outstanding is $400,000. Since the beginning of the fiscal year ended December 31, 1992, the largest aggregate amounts of indebtedness of the following executive officers were as follows: William T. Schleyer ($898,571), Jeffrey T. DeLorme ($1,007,679) and Nancy Hawthorne ($636,519). (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
186 - -------- (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) 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 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 January 27, 1995, the amounts of the loans outstanding to the three executive officers named above were as follows: Amos B. Hostetter, Jr. ($1,662,750), 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. ($3,134,686), 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. 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 187 executive officers, see "Certain Transactions".) In addition, the Hostetter Foundation, an entity controlled by Mr. Hostetter, sold 1,184 (not giving effect to the Continental Recapitalization Amendment and the Continental Stock Split) shares of Continental Class B Common Stock 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, nontax-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 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 52,107 188 shares to Corporate Offshore Partners for a purchase price of $18,237,450, both of which are investment partnerships affiliated with Lazard Freres & Co. ("Lazard"). Lester Pollack, a Director of Continental, is Senior Managing Director of Corporate Advisors and a General Partner of Lazard. Jonathan H. Kagan, a Director of Continental, is Managing Director of Corporate Advisors and a General Partner 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 the Preferred Equity 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 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. 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 Venture 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. 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) 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 Stock Split. BENEFICIAL OWNERSHIP OF CONTINENTAL CAPITAL STOCK AFTER THE MERGER The following table provides information as of January 15, 1995 (giving effect to the Merger, the Continental Recapitalization Amendment and the Continental Stock Split), with respect to the shares of 189 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".) Ownership of Continental Series B Preferred Stock cannot be calculated at this time since each Providence Journal stockholder is entitled, under certain circumstances, to elect the percentage of Continental Series B Preferred Stock and Continental Class A Common Stock that he, she or it wishes to receive pursuant to the Merger. (See "The Merger-- General Provisions".) For these same reasons, a determination of 5% beneficial owners of Continental Class A Common Stock is not possible at this time. 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 January 15, 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.
PERCENTAGE OF NUMBER OF NUMBER OF OUTSTANDING SHARES OF PERCENTAGE OF SHARES OF SHARES OF CONTINENTAL OUTSTANDING CONTINENTAL CONTINENTAL PREFERRED CONTINENTAL COMMON STOCK(1) COMMON STOCK(2) SHARES OF BENEFICIALLY STOCK AFTER BENEFICIALLY PREFERRED NAME OWNED THE MERGER OWNED STOCK ---- --------------- ------------- ------------ ------------- Amos B. Hostetter, Jr.(3). 45,272,425 30.97% -- -- Timothy P. Neher(4)....... 1,671,725 1.14 -- -- Michael J. Ritter......... 589,900 * -- -- Roy F. Coppedge III(5)...... 7,514,075 5.14 -- -- Jonathan H. Kagan(6)...... 28,571,450 16.35 1,142,858 100.00 Robert B. Luick(7)........ 233,625 * -- -- Henry F. McCance(8)....... 258,125 * -- -- Lester Pollack(6)......... 28,571,450 16.35 1,142,858 100.00 Vincent J. Ryan(9)........ 5,724,950 3.92 -- -- William T. Schleyer....... 766,200 * -- -- Jeffrey T. Delorme........ 391,525 * -- -- Nancy Hawthorne........... 209,325 * -- -- Stephen Hamblett.......... 100,305 * -- -- Trygve E. Myhren.......... 990 * -- -- Directors and Executive Officers as a Group (14 persons)(6).............. 91,299,495 52.22 1,142,858 100.00 H. Irving Grousbeck(10)... 10,033,000 6.86 -- -- Boston Ventures Company Limited Partnership III Boston Ventures Limited Partnership III(11).... 3,034,525 2.08 -- -- Boston Ventures Limited Partnership IIIA(11)... 799,825 * -- -- Boston Ventures Company Limited Partnership IV Boston Ventures Limited Partnership IV(11)..... 2,381,725 1.63 -- -- Boston Ventures Limited Partnership IVA(11).... 1,298,000 * -- -- ---------- ----- Total as a group...... 7,514,075 5.14 -- --
190
PERCENTAGE OF NUMBER OF NUMBER OF OUTSTANDING SHARES OF PERCENTAGE OF SHARES OF SHARES OF CONTINENTAL OUTSTANDING CONTINENTAL CONTINENTAL PREFERRED CONTINENTAL COMMON STOCK(1) COMMON STOCK(2) SHARES OF BENEFICIALLY STOCK AFTER BENEFICIALLY PREFERRED NAME OWNED THE MERGER OWNED STOCK ---- --------------- ------------- ------------ ------------- LFCP Corp. and Corporate Advisors, L.P.(12) Corporate Partners, L.P.(12)............. 18,223,825 11.09 728,953 63.78 First Plaza Group Trust(12)(13)........ 4,285,725 2.85 171,429 15.00 The State Board of Administration of Florida(12).......... 1,902,100 1.28 76,084 6.66 Vencap Holdings (1992) Pte Ltd(12).......... 1,785,700 1.21 71,428 6.25 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 16.57%(14) 1,142,858 100.00
- -------- *Less than 1% of class. (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 25.65% of the Continental Common Stock and approximately 2.71% 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 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 191 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 general partners 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 73,350 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 192 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) FPGT is a trustee for certain pension plans and has sole voting and dispositive power with respect to the shares held by it. Pursuant to the Co-Investment Agreement, FPGT has agreed, 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. 193 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 and the filing of a Certificate of Designation pertaining to the Continental Series B Preferred Stock (the "Series B Certificate of Designation"), 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 and 4,987,113 of which will have been designated Continental Series B Preferred Stock. As of January 15, 1995, there were outstanding 8,640,100 shares of Continental Class A Common Stock and 109,264,675 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 and, if the Merger is consummated, the Continental Series B 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 (i) 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) and (ii) if the Merger is consummated, the holders of the Continental Series B Preferred Stock who will have one vote per share, 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" and "Continental Series B 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 (including, after the Merger, the Continental Series B Preferred 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 the 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, except that the Continental Series B Preferred Stock will not be entitled to vote on such an increase or a decrease in the number of authorized shares of any class or classes of stock). 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. 194 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 shares of Continental Class B Common Stock in the hands of the purported transferee into shares of Continental Class A Common Stock, effective on the date of such purported transfer. Therefore, stockholders who desire to sell their shares of Continental Class B Common Stock must first convert those shares into shares of Continental Class A Common Stock. 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. A "Permitted Class B Transferee" of a Class B Holder is 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. UNISSUED CONTINENTAL PREFERRED STOCK The 193,870,029 shares of authorized and unissued Continental Preferred Stock (after giving effect to the Continental Recapitalization Amendment and the issuance of the Continental Series B Preferred Stock) 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 195 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 Continental Series A Preferred Stock and the Continental Series B Preferred Stock are entitled to receive payment of any dividend declared on a pari passu basis, (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. Each share of Continental Series A Preferred Stock is 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 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 class voting rights with respect to certain matters. The affirmative vote of 66 2/3% of the Continental Series A Preferred Stock is necessary (A) to 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. 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 196 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 single class or as a class with the holders of Continental Series B Preferred Stock and the holders of shares 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 "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 Redemption Price by 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 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 197 Stock Investors (i.e. one of the original purchasers) or an Allowed Transferee of a 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, thereafter, each share of Continental Series A Preferred Stock is 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 Redemption Price. Continental may elect to redeem the Continental Series A Preferred Stock by paying the 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 election of Directors is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners of 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 Continental 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 (including the Continental Common Stock) to or on a parity with the Continental Series A Preferred Stock and Continental Series B 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 198 dividends, liquidation preference, or rights upon dissolution and winding up. The Continental Series A Preferred Stock, ranks pari passu with the Continental Series B Preferred Stock with respect to dividends, liquidation preference or rights upon dissolution and winding up. CONTINENTAL SERIES B PREFERRED STOCK The terms of the Continental Series B Preferred Stock will be set forth in the Series B Certificate of Designation. The form of the Series B Certificate of Designation is attached as an exhibit to the Merger Agreement, which is attached hereto as Annex I, and the summary of the terms of the Series B Certificate of Designation set forth below is qualified in its entirety by reference thereto. All of the shares of Continental Preferred Stock that will be designated by Continental's Board of Directors as Continental Series B Preferred Stock are to be issued to the holders of Restructured PJC Common Stock pursuant to the Merger Agreement. DIVIDENDS. The holders of record of Continental Series B Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of Continental, out of the assets of Continental legally available therefor, cash dividends at an annual rate which will equal 100 basis points over the average yield for the ten Trading Day (as defined below) period ending five Trading Days prior to the Effective Time on Continental's 8 7/8% Senior Debentures due 2005; provided, however, that such rate shall equal 50 basis points over such average yield if, between November 18, 1994 and the Effective Time, Continental issues in excess of $1,000,000,000 of capital stock. The average yield on such Senior Debentures for the ten Trading Day period ending on March , 1995 was %. As a result, assuming the Effective Time occurred on March , 1995 and that Continental did not issue in excess of $1,000,000,000 in capital stock between November 18, 1994 and the Effective Time, dividends would accrue on the Continental Series B Preferred Stock at an annual rate equal to %. However, there can be no assurances that the actual dividend rate on the Continental Series B Preferred Stock will be greater or less than %. Such dividends (i) shall be payable semi-annually on the first day of June and December in each year commencing on the first such date to occur after shares of the Continental Series B Preferred Stock are issued pursuant to the Merger Agreement (the "Issue Date"), (ii) shall be cumulative and (iii) shall accrue on each share of Continental Series B Preferred Stock from the Issue Date, whether or not declared by Continental's Board of Directors. Dividends payable on the Continental Series B Preferred Stock for any period of less than a full six months shall be computed on the basis of the actual number of days elapsed and a 365-day year. Dividends paid on the shares of Continental Series B Preferred Stock (and on any other series of Continental Preferred Stock ranking on a parity as to dividends with the Continental Series B Preferred Stock) in an amount less than the total amount of such dividends at the time payable on such shares shall be made pro rata in proportion to the total amount of unpaid dividends then due and payable on the Continental Series B Preferred Stock and such other series of Continental Preferred Stock. The Continental Board of Directors shall fix a record date, which shall be no more than 60 days prior to the date fixed for payment, for the determination of holders of shares of Continental Series B Preferred Stock entitled to receive payment of a dividend declared thereon. The holders of Continental Series B Preferred Stock will be entitled to receive payment of any such dividend before any payment of dividends is made to the holders of Continental Common Stock or any other class or series of the capital stock of Continental ranking junior to the Continental Series B Preferred Stock in payment of dividends. The holders of Continental Series B Preferred Stock shall not be entitled to receive any dividends or other distributions except as described herein. VOTING RIGHTS. Each share of Continental Series B Preferred Stock will be entitled to one vote per share and to vote together as a single class with the Continental Class A Common Stock on all matters voted on by holders of Continental Class A Common Stock and any other class of capital stock of Continental which votes as a single class with the Continental Class A Common Stock; provided, however, that holders of Continental Series B Preferred Stock will not be entitled to vote on any decrease or increase in the number of any authorized shares of any class of the capital stock of Continental. If Continental shall at any time or from time to time 199 after the Issue Date declare or pay any dividend on Continental Class A Common Stock in shares of Continental Class A Common Stock, or effect a subdivision or combination or consolidation of the Continental Class A Common Stock (other than by payment of a dividend in shares of Continental Class A Common Stock) into a greater or lesser number of shares of Continental Class A Common Stock without making an identical subdivision, combination or consolidation of the outstanding shares of Continental Series B Preferred Stock, then in each such case the number of votes to which each share of Continental Series B Preferred Stock will be entitled immediately after such event shall be adjusted by multiplying the number of votes to which each such share was entitled immediately prior to such event by a fraction, the numerator of which is the number of shares of Continental Class A Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Continental Class A Common Stock that were outstanding immediately prior to such event. In each case of such an adjustment, Continental at its expense will promptly compute the adjustment to be made in accordance with the preceding sentence to the voting rights of the Continental Series B Preferred Stock and will promptly mail to each holder of record of Continental Series B Preferred Stock notice of such adjustment, which notice shall set forth (i) the computation described above, (ii) the number of vote(s) per share to which each share of Continental Series B Preferred Stock was entitled before giving effect to such adjustment, and (iii) the number of vote(s) per share to which each share of Continental Series B Preferred Stock will be entitled after giving effect to such adjustment. Adverse Amendment. The affirmative vote of at least a majority of the Continental Series B Preferred Stock (or, if any other series of Continental Preferred Stock would be similarly affected, the affirmative vote of at least a majority of the voting power represented by the outstanding shares of Continental Series B Preferred Stock and such other series of Continental Preferred Stock, voting together as single class) will be necessary to change by amendment to the Continental Restated Certificate the powers, preferences or special rights of the Continental Series B Preferred Stock (and, if applicable, the powers, preferences or special rights of such other series of Continental Preferred Stock) so as to affect the Continental Series B Preferred Stock (or such other series of Continental Preferred Stock) adversely. Board Representation. Holders of Continental Series B Preferred Stock will have the right (voting separately as a single class or as a class with the holders of Continental Series A Preferred Stock and the holders of shares of any other class of capital stock ranking on a parity, either as to dividends or upon liquidation, dissolution or winding up, with the Continental Series B Preferred Stock ("Parity 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 Directors to the Continental Board of Directors in the event of a failure by Continental to pay dividends or distributions on a series of Continental Preferred Stock (including, without limitation, the dividends payable with respect to the Continental Series B Preferred Stock, as described under the caption "Dividends" above), for three consecutive semi-annual periods (provided, however, that if such Directors would represent more than 25% of the total number of directors of Continental, then such stockholders shall have the right to elect only one Director Upon Default). Such right to elect Directors Upon Default will continue until such time as Continental has cured the default, at which time such Directors Upon Default will no longer be Directors of Continental; provided, however, that the right of the holders of Continental Series B Preferred Stock to elect Directors Upon Default shall revest in the event of each and every subsequent failure of Continental to pay dividends or distributions on the Continental Series B Preferred Stock and all other Series of Continental Preferred Stock for three consecutive semi-annual periods. In case any vacancy shall occur among the Directors Upon Default, such vacancy may be filled for the unexpired portion of the term by vote of the remaining Director Upon Default (if there is a remaining director), or such Director Upon Default's successor in office. If any such vacancy is not so filled within 20 days after the creation thereof, or (if applicable) if both Directors Upon Default shall cease to serve as directors before their terms shall expire, the holders of the Continental Series B Preferred Stock or the holders of Continental Series B Preferred Stock and the holders of any other series of Continental Preferred Stock which, together with the holders of the Continental Series B Preferred Stock, elected such Directors Upon 200 Default then entitled to vote for such Directors may, by written consent or at a special meeting of such holders called as provided in the Series B Certificate of Designation, elect successors to hold office for the unexpired terms of the Directors Upon Default whose places shall be vacant. Any Director Upon Default may be removed from office with or without cause by the vote or written consent of the holders of at least a majority of the voting power represented by the outstanding shares of Continental Series B Preferred Stock and the Parity Stock which, together with the holders of the Continental Series B Preferred Stock, elected such Directors Upon Default. Meetings, Quorum, Etc. The special voting rights of holders of Series B Preferred Stock described in "Adverse Amendments" and "Board Representation" may be exercised at any annual or special meeting of the stockholders of Continental or by written consent. So long as such right to vote continues (unless action has been taken pursuant to written consent), the Chairman of the Board of Directors may call, and upon the written request addressed to the Secretary of Continental of holders of record of at least 20% of the voting power represented by the Continental Series B Preferred Stock and such other series of Continental Preferred Stock, if any, entitled to vote on such matter, the Chairman of the Board shall call, a special meeting of such holders in order to exercise such rights. The special meeting must be held within 30 days after the delivery of such request to the Secretary. At any such annual or special meeting at which the holders of the Continental Series B Preferred Stock are to vote as a separate class or as a class with such other series of Continental Preferred Stock, the presence in person or by proxy of the holders of record of one-third of the voting power represented by the Continental Series B Preferred Stock and such other series of Continental Preferred Stock shall constitute a quorum for purposes of the actions to be taken by the holders of Continental Series B Preferred Stock and such other series of Continental Preferred Stock. If the holders of Continental Series B Preferred Stock are to vote as a class with the holders of any other series of Continental Preferred Stock as to any matter described under "Adverse Amendments" and "Board Representation", (i) each holder of Continental Series B Preferred Stock and such other series of Continental Preferred Stock which is not convertible into Continental Common Stock shall have one vote per share and (ii) each holder of a share of such other series of Continental Preferred Stock which is convertible into Continental Common Stock shall have the number of votes as may be cast by the holder of the number of shares of Continental Common Stock into which such share of Continental Preferred Stock is then convertible. LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of Continental, no distribution shall be made (i) to the holders of shares of any capital stock of Continental ranking junior, either as to dividends or upon liquidation, distribution or winding up, to the Continental Series B Preferred Stock ("Junior Stock") unless, prior thereto, the holders of shares of Continental Series B Preferred Stock shall have received $19.40 with respect to each share of Continental Series B Preferred Stock together with all unpaid dividends thereon, whether or not declared, to the date of such liquidation, dissolution or winding up, or (ii) to the holders of shares of Parity Stock, except distributions made ratably on all such Parity Stock and the Continental Series B Preferred Stock in proportion to the total amounts to which the holders of all shares of such Parity Stock and the Continental Series B Preferred Stock are entitled upon such liquidation, dissolution or winding up. Upon any such liquidation, dissolution or winding up of Continental, after the holders of the Continental Series B Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the remaining net assets of Continental shall be distributed to the holders of Junior Stock, and the holders of Continental Series B Preferred Stock shall not be entitled to participate in such distribution. Neither the consolidation, merger or other business combination of Continental with or into any other person or entity nor the sale of all or substantially all of the assets of Continental shall be deemed to be such a liquidation, dissolution or winding up. REDEMPTION RIGHTS. At any time after the fifth anniversary of the Issue Date, by written notice delivered to the record holders of the Continental Series B Preferred Stock, Continental, at its sole option, may elect to redeem, in whole or from time to time in part, the shares of Continental Series B Preferred Stock held by such holders at a price per share equal to $19.40 (the "Stated Amount") plus (i) an amount per share equal 201 to all unpaid dividends thereon, whether or not declared, to the date of redemption and (ii) if applicable, a premium equal to (a) if redeemed prior to the sixth anniversary of the Issue Date, 2% of the Stated Amount, and (b) if redeemed on or after the sixth anniversary date and prior to the seventh anniversary date of the Issue Date, 1% of the Stated Amount, and (c) if redeemed on or after the seventh anniversary date of the Issue Date, 0% of the Stated Amount (the "Redemption Price"). Notice of such redemption of shares of Continental Series B Preferred Stock shall be mailed at least 30, but not more than 60, Trading Days (as defined below) prior to the date fixed for redemption to each record holder of shares of Continental Series B Preferred Stock to be redeemed, at such holder's address as it appears on the transfer books of Continental. If at any time less than all of the shares of Continental Series B Preferred Stock then outstanding are to be redeemed, the shares so to be redeemed may be selected (I) by lot, (II) on a pro rata basis among the holders of all such shares, or (III) in such other manner as the Continental Board of Directors in its sole discretion may determine to be fair and equitable. The term "Trading Day", as defined in the Series B Certificate of Designation, means a day on which the principal national securities exchange on which the Continental Class A Common Stock is listed or admitted to trading is open for the transaction of business or, if the Continental Class A Common Stock is not listed or admitted to trading on any national securities exchange, a business day. In addition, on the tenth anniversary of the Issue Date and on each such anniversary date thereafter so long as any shares of Continental Series B Preferred Stock are outstanding, any holder of the Continental Series B Preferred Stock will have the right to cause Continental to redeem any or all of its shares of Continental Series B Preferred Stock at a price per share equal to the Redemption Price. Pursuant thereto, not more than 60 nor less than 30 Trading Days prior to any such anniversary date, Continental shall give notice (the "Redemption Notice") to each record holder of shares of Continental Series B Preferred Stock, at such holder's address as it appears on the transfer books of Continental, that each holder has the right to require Continental to redeem any or all shares of Continental Series B Preferred Stock held by such holder at a price per share equal to the Redemption Price. The notice shall also specify the redemption date (which date shall be not more than 60, nor less than 45, days from the date of such notice) and the procedures to be followed by such holder in exercising such holder's right to cause such redemption and to receive payment of the Redemption Price (if such holder elects to cause such redemption). Failure by Continental to give the Redemption Notice, or the formal insufficiency of any such notice, shall not prejudice the rights of any holder of shares of Continental Series B Preferred Stock to cause Continental to redeem any such shares held by such holder. If a record holder of shares of Continental Series B Preferred Stock shall elect to require Continental to redeem any or all such shares of Continental Series B Preferred Stock in the manner provided in this paragraph, such holder shall deliver, within 30 days of the mailing to such holder of the Redemption Notice, or, if no Redemption Notice is given, within 30 days following the last day Continental was required to give a Redemption Notice in accordance with the terms of the Series B Certificate of Designation (in which case the date of redemption shall be the date which is 45 business days following the last day Continental was required to give such notice), a written notice, in the form specified by Continental (if Continental did in fact give the required Redemption Notice), to Continental stating such election and specifying the number of shares to be so redeemed. Continental shall redeem the number of shares so specified on the date fixed for redemption in accordance with the provisions of the Series B Certificate of Designation. Continental, at its sole option, may satisfy its obligation to pay all or any portion of the Redemption Price for any redemption of the Continental Series B Preferred Stock described above by making an election on or prior to the date set for redemption to issue shares of Continental Class A Common Stock in respect of all or any portion of the Redemption Price. Such election shall be set forth in a certificate signed on behalf of Continental by the Chairman of the Board, the Vice Chairman of the Board, the President or any Vice President of Continental and delivered to the Secretary of Continental and shall be deemed to have been made on the date on which such certificate is delivered to the Secretary. Notice of such election and of the portion of the Redemption Price as to which such election was made shall be given to the holders of the Continental Series B Preferred Stock by Continental promptly upon making such election. The number of shares of Continental Class A Common Stock to be issued pursuant thereto shall be determined by dividing the Redemption Price per share of Continental Series B Preferred Stock (or portion thereof to be paid in shares 202 of Continental Class A Common Stock) by the Current Market Price (as defined below) of a share of Continental Class A Common Stock valued, if the Continental Class A Common Stock is not publicly traded, on the date of redemption or, if the Continental Class A Common Stock is publicly traded, for the period of 15 Trading Days ending two Trading Days prior to the date of redemption (the "Base Price"). The term "Current Market Price", as defined in the Series B Certificate of Designation in relation to the Continental Class A Common Stock, means (i) if the Continental Class A Common Stock is publicly held, the closing price per share of Continental Class A Common Stock on any date in question and, when used with reference to shares of Class A Common Stock for any period, shall mean the average of the daily closing prices per share of Class A Common Stock for such period (the calculation of the closing price for any day will vary depending upon whether there has been a sale on such date and depending upon the national securities exchange, if any, on which the Continental Class A Common Stock is listed, all as is more fully set forth in the Series B Certificate of Designation) or (ii) if the Continental Class A Common Stock is not publicly held or so listed or publicly traded, the amount determined by investment bankers mutually agreeable to Continental and the holders of a majority of the outstanding shares of Continental Series B Preferred Stock to be equal to the net proceeds that would be expected to be received by a holder of Continental Class A Common Stock from the sale of a share of Continental Class A Common Stock in an underwritten public offering after being reduced by pro forma expenses and underwriting discounts. In connection with any such redemption, unless, in the reasonable determination of Continental, the exchange of shares of Continental Class A Common Stock for Continental Series B Preferred Stock is exempt from the registration requirements of the Securities Act, Continental shall register such exchange under such Act, and such exchange shall not be completed until such registration is effective. No fractional shares of Continental Class A Common Stock shall be issued upon any exchange of shares of Continental Series B Preferred Stock redeemed as described above. In lieu thereof, Continental shall pay a cash adjustment equal to such fractional interest multiplied by the Base Price. If more than one share of Continental Series B Preferred Stock shall be surrendered for exchange by the same holder, the number of full shares of Continental Class A Common Stock issuable on exchange thereof shall be computed on the basis of the total number of shares of Continental Series B Preferred Stock so surrendered. In case Continental shall at any time or from time to time after the Issue Date effect a capital reorganization, reclassification, subdivision, combination or consolidation of outstanding shares of Continental Common Stock (other than by payment of a dividend in shares of Continental Common Stock) so that, after giving effect to such capital reorganization, reclassification, subdivision, combination or consolidation, Continental shall no longer have authorized shares of Continental Class A Common Stock, Continental shall be entitled, at its sole option and in lieu of shares of Continental Class A Common Stock, to issue shares of voting Continental Common Stock which, at such time, have the fewest votes per share as compared to other classes of Continental's voting Common Stock in payment of all or any portion of the Redemption Price. On the date of any redemption of the Continental Series B Preferred Stock, Continental shall, and at any time before the date of redemption, may: (i) deposit for the benefit of the holders of shares of Continental Series B Preferred Stock to be redeemed the funds and/or shares of Continental Class A Common Stock, as applicable, necessary for such redemption with a bank or trust company in the Borough of Manhattan, The City of New York, or in the City of Boston, in either case having a capital and surplus of at least $50,000,000; or (ii) if Continental so elects, segregate and hold in trust for the benefit of the holders of shares of Continental Series B Preferred Stock to be redeemed the funds and/or shares of Continental Class A Common Stock, as applicable, necessary for such redemption. Any moneys and/or shares so deposited or segregated and held in trust by Continental and unclaimed at the end of two years from the date designated for such redemption shall be released from any such deposit or trust and revert to the general funds of Continental. After such reversion, any such bank or trust company shall, upon demand, pay over to Continental such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof 203 and any holder of shares of Continental Series B Preferred Stock to be redeemed shall look only to Continental for the payment of the Redemption Price. Any interest and/or shares accrued on such funds and/or such shares deposited shall be paid from time to time to Continental for its own account. Upon the deposit or segregation in trust of such funds and/or such shares, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, from and after the date of redemption designated in the notice of redemption (or, if no such notice is given by Continental, the date of redemption), (i) the shares represented thereby shall no longer be deemed outstanding, (ii) the rights to receive dividends thereon shall cease to accrue and (iii) all rights of the holders of shares of Continental Series B Preferred Stock to be redeemed shall cease and terminate, excepting only the right to receive the Redemption Price therefor. CONVERSION. The Continental Series B Preferred Stock will not be convertible into any other securities of Continental, provided, however, that Continental may elect to satisfy its redemption obligations with respect to the Continental Series B Preferred Stock with shares of Continental Class A Common Stock. See "Redemption Rights" above. RESTRICTIONS ON CONTINENTAL. If any dividends or distributions payable on the Continental Series B Preferred Stock have not been paid in full then, until such time as all such unpaid dividends or distributions shall have been paid in full or declared and set aside for payment, without the consent of either (i) not less than a majority of the shares of Continental Series B Preferred Stock then outstanding, or (ii) if dividends or distributions on any other class or series of Continental Preferred Stock are not then paid in full and the consent of the holders of such class or series is required for Continental to take any of the actions set forth below, not less than a majority of the voting power represented by shares of Continental Series B Preferred Stock and such other series of Continental Preferred Stock, voting together as a single class, Continental may not (i) declare or pay dividends or make any other distributions on the Continental Common Stock or on any Junior Stock or Parity Stock (other than (x) dividends or distributions payable in Continental Common Stock or in any other capital stock of Continental ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Continental Series B Preferred Stock or (y) dividends paid pro rata on Continental Series B Preferred Stock and Parity Stock in accordance with the second paragraph of "Dividends" above), or (ii) redeem, purchase or otherwise acquire for consideration any shares of Junior Stock or Parity Stock pursuant to any mandatory redemption, put, sinking fund or other similar obligation; provided, however, that Continental may at any time (a) redeem, purchase or otherwise acquire shares of Junior Stock or Parity Stock in exchange for shares of Continental Common Stock or for other capital stock of Continental ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Continental Series B Preferred Stock, and (b) accept shares of Junior Stock or Parity Stock for conversion. As a result, Continental's obligations under the 1998-1999 Share Repurchase Program would be junior to any arrearage on dividends to be paid on the Continental Series B Preferred Stock existing at the time Continental repurchases shares of Continental Common Stock pursuant to the 1998-1999 Share Repurchase Program. Continental will not permit any of its subsidiaries to purchase or otherwise acquire for consideration any shares of capital stock of Continental unless Continental could purchase such shares without violation of the restrictions described in this paragraph. RANKING WITH OTHER PREFERRED STOCK; LISTING. The Continental Series B Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution or winding up, rank pari passu with the Continental Series A Preferred Stock and prior to all classes of Continental Common Stock. Continental has agreed to use its reasonable best efforts to cause the shares of Continental Series B Preferred Stock to be approved for listing on the NASDAQ upon issuance thereof. MERGER OR SALE OF CONTINENTAL. If at any time there shall be a merger or consolidation of Continental with or into another person or entity such that Continental is not the surviving corporation of such merger or consolidation, or a sale of all or substantially all of the assets of Continental to any other person or entity (either, a "Preferred Extraordinary Transaction"), then, as part of such Preferred Extraordinary Transaction and at the election of Continental, either: (i) the successor entity resulting from such Preferred Extraordinary Transaction shall issue or deliver to each holder of Continental Series B Preferred Stock either (a) certificates 204 representing shares of preferred stock of such successor entity of a class or series having substantially similar terms to those for the Continental Series B Preferred Stock in exchange for such holders' shares of Continental Series B Preferred Stock, or (b) such shares of stock, securities or other assets of such successor entity to which the holders of Continental Series B Preferred Stock would have been entitled pursuant to such Preferred Extraordinary Transaction if, immediately prior thereto, each share of Continental Series B Preferred Stock had been redeemed by Continental with shares of Continental Class A Common Stock (as described under "Redemption Rights" above); or (ii) immediately prior to the consummation of such Preferred Extraordinary Transaction, Continental shall redeem all, but not less than all, of the shares of Continental Series B Preferred Stock then outstanding in the manner described above under the caption "Redemption Rights". 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 potential 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 may be removed, with or without 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. The Continental By-Laws provide that removal of Directors shall be made only for cause. 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. 205 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 (including, after the Merger, the Continental Series B Preferred Stock), 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 (including, after the Merger, the Continental Series B Preferred Stock). 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 insure 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. Each certificate representing shares of Continental Preferred Stock, Continental Class A Common Stock and Continental Class B Common Stock of Continental must bear a legend indicating that the shares are subject to these restrictions on their transfer. 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 206 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, and the affiliates and associates 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 Series B Preferred 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 36,900,409 shares of Continental Class A Common Stock, 109,264,675 shares of Continental Class B Common Stock, 1,142,858 shares of Continental Series A Preferred Stock and 4,987,113 shares of Continental Series B Preferred Stock outstanding. Of these shares, the 28,260,309 shares of Continental Class A Common Stock and the 4,987,113 shares of Continental Series B Preferred Stock (otherwise referred to collectively as the Continental Merger Stock) registered and sold to the Providence Journal stockholders pursuant to the Continental Registration Statement 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. Only the Continental Class A Common Stock and the Continental Series B Preferred 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 143,449,675 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, 44,916,875 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, 94,381,775 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. 207 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 pursuant to 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 Common Stock (approximately shares, based on the number of shares of Continental Common Stock that will be outstanding after the Merger and assuming the conversion of all outstanding shares of Continental Series A Preferred Stock in Continental Common Stock), 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 of shares of Continental Common Stock that are not "restricted securities" by affiliates of Continental (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 and Continental Series B Preferred Stock issued and sold pursuant to the Continental Registration Statement in connection with the Merger are registered securities, and thus not restricted securities. Non-affiliates of Providence Journal will be able to freely sell the Continental Merger Stock after the Merger in the public market, subject only to any lock-up, standstill or other contractual restrictions to which such holders may agree. Persons who are currently affiliates of Providence Journal and who are not affiliates of Continental, for two years after the Effective Time, may only sell the Continental Merger Stock pursuant 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 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 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.) 208 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 2,343,750 shares of Continental Class B Common Stock to certain of its officers and employees pursuant to its 1995 Restricted Stock Purchase Program V, including 707,500 shares to persons deemed to be affiliates of Continental and 1,636,250 shares to non-affiliates of Continental. Such shares are subject to vesting over the next eight 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 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 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, 209 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. 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. 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. "Unrestricted Subsidiaries" are subsidiaries that have not been so designated as Restricted Subsidiaries. The Unrestricted Subsidiaries are not parties to any of Continental's credit agreements. Such agreements give Continental the ability to terminate the designation of a Restricted Subsidiary under certain circumstances. 1994 CREDIT FACILITY. Continental and its Restricted Subsidiaries (the "Restricted Group") are party 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. The 1994 Credit Facility is an amendment and restatement of the 1990 Credit Agreement. Credit availability under the 1994 Credit Facility will decrease on a schedule commencing December 31, 1997 with annual reductions on each December 31 thereafter, with a final maturity of October 10, 2003. As of January 15, 1995, Continental had credit availability of $780,580,000 under the 1994 Credit Facility. Continental's obligations under the 1994 Credit Facility are guaranteed by substantially all of the Restricted Subsidiaries. Continental applied a portion of the borrowings under the 1994 Credit Facility to refinance in their entirety of (i) all amounts outstanding under the 1992 Credit Facility and (ii) all amounts outstanding under the 12 7/8% Senior Subordinated Debentures. (See "Description of Continental--Capitalization".) 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 the (ii) 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 210 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 September 30, 1994, Continental's ratio of fixed interest rate debt (which factors in Swaps, Caps and debt fixed by its terms) to total debt was approximately 64%. 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 less. As of September 30, 1994 Continental had Swaps, pursuant to which it pays fixed interest rates averaging 9.1% on notional amounts of $800,000,000 (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 6.75%. As of September 30, 1994, Continental had $600,000,000 of Caps, which limit 6-month LIBOR to approximately 7%. 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 which is a guarantor of Continental's obligations under the 1994 Credit Facility) 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 $443,000,000 was available as of September 30, 1994 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, cash or certain operating assets having an aggregate value (after deducting certain underwriting discounts and expenses) of at least $100,000,000. In addition to customary events of default it is an event of default under the 1994 Credit Facility if Amos B. Hostetter, Jr., certain of his permitted transferees and the other officers of Continental and its subsidiaries 211 (collectively, the "Management Group") fail to own at least 25% of the voting power of Continental's capital stock; provided that such percentage may fall below 25% after an offering and sale of capital stock of Continental so long as the Management Group maintains a block of voting power larger than any block of voting power held by any other person, together with such person's affiliates and any members of a group with such person. After giving effect to the issue of Continental Class A Common Stock issued in the Merger, Continental anticipates that the Management Group will hold greater than 25% of the voting power of Continental's capital stock. INDENTURES FOR NOTES AND DEBENTURES. Continental is currently party to indentures for the following debt securities (collectively, the "Notes and Debentures"): (i) $300,000,000 of 9% Debentures due September 1, 2008; $100,000,000 of 8 5/8% Notes due August 15, 2003; $200,000,000 of 8 1/2% Notes due September 15, 2001; and $275,000,000 of 8 7/8% Debentures due September 15, 2005 (collectively, the "Non-Callable Notes and Debentures"); and (ii) the Prudential Notes; $300,000,000 of 11% Debentures due June 1, 2007; $100,000,000 of 10 5/8% Notes due June 15, 2002; $525,000,000 of 9 1/2% Debentures due August 1, 2013 and $100,000,000 of floating rate Debentures (the "Floating Rate Debentures") (which currently bear interest at a rate per annum equal to three-month LIBOR, adjusted quarterly, plus 300 basis points (collectively, the "Callable Notes and Debentures"). The Non-Callable Notes and Debentures are not redeemable at the option of Continental prior to their maturity. At any time after, June 1, 1999 for the 11% Debentures, June 15, 1997 for the 10 5/8% Notes, and August 1, 2005 for the 9 1/2% Debentures, Continental may prepay all or any part of each such class of securities at a premium (which differs for each class and which decreases on an annual basis after the date on which a particular class becomes callable). The Prudential Notes and the Floating Rate Debentures may be prepaid at the option of Continental at any time, in whole or in part, at a premium. The holders of each class of the Notes and Debentures are entitled to demand prepayment of such securities, plus a premium (which differs for each class and which decreases on an annual basis), if Continental, under certain defined circumstances, proposes to (a) incur additional indebtedness or (b) repurchase shares of its Continental Common Stock which are subject to the 1998-1999 Share Repurchase Program. Such holders (other than holders of the Floating Rate Debentures) are also entitled to demand prepayment, without a premium, if Continental, in certain circumstances, proposes to redeem shares of its Continental Series A Preferred Stock in connection with a change of control of Continental. (See "Description of Continental Capital Stock".) Continental is required to prepay the principal amount of the Prudential Notes on a semi-annual amortization schedule with a final principal repayment of $17,500,000 due on July 1, 1999. Continental's obligations under the Prudential Notes are guaranteed by substantially all of the Restricted Subsidiaries. As of September 30, 1994, $150,000,000 in aggregate principal amount of the Prudential Notes was outstanding. The Floating Rate Debentures are subject to mandatory prepayments at the election of the holders if, under certain circumstances, Amos B. Hostetter, Jr. and certain of his permitted transferees fail to own, directly or indirectly, at least 30% of Continental Common Stock. Upon a Change of Control Event, each holder of the Floating Rate Debentures has the right to tender all, but not less than all, of such holder's Floating Rate Debentures to Continental for redemption at the principal amount thereof, plus (i) accrued interest and (ii) certain other amounts relating to breakage costs and certain taxes. Continental is required to give notice of the Change of Control Event and the right of the holders to have their Floating Rate Debentures redeemed within 10 days of the occurrence thereof by publishing a notice in certain specified newspapers to that effect, which notice must include the date on which payment will be made by Continental in respect of all Floating Rate Debentures tendered for redemption (which must be at least 31 and no more than 60 days after the date of Continental's notice). Any holder of Floating Rate Debentures who elects to have its Floating Rate Debentures redeemed as a result of the Change of Control Event must give notice to such effect to Continental within 30 days after Continental's notice. 212 The indentures for the Notes and Debentures contain customary financial and other covenants, as well as a restriction against the redemption or repurchase of, or the payment of cash dividends on, the capital stock of Continental similar to those contained in the 1994 Credit Facility, as described above. COMPARISON OF RIGHTS OF STOCKHOLDERS OF PROVIDENCE JOURNAL AND CONTINENTAL Continental and Providence Journal are incorporated in Delaware and Rhode Island, respectively. Stockholders of Providence Journal, whose rights as stockholders are currently governed by Rhode Island Law, the Providence Journal Charter, and the Providence Journal By-Laws, upon consummation of the Plan of Reorganization and the Merger will (in addition to being stockholders of New Providence Journal), automatically become stockholders of Continental, holding shares of Continental Class A Common Stock and Continental Series B Preferred Stock, and, as stockholders of Continental, their rights will be governed by the DGCL, the Continental Restated Certificate and the Continental By-Laws. Although it is impractical to note all of the differences, the following is a summary of certain material differences between the rights of holders of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock on the one hand and those of holders of Continental Class A Common Stock and Continental Series B Preferred Stock on the other. The following does not purport to be a complete description of the differences between the rights of Continental and Providence Journal stockholders. Such differences may be determined in full by reference to the RIBCA, the DGCL, the Continental Restated Certificate, the Providence Journal Charter, the respective Continental and Providence Journal By-Laws and the Rights Agreement. RIGHTS TO PURCHASE OR REDEEM SHARES PROVIDENCE JOURNAL. The Providence Journal Charter contains a provision granting Providence Journal the right to purchase any shares offered by the holder of such shares for sale to a third party at the lowest price at which the holder is willing to sell such shares. CONTINENTAL. The Continental Restated Certificate does not contain a similar provision granting a right of first refusal with respect to third party purchases of shares of its capital stock. However, the Continental Restated Certificate includes provisions designed to ensure that the ownership or purchase of shares of Continental's capital stock will not result in a violation of laws or regulations. Specifically, Continental may redeem shares to the extent necessary to prevent the loss or secure the reinstatement of any license or franchise from any governmental authority at a price equal to the lesser of (a) fair market value or (b) if the shares were purchased within one year of the redemption date, the price paid for such shares. REQUIRED VOTE FOR CERTAIN BUSINESS COMBINATIONS Both the RIBCA and the DGCL generally require approval of a merger, consolidation, dissolution or sale of all or substantially all of a corporation's assets by the affirmative vote of the holders of a majority of the outstanding shares of stock of the corporation entitled to vote thereon. In certain instances, a charter may require super-majority stockholder approval of a transaction if it is a "Business Combination" as described below. In addition, under Rhode Island Law, if any class of stock is entitled to vote separately, approval of the plan of merger or consolidation, dissolution or sale of all or substantially all assets also requires the affirmative vote of the holders of a majority of the shares of each class of stock entitled to vote as a class thereon. The DGCL, absent a charter provision to the contrary, does not require such a class vote. PROVIDENCE JOURNAL. Rhode Island Law provides that, unless the corporate charter provides otherwise, the vote of the stockholders of a surviving corporation is not required to approve a merger if (a) the plan of merger does not amend the corporation's charter and (b) the number of shares of common stock to be issued or transferred in the merger, plus the number of shares of common stock into which any other securities to be issued in the merger are convertible within one year, does not exceed one-third of the total combined voting 213 power of all classes of stock then entitled to vote for the election of directors which would be outstanding immediately after the merger. The Providence Journal Charter provides that with regard to: (a) the sale, lease, exchange, transfer, or other disposition by Providence Journal or any of its subsidiaries of all or substantially all of its assets to or with any person participating in the Business Combination, as defined in the Business Combination Act of 1990 (Section 7-5.2-1 et seq.); (b) any merger or consolidation of Providence Journal or any of its subsidiaries into or with a corporation, irrespective of which corporation is the surviving corporation in such merger or consolidation; or (c) any reclassification of securities, recapitalization, or other transaction which has the effect, directly or indirectly, of any partial or complete liquidation or spin-off of Providence Journal (each of clauses (a) through (c) is hereinafter referred to as a "Providence Journal Business Combination"), such Providence Journal Business Combination must either (x) receive the approval by affirmative vote of not less than two-thirds of the whole Board of Directors of Providence Journal plus any affirmative vote of stockholders required under Rhode Island Law; or (y) receive the prior approval of 80% or more of the outstanding capital stock of Providence Journal entitled to vote thereon and must satisfy certain enumerated qualification tests relating to the adequacy of price and procedure including solicitation of stockholder approval of the Providence Journal Business Combination pursuant to a proxy statement including any recommendations of the Providence Journal Board and any fairness opinion (or lack of fairness) from a selected investment banking firm. The Providence Journal Charter adopts the provisions set forth in the Business Combination Act of 1990 (Section 7-5.2-1 et seq.). (See "State Anti-Takeover Statutes".) The Merger would constitute a Providence Journal Business Combination, and accordingly, the voting requirements set forth above must be satisfied. CONTINENTAL. Pursuant to the DGCL, unless the corporate charter provides otherwise, no vote of the stockholders of a surviving corporation is required to approve a merger if (a) the agreement of merger does not amend in any respect, the surviving corporation's charter; (b) each share of the corporation's stock outstanding immediately prior to the effective date of the merger is to remain outstanding; and (c) the number of shares of the surviving corporation's common stock (including shares issuable upon conversion of any convertible securities) to be issued or delivered under the plan of merger does not exceed 20% of the surviving corporation's common stock outstanding immediately prior to the effective date of the merger. For transactions falling outside the enumerated exceptions, majority stockholder approval is required. The Merger must be approved by the affirmative vote of a majority of the outstanding shares of Continental Voting Stock. The DGCL sets forth specific requirements for certain business combinations. (See "Description of Continental Capital Stock--DGCL and Certain Provisions of the Continental Restated Certificate and the Continental By-Laws--Anti-Takeover Statute".) CHARTER AMENDMENTS GENERAL LAW. To authorize an amendment to the corporate charter, both Delaware and Rhode Island Law generally require the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon. Both Delaware and Rhode Island Law also provide for any class or series of stock to vote as a class for the proposed amendment if the amendment would change the number or par value of the aggregate authorized shares of a class. The DGCL also provides for class voting if the amendment would alter or modify the powers, preferences or special rights of the shares of such class to affect such class adversely. Rhode Island Law similarly requires separate class voting if the amendment would, among other things, change the designations, preferences, limitations, or relative rights of the class, effect an exchange, or create a right of exchange of all or any part of the shares of another class into shares of the class, or create a new class of shares having rights and preferences prior and superior to the shares of the class. PROVIDENCE JOURNAL. The Providence Journal Charter provides that any amendment, alteration, change, repeal or adoption of the provisions of the Providence Journal Charter relating to election and service of Directors, liability of Directors, Providence Journal Business Combinations, and Providence Journal's right 214 of first refusal requires either the affirmative vote of 80% of the outstanding capital stock entitled to vote thereon, or the approval by a two-thirds vote of the Providence Journal Board and any stockholder vote required by law. CONTINENTAL. Under the Continental Restated Certificate, the approval of 66 2/3% of the votes entitled to be cast by the holders of Continental Voting Stock is required for the amendment of certain provisions of the Continental Restated Certificate. (See "Description of Continental Capital Stock-- Continental Common Stock--Voting Rights" and "DGCL and Certain Provisions of the Continental Restated Certificate and the Continental By-Laws--Amendment of Certain Provisions of the Continental Restated Certificate and the Continental By-Laws".) BY-LAW AMENDMENTS GENERAL LAW. The RIBCA generally, and the DGCL if so provided in the charter, provides that the by-laws of a corporation may be amended by the vote of a majority of the Board of Directors. The DGCL similarly permits the Board to amend a corporation's certificate of incorporation so provided. The Board of Directors' authority to adopt, amend or repeal the by-laws of a corporation does not divest nor limit the power of stockholders to adopt, amend or repeal by-laws. Any amendment by the Board of Directors to the by-laws may be subsequently changed by the affirmative vote of holders of a majority of the shares entitled to vote thereon. PROVIDENCE JOURNAL. The Providence Journal By-Laws generally provide that the affirmative vote of a majority of shares entitled to vote or an affirmative vote of a majority of the Providence Journal Board may alter, amend or repeal provisions of the Providence Journal By-Laws. However, the Providence Journal By-Law provisions relating to the number, election, classes, or removal and replacement, and indemnification of Directors may only be amended, altered or repealed by either (a) an affirmative vote of 80% of the holders of the outstanding shares of capital stock entitled to vote thereon or (b) the affirmative vote of two-thirds of the whole Providence Journal Board and majority stockholder approval. CONTINENTAL. The Continental Restated Certificate provides that the Continental By-Laws may only be amended by a majority vote of the entire Continental Board or by the approval of 66 2/3% of the votes entitled to be cast by the holders of Continental Voting Stock. VOTING RIGHTS PROVIDENCE JOURNAL. Holders of Providence Journal Class A Common Stock are entitled to one vote per share, and holders of Providence Journal Class B Common Stock are entitled to four votes per share. Holders of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock vote together as a single class, except as otherwise required by Rhode Island Law. Any proposed increase in the number of authorized shares of Providence Journal Class A Common Stock or Providence Journal Class B Common Stock requires the approval of a majority of the then outstanding shares of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock, voting together as a single class. CONTINENTAL. Holders of Continental Class A Common Stock are entitled to one vote per share, and holders of Continental Class B Common Stock are entitled to ten votes per share. Holders of Continental Class A and Class B Common Stock vote together as a single class, except as otherwise required by the DGCL. Each share of Continental Series A Preferred Stock entitles the holder to vote on all matters voted on by the holders of Continental Common Stock into which such Continental Series A Preferred Stock is convertible. The Continental Series A Preferred Stock is convertible into either Continental Class A Common Stock or Continental Class B Common Stock and has certain class voting rights. (See "Description of Continental Capital Stock--Continental Series A Preferred Stock--Voting Rights" and "Board Representation".) The holders of the Continental Series B Preferred Stock, when it is issued in connection with the Merger, will have one vote per share and will vote together with the Continental Common Stock 215 and the Continental Series A Preferred Stock on all matters except that such holders will not be entitled to vote on any increase or decrease in the number of authorized shares of any class or classes of Continental capital stock. BOTH THE HOLDERS OF PROVIDENCE JOURNAL CLASS A COMMON STOCK AND PROVIDENCE JOURNAL CLASS B COMMON STOCK WILL RECEIVE THE SAME CONSIDERATION PURSUANT TO THE MERGER FROM CONTINENTAL, THEREFORE THE CURRENT DISPARATE VOTING RIGHTS OF SUCH HOLDERS WILL NOT BE PRESERVED WITH RESPECT TO THE CONTINENTAL MERGER STOCK. RIGHTS AGREEMENT PROVIDENCE JOURNAL. Pursuant to the Providence Journal Charter, approximately 75% of the shares of each of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock are set aside for issuance under the Rights Agreement. FOR A DESCRIPTION OF TERMS OF THE PROVIDENCE JOURNAL RIGHTS AGREEMENT SEE "DESCRIPTION OF NEW PROVIDENCE JOURNAL CAPITAL STOCK--NPJ RIGHTS AGREEMENT" WHICH IS IDENTICAL IN SUBSTANCE TO THE RIGHTS AGREEMENT. CONTINENTAL. Continental does not have a Rights Agreement or any similar arrangement. PREEMPTIVE RIGHTS PROVIDENCE JOURNAL. The Providence Journal Charter grants stockholders preemptive rights to acquire authorized but unissued shares to the extent permitted by Rhode Island Law. Such preemptive rights do not extend to (a) the acquisition of treasury shares upon reissuance; (b) any right to acquire Providence Journal Class A Common Stock issued upon conversion of Providence Journal Class B Common Stock; or (c) any rights inconsistent with the Rights Agreement. CONTINENTAL. The Continental Restated Certificate contains no provision relating to preemptive rights. TRANSFERABILITY OF SHARES PROVIDENCE JOURNAL. The Providence Journal Charter prohibits transfer of shares of Providence Journal Class B Common Stock except to permitted transferees (as such term is defined in the Providence Journal Charter), which generally includes the spouse, parent and children of the transferor, as well as trusts for the benefit of and corporations owned by such family members of the transferor. CONTINENTAL. Although the Continental Restated Certificate similarly restricts transfer of Continental Class B Common Stock, no such restrictions are imposed on shares of Continental Class A Common Stock or Continental Series B Preferred Stock, which will be acquired in the Merger by Providence Journal stockholders. SPECIAL MEETINGS PROVIDENCE JOURNAL. Rhode Island Law permits a special meeting of stockholders to be called by the President, the Board of Directors, or by the holders of 10% or more of the shares entitled to vote at such meeting, or such other officers or persons specified by the charter or by-laws. The Providence Journal By-Laws permit a special meeting of the stockholders to be called at any time for any purpose by the Chairman of the Board, the President, the Providence Journal Board, or by a stockholder or stockholders holding of record at least 20% of the voting power of the outstanding shares of Providence Journal entitled to vote at such meeting. CONTINENTAL. Under the DGCL, a special meeting of stockholders may be called by the Board of Directors or such other persons as are authorized by the certificate of incorporation or by-laws. The Continental By-Laws provide special meetings may be called for any purpose, unless otherwise prescribed by law, by the Chairman, or Vice Chairman of the Continental Board, or by a majority of the Continental Board then in office, and shall be called by the President or Secretary at the written request of the stockholders holding of record a majority of the shares of stock of Continental issued and outstanding and entitled to vote. Additionally, the Series A Certificate of Designation provides that the Chairman shall call a special 216 meeting upon receipt of the written request of the holders of record of 20% of the voting power represented by the outstanding shares of Continental Series A Preferred Stock, if the holders of the Continental Series A Preferred Stock are entitled to vote separately as a single class for Directors upon Default, or the holders of record of 20% of the voting power represented by the outstanding shares of Continental Series A Preferred Stock and any series of preferred stock with rights on parity with the Continental Series A Preferred Stock or Continental Series B Preferred Stock, if Continental is in default under the terms of such stock. CORPORATE ACTION WITHOUT A MEETING PROVIDENCE JOURNAL. Except for corporate action relating to a merger or consolidation, acquisition or disposition, Rhode Island Law permits corporate action without a meeting if the charter or by-laws of a corporation authorizes such action, and the stockholders consenting to such action would be entitled to vote thereon and comprise at least the minimum number of votes which would be required to take such action. Rhode Island Law further provides that corporate action relating to a merger, consolidation, acquisition or disposition may be taken without a meeting if all stockholders entitled to vote thereon consent in writing. The Providence Journal By-Laws authorize corporate action without a meeting by unanimous written consent, or by less than unanimous consent to the extent permitted by Rhode Island Law and the Providence Journal Charter. CONTINENTAL. The DGCL permits corporate action without a stockholder's meeting, without prior notice and without a vote of stockholders upon receipt of written consent of that number of shares that would be necessary to authorize the proposed corporate action at a meeting at which all shares entitled to vote thereon were present and voting, unless the charter expressly provides otherwise. Prompt notice of the taking of action without a meeting by less than unanimous written consent must be given to all stockholders who have not consented in writing. The Continental By-Laws permit corporate action without a meeting of the stockholders in accordance with the parameters set forth in the DGCL. DIVIDENDS PROVIDENCE JOURNAL. Under Rhode Island Law, the Board of Directors has the power to declare and pay dividends in cash, property or securities of the corporation unless (a) such corporation is or would be thereby made insolvent or (b) the declaration or payment of such dividends would be contrary to any restrictions contained in the charter. Rhode Island Law further provides that no distribution may be made (i) if the corporation would become unable to pay its debts as they become due in the usual course of business or (ii) the corporation's total assets would be less than the sum of its liabilities plus, unless the articles of incorporation permit otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution. The Providence Journal Charter provides for the ratable payment of dividends to holders of shares of Providence Journal Class A and Providence Journal Class B Common Stock in accordance with Rhode Island Law. CONTINENTAL. Under the DGCL, the Directors of a corporation are generally permitted to declare and pay dividends out of surplus or out of net profits for the current and/or preceding fiscal year, provided that such dividends will not reduce capital below the amount of capital represented by all classes of issued and outstanding stock having a preference upon the distribution of assets. Also under the DGCL, a corporation may generally redeem or purchase shares of its stock if such redemption or purchase will not impair the capital of the corporation. Pursuant to the Continental Restated Certificate, the holders of shares of Continental Class A and Class B Common Stock share ratably in dividends, but the right of holders of either Continental Class A or Class B Common Stock to receive dividends is subject to the rights of the Continental Series A Preferred Stock (and, after the Merger, the rights of the Continental Series B Preferred Stock). 217 LIQUIDATION GENERAL LAW. Pursuant to both Rhode Island Law and the DGCL, upon the winding up, dissolution or liquidation of a corporation, the stockholders of such corporation are entitled to share in any of the assets distributable to the holders of the respective corporation's stock upon such liquidation, dissolution or winding up in accordance with their respective rights and interests. PROVIDENCE JOURNAL. The Providence Journal Charter provides for the ratable distribution to holders of Providence Journal Class A and Providence Journal Class B Common Stock in the event of any liquidation, dissolution or winding up. The Plan of Reorganization, however, provides for a non-ratable distribution in connection with the Restructuring (one step of which is the dissolution of Providence Journal). The approval of the Plan of Reorganization by the stockholders of Providence Journal will have the same effect as an amendment of the Providence Journal Charter by providing that each stockholder of Providence Journal Class A Common Stock will receive, in the Restructuring, one share of Restructured PJC Class A Common Stock in exchange for and in redemption of each share of Providence Journal Class A Common Stock held and one share of Restructured PJC Class B Common Stock in exchange for and in redemption of each share of Providence Journal Class B Common Stock held. CONTINENTAL. Similarly, the Continental Restated Certificate provides for the ratable distribution to holders of Continental Class A Common Stock and Continental Class B Common Stock in the event of a liquidation, dissolution or winding up. However, the rights of holders of Continental Class A and Continental Class B Common Stock (or any other capital stock, if issued, ranking junior to Continental Series A Preferred Stock) are subject to the preferential rights of the holders of Continental Series A Preferred Stock (and, after the Merger, the Continental Series B Preferred Stock). APPRAISAL OR DISSENTERS' RIGHTS PROVIDENCE JOURNAL. Under Rhode Island Law, dissenters' rights are available only in connection with (a) a plan of merger or consolidation (unless the corporation is the surviving corporation and stockholder approval is not required); (b) acquisitions which require stockholder approval; and (c) sales or exchanges of all or substantially all of the property and assets of a corporation in a transaction requiring stockholder approval. In addition, unless otherwise provided in the articles of incorporation, no dissenters rights are available to holders of shares of any class of stock which, as of the date fixed to determine the stockholders entitled to receive notice of the proposed transaction, is either (i) listed on a national securities exchange or included as national market securities in the NASDAQ system or any successor system or (ii) held of record by 2,000 or more stockholders. There are no provisions in the Providence Journal Charter relating to appraisal rights. Pursuant to Rhode Island Law, the stockholders of Providence Journal will have appraisal rights in connection with the Merger. (See "Rights of Dissenting Stockholders--Providence Journal".) CONTINENTAL. Under the DGCL, appraisal rights are available in connection with a statutory merger or consolidation in certain specified situations. Appraisal rights are not available when a corporation is to be a surviving corporation, and no vote of its stockholders is required to approve the merger. In addition, unless otherwise provided in the charter, no appraisal rights are available to holders of shares of any class of stock which is either: (a) listed on a national securities exchange or designated as a national market system security and quoted in the NASDAQ system or (b) held of record by more than 2,000 stockholders, unless such stockholders are required by the terms of the merger to accept anything other than: (i) shares of stock of the surviving corporation; (ii) shares of stock of another corporation which are or will be so listed on a national securities exchange or designated as a national market system security and quoted in the NASDAQ system or held of record by more than 2,000 stockholders; (iii) cash in lieu of fractional shares of such stock; or (iv) any combination thereof. The Continental Restated Certificate has no provision relating to appraisal rights. (See "Rights of Dissenting Stockholders--Continental".) 218 PROVISIONS RELATING TO DIRECTORS AND OFFICERS GENERAL LAW. Under both Rhode Island Law and Delaware Law, a corporation must have a Board of Directors consisting of at least one director. Under Rhode Island Law and the DGCL, a corporation's charter may (i) confer upon holders of any class or series of stock the right to elect one or more directors to serve for such term and to have such voting powers as may be specified therein, (ii) permit classification of the Board of Directors, and (iii) permit cumulative voting for the election of Directors. PROVIDENCE JOURNAL. The Providence Journal Charter provides for a Board of Directors consisting of no less than nine and no more than 15 Directors. The exact number of Directors is to be determined from time to time by an affirmative vote of a majority of the whole Board of Directors. Currently, the Providence Journal Board consists of 12 members and is divided into three equal classes with staggered terms. Any vacancies on the Providence Journal Board, however caused, shall be filled solely by a majority vote of the Directors then in office, whether or not a quorum, and any Director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the Director has been chosen expires. The Providence Journal Charter does not provide for cumulative voting or class voting for election of Directors. CONTINENTAL. The Continental Restated Certificate provides that the number of Directors is determined by the Continental Board (exclusive of Directors to be elected, if any, by holders of shares of Continental Series A Preferred Stock). (See "Voting Rights--Continental".) Currently, the Continental Board consists of nine members and is divided into three classes with staggered terms. Any vacancy on the Continental Board shall 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 does not provide for cumulative voting. The Continental Restated Certificate permits class voting only with respect to holders of shares of Continental Series A Preferred Stock in the event of certain dividend arrearages, breaches of specific obligations owed to such holders or with respect to any proposed action which would result in a modification of their rights as holders of Continental Series A Preferred Stock. (See "Description of Continental Capital Stock--Continental Series A Preferred Stock--Board Representation".) STOCKHOLDER NOMINATIONS AND RIGHTS OF PREFERRED STOCKHOLDERS TO ELECT DIRECTORS PROVIDENCE JOURNAL. Neither the Providence Journal Charter nor the Providence Journal By-Laws sets forth the procedure for nominating individuals for election to the Providence Journal Board. CONTINENTAL. The Continental By-Laws require nominations of persons for election to the Continental Board to be made at a meeting of stockholders by or at the direction of the Continental Board, by any nominating committee or person appointed by the Continental Board or by any stockholder of Continental entitled to vote for the election of Directors at the meeting. Notwithstanding, in the event any holder of Continental Series A Preferred Stock is entitled to elect Directors at the annual meeting the number of Directors of Continental shall be increased as required under the Preferred Stock Purchase Agreement. (See "Description of Continental Capital Stock--Continental Series A Preferred Stock--Voting Rights" and "Board Representation".) REMOVAL PROVIDENCE JOURNAL. Under Rhode Island Law, a director may be removed by the stockholders without cause, if the charter or by-laws so provide. The Providence Journal Charter provides that any director or the entire Providence Journal Board may be removed at any time, but only for cause and only by the affirmative vote of (a) the holders of 80% of the outstanding shares of capital stock entitled to vote in the election of directors; or (b) the holders of a majority of outstanding shares and upon the recommendation of not less than two-thirds of the whole Providence Journal Board. CONTINENTAL. Under the DGCL, any director or the entire Board of Directors of a corporation may be removed, with or without cause, by the holders of a majority of the shares then entitled to elect Directors. In 219 the case of a corporation whose Board of Directors is classified, stockholders may effect such removal only for cause unless the charter provides otherwise. DERIVATIVE SUITS Under both Rhode Island Law and the DGCL, stockholders may bring suit on behalf of the corporation to enforce the rights of a corporation. Under both Rhode Island Law and the DGCL, a person may institute and maintain a suit only if such person was a stockholder at the time of the transaction which is the subject of the suit. RHODE ISLAND LAW. Under Rhode Island Law, upon final judgment and a finding that the commencement of a derivative action by a stockholder was without reasonable cause, a court may require the plaintiff(s) to pay to the parties named as defendant(s) the reasonable expenses including legal fees incurred by them in defense of such action. DGCL. Additionally, under the DGCL, the plaintiff generally must be a stockholder not only at the time of the transaction which is the subject of the suit, but also through the duration of the derivative suit. The DGCL also requires that the derivative plaintiff make demand on the Directors of the corporation to assert the corporate claim unless such demand would be futile before the suit may be prosecuted by the derivative plaintiff. CONFLICT OF INTEREST TRANSACTIONS Both Rhode Island Law and the DGCL provide that contracts or other transactions between a corporation and one or more or its Directors or officers or between a corporation and any other corporation or other entity with respect to which any of the corporation's Directors or officers are Directors, officers or financially interested persons, are permitted if: (a) the material facts as to the contract or transaction and the Director's relationship or interest are disclosed to the Board of Directors or committee, and the Board of Directors or committee authorizes the contract in good faith by the affirmative vote of a majority of disinterested Directors (even though less than a quorum); (b) if the material facts as to the contract or transaction and the Director's relationship or interest are disclosed to the stockholders entitled to vote thereon and it is approved in good faith by vote of the stockholders, or (c) if the contract or transaction is fair and reasonable as to the corporation as of the time it is approved by the Board of Directors, a committee, or the stockholders. Neither the Providence Journal Charter nor Providence Journal By-Laws nor the Continental Restated Certificate or Continental By-Laws contain additional provisions governing transactions involving interested Directors. STATE ANTI-TAKEOVER STATUTES PROVIDENCE JOURNAL. Pursuant Sections 7-5.2-1 et seq. of RIBCA, a corporation shall not engage in any business combination with an interested stockholder (generally defined as the beneficial owner of 10% or more of the corporation's outstanding voting stock or an affiliate of the corporation who within five years prior to the date in question was the beneficial owner of 10% or more of the corporation's outstanding voting stock) for a period of five years following the date the stockholder became an interested stockholder unless either (a) the Board of Directors of the corporation approved the business combination or transaction prior to the date the stockholder became an interested stockholder; (b) holders of two-thirds of the outstanding voting stock, excluding any stock owned by the interested stockholder or any affiliate or associate of the interested stockholder, have approved the business combination at a meeting called for such purpose no earlier than five years after the interested stockholder's stock acquisition date; or (c) the business combination meets each of the following conditions: (i) the nature, form and adequacy of the consideration to be received by the corporation's stockholders in the business combination transaction satisfies certain specific enumerated criteria; (ii) the holders of all the outstanding shares of stock of the corporation not beneficially owned by the interested stockholder are entitled to receive the specified consideration in the business combination 220 transaction; and (iii) the interested stockholder shall not acquire additional shares of voting stock of the corporation except in certain specifically identified transactions. The restrictions prescribed by the statute will not be applicable to any business combination (a) involving a corporation that does not have a class of voting stock, registered under the Exchange Act, unless the charter provides otherwise; (b) involving a corporation which did not have a class of voting stock registered under the Exchange Act at the time corporation's charter was amended to provide that the corporation shall be subject to the statutory restriction provisions and the interested stockholder's stock acquisition date is prior to the effective date of the charter amendment; (c) involving a corporation whose original charter contains a provision expressly electing not to be subject to the statutory restrictions or which adopted an amendment expressly electing not to be subject to the statutory restrictions either to its by-laws prior to March 31, 1991 or to its charter if such charter amendment is approved by the affirmative vote of holders, other than the interested stockholders, and their affiliates and associates, of two-thirds of the outstanding voting stock, excluding the voting stock of the interested stockholders; provided, that the amendment to the charter shall not be effective until 12 months after the vote of the stockholders and shall not apply to any business combination of the corporation with an interested stockholder whose stock acquisition date is on or prior to the effective date of the amendment; or (d) involving a corporation with an interested stockholder who became an interested stockholder inadvertently, if the interested stockholder divests itself of such number of shares so that it is no longer the beneficial owner of 10% of the outstanding voting stock and, but for such inadvertent ownership, was not an interested stockholder within the five-year period preceding the announcement of the business combination. The Providence Journal Charter explicitly adopts the terms of this Rhode Island Statute. For specific voting requirements applicable to the Merger, see "Required Vote For Certain Business Combinations". CONTINENTAL. (For a discussion of Section 203 of the DGCL, see "Description of Continental Capital Stock--DGCL and Certain Provisions of the Continental Restated Certificate and the Continental By-Laws--Anti-Takeover Statute".) Although Continental is not presently subject to the restrictions prescribed by the statute, it will be so following the consummation of the Merger. LEGISLATION AND REGULATION The cable television industry is regulated by the FCC, some state governments and substantially all local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies may materially affect the cable television industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable television industry and a description of certain state and local laws. CABLE COMMUNICATIONS POLICY ACT OF 1984 The 1984 Cable Act became effective in December 1984. This federal statute, which amended the Communications Act of 1934, creates uniform national standards and guidelines for the regulation of cable television systems. Violations by a cable television system operator of provisions of the 1984 Cable Act, as well as of FCC regulations, can subject the operator to substantial monetary penalties and other sanctions. Among other things, the 1984 Cable Act affirmed the right of franchising authorities (state or local, depending on the practice in individual states) to award one or more franchises within their jurisdictions. It also prohibited non-grandfathered cable television systems from operating without a franchise in such jurisdictions. In connection with new franchises, the 1984 Cable Act provides that in granting or renewing franchises, franchising authorities may establish requirements for cable-related facilities and equipment, but may not establish or enforce requirements for video programming or information services other than in broad categories. 221 CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992 OVERVIEW. In October 1992, Congress enacted the 1992 Cable Act. This legislation made significant changes to the legislative and regulatory environment in which the cable industry operates. It amends the 1984 Cable Act in many respects. The 1992 Cable Act became effective in December 1992, although certain provisions, most notably those dealing with rate regulation and retransmission consent, became effective at later dates. The legislation required the FCC to initiate a number of rule-making proceedings to implement various provisions of the statute, the majority of which, including certain of those related to rate regulation, have been completed. The 1992 Cable Act allows for a greater degree of regulation of the cable industry with respect to, among other things: (i) cable system rates for both basic and certain cable programming services; (ii) programming access and exclusivity arrangements; (iii) access to cable channels by unaffiliated programming services; (iv) leased access terms and conditions; (v) horizontal and vertical ownership of cable systems; (vi) customer service requirements; (vii) franchise renewals; (viii) television broadcast signal carriage and retransmission consent; (ix) technical standards; (x) customer privacy; (xi) consumer protection issues; (xii) cable equipment compatibility; (xiii) obscene or indecent programming; and (xiv) subscription to tiers of service other than basic service as a condition of purchasing premium services. Additionally, the legislation encourages competition with existing cable television systems by: allowing municipalities to own and operate their own cable television systems without a franchise; preventing franchising authorities from granting exclusive franchises or unreasonably refusing to award additional franchises covering an existing cable system's service area; and prohibiting the common ownership of cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also precludes video programmers affiliated with cable television companies from favoring cable operators over competitors and requires such programmers to sell their programming to other multi-channel video distributors. Various cable operators have filed actions in the United States District Court in the District of Columbia challenging the constitutionality of several sections of the 1992 Cable Act. Pursuant to special jurisdictional provisions in the 1992 Cable Act, a challenge to the must-carry provisions of the Act was heard by a three-judge panel of the district court. In April 1993, the three- judge court granted summary judgment for the government, upholding the constitutional validity of the must-carry provisions of the 1992 Cable Act. That decision was appealed directly to the United States Supreme Court. In June 1994, the United States Supreme Court remanded the case to the district court. Pending the outcome of further proceedings before the district court, the must- carry statutes and the FCC regulations remain in place. The cable operators' constitutional challenge to the balance of the 1992 Cable Act provisions was heard by a single judge of the district court. In September 1993, the court rendered its decision upholding the constitutionality of all but three provisions of the statute (multiple ownership limits for cable operators, advance notice of free previews for certain programming services, and channel set-asides for DBS operators). This decision has been appealed to the United States Court of Appeals for the District of Columbia Circuit. Appeals have also been filed in that court from the FCC's rate regulation rule- making decisions. FEDERAL REGULATION The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations covering such areas as the registration of cable television systems, cross-ownership between cable television systems and other communications businesses, carriage of television broadcast programming, consumer education and lockbox enforcement, origination, cablecasting and sponsorship identification, children's programming, the regulation of basic cable service rates in areas where cable television systems are not subject to effective competition, signal leakage and frequency use, technical performance, maintenance of various records, equal employment opportunity, and antenna structure notification, marking and lighting. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. The 1992 Cable Act required the FCC to adopt additional regulations covering, among 222 other things, cable rates, signal carriage, consumer protection and customer service, leased access, indecent programming, programmer access to cable television systems, programming agreements, technical standards, consumer electronics equipment compatibility, ownership of home wiring, program exclusivity, equal employment opportunity, and various aspects of DBS system ownership and operation. A brief summary of certain of these federal regulations as adopted to date follows. RATE REGULATION. The 1984 Cable Act codified existing FCC preemption of rate regulation for premium channels and optional cable programming service tiers. The 1984 Cable Act also deregulated basic cable rates for cable television systems determined by the FCC to be subject to effective competition. The 1992 Cable Act substantially changed the 1984 Cable Act and FCC rate regulation standards then in existence. The 1992 Cable Act replaced the FCC's old standard for determining effective competition, under which most cable systems were not subject to local rate regulation, with a statutory provision that results in nearly all cable television systems becoming subject to local rate regulation of basic service. Additionally, the legislation eliminates the 5% annual rate increase for basic service previously allowed by the 1984 Cable Act without local approval; requires the FCC to adopt a formula, for franchising authorities to enforce, to assure that basic cable rates are reasonable; allows the FCC to review rates for cable programming service tiers (other than per- channel or per-event services) in response to complaints filed by franchising authorities and/or cable customers; prohibits cable television systems from requiring subscribers to purchase service tiers above basic service in order to purchase premium services if the system is technically capable of doing so; requires the FCC to adopt regulations to establish, on the basis of actual costs, the price for installation of cable service, remote controls, converter boxes and additional outlets; and allows the FCC to impose restrictions on the retiering and rearrangement of cable services under certain limited circumstances. The FCC issued rule-making decisions designed to implement these rate regulation provisions in April 1993. The FCC's regulations adopted in April 1993 set standards for the regulation of basic and cable programming service tier rates. The FCC also ordered an interim 120-day freeze on these rates effective April 5, 1993, which was extended until May 15, 1994. The FCC's rules governing rates became effective for cable systems serving more than 1,000 subscribers in September 1993. The FCC had granted a temporary stay of its rate regulation rules for small systems serving 1,000 or fewer subscribers, but the stay was lifted when the FCC revised its rate regulations on February 22, 1994, to be effective on the effective date of those revised regulations, May 15, 1994. The April 1993 rate regulations adopted a benchmark price cap system for measuring the reasonableness of existing basic and cable programming service rates. Regulated services include: (i) the basic service tier required to be established by the 1992 Cable Act, consisting, at a minimum, of all broadcast signals carried by such system except those imported by satellite from another market (i.e., superstations) and all public, educational and governmental access programming and (ii) other cable programming (service tiers above the basic service tier, excluding per-channel and per-program programming). Alternatively, cable operators are given the opportunity to make a cost-of- service showing to justify rates above the applicable benchmarks. If a cost-of- service showing is unsuccessful, the rates for a system may be reduced below the applicable benchmark. As discussed below, the FCC has published regulations setting forth the procedures to be utilized in such a cost-of-service showing; however, the rules are not yet final. The rules regarding rate regulation also require that charges for cable-related equipment (e.g., converter boxes and remote control devices) and installation services be unbundled from the provision of cable service and based upon actual costs plus a reasonable profit and established a formula for evaluating future rate increases. Local franchising authorities (if certified by the FCC) and/or the FCC are empowered to order a reduction of existing rates. Refund liability for basic cable rates is limited to a one-year period, initially calculated from the effective date of the FCC's regulations. Refund liability for cable programming service rates is calculated from the date a complaint is filed with the FCC until the refund is implemented. A complaint alleging an unreasonable rate for a cable programming service in effect on September 1, 1993, must have been filed by February 28, 1994. After that date, a complaint regarding a rate increase for a cable programming service must be filed with the FCC within 45 days from the date that the complainant receives the bill. In general, in order to avoid refund 223 liability, cable operators whose rates were above FCC benchmark levels were required, absent a successful cost-of-service showing, to reduce those rates to the benchmark level or by up to 10% of the rates in effect on September 30, 1992, whichever reduction was less, adjusted for inflation and channel modifications occurring subsequent to September 30, 1992. The FCC, however, reserved the right to raise or lower the benchmarks that it established. The regulations also provided that future rate increases could not exceed an inflation-indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs that exceed the inflation index. On February 22, 1994, the FCC adopted a revision of its benchmark regulations effective May 15, 1994. The FCC allowed a sixty day transition period for implementing the new rates to July 15, 1994. The new benchmarks subject cable television systems to rate reductions, absent a successful cost-of-service showing, of up to 17% of the rates in effect on September 30, 1992, adjusted for inflation, channel modifications, equipment costs and certain increases in programming costs. Further rate reductions for cable systems whose rates are below the revised benchmark levels will be held in abeyance pending completion by the FCC of cable system cost studies, as will reductions that would require operators to reduce rates below benchmark levels in order to achieve a 17% rate reduction. These additional rate reductions below the new benchmarks would be required only if validated by the studies. The FCC also announced its intention to investigate cable systems whose rates are substantially above the permitted benchmark levels. Also on February 22, 1994, the FCC adopted interim rules for cost-of-service showings that establish a regulatory framework pursuant to which a cable television operator may attempt to justify rates in excess of the new benchmarks. Such justifications are based upon (i) the operator's costs in operating a cable television system (including certain operating expenses, depreciation and taxes) and (ii) a return on the investment the operator has made to provide regulated cable television services in such system (such investment being referred to as its "rate base"). The guidelines disallow from a cable operator's rate base "excess acquisition costs" beyond the original construction costs or "book value" of a cable system but include in the rate base the costs associated with certain intangibles such as franchise rights and customer lists. The uniform rate of return for regulated cable television service is 11.25%, after taxes, on a cable system's rate base. The interim guidelines originally included a "productivity offset feature" that could reduce otherwise justifiable rate increases based on a claimed increase in a cable television system's operational efficiencies. The FCC dropped this proposal in September, 1994. Some cable operators, relying on provisions in the Cable Act that exempt programming offered on an individual per-channel basis from rate regulation, offered a group of such per-channel (or "a la carte") offerings at a discounted package price. The Company has not to date created such a la carte packages. On February 22, 1994, the FCC adopted rules that revised its treatment of a la carte programming offerings by applying various criteria to determine whether a cable operator's a la carte packages should be subject to rate regulation. Local franchising authorities were given the authority under FCC rules, subject to review by the FCC, to determine whether an a la carte offering should be subject to rate regulation. If a cable operator is found to have bundled channels in an a la carte package to evade rate regulations, the FCC may impose forfeitures or other sanctions. The FCC on November 10, 1994 reversed its policy regarding rate regulation of packages of a la carte services. A la carte services that are offered in a package will now be subject to rate regulation by the FCC. In light of the uncertainty created by the various criteria that the FCC previously applied to a la carte packages, the FCC, in those cases in which it was not clear how the FCC's previous criteria should have been applied to the package at issue, and where only a "small number" of channels were moved from a previously regulated tier to the package, will allow cable operators to treat existing packages as NPTs as discussed below. The FCC, in addition to revising its rules governing a la carte channels, also on November 10, 1994 revised its regulations governing the manner in which cable operators may charge subscribers for new cable programming services. The FCC instituted a three-year flat fee mark-up plan for charges relating to new 224 channels of cable programming services in addition to the present formula for calculating the permissible rate for new services. Commencing on January 1, 1995, operators may charge for new channels of cable programming services added after May 14, 1994 at a markup of up to 20 cents per channel over actual programming costs, but may not make adjustments to monthly rates totalling more than $1.20, plus an additional 30 cents solely for programming license fees, per subscriber over the first two years of the three-year period for these new services. Cable operators may charge an additional 20 cents in the third year only for channels added in that year. Cable operators electing to use the 20 cent per channel adjustment may not take a 7.5% mark-up on programming cost increases, which is permitted under the FCC's current rate regulations. The FCC requested further comment on whether cable operators should continue to receive the 7.5% mark-up on increases in license fees on existing programming services. Additionally, the FCC will permit cable operators to offer NPTs at rates which they elect so long as, among other conditions, other service tiers that are subject to rate regulation are priced in conformity with applicable FCC regulations and cable operators do not remove programming services from existing service tiers and offer them on the NPT. Many franchising authorities have become certified by the FCC to regulate the rates charged by Continental and Providence Journal for basic cable service and associated basic cable service equipment. In addition, a number of the Continental and Providence Journal customers have filed complaints with the FCC regarding the rates charged for cable programming services. Some local franchising authority decisions have been rendered that were adverse to Continental and Providence Journal. Several of these have been appealed to the FCC, and it is likely that some refunds will be ordered in the future. Either Continental and Providence Journal revenues could be materially and adversely affected if either Continental or Providence Journal was required to reduce its rates and pay refunds, or if the ability to implement rate increases consistent with past practices were materially limited by the regulations that the FCC has adopted. OTHER REGULATIONS UNDER THE 1992 CABLE ACT. In addition to the foregoing rate regulations, the FCC has adopted regulations pursuant to the 1992 Cable Act which require cable systems to permit customers to purchase video programming on a per-channel or a per-event basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the cable system is technically incapable of doing so. Generally, this exemption from compliance with the statute for cable systems that do not have such technical capability is available until a cable system obtains the capability, but not later than December 2002. The FCC also has adopted a number of measures for improving compatibility between existing cable systems and consumer equipment. In conjunction therewith, the FCC rules prohibit cable operators from scrambling program signals carried on the basic tier, absent a waiver. The FCC also is proposing to extend this prohibition to cover all regulated tiers. The FCC also has adopted regulations in connection with its cost-of-service proceedings which govern programming charges for affiliated entities. These rules apply to systems subject to regulation under both the benchmark and cost- of-service regulations. The cost of programming to affiliated entities must be the prevailing company price, based on the sale of programming to third parties, or a price equal to the lower of the programming service's net book cost and its estimated fair market value. CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act contains new signal carriage requirements. These new rules allow commercial television broadcast stations which are "local" to a cable system, i.e., the system is located in the station's Area of Dominant Influence, to elect every three years whether to require the cable system to negotiate for "retransmission consent" to carry the station. The first such election was made in June 1993. A recent amendment to the Copyright Act will in some cases increase the number of stations that may elect must-carry status on cable systems located within such stations ADI. Local non-commercial television stations are given mandatory carriage rights, subject to certain exceptions, within the larger of: (i) a 50 mile radius from the station's city of license; or (ii) the station's Grade B contour (a measure of signal strength). Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable systems have to obtain 225 retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations" (i.e., commercial satellite- delivered independent stations such as WTBS). The must-carry provisions for non-commercial stations became effective in December 1992. Implementing must- carry rules for non-commercial and commercial stations and retransmission consent rules for commercial stations were adopted by the FCC in March 1993. All commercial stations entitled to carriage were to have been carried by June 1993, and any non-must-carry stations (other than superstations) for which retransmission consent had not been obtained could no longer be carried after October 5, 1993. NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or nonsimultaneous network programming of a distant station when such programming has also been contracted for by the local station on an exclusive basis. DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from other television stations which are carried by the cable system. The extent of such deletions will vary from market to market and cannot be predicted with certainty. However, it is possible that such deletions could be substantial and could lead the cable operator to drop a distant signal in its entirety. The FCC also has commenced a proceeding to determine whether to relax or abolish the geographic limitations on program exclusivity contained in its rules, which would allow parties to set the geographic scope of exclusive distribution rights entirely by contract, and to determine whether such exclusivity rights should be extended to noncommercial educational stations. It is possible that the outcome of these proceedings will increase the amount of programming that cable operators are required to black out. Finally, the FCC has declined to impose equivalent syndicated exclusivity rules on satellite carriers who provide services to the owners of home satellite dishes similar to those provided by cable systems. FRANCHISE FEES. Although franchising authorities may impose franchise fees under the 1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross revenues. Franchising authorities are also empowered in awarding new franchises or renewing existing franchises to require cable operators to provide cable-related facilities and equipment and to enforce compliance with voluntary commitments. In the case of franchises in effect prior to the effective date of the 1984 Cable Act, franchising authorities may enforce requirements contained in the franchise relating to facilities, equipment and services, whether or not cable-related. The 1984 Cable Act, under certain limited circumstances, permits a cable operator to obtain modifications of franchise obligations. RENEWAL OF FRANCHISES. The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchises against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Even after the formal renewal procedures are invoked, franchising authorities and cable operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. The 1992 Cable Act makes several changes to the process under which a cable operator seeks to enforce its renewal rights which could make it easier in some cases for a franchising authority to deny renewal. While a cable operator must still submit its request to commence renewal proceedings within 30 to 36 months prior to franchise expiration to invoke the formal renewal process, the request must be in writing and the franchising authority must commence renewal proceedings not later than six months after receipt of such notice. The four- month period for the franchising authority to grant or deny the renewal now runs from the submission of the renewal proposal, not the completion of the public proceeding. Franchising authorities may consider the "level" of programming service provided by a cable operator in deciding whether to renew. 226 Franchising authorities are no longer precluded from denying renewal based on failure to substantially comply with the material terms of the franchise where the franchising authority has "effectively acquiesced" to such past violations. Rather, the franchising authority is estopped if, after giving the cable operator notice and opportunity to cure, it fails to respond to a written notice from the cable operator of its failure or inability to cure. Courts may not reverse a denial of a renewal based on procedural violations found to be "harmless error." CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising authorities to require cable operators to set aside certain channels for public, education and governmental access programming. The 1984 Cable Act further requires cable television systems with 36 or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. While the 1984 Cable Act allowed cable operators substantial latitude in setting leased access rates, the 1992 Cable Act required leased access rates to be set according to an FCC-prescribed formula. The FCC adopted such a formula and implemented regulations in April 1993, but various parties have filed petitions requesting the FCC to reconsider its decision. COMPETING FRANCHISES. Questions concerning the right of a municipality to award de facto exclusive cable television franchises and to impose certain franchise restrictions upon cable television companies are under consideration in Preferred Communications, Inc. v. City of Los Angeles, involving a proposed applicant for a franchise in one of the Company's service areas, in which the United States Supreme Court declared that cable television operators have First Amendment rights which cannot be abridged in the absence of overriding governmental interests. While establishing this broad judicial standard, the Supreme Court remanded the case to a lower federal court for trial on the factual issues surrounding a cable television operator's use of public rights- of-way and a municipality's interest in awarding a de facto exclusive franchise, or placing a limit on the number of franchisees. Recently, the United States Supreme Court denied a petition to review the Ninth Circuit's January 1994 decision reaffirming that a municipality may not constitutionally restrict the award of a cable franchise to a single entity. Until the United States Supreme Court rules definitively on the scope of cable television's First Amendment protections, the legality of the franchising process and of various specific franchise requirements is likely to be in a state of flux. It is not possible at the present time to predict the constitutionally permissible bounds of cable franchising and particular franchise requirements. However, the 1992 Cable Act, among other things, prohibits franchising authorities from unreasonably refusing to grant franchises to competing cable television systems and permits franchising authorities to operate their own cable television systems without franchises. OWNERSHIP AND CROSS-OWNERSHIP LIMITATIONS. The 1984 Cable Act codified existing FCC cross-ownership regulations, which, in part, prohibit LECs from providing video programming directly to customers within their local exchange telephone service areas, except in rural areas or by specific waiver of FCC rules. Several federal district courts have struck down the 1984 Cable Act's cable/telco cross-ownership prohibition as facially invalid and inconsistent with the First Amendment. Two district court decisions have been upheld by the United States Courts of Appeals for the Fourth Circuit and the Ninth Circuit. Other decisions have been appealed or will be appealed. Similar litigation by other telephone companies has commenced in several other district courts. 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 noncommon carrier activities such as video processing, billing and collection and joint marketing arrangements. The FCC recently issued an order on reconsideration reaffirming its initial decision, and this order has been appealed. In its video dialtone order, the FCC concluded that neither the 1984 Cable Act nor its rules apply to prohibit the interexchange carriers (i.e., long distance telephone companies such as AT&T) from providing such services to their customers. Additionally, the FCC also concluded that where a LEC makes its facilities available on a common carrier basis for the provision of video programming to the public, the 1984 Cable Act does not require the LEC or its programmer customers to obtain a franchise to provide such service. This aspect of the FCC's video dialtone order was upheld on appeal by the U.S. Court of Appeals for the D.C. Circuit. Because cable operators are 227 required to bear the costs of complying with local franchise requirements, including the payment of franchise fees, the FCC's decision could place cable operators at a competitive disadvantage vis-a-vis services offered on a common carrier basis over local telephone company provided facilities. As part of the same proceeding, the FCC recommended that Congress amend the 1984 Cable Act to allow LECs to provide their own video programming services over their facilities in competition with their customers' services. The FCC also decided to loosen ownership and affiliation restrictions currently applicable to telephone companies, and has proposed to increase the numerical limit on the population of areas qualifying as "rural" and in which LECs can provide cable service without FCC waiver. The telephone industry has continued to lobby Congress for legislation that will permit LECs to provide video programming directly to consumers within their service areas. Bills were introduced in the last Congress that would have permitted the LECs to provide cable television service over their own facilities conditioned on establishing a video programming affiliate that would maintain separate records to prevent cross-subsidization. Provisions in these bills would also have prohibited telephone companies from purchasing existing cable television systems within their telephone service areas with certain exceptions. None of these bills were adopted. Similar legislation is expected to be introduced in the current Congress. The outcome of these FCC, legislative or court proceedings and proposals or the effect of such outcome on cable system operations cannot be predicted. The 1984 Cable Act and the FCC's rules also prohibit the common ownership, operation, control or interest in a cable system and a local television broadcast station whose predicted grade B contour (a measure of a television station's significant signal strength as defined by the FCC's rules) covers any portion of the community served by the cable system. Common ownership or control has historically also been prohibited by the FCC (but not by the 1984 Cable Act) between a cable system and a national television network, although the FCC has adopted an order which substantially relaxes the network/cable cross-ownership prohibitions subject to certain national and local ownership limits. As a part of the same action, the FCC also voted to recommend to Congress that the broadcast/cable cross-ownership restrictions contained in the 1984 Cable Act be repealed. Finally, in order to encourage competition in the provision of video programming, the FCC adopted a rule prohibiting the common ownership, affiliation, control or interest in cable television systems and MDS facilities having overlapping service areas, except in very limited circumstances. The 1992 Cable Act codified this restriction and extended it to co-located SMATV systems. Permitted arrangements in effect as of October 5, 1992 were grandfathered. In January 1993, the FCC loosened its previously stringent interpretation of the lack of ability of a cable operator to purchase a SMATV system in the same franchise area. The 1992 Cable Act permits states or local franchising authorities to adopt certain additional restrictions on the ownership of cable television systems. Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of cable systems which a single cable operator can own. In general, no cable operator can have an attributable interest in cable systems which pass more than 30% of all homes nationwide. Attributable interests for these purposes include voting interests of 5% or more (unless there is another single holder of more than 50% of the voting stock), officerships, directorships and general partnership interests. The FCC has stayed the effectiveness of these rules pending the outcome of the appeal from the United States District Court decision holding the multiple ownership limit provision of the 1992 Cable Act unconstitutional. The FCC has also adopted rules which limit the number of channels on a cable system which can be occupied by programming in which the entity which owns the cable system has an attributable interest. The limit is 40% of all activated channels. BROADBAND PCS AUCTIONS. PCS represents mobile radio communications services that can be integrated with a variety of networks. The FCC has allocated 120 MHz of spectrum in the 2GHz band to be licensed to competing broadband PCS providers, who it is anticipated will offer advanced digital wireless services in competition with current cellular and specialized mobile radio services as well as with landline telephone 228 service. Broadband PCS spectrum will be auctioned by the FCC in three separate auctions that began in December 1994. Six licenses will be auctioned in each service area, and FCC rules permit some aggregation of PCS spectrum by PCS operators. The first broadband PCS auction includes 30 MHz frequency blocks of spectrum (Blocks "A" and "B") licensed by MTA. The next auction, which has not yet been scheduled, will include spectrum Blocks C and F, which are available only to parties that meet specific FCC eligibility criteria and will be licensed using Basic Trading Areas. The final auctions will include two Basic Trading Area 10 Mhz blocks of spectrum, Blocks D and E, which will not be subject to the additional eligibility requirements imposed on Blocks C and F. EQUAL EMPLOYMENT OPPORTUNITY. The 1984 Cable Act includes provisions to ensure that minorities and women are provided equal employment opportunities within the cable television industry. The statute requires the FCC to adopt reporting and certification rules that apply to all cable system operators with more than five full-time employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has imposed more detailed annual Equal Employment Opportunity ("EEO") reporting requirements on cable operators and has expanded those requirements to all multi-channel video service distributors. Failure to comply with the EEO requirements can result in the imposition of fines and/or other administrative sanctions, or may, in certain circumstances, be cited by a franchising authority as a reason for denying a franchisee's renewal request. PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner in which cable system operators can collect and disclose data about individual system customers. The statute also requires that the system operator periodically provide all customers with written information about its policies regarding the collection and handling of data about customers, their privacy rights under federal law and their enforcement rights. In the event that a cable operator is found to have violated the customer privacy provisions of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and other costs. Under the 1992 Cable Act, the privacy requirements are strengthened to require that cable operators take such actions as are necessary to prevent unauthorized access to personally identifiable information. ANTI-TRAFFICKING. The 1992 Cable Act precludes cable operators from selling or otherwise transferring ownership of a cable television system within 36 months after acquisition or initial construction, except for: resales required by the terms of a contract covering the acquisition of multiple systems; tax- free sales or reorganizations; governmentally required divestitures; or internal transfers to a commonly controlled entity. The anti-trafficking restriction applies to systems acquired prior to the effective date of the new law (i.e., December 4, 1992) as well as subsequent acquisitions. The FCC may waive the foregoing restrictions where generally consistent with the public interest, unless the franchising authority has refused to grant any required approval. The 1992 Cable Act also requires franchising authorities to act on any franchise transfer request submitted after December 4, 1992 within 120 days after receipt of all information required by FCC regulations and by the franchising authority. Approval is deemed to be granted if the franchising authority fails to act within such period. REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing operation in a particular community, all cable television systems must file a registration statement with the FCC listing the broadcast signals they will carry and certain other information. Additionally, cable operators periodically are required to file various informational reports with the FCC. Cable operators who operate in certain frequency bands are required on an annual basis to file the results of their periodic cumulative leakage testing measurements. Operators who fail to make this filing or who exceed the FCC's allowable cumulative leakage index risk being prohibited from operating in those frequency bands in addition to other sanctions. TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical standards applicable to the cable channels on which broadcast stations are carried, and has prohibited franchising authorities from adopting standards which were in conflict with or more restrictive than those established by the FCC. The FCC has recently revised such standards and made them applicable to all classes of channels which carry downstream National Television System Committee video programming. Local franchising authorities are permitted to 229 enforce the FCC's new technical standards. The FCC also has adopted additional standards applicable to cable television systems using frequencies in the 108- 137 Mhz and 225-400 Mhz bands in order to prevent harmful interference with aeronautical navigation and safety radio services and has also established limits on cable system signal leakage. The 1992 Cable Act requires the FCC to periodically update its technical standards to take into account changes in technology and to entertain waiver requests from franchising authorities who would seek to impose more stringent technical standards upon their franchised cable television systems. Although the 1992 Cable Act requires the FCC to establish "minimum technical standards relating to cable televisions systems' technical operation and signal quality," the FCC has announced that its recently completed cable television technical standards rule-making satisfies the new statutory mandate. POLE ATTACHMENTS. The FCC currently regulates the rates and conditions imposed by certain public utilities for use of their poles, unless under the Federal Pole Attachments Act state public utility commissions are able to demonstrate that they regulate rates, terms and conditions of the cable television pole attachments. A number of states and the District of Columbia have certified to the FCC that they regulate the rates, terms and conditions for pole attachments. In the absence of state regulation, the FCC administers such pole attachment rates through use of a formula which it has devised and from time to time revises. OTHER MATTERS. FCC regulation also includes matters regarding a cable system's carriage of local sports programming; restrictions on origination and cablecasting by cable system operators; application of the rules governing political broadcasts; customer service; home wiring and limitations on advertising contained in nonbroadcast children's programming. Implementing provisions of the 1993 Budget Act, the FCC adopted requirements for payment of 1994 annual "regulatory fees." Cable television systems are required to pay regulatory fees of $0.37 per subscriber, which, pursuant to a recent FCC order, may be passed on to subscribers as "external cost" adjustments to rates for basic cable service. Fees are also assessed for other licenses, including licenses for business radio, cable television relay systems and earth stations, which, however, may not be collected directly from subscribers. COPYRIGHT REGULATION Cable television systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried and the location of the cable system with respect to over-the-air television stations. Cable operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for the overpayment of copyright fees. Originally, the Federal Copyright Royalty Tribunal was empowered to make and, in fact, did make several adjustments in copyright royalty rates. This tribunal was eliminated by Congress in 1993. Any future adjustment to the copyright royalty rates will be done through an arbitration process to be supervised by the U.S. Copyright Office. Present rates will remain in place through 1995, barring the successful filing of a new petition for ratemaking with the Copyright Office and any changes in the FCC's signal carriage, syndicated exclusivity or sports blackout rules. Various bills have been introduced into Congress over the past several years that would eliminate or modify the cable television compulsory license. The FCC has recommended to Congress that it repeal the cable industry's compulsory copyright license. The FCC determined that the statutory compulsory copyright license for local and distant broadcast signals no longer serves the public interest and that private negotiations between the applicable parties would better serve the public. Without the compulsory license, cable operators might need to negotiate rights from the copyright owners for each program carried on each broadcast station in the channel lineup. Such negotiated agreements could increase the cost to cable operators of carrying broadcast signals. The 1992 Cable Act's retransmission consent provisions expressly provide that retransmission consent agreements between television broadcast stations and cable operators do not obviate 230 the need for cable operators to obtain a copyright license for the programming carried on each broadcaster's signal. Copyright music performed in programming supplied to cable television systems by pay cable networks (such as HBO) and cable programming networks (such as USA Network) has generally been licensed by the networks through private agreements with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"), the two major performing rights organizations in the United States. ASCAP and BMI offer "through to the viewer" licenses to the cable networks which cover the retransmission of the cable networks' programming by cable television systems to their customers. The cable industry has not yet concluded negotiations on licensing fees with music performing rights societies for the use of music performed in programs locally originated by cable television systems. STATE AND LOCAL REGULATIONS Because cable television systems use local streets and rights-of-way, cable television systems are subject to state and local regulation, typically imposed through the franchising process. State and/or local officials are usually involved in franchise selection, system design and construction, safety, service rates, consumer relations, billing practices and community related programming and services. Cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions. Although the 1984 Cable Act provides for certain procedural protection, there can be no assurance that renewals will be granted or that renewals will be made on similar terms and conditions. Franchises usually call for the payment of fees, often based on a percentage of the system's gross customer revenues, to the granting authority. Upon receipt of a franchise, the cable system owner usually is subject to a broad range of obligations to the issuing authority directly affecting the business of the system. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction, and even from city to city within the same state, historically ranging from reasonable to highly restrictive or burdensome. The 1984 Cable Act places certain limitations on a franchising authority's ability to control the operation of a cable system, and the courts have from time to time reviewed the constitutionality of several general franchise requirements, including franchise fees and access channel requirements, often with inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive franchises, and allows franchising authorities to exercise greater control over the operation of franchised cable television systems, especially in the areas of customer service and rate regulation. The 1992 Cable Act also allows franchising authorities to operate their own multi-channel video distribution system without having to obtain a franchise and permits states or local franchising authorities to adopt certain restrictions on the ownership of cable television systems. Moreover, franchising authorities are immunized from monetary damage awards arising from regulation of cable television systems or decisions made on franchise grants, renewals, transfers and amendments. The specific terms and conditions of a franchise and the laws and regulations under which it was granted directly affect the profitability of the cable television system. Cable franchises generally contain provisions governing charges for basic cable television services, fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable services provided. Various proposals have been introduced at the state and local levels with regard to the regulation of cable television systems, and a number of states have adopted legislation subjecting cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulations of a character similar to that of a public utility. The attorneys general of approximately 25 states have announced the initiation of investigations designed to determine whether cable television systems in their states have acted in compliance with the FCC's rate regulations. 231 REGULATION OF TELECOMMUNICATIONS ACTIVITIES As noted above under "Description of Continental--Strategic Investments-- Telecommunications and Technology Investments", Continental provides in certain of its Systems alternate access local telecommunications services over a portion of its fiber-optic cable facilities, and Continental owns a 20% interest in TCG. Local telecommunications activities are regulated by either the FCC or state public utility commissions, or both. In some instances, Continental or TCG may be required to obtain regulatory permission to offer such services, and may be required to file tariffs for its service offerings, depending on whether particular alternate access activities of Continental or TCG are classified as common carriage or private carriage. The foregoing does not purport to be a summary of all present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal regulations, copyright licensing, and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable industry or Providence Journal or Continental can be predicted at this time. RIGHTS OF DISSENTING STOCKHOLDERS CONTINENTAL The Continental Merger Stock to be received by holders of Providence Journal Common Stock will exceed 20% of the aggregate number of shares of Continental Class A Common Stock and Continental Class B Common Stock which are outstanding immediately prior to the Effective Time. Accordingly, each holder of Continental Voting Stock may demand and perfect appraisal rights in accordance with the conditions established by Section 262. SECTION 262 IS REPRINTED IN ITS ENTIRETY AS ANNEX IV TO THIS JOINT PROXY STATEMENT-PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX IV. THIS DISCUSSION AND ANNEX IV SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS. A holder of record of Continental Voting Stock as of the Continental Record Date who makes the demand described below with respect to such shares, who continuously is the record holder of such shares through the Effective Time, who otherwise complies with the statutory requirements of Section 262 and who neither votes in favor of the Merger Agreement nor consents thereto in writing may be entitled to an appraisal by the Delaware Court of Chancery (the "Delaware Court") of the fair value of his or her shares of stock. All references in this summary of appraisal rights to a "stockholder" is to the record holder or holders of shares of Continental Voting Stock. Except as set forth herein, stockholders of Continental will not be entitled to appraisal rights in connection with the Merger. Under Section 262, where a merger is to be submitted for approval at a meeting of stockholders, as in the Continental Special Meeting, not less than 20 days prior to the meeting, each constituent corporation must notify each of the holders of its stock for which appraisal rights are available that such appraisal rights are available and include in each such notice a copy of Section 262. This Joint Proxy Statement-Prospectus shall constitute such notice to the record holders of Continental Voting Stock. 232 Continental Voting Stockholders who desire to exercise their appraisal rights must not vote in favor of the Merger Agreement or the Merger and must deliver a separate written demand for appraisal to Continental prior to the vote by the stockholders of Continental on the Merger Agreement and the Merger. A stockholder who signs and returns a proxy without expressly directing by checking the applicable boxes on the reverse side of the proxy card enclosed herewith that his or her shares of Continental Voting Stock be voted against the proposal or that an abstention be registered with respect to his or her shares of Continental Voting Stock in connection with the proposal will effectively have thereby waived his or her appraisal rights as to those shares of Continental Voting Stock because, in the absence of express contrary instructions, such shares of Continental Voting Stock will be voted in favor of the proposal. (See "The Special Meetings--Solicitation and Voting of Proxies".) Accordingly, a stockholder who desires to perfect appraisal rights with respect to any of his or her shares of Continental Voting Stock must, as one of the procedural steps involved in such perfection, either (i) refrain from executing and returning the enclosed proxy card and from voting in person in favor of the proposal to approve the Merger Agreement, or (ii) check either the "Against" or the "Abstain" box next to the proposal on such card or affirmatively vote in person against the proposal or register in person an abstention with respect thereto. A demand for appraisal must be executed by or on behalf of the stockholder of record and must reasonably inform Continental of the identity of the stockholder of record and that such record stockholder intends thereby to demand appraisal of the Continental Voting Stock. A person having a beneficial interest in shares of Continental Voting Stock that are held of record in the name of another person, such as a broker, fiduciary or other nominee, must act promptly to cause the record holder to follow the steps summarized herein properly and in a timely manner to perfect whatever appraisal rights are available. If the shares of Continental Voting Stock are owned of record by a person other than the beneficial owner, including a broker, fiduciary (such as a trustee, guardian or custodian) or other nominee, such demand must be executed by or for the record owner. If the shares of Continental Voting Stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, such person is acting as agent for the record owner. A record owner, such as a broker, fiduciary or other nominee, who holds shares of Continental Voting Stock, as a nominee for others, may exercise appraisal rights with respect to the shares held for all or less than all beneficial owners of shares as to which such person is the record owner. In such case, the written demand must set forth the number of shares covered by such demand. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares of Continental Voting Stock outstanding in the name of such record owner. A stockholder who elects to exercise appraisal rights, if available, should mail or deliver his or her written demand to: Continental Cablevision, Inc., The Pilot House, Lewis Wharf, Boston, Massachusetts, 02110, Attention: P. Eric Krauss, Treasurer. The written demand for appraisal should specify the stockholder's name and mailing address, the number of shares of Continental Voting Stock owned, and that the stockholder is thereby demanding appraisal of his or her shares. A proxy or vote against the Merger Agreement will not by itself constitute such a demand. Within ten days after the Effective Time, the surviving corporation must provide notice of the Effective Time to all stockholders who have complied with Section 262. Within 120 days after the Effective Time, either the surviving corporation or any stockholder who has complied with the required conditions of Section 262 may file a petition in the Delaware Court, with a copy served on the surviving corporation in the case of a petition filed by a stockholder, demanding a determination of the fair value of the shares of all dissenting stockholders. Accordingly, Continental stockholders who desire to have their shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. If appraisal rights are available, within 120 days after the Effective Time, any stockholder who has theretofore complied with the applicable 233 provisions of Section 262 will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate number of shares of Continental Voting Stock not voting in favor of the Merger Agreement and with respect to which demands for appraisal were received by Continental and the number of holders of such shares. Such statement must be mailed within 10 days after the written request therefor has been received by the surviving corporation. If a petition for an appraisal is timely filed and assuming appraisal rights are available, at the hearing on such petition, the Delaware Court will determine which stockholders, if any, are entitled to appraisal rights. The Delaware Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Delaware Court may dismiss the proceedings as to such stockholder. Where proceedings are not dismissed, the Delaware Court will appraise the shares of Continental Voting Stock owned by such stockholders, determining the fair value of such shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining fair value, the Delaware Court is to take into account all relevant factors. In Weinberger v. UOP Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "fair price obviously requires consideration of all relevant factors involving the value of a company." The Delaware Supreme Court stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which could be ascertained as of the date of the merger which throw light on future prospects of the merged corporation. In Weinberger, the Delaware Supreme Court stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." Section 262, however, provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." The cost of the appraisal proceeding may be determined by the Delaware Court and taxed against the parties as the Delaware Court deems equitable in the circumstances. Upon application of a dissenting stockholder of Continental, the Delaware Court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, be charged pro rata against the value of all shares of stock entitled to appraisal. Any holder of shares of Continental Voting Stock who has duly demanded appraisal in compliance with Section 262 will not, after the Effective Time, be entitled to vote for any purpose any shares subject to such demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the Effective Time. At any time within 60 days after the Effective time, any stockholder will have the right to withdraw such demand for appraisal; after this period, the stockholder may withdraw such demand for appraisal only with the consent of the surviving corporation. If no petition for appraisal is filed with the Delaware Court within 120 days after the Effective Time, stockholders' rights to appraisal shall cease. Any stockholder may withdraw such stockholder's demand for appraisal by delivering to the surviving corporation a written withdrawal of his or her demand for appraisal and acceptance of the Merger, except that (i) any such attempt to withdraw made more than 60 days after the Effective Time will require written approval of the surviving corporation and (ii) no appraisal proceeding in the Delaware Court shall be dismissed as to any stockholder without the approval of the Delaware Court, and such approval may be conditioned upon such terms as the Delaware Court deems just. 234 PROVIDENCE JOURNAL Each stockholder of Providence Journal has the right to dissent from the Restructuring, the PJC Spin-Off and the Merger and, in lieu of receiving Restructured PJC Common Stock and, in turn, Continental Merger Stock pursuant to the Merger and New Providence Journal Common Stock pursuant to the PJC Spin- Off, to seek the "fair value" of all of his, her or its Providence Journal Common Stock, as determined in accordance with the applicable provisions of the RIBCA. In order to perfect such dissenters' rights, a stockholder is required to follow the procedures set forth in Section 74. SECTION 74 IS REPRINTED IN ITS ENTIRETY AS ANNEX V TO THIS JOINT PROXY STATEMENT-PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO DISSENTERS' RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX V. THIS DISCUSSION AND ANNEX V SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS. A Providence Journal stockholder may only elect to dissent from the Restructuring, the PJC Spin-Off and the Merger with respect to all of the Providence Journal Common Stock registered in his, her or its name. A stockholder who votes in favor of the Plan of Reorganization and the Merger Agreement, whether in person at the Providence Journal Special Meeting or by proxy, will waive his, her or its dissenters' rights. However, a stockholder is not required to vote against the Merger in order to qualify to exercise dissenters' rights. Any stockholder electing to exercise the right to dissent must file with Providence Journal, prior to or at the Providence Journal Special Meeting, a written objection to the Plan of Reorganization and the Merger Agreement. If the Merger is approved by the required vote, and the stockholder shall not have voted in favor thereof, the stockholder must, within ten (10) days after the date on which the vote was taken, make written demand on Continental for payment of the fair value of the stockholder's shares, and, if the proposed Restructuring, PJC Spin-Off and Merger is effected, Continental shall pay to the stockholder, upon surrender of the certificate or certificates representing the shares, the fair value thereof as of the day prior to the date on which the vote was taken approving the Plan of Reorganization and the Merger Agreement, excluding any appreciation or depreciation in anticipation of the Merger. Any stockholder failing to make demand within such ten (10) day period shall be bound by the terms of the Restructuring, the PJC Spin-Off and the Merger. Pursuant to Section 74, "fair value" is measured as of the day prior to the date on which a vote is taken approving the Merger, in this case the day before the date of the Providence Journal Special Meeting. Any stockholder making the demand shall thereafter be entitled only to payment as provided in Section 74 and shall not be entitled to vote or to exercise any other rights of a stockholder. FAILURE TO MAKE SUCH WRITTEN DEMAND WILL CONSTITUTE A WAIVER OF THE STOCKHOLDER'S DISSENTERS' RIGHTS. VOTING AGAINST THE PLAN OF REORGANIZATION AND THE MERGER AGREEMENT, WHETHER IN PERSON AT THE PROVIDENCE JOURNAL SPECIAL MEETING OR BY PROXY, OR ABSTAINING FROM VOTING ON THE MERGER, DOES NOT BY ITSELF CONSTITUTE A PROPER WRITTEN OBJECTION. A stockholder may not dissent as to less than all the shares registered in his or her name which are owned beneficially by him or her. A nominee or fiduciary may not dissent on behalf of any beneficial owner as to less than all of the shares of the owner registered in the name of the nominee or fiduciary. No demand may be withdrawn unless Continental shall consent thereto. If, however, the demand shall be withdrawn upon consent, or if the Merger shall be abandoned or the stockholders shall revoke the authority to effect the Merger, or if, on the date of the filing of the articles of merger, Continental is the owner of all the outstanding shares of the other corporations, domestic and foreign, that are parties to the Merger, or if no demand or petition for the determination of fair value by a court shall have been made or 235 filed within the time provided in Section 74, or if a court of competent jurisdiction shall determine that the stockholder is not entitled to the relief provided by Section 74, then the right of the stockholder to be paid the fair value of his or her shares shall cease and his or her status as a stockholder shall be restored, without prejudice to any corporate proceedings which may have been taken during the interim. In such event, the stockholder will be entitled to receive the shares of Continental Merger Stock and New Providence Journal Common Stock such stockholder would have been entitled to receive had he, she or it not exercised dissenters' rights. Within ten (10) days after the Restructuring, Continental shall give written notice thereof to each dissenting stockholder who has made demand as herein provided and shall make a written offer to each dissenting stockholder to pay for the shares at a specified price deemed by Continental to be the fair value thereof. The Dissenters' notice and offer shall be accompanied by a balance sheet of Providence Journal, as of the latest available date and not more than twelve (12) months prior to the making of the offer, and a profit and loss statement of Providence Journal for the twelve (12) months' period ended on the date of the balance sheet. If within thirty (30) days after the date on which the Restructuring was effected the fair value of the shares is agreed upon between any dissenting stockholder and Continental, payment therefor shall be made within ninety (90) days after the date on which the Restructuring was effected, upon surrender of the certificate or certificates representing the shares. Upon payment of the agreed value, the dissenting stockholder shall cease to have any interest in the shares. If within the period of thirty (30) days a dissenting stockholder and Continental do not so agree, then Continental, within thirty (30) days after receipt of a written request for the filing from any dissenting stockholder given within sixty (60) days after the date on which the Restructuring was effected, shall, or at its election at any time within the period of sixty (60) days may, file a petition in any court of competent jurisdiction in Providence County in Rhode Island praying that the fair value of the shares be found and determined. If Continental shall fail to institute the proceeding as provided in Section 74, any dissenting stockholder may do so in the name of Continental. All dissenting stockholders, wherever residing, shall be made parties to the proceeding as an action against their shares quasi in rem. A copy of the petition shall be served on each dissenting stockholder who is a resident of Rhode Island and shall be served by registered or certified mail on each dissenting stockholder who is a nonresident. Service on nonresidents shall also be made by publication as provided by law. The jurisdiction of the court shall be plenary and exclusive. All stockholders who are parties to the proceeding shall be entitled to judgment against Continental for the amount of the fair value of their shares. The court may, if it so elects, appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have such power and authority as shall be specified in the order of their appointment or an amendment thereof. The judgment shall be payable only upon and concurrently with the surrender to Continental of the certificate or certificates representing the shares. Upon payment of the judgment, the dissenting stockholder shall cease to have any interest in the shares. The judgment shall include an allowance for interest at such rate as the court may find to be fair and equitable in all the circumstances, from the date on which the vote was taken on the Merger to the date of payment. The costs and expenses of any proceeding shall be determined by the court and shall be assessed against Continental, but all or any part of the costs and expenses may be apportioned and assessed as the court may deem equitable against any or all of the dissenting stockholders who are parties to the proceeding to whom Continental shall have made an offer to pay for the shares if the court shall find that the action of the stockholders in failing to accept the offer was arbitrary or vexatious or not in good faith. The expenses shall include reasonable compensation for and reasonable expenses of the appraisers, but shall exclude the fees and expenses of counsel for and experts employed by any party; but if the fair value of the shares as determined materially exceeds the amount which Continental offered to pay therefor, or if no offer was made, the court in its discretion may award to any stockholder who is a party to the proceeding such sum as the court may determine to be reasonable compensation to any expert or experts employed by the stockholder in the proceeding. 236 Within twenty (20) days after demanding payment for his, her or its shares of Providence Journal Common Stock, each stockholder demanding payment shall submit the certificate or certificates representing his, her or its shares of Providence Journal Common Stock to Continental for notation thereon that the demand has been made. His, her or its failure to do so shall, at the option of Continental, terminate his, her or its rights under Section 74 unless a court of competent jurisdiction, for good and sufficient cause shown, shall otherwise direct. If shares of Providence Journal Common Stock represented by a certificate on which notation has been so made shall be transferred, each new certificate issued therefor shall bear similar notation, together with the name of the original dissenting holder of the shares, and a transferee of the shares shall acquire by the transfer no rights in Providence Journal other than those which the original dissenting stockholder had after making demand for payment of the fair value thereof. Any notice, objection, demand or other written communication required to be given to Providence Journal or Continental by a dissenting stockholder should be delivered to the Secretary of such respective corporation at the address set forth on the cover of this Joint Proxy Statement-Prospectus for the respective corporation or should be delivered as otherwise permitted by law. Although not specifically required, Providence Journal and Continental recommend that such written communications be sent by registered or certified mail, return receipt requested. Pursuant to the Merger Agreement, New Providence Journal has agreed to reimburse Continental for any payments Continental makes to any dissenting Providence Journal stockholder who become entitled under Section 74 to payment for such holder's shares of Providence Journal Common Stock and for any other payments and expenses incurred by Continental in connection with the exercise by Providence Journal stockholders of their dissenters' rights under Section 74. The Merger Agreement further provides that any Continental Merger Stock that would have been issued to such dissenting stockholders had they not exercised their dissenters' rights will be issued to New Providence Journal after its reimbursement of all payments made by Continental to such dissenting stockholders. Stockholders should be aware that in the absence of contrary directions, any proxy that is not revoked prior to being voted at the Providence Journal Special Meeting will be voted in favor of the Plan of Reorganization and the Merger Agreement, and the holder of any shares represented by a proxy that is so voted will not be entitled to exercise dissenters' rights, even though such holder may have filed a written objection to the Plan of Reorganization and Merger Agreement. IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF RHODE ISLAND LAW, ANY STOCKHOLDER WHO IS CONSIDERING DISSENTING FROM THE MERGER AND EXERCISING DISSENTERS' RIGHTS SHOULD CONSULT HIS OR HER LEGAL ADVISOR. PAYMENT AND DISTRIBUTION TO STOCKHOLDERS In order to receive the New Providence Journal Common Stock to which stockholders will be entitled as a result of the PJC Spin-Off and shares of Continental Merger Stock, together with any cash in lieu of fractional interests, pursuant to the Merger (collectively, the "Transaction Consideration"), each stockholder of Restructured PJC (the former stockholders of Providence Journal) will be required to surrender the certificates evidencing the shares of Restructured PJC Common Stock (which formerly evidenced shares of Providence Journal Common Stock) to such bank or trust company as is agreed to by Continental and Providence Journal, which shall act as exchange agent (the "Exchange Agent"). Promptly after the Effective Time, the Exchange Agent will mail or make available to each stockholder a notice and letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the shares of Restructured PJC Common Stock shall pass, only upon proper delivery of the shares to the Exchange Agent) advising such stockholder of the effectiveness of the PJC Spin-Off and the Merger and the procedures to be used in effecting the surrender of shares for payment therefor. Promptly after surrender of such shares the stockholder will receive the Transaction Consideration. Stockholders should surrender shares only with a letter of transmittal. Please do not send shares with the enclosed proxy. 237 If payment of the Transaction Consideration is to be made to a person other than a person in whose name the shares are registered, it shall be a condition of payment that the shares so surrendered be properly endorsed or otherwise be in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the shares, or shall establish to the satisfaction of Restructured PJC that such tax either has been paid or is not applicable. Until surrendered and exchanged in accordance with the Merger Agreement, after the Effective Time each share of Restructured PJC Common Stock shall represent only the right to receive the Transaction Consideration to which such shares are entitled. At the close of business on the day prior to the date of the Effective Time, the stock transfer books shall be closed and no further transfers shall be made. If, thereafter, any shares are presented for transfer, such shares shall be canceled and exchanged for the Transaction Consideration; provided however, that no party shall be liable to any holder of certificates formerly representing Restructured PJC Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. LEGAL MATTERS Certain legal matters relating to the validity of the shares of New Providence Journal Series A Common Stock and New Providence Journal Class B Common Stock will be passed upon by Edwards & Angell. Certain legal matters relating to the validity of the shares of Continental Class A Common Stock, and Continental Series B Preferred Stock will be passed upon by Sullivan & Worcester. EXPERTS The portions of this Joint Proxy Statement-Prospectus under the caption "Description of Continental Business--Competition" and "Legislation and Regulation" have been reviewed by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Washington, D.C., and the statements therein have been included herein in reliance upon their opinion. The consolidated financial statements and schedule of Providence Journal Company and Subsidiaries as of December 31, 1992 and 1993 and for each of the two years ended December 31, 1993 have been included in this Joint Proxy Statement-Prospectus in reliance upon the reports of KPMG Peat Marwick LLP and Deloitte & Touche LLP, independent auditors, appearing herein and elsewhere in this registration statement, and upon the authority of said firms as experts in accounting and auditing. The report of KPMG Peat Marwick LLP, refers to a change in accounting for income taxes and a change in accounting for postretirement benefits in 1992. The consolidated financial statements of King Holding Corp. included in this Joint Proxy Statement-Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and is included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements and schedule of Providence Journal Company and Subsidiaries as of the year ended December 29, 1991 (prior to restatement for discontinued operations of the Providence Journal's cable businesses) have been audited by Coopers & Lybrand as stated in their reports appearing herein. The combined financial statements of Providence Journal Cable as of December 31, 1992 and 1993 and for each of the two years ended December 31, 1993 have been included in this Joint Proxy Statement-Prospectus in reliance upon the reports of KPMG Peat Marwick LLP and Deloitte & Touche LLP, 238 independent auditors, appearing herein and elsewhere in this registration statement and upon the authority of said firms as experts in accounting and auditing. The report of KPMG Peat Marwick LLP, refers to a change in accounting for income taxes in 1992. The consolidated financial statements of King Videocable Company (not included herein) have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and is included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Colony Communications, Inc. and Copley/Colony, Inc., both as of December 31, 1990 and 1991 and for each of the two years ended December 31, 1991, have been audited by Coopers & Lybrand as stated in their reports appearing herein. The consolidated financial statements of Continental Cablevision, Inc. and subsidiaries included in this Joint Proxy Statement-Prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports (which reports express an unqualified opinion and includes an explanatory paragraph referring to a change in the method of accounting for income taxes in 1993) appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The financial statements as of December 31, 1993 and 1992 and for each of the two years ended December 31, 1993 of Columbia Cable of Michigan (a division of Columbia Associates, L.P.) included in this Joint Proxy Statement-Prospectus have been audited by Arthur Andersen LLP, independent auditors, as stated in their report appearing herein. The financial statements as of December 31, 1993 and for the year ended December 31, 1993 of Clay Cablevision (a division of Rifkin Cable Income Partners, L.P.) included in this Joint Proxy Statement-Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of N-Com Limited Partnership II at September 30, 1994 and 1993, and for each of the two years ended September 30, 1994, appearing in this Joint Proxy Statement-Prospectus have been audited by Ernst & Young, LLP, independent auditors, as stated in their report appearing herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of Cablevision of Chicago (a limited partnership) as of December 31, 1993 and 1992 and for each of the two years ended December 31, 1993 have been included in this Joint Proxy Statement-Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, appearing herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements as of December 31, 1993 and for the year then ended of United Broadcasting Company, Inc. and Subsidiaries included in this Joint Proxy Statement Prospectus have been audited by Councilor, Buchanan & Mitchell, P.C., independent auditors, as stated in their report appearing herein. The financial statements described above are included in reliance upon such applicable reports as given upon the authority of such firms as experts in accounting and auditing. 239 INDEX TO FINANCIAL STATEMENTS
PAGE ---- PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES Independent Auditors' Reports........................................... F-3 Consolidated Balance Sheets, December 31, 1992 and 1993, and (Unaudited) September 30, 1994..................................................... F-5 Consolidated Statements of Operations, for the Years Ended December 29, 1991, December 31, 1992 and 1993, and (Unaudited) Nine Months Ended September 30, 1993 and 1994............................................ F-6 Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 1991, December 31, 1992 and 1993, and (Unaudited) Nine Months Ended September 30, 1994........................................ F-7 Consolidated Statements of Cash Flows for the Years Ended December 29, 1991, December 31, 1992 and 1993, and (Unaudited) Nine Months Ended September 30, 1993 and 1994............................................ F-8 Notes to Consolidated Financial Statements.............................. F-9 KING HOLDING CORP. AND SUBSIDIARIES Independent Auditors' Report............................................ F-28 Consolidated Balance Sheets, December 31, 1992 and 1993 and (Unaudited) September 30, 1994..................................................... F-29 Consolidated Statements of Operations for the Period February 25, 1992 to December 31, 1992 and the year ended December 31, 1993 and (Unaudited) Nine Months Ended September 30, 1993 and 1994.............. F-30 Consolidated Statements of Stockholders' Equity for the Period February 25, 1992 to December 31, 1992 and the year ended December 31, 1993 and (Unaudited) the Nine Months Ended September 30, 1994................... F-31 Consolidated Statements of Cash Flows, for the Period February 25, 1992 to December 31, 1992 and the year ended December 31, 1993 and (Unaudited) the Nine Months Ended September 30, 1993 and 1994.......... F-32 Notes to Consolidated Financial Statements.............................. F-33 PROVIDENCE JOURNAL CABLE Independent Auditors' Reports........................................... F-42 Combined Balance Sheets, December 31, 1992 and 1993, and (Unaudited) September 30, 1994..................................................... F-44 Combined Statements of Operations for the Years Ended December 31, 1991 (Unaudited), 1992, and 1993, and (Unaudited) Nine Months Ended September 30, 1993 and 1994............................................ F-45 Combined Statements of Changes in Group Equity for the Years Ended December 31, 1991 (Unaudited), 1992 and 1993, and (Unaudited) Nine Months Ended September 30, 1994........................................ F-46 Combined Statements of Cash Flows, for the Years Ended December 31, 1991 (Unaudited), 1992 and 1993, and (Unaudited) Nine Months Ended September 30, 1994............................................................... F-47 Notes to Combined Financial Statements.................................. F-48 COLONY COMMUNICATIONS, INC. Independent Auditors' Report............................................ F-57 Consolidated Balance Sheets, December 31, 1991 and 1990................. F-58 Consolidated Statements of Income and Retained Earnings for the Years Ended December 31, 1991 and 1990....................................... F-59 Consolidated Statements of Cash Flows, for the Years Ended December 31, 1991 and 1990.......................................................... F-60 Notes to Consolidated Financial Statements.............................. F-61 COPLEY/COLONY INC. Independent Auditors' Report............................................ F-67 Consolidated Balance Sheets, December 31, 1991 and 1990................. F-68 Consolidated Statements of Operations for the Years Ended December 31, 1991 and 1990.......................................................... F-69 Consolidated Statements of Cash Flows, for the Years Ended December 31, 1991 and 1990.......................................................... F-70 Notes to Consolidated Financial Statements.............................. F-71 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES: Independent Auditors' Report............................................ F-75 Consolidated Balance Sheets, December 31, 1992 and 1993, and (Unaudited) September 30, 1994..................................................... F-77 Statements of Consolidated Operations, for the Years Ended December 31, 1991, 1992, and 1993, and (Unaudited) nine Months Ended September 30, 1993 and 1994.......................................................... F-78 Statements of Consolidated Shareholders' Equity (Deficiency), for the Years Ended December 31, 1991, 1992 and 1993, and (Unaudited), Nine Months Ended September 30, 1994........................................ F-79 Statements of Consolidated Cash Flows, for the Years Ended December 31, 1991, 1992 and 1993, and (Unaudited), Nine Months Ended September 30, 1993 and 1994.......................................................... F-80 Notes to Consolidated Financial Statements.............................. F-81
F-1
PAGE ----- ADDITIONAL ACQUIREES OF CONTINENTAL CABLEVISION, INC. COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) Report of Independent Public Accountants............................... F-95 Statements of Assets, Liabilities and Control Account, December 31, 1993 and 1992......................................................... F-96 Statements of Operations and Control Account, for the Years Ended December 31, 1993 and 1992............................................ F-97 Statements of Cash Flows, for the Years Ended December 31, 1993 and 1992.................................................................. F-98 Notes to Financial Statements.......................................... F-99 Statements of Assets, Liabilities and Control Account (Unaudited), September 30, 1994.................................................... F-101 Statements of Operations and Control Account (Unaudited), for the Nine Months Ended September 30, 1994....................................... F-102 Statements of Cash Flows (Unaudited), for the Nine Months Ended September 30, 1994.................................................... F-103 Notes to Financial Statements (Unaudited).............................. F-104 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS, L.P.) Report of Independent Accountants...................................... F-105 Balance Sheet, December 31, 1993....................................... F-106 Statement of Operations, for the Year Ended December 31, 1993.......... F-107 Statements of Cash Flows, for the Year Ended December 31, 1993......... F-108 Notes to Financial Statements.......................................... F-109 Balance Sheet (Unaudited), September 30, 1994.......................... F-112 Statement of Operations (Unaudited), for the Nine Months Ended September 30, 1994.................................................... F-113 Statement of Cash Flows (Unaudited), for the Nine Months Ended September 30, 1994.................................................... F-114 Notes to Financial Statements (Unaudited).............................. F-115 N-COM LIMITED PARTNERSHIP II Report of Independent Auditors......................................... F-118 Consolidated Balance Sheet, September 30, 1994 and 1993................ F-119 Consolidated Statement of Operations and Partners' Net Capital Deficiency, for the Year Ended September 30, 1994 and 1993........................................... F-120 Consolidated Statement of Cash Flows, for the Year Ended September 30, 1994 and 1993......................................................... F-121 Notes to Consolidated Financial Statements............................. F-122 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) Independent Auditors' Report........................................... F-126 Balance Sheets, December 31, 1993 and 1992............................. F-127 Statements of Operations and Partners' Deficiency, for the Years ended December 31, 1993 and 1992............................................ F-128 Statements of Cash Flows, for the Years Ended December 31, 1993 and 1992.................................................................. F-129 Notes to Financial Statements.......................................... F-130 Balance Sheets (Unaudited), September 30, 1994......................... F-137 Statements of Operations and Partners' Deficiency (Unaudited), for the Nine Months Ended September 30, 1994.................................. F-138 Statements of Cash Flows (Unaudited), for the Nine Months Ended September 30, 1994.................................................... F-139 Notes to Financial Statements (Unaudited).............................. F-140 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES Independent Auditors' Report........................................... F-141 Consolidated Balance Sheet, December 31, 1993.......................... F-142 Consolidated Statement of Income, for the Year Ended December 31, 1993. F-144 Consolidated Statement of Retained Earnings, for the Year Ended December 31, 1993..................................................... F-145 Consolidated Statement of Cash Flows, for the Year Ended December 31, 1993.................................................................. F-146 Notes to Consolidated Financial Statements............................. F-147
F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Providence Journal Company: We have audited the accompanying consolidated balance sheets of Providence Journal Company and Subsidiaries (the Company) as of December 31, 1992 and 1993 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of King Holding Corp. a 50% owned investee company. The Company's investment in King Holding Corp. at December 31, 1992 and 1993 was $92,398,000 and $85,154,000, respectively and its equity in losses of King Holding Corp. was $12,602,000 and $7,244,000 for the period from February 25, 1992 through December 31, 1992 and for the year ended December 31, 1993, respectively. The consolidated financial statements of King Holding Corp. were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for King Holding Corp. is based solely on the report of the other auditors. The accompanying consolidated financial statements of Providence Journal Company and subsidiaries for the year ended December 29, 1991, were audited by other auditors whose report thereon dated February 12, 1992, expressed an unqualified opinion on those statements, before the restatement described in note 2 to the consolidated financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. As discussed more fully in note 2 to the consolidated financial statements, the Company entered into an Agreement and Plan of Merger, dated November 18, 1994, whereby it will sell all owned and partially owned cable television businesses to Continental Cablevision, Inc. In our opinion, based on our audits and the report of the other auditors, the 1992 and 1993 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Providence Journal Company and Subsidiaries as of December 31, 1992 and 1993, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. We also audited the adjustments described in note 2 that were applied to restate the 1991 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. As discussed in notes 1 and 7 to the consolidated financial statements, the Company changed its method of accounting for income taxes, and as discussed in notes 1 and 11 to the consolidated financial statements, the Company also changed its method of accounting for certain postretirement benefits in 1992. KPMG Peat Marwick LLP Providence, Rhode Island February 11, 1994, except as to note 2 which is as of November 18, 1994, and note 11(b) which is as of October 26, 1994. F-3 INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of Providence Journal Company We have audited the consolidated statements of operations, stockholders equity and cash flows (all prior to restatement for discontinued operations of the Company's cable television businesses) of Providence Journal Company for the year ended December 29, 1991. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows (prior to restatement for discontinued operations of the Company's cable television businesses) of Providence Journal Company for the year ended December 29, 1991 in conformity with generally accepted accounting principles. As discussed in Note 9 to the financial statements, the Company changed its method of accounting for television program rights in 1991. Coopers & Lybrand Boston, Massachusetts February 12, 1992 F-4 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ----------------- SEPTEMBER 30, 1992 1993 1994 -------- ------- ------------- (UNAUDITED) ASSETS ------ Current assets: Cash........................................ $ 977 1,017 1,400 Accounts receivable, net of allowance for doubtful accounts of $2,501 in 1992, $2,134 in 1993 and $2,610 in 1994................. 22,981 24,432 21,265 Inventories................................. 1,414 1,022 864 Television program rights, net (note 9)..... 5,647 5,006 5,164 Prepaid expenses and other current assets... 1,317 1,703 2,483 Federal and state income tax receivable..... -- 667 4,455 Deferred income taxes (note 7).............. 3,522 5,159 5,159 -------- ------- ------- Total current assets...................... 35,858 39,006 40,790 Investments in affiliated companies (note 3).. 106,648 101,780 100,560 Notes receivable (note 4)..................... 25,350 22,599 20,239 Television program rights, net (note 9)....... 4,228 3,093 3,817 Property, plant and equipment (note 5)........ 246,865 252,402 256,722 Less accumulated depreciation................. 94,768 110,082 123,132 -------- ------- ------- Net property, plant and equipment......... 152,097 142,320 133,590 License costs, goodwill and other intangible assets, net.................................. 54,812 51,420 49,025 Other assets (notes 1(c) and 11(a))........... 24,317 30,302 34,344 Net assets of discontinued operations (note 2)........................................... 390,123 385,165 366,384 -------- ------- ------- $793,433 775,685 748,749 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable............................ $ 10,785 7,657 6,849 Accrued expenses and other liabilities (note 6)......................................... 25,442 25,782 18,818 Current installments of long-term debt (note 8)......................................... 10,503 3,505 3,498 Current portion of television program rights payable (note 9)........................... 6,090 5,251 5,895 Federal and state income taxes payable...... 4,494 -- -- -------- ------- ------- Total current liabilities................. 57,314 42,195 35,060 Long-term debt, excluding current installments (note 8)..................................... 253,106 276,601 271,055 Television program rights payable (note 9).... 2,795 2,246 2,413 Other liabilities............................. 43,910 45,984 47,950 Deferred income taxes (note 7)................ 15,295 14,271 16,429 Deferred compensation......................... 29,046 34,813 32,585 -------- ------- ------- Total liabilities......................... 401,466 416,110 405,492 -------- ------- ------- Commitments and contingencies (notes 2, 3, 9, 10, 11 and 14)............................... Stockholders' equity (notes 11(e) and 15): Class A common stock, par value $2.50 per share; authorized 600,000 shares; issued 37,979 shares, 38,353 shares, and 38,639 shares in 1992, 1993, and 1994, respectively............................... 95 96 96 Class B common stock, par value $2.50 per share; authorized 300,000 shares; issued 47,671 shares, 47,297 shares and 47,281 shares in 1992, 1993, and 1994, respectively............................... 119 118 118 Additional capital.......................... 1,225 1,225 1,225 Retained earnings........................... 391,298 361,293 346,944 Unrealized gain on securities held for sale, net........................................ -- -- 2,322 Treasury stock, at cost, 100 shares, 427 shares and 961 shares in 1992, 1993, and 1994, respectively......................... (770) (3,157) (7,448) -------- ------- ------- Total stockholders' equity................ $391,967 359,575 343,257 -------- ------- ------- $793,433 775,685 748,749 ======== ======= =======
See accompanying notes to consolidated financial statements. F-5 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ----------------------- 1991 1992 1993 1993 1994 -------- ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues................... $167,008 172,453 179,499 129,473 138,531 -------- ------- ------- ------- ------- Expenses: Operating and administrative........... 169,339 161,125 171,557 119,585 124,960 Depreciation and amortization............. 22,040 21,566 21,412 16,549 15,674 Write-down of assets (note 5)....................... 7,422 661 3,363 -- -- -------- ------- ------- ------- ------- Total expenses............ 198,801 183,352 196,332 136,134 140,634 -------- ------- ------- ------- ------- Operating loss............. (31,793) (10,899) (16,833) (6,661) (2,103) Other income (expense): Interest income and management fees from related parties (notes 3 and 12(a))............... 31,158 41,788 4,520 3,449 3,174 Interest expense.......... (10,102) (6,455) (2,578) (1,947) (2,038) Equity in loss of affiliates (note 3)...... (72) (11,328) (7,350) (3,183) (4,818) Other income.............. 7,806 6,089 1,286 686 785 -------- ------- ------- ------- ------- Total other income (expense)................ 28,790 30,094 (4,122) (995) (2,897) -------- ------- ------- ------- ------- Income (loss) from continuing operations, before income taxes, discontinued operations, extraordinary item and cumulative effect of accounting changes........ (3,003) 19,195 (20,955) (7,656) (5,000) Income tax expense (benefit) (note 7)........ 3,616 11,837 (5,765) (1,003) (1,427) -------- ------- ------- ------- ------- Income (loss) from continuing operations, before discontinued operations, extraordinary item and cumulative effect of accounting changes..... (6,619) 7,358 (15,190) (6,653) (3,573) Discontinued operations (note 2): Income (loss) from operations of discontinued segments, net of income taxes...... 9,240 1,555 (7,494) (4,228) (4,298) Gain on disposal of segments, net............ 1,573 -- -- -- 812 -------- ------- ------- ------- ------- Income (loss) before extraordinary item and cumulative effect of accounting changes........ $ 4,194 8,913 (22,684) (10,881) (7,059) Extraordinary item, net of income taxes of $799 (note 8)........................ -- -- 1,551 1,551 -- Cumulative effect of changes in accounting principles, net (notes 7, 9 and 11)................. (2,974) 1,257 -- -- -- -------- ------- ------- ------- ------- Net income (loss).......... $ 1,220 10,170 (21,133) (9,330) (7,059) ======== ======= ======= ======= ======= Net income (loss) per common share: From continuing operations............... $ (75.38) 85.53 (178.08) (77.97) (42.06) From discontinued operations............... 123.14 18.08 (87.85) (49.54) (41.05) Extraordinary item........ -- -- 18.18 18.18 -- Changes in accounting principles............... (33.87) 14.61 -- -- -- -------- ------- ------- ------- ------- Net income (loss) per common share.............. $ 13.89 118.22 (247.75) (109.33) (83.11) ======== ======= ======= ======= ======= Weighted average shares outstanding............... 87,813 86,026 85,302 85,330 84,947 ======== ======= ======= ======= =======
See accompanying notes to consolidated financial statements. F-6 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A CLASS B UNREALIZED COMMON STOCK COMMON STOCK GAIN ON TREASURY STOCK --------------- --------------- ADDITIONAL RETAINED SECURITIES ------------------ SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS HELD FOR SALE SHARES AMOUNT TOTAL ------- ------ ------- ------ ---------- --------- ------------- ------- --------- -------- Balances at December 30, 1990............. 60,636 $151 54,048 $135 $1,225 $ 565,420 -- (20,240) $(106,610) $460,321 Treasury stock activity: Tender offer and other purchases..... -- -- -- -- -- -- -- (7,583) (53,798) (53,798) Expenses related to tender offer........ -- -- -- -- -- -- -- -- (258) (258) Retirement........... (21,660) (54) (6,063) (15) -- (159,827) -- 27,723 159,896 -- Conversion upon sale of Class B to Class A common stock......... 10 -- (10) -- -- -- -- -- -- -- Dividends declared, $86 per share........ -- -- -- -- -- (7,546) -- -- -- (7,546) Net income........... -- -- -- -- -- 1,220 -- -- -- 1,220 ------- ---- ------- ---- ------ --------- ------- ------- --------- -------- Balances at December 29, 1991............. 38,986 97 47,975 120 1,225 399,267 -- (100) (770) 399,939 Treasury stock activity: Purchases........... -- -- -- -- -- -- -- (1,311) (10,014) (10,014) Retirement.......... (1,021) (2) (290) (1) -- (10,011) -- 1,311 10,014 -- Conversion upon sale of Class B to Class A common stock......... 14 -- (14) -- -- -- -- -- -- -- Dividends declared, $94.60 per share..... -- -- -- -- -- (8,128) -- -- -- (8,128) Net income........... -- -- -- -- -- 10,170 -- -- -- 10,170 ------- ---- ------- ---- ------ --------- ------- ------- --------- -------- Balances at December 31, 1992............. 37,979 95 47,671 119 1,225 391,298 -- (100) (770) 391,967 Treasury stock activity: Tender offer and other purchases..... -- -- -- -- -- -- -- (337) (2,460) (2,460) Issuance of common stock from treasury. -- -- -- -- -- -- -- 10 73 73 Conversion upon sale of Class B to Class A common stock......... 374 1 (374) (1) -- -- -- -- -- -- Dividends declared, $104 per share....... -- -- -- -- -- (8,872) -- -- -- (8,872) Net loss............. -- -- -- -- -- (21,133) -- -- -- (21,133) ------- ---- ------- ---- ------ --------- ------- ------- --------- -------- Balances at December 31, 1993............. 38,353 96 47,297 118 1,225 361,293 -- (427) (3,157) 359,575 Tender offer and other purchases (unaudited).......... -- -- -- -- -- -- -- (534) (4,291) (4,291) Conversion upon sale of Class B to Class A common stock (unaudited).......... 16 -- (16) -- -- -- -- -- -- -- Dividends declared, $85.80 per share (unaudited).......... -- -- -- -- -- (7,290) -- -- -- (7,290) Cumulative effect of change in accounting principle (note 1(c)) (unaudited).......... -- -- -- -- -- -- 5,120 -- -- 5,120 Decrease in unrealized gain on securities held for sale (unaudited)..... -- -- -- -- -- -- (2,798) -- -- (2,798) Net loss (unaudited). -- -- -- -- -- (7,059) -- -- -- (7,059) ------- ---- ------- ---- ------ --------- ------- ------- --------- -------- Balances at September 30, 1994 (unaudited). 38,369 $ 96 47,281 $118 $1,225 $ 346,944 $ 2,322 (961) $ (7,448) $343,257 ======= ==== ======= ==== ====== ========= ======= ======= ========= ========
See accompanying notes to consolidated financial statements. F-7 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ----------------------- 1991 1992 1993 1993 1994 --------- --------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Operating activities: Income (loss) from continuing operations. $ (6,619) 7,358 (15,190) (6,653) (3,573) Adjustments to reconcile income (loss) from continuing operations to cash flows provided by continuing operations: Depreciation and amortization.......... 22,040 21,566 21,412 16,549 15,674 Program rights amortization.......... 8,438 8,080 7,674 5,109 5,026 Writedown of assets.... 7,422 661 3,363 -- -- Equity in loss of affiliates............ 72 11,328 7,350 3,183 4,818 Interest income on notes receivable...... (20,543) (22,611) -- -- -- Other liabilities...... -- 1,353 1,942 19 1,966 Deferred income taxes.. (6,118) (1,093) (4,846) (69) (12) Net provision (payments) for deferred compensation. 7,368 (2,952) 5,767 1,360 (2,229) (Gain) loss on sale of assets................ (7) (503) 124 (82) (110) Changes in assets and liabilities: Accounts receivable, inventories, prepaid expenses and other current assets........ 32 1,731 (2,111) 2,533 (1,077) Accounts payable, accrued expenses, other current liabilities and income taxes payable......... 17,055 (6,141) (1,167) (5,205) (1,763) Other, net............. (347) 476 (935) (261) (145) --------- --------- -------- ------- ------- Cash flows provided by continuing operations........... 28,793 19,253 23,383 16,483 18,575 Income (loss) from discontinued operations............. 10,813 1,555 (7,494) (4,228) (3,486) Adjustments to reconcile net income (loss) from discontinued operations to cash flows provided by (used in) discontinued operations............. (170,507) 28,291 52,451 39,684 32,951 --------- --------- -------- ------- ------- Cash flows provided by (used in) operating activities........... (130,901) 49,099 68,340 51,939 48,040 --------- --------- -------- ------- ------- Investing activities: Investments in marketable securities. -- -- (5,551) (5,551) -- Investments in affiliates............ (491) (105,820) (5,783) (2,501) (6,823) Dividends from affiliate............. -- 2,939 3,301 5,380 3,225 Additions to property, plant and equipment, net................... (40,136) (20,030) (11,597) (8,886) (4,247) Principal collections on notes receivable... -- 15,959 2,751 1,672 2,757 Proceeds from sale of marketable securities and other assets...... 238,426 3,501 1,073 786 553 --------- --------- -------- ------- ------- Cash flows provided by (used in) investing activities of continuing operations. 197,799 (103,451) (15,806) (9,100) (4,535) Investment in discontinued operations............ (15,541) (97,062) (37,555) (24,484) (21,229) --------- --------- -------- ------- ------- Cash flows provided by (used in) investing activities........... 182,258 (200,513) (53,361) (33,584) (25,764) --------- --------- -------- ------- ------- Financing activities: Proceeds from long-term debt.................. 35,431 234,100 30,000 6,661 -- Principal payments on long-term debt........ (11,266) (43,602) (11,153) (11,050) (5,553) Payments for financing costs................. (653) (7,097) -- -- -- Principal payments on television program rights payable........ (8,150) (8,112) (7,296) (5,090) (5,097) Cash dividends paid.... (7,546) (8,128) (8,872) (6,656) (7,290) Purchase of treasury stock, net of reissued.............. (54,056) (10,014) (2,387) (2,387) (4,291) --------- --------- -------- ------- ------- Cash flows provided by (used in) financing activities on continuing operations. (46,240) 157,147 292 (18,522) (22,231) Financing activities of discontinued operations............ (5,584) (5,000) (15,000) -- -- --------- --------- -------- ------- ------- Cash flows provided by (used in) financing activities........... (51,824) 152,147 (14,708) (18,522) (22,231) --------- --------- -------- ------- ------- Increase (decrease) in cash................. (467) 733 271 (167) 45 Net cash provided by (used in) discontinued operations........... 38 (117) (231) 79 338 --------- --------- -------- ------- ------- Increase (decrease) in cash of continuing operations............. (429) 616 40 (88) 383 Cash at beginning of period................. 790 361 977 977 1,017 --------- --------- -------- ------- ------- Cash at end of period... $ 361 977 1,017 889 1,400 ========= ========= ======== ======= =======
See accompanying notes to consolidated financial statements. F-8 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 29, 1991, DECEMBER 31, 1992 AND 1993 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Providence Journal Company and Subsidiaries (the "Company") are: (a) Description of Business and Basis of Consolidation The consolidated financial statements present the financial position and results of operations of Providence Journal Company and its wholly-owned and majority-owned subsidiaries: . Providence Journal Company, the parent company, engaged in newspaper operations and its wholly-owned subsidiaries ("Providence Journal"), including its remaining investments in discontinued cellular telephone and paging entities. . Colony Communications, Inc. and its wholly-owned and majority-owned cable television subsidiaries ("Colony"). As discussed in note 2, these cable television operations have been presented as discontinued operations. . Providence Journal Broadcasting Corp. and its wholly-owned television broadcasting subsidiaries ("Broadcasting"). Investments in affiliates in which the Company has significant influence (generally 20% to 50% owned) are accounted for using the equity method. Other investments (generally less than 20% owned) are carried at cost. The results of operations of wholly-owned and majority-owned subsidiaries acquired or disposed of during the year are included in the consolidated statements of operations since the date of acquisition or up to the date of disposal. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation. The Company, for 1992 and 1993, has reported financial results on a calendar- year basis. During 1991 the Company, except for Colony, reported on a fiscal year which ended on the last Sunday of the calendar year. Colony reported on a calendar-year basis during 1991. (b) Cash A cash management program is operated under which outstanding checks in excess of cash in the concentration account are not accounted for as reductions of cash until presented to the bank for payment. Supplemental cash flow information, excluding discontinued operations, is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1991 1992 1993 ---------- ---------------- Income taxes paid during the year................ $ 176,517 9,823 9,815 ========== ======= ======= Interest paid during the year, net of amounts capitalized..................................... $ 5,511 10,686 20,285 ========== ======= ======= Obligations incurred for acquisition of televi- sion program rights (non-cash transaction)...... $ 8,715 5,428 5,898 ========== ======= =======
F-9 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) During 1992, the Company acquired certain assets and assumed certain liabilities in connection with various purchase business combinations, as follows:
Tangible assets (primarily property, plant and equipment) ac- quired........................................................... $ 86,388 ========= Intangible assets acquired........................................ $ 270,325 ========= Liabilities assumed............................................... $ 24,214 ========= Exchange of note receivable in connection with purchase business combination...................................................... $ 250,555 =========
(c) Marketable Equity Securities Marketable equity securities consist of common stocks and are included in other assets on the accompanying consolidated balance sheets. Prior to January 1, 1994, marketable equity securities were stated at the lower of aggregate cost or market value. A decline in the market value of any marketable equity security below cost that is deemed other than temporary results in an adjustment to the cost basis of the security which is charged to the statement of operations. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this standard, the Company's marketable equity securities are considered to be "held for sale" and unrealized gains, net of the related tax effect, are recorded as a separate component of stockholders' equity. At December 31, 1993, the cost and fair market value of marketable equity securities totaled $5,873 and $14,406, respectively. (d) Inventories Inventories, principally comprising raw materials, are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (LIFO) basis. Replacement cost of inventories was $1,810 and $1,433 at December 31, 1992 and 1993, respectively. (e) Television Program Rights Television program rights acquired under license agreements are recorded as assets at the gross value of the related liabilities at the time the programs become available for showing. The rights are amortized using accelerated methods over the term of the applicable contract. Amortized costs are included in operating expenses in the accompanying statements of operations. Program rights classified as a current asset represent the total amount estimated to be amortized within a year. Related liabilities due to licensers are classified as current or long-term in accordance with the payment terms. (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to income as incurred; significant improvements are capitalized. The Company provides for depreciation using the straight-line method over the following estimated useful lives: Buildings and improvements.................................... 10-45 years Machinery and equipment....................................... 3-11 Furniture and fixtures........................................ 5-10 Broadcast equipment........................................... 5-20
F-10 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) When the Company determines that certain property, plant and equipment is impaired, a loss for impairment is recorded for the excess of the carrying value over the fair value of the asset. (g) License Costs, Goodwill and Other Intangible Assets License costs and other intangible assets are stated at cost. Goodwill represents the excess of purchase price over fair value of net assets acquired. The Company provides for amortization using the straight-line method over periods ranging from 5 to 40 years. Amortization expense on intangible assets charged to continuing operations totaled $5,173, $3,851 and $3,649 in 1991, 1992, and 1993, respectively. Accumulated amortization on intangible assets totaled $29,962 and $33,363 at December 31, 1992 and 1993, respectively. The Company continually reviews its intangible assets to determine whether any impairment has occurred. The Company assesses the recoverability of intangible assets by reviewing the performance of the underlying operations, in particular the future operating cash flows (earnings before income taxes, depreciation, and amortization) of the acquired operation. (h) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Effective January 1, 1992, the Company adopted Statement 109 and it has reported the cumulative effect of that change in the method of accounting for income taxes in the 1992 consolidated statement of operations (see note 7). Pursuant to the deferred method under APB Opinion 11, which was applied prior to 1992, deferred income taxes were recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable in the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates. (i) Pension and Other Postretirement Benefits The Company has defined benefit pension plans covering substantially all employees of Providence Journal and certain employees of Broadcasting. The plans are funded in accordance with the requirements of the Employee Retirement Income Security Act. The Company sponsors a defined life insurance and medical plan for its newspaper and one of its broadcast operations, respectively. Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions", which establishes a new accounting principle for the cost of retiree health care and other postretirement benefits (see note 11). Prior to 1992, the Company recognized these benefits on the pay-as-you-go method (i.e.: cash basis). The cumulative effect of the change in method of accounting for postretirement benefits other than pensions is reported in the 1992 consolidated statement of operations. F-11 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (j) Interest Rate Swaps The Company has entered into interest rate swap agreements which are accounted for as a hedge of the obligation and, accordingly, the net swap settlement amount is recorded as an adjustment to interest expense in the period incurred (see note 8). Gains and losses upon settlement of a swap agreement are deferred and amortized over the remaining term of the agreement. (k) Unaudited Interim Consolidated Financial Statements The consolidated financial statements as of and for the nine months ended September 30, 1993 and 1994 are unaudited, however, they include all adjustments (consisting of normal recurring adjustments) considered necessary by management for presentation of the financial position and results of operations for these periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. (2) DISCONTINUED OPERATIONS On November 18, 1994, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Continental Cablevision, Inc. (Continental) whereby Continental will acquire all of the Company's cable television businesses in a tax-free merger. In order to facilitate the tax-free nature of the merger the Company will reorganize its corporate structure in a series of transactions the end result of which will be to spin-off all non-cable television businesses into a new company (New Providence Journal). Upon completion of the spin-off, shareholders of the Company will also own the equivalent number and class of common shares of New Providence Journal. The Merger Agreement provides that, as a condition to the merger, each of the following transactions shall have been completed prior to the closing: a) The Company will have completed its corporate reorganization described in the preceding paragraph; b) The Company will incur additional indebtedness in a minimum principal amount of $755,000. Such indebtedness will be used to repay existing indebtedness of the Company and King Holding Corp., complete the King acquisition (see (c) below), and purchase minority interests in other cable television subsidiaries/investments; and, c) The Company will acquire all of the capital stock of King Holding Corp. (as discussed in note 3(a), the Company presently owns 50% of such capital stock). The Company has entered into a Letter of Intent dated October 25, 1994 with its partner whereby both parties have agreed in principle to the acquisition by the Company of all capital stock of King Holding Corp. at a purchase price of $265,000 (including transaction costs). The merger will be completed by an exchange of shares of the Company (after spin-off of all non-cable television businesses) for shares of capital stock of Continental with a value equal to approximately $645,000. The number of Continental shares exchanged may be reduced to the extent the Company is unable to acquire minority interests in existing cable television subsidiaries/investments. F-12 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) In addition, Continental will assume substantially all liabilities of the Company's cable television businesses, including $755 million of the additional indebtedness described in (b) above. However, the Company will indemnify Continental from any and all liabilities arising from the non-cable television businesses, 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. The Company is obligated to make capital improvements to all cable systems being sold, totaling $55,000 on an annualized basis from November 18, 1994, until the closing. If the Merger Agreement is terminated under certain limited circumstances, the Company may be required to pay to Continental a termination fee of $42,000 plus up to an additional $10,000 to reimburse Continental for reasonable fees and expenses it incurred in connection with the merger transaction. Consummation of the merger requires approval by the shareholders of the Company and Continental, consent of the FCC to the transfer of control of certain licenses issued to the Company, and consent and/or waiver from relevant governmental authorities under certain franchises issued to the Company. As such, closing of the merger is not expected to be completed until the second half of 1995. The net assets of the cable television businesses to be acquired by Continental are presented in the accompanying consolidated balance sheets as "net assets of discontinued operations". Discontinued assets consist primarily of plant and equipment, and intangible assets. Liabilities to be assumed consist primarily of accounts payable and accrued expenses. Income (loss) from discontinued operations includes allocated interest expense totaling $1,679, $8,774 and $19,807 in 1991, 1992 and 1993, respectively. Interest allocated to discontinued operations was limited to the associated interest on debt that is to be repaid in connection with the merger. In addition, in 1991, the Company sold one of its two remaining investments in cellular systems for $25,330, and the second investment was disposed of in 1994. The Company also sold its paging subsidiary in 1994. As a result of the cellular system disposed of in 1991, the Company recorded a gain of $1,573 (net of operating losses during the phase-out period equal to $1,512, and net of income taxes of $777). The results of operations of the cable television segment and the cellular system and paging subsidiary have been reported as discontinued in the accompanying consolidated statements of operations. Prior year financial statements have been reclassified to present these businesses as discontinued operations. Operating results of these discontinued operations were as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1991 1992 1993 -------- -------- -------- Revenues....................................... $ 98,018 112,334 177,417 Costs and expenses............................. (78,699) (107,824) (185,998) -------- -------- -------- Income (loss) before income taxes.............. 19,319 4,510 (8,581) Income tax expense (benefit)................... 8,506 2,955 (1,087) -------- -------- -------- Net income (loss).............................. $ 10,813 1,555 (7,494) ======== ======== ========
F-13 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) INVESTMENTS IN AFFILIATED COMPANIES (a) King Holding Corp. In February 1992 Providence Journal acquired 50% of King Holding Corp. for $105,000. King Holding Corp. subsequently acquired all of the common stock of King Broadcasting Company ("King"), a company engaged in broadcast and cable television operations, for $547,000. The Company has accounted for this investment under the equity method. In connection with this investment the Company received a transaction fee in 1992 totaling $6,000 and receives annual governance fees of $1,000 all of which have been included with interest income and management fees from related parties in the accompanying consolidated statements of operations. Providence Journal has a management agreement with King to operate its broadcast stations and cable systems and charged King management fees of $2,104 and $2,525 in 1992 and 1993, respectively, which has also been included in interest income and management fees from related parties. The Company charged King $300 for accounting services in 1993 and is also entitled to reimbursement for expenses incurred in its capacity as manager and was reimbursed $2,202 and $2,842 by King in 1992 and 1993, respectively. As part of the initial financing of the King transaction, the Company was awarded a warrant allowing for the purchase of 2,102 shares of Class B nonvoting common stock at $0.10 per share. In addition, the management agreement provides for the awarding of certain warrant bonuses, both on an annual and cumulative basis, based on operating cash flow during defined periods. The Company was awarded a warrant bonus providing for the purchase of 1,050 and 339 shares, during 1992 and 1993, respectively, of King's Class B nonvoting common stock at $0.10 per share. The Company can also earn cash bonuses based on operating cash flow achieved during defined periods. The Company recorded a cash bonus under the management agreement equal to $488 and $257 in 1992 and 1993, respectively. (b) Copley/Colony, Inc. Colony owns 50% of Copley/Colony, Inc. ("Copley/Colony") a joint venture, with Copley Press Electronics Company, engaged in cable television operations. Colony has a management agreement with Copley/Colony to operate its cable television systems and charged Copley/Colony management fees of $708, $744 and $738 in 1991, 1992 and 1993, respectively, which have been included in interest income and management fees from related parties. Colony charged Copley/Colony processing fees for customer billings totaling $521, $542 and $559 in 1991, 1992 and 1993, respectively. At December 31, 1992 and 1993, Colony had a net balance due to Copley/Colony totaling $2,455 and $3,451, respectively. (c) Television Food Network, G.P. In August 1993, the Company, through its wholly owned subsidiaries PJ Programming, Inc. and Colony Cable Networks, Inc., acquired a 20.92% interest in Television Food Network, G.P. (a development stage enterprise) The Company controls 20% of the voting interest in the partnership, which was formed specifically to own and operate the Television Food Network channel (TVFN). TVFN develops cable television programming related to food, its preparation and other related topics. The Company has accounted for this investment under the equity method. The Company invested $5,001 in the partnership in October 1993. In addition, it has agreed to invest $2,000 in both 1994 and 1995. During 1993, the Company was reimbursed $50 from TVFN for administrative and accounting services. The Company also grants TVFN carriage rights on its cable networks. F-14 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (d) Linkatel Pacific, L.P. In July 1993, the Company, through its wholly-owned subsidiary Colony/Linkatel Network, Inc., invested in Linkatel Pacific, L.P. (a development stage enterprise) with two other communications companies. The Company has a 33.33% (as of December 31, 1993) limited interest in the partnership, which was formed to pursue the development of alternative access networks. The investment is accounted for under the equity method. At December 31, 1993, the Company had invested $501 in Linkatel Pacific, L.P. and had loaned an additional $500 through a non-interest bearing demand note that will be converted to equity in 1994. In addition, the Company has committed to invest an additional $8,000 by 1995. Summary combined financial information for King Holding Corp.; Copley/Colony, Inc.; Television Food Network, G.P.; and Linkatel Pacific, L.P. as of December 31, 1992 and 1993, and for the years ended December 29, 1991 and December 31, 1992 and 1993 is as follows:
1992 1993 -------- ------- Current assets.............................................. $ 37,385 64,974 Current liabilities......................................... 31,172 47,769 -------- ------- Working capital........................................... 6,213 17,205 Property, plant and equipment, net.......................... 188,086 174,469 Intangible and other assets................................. 436,320 417,600 Long-term liabilities....................................... 419,909 395,964 -------- ------- Stockholders' equity...................................... $210,710 213,310 ======== =======
1991 1992 1993 ------- ------- ------- Revenues......................................... $23,285 175,134 210,333 ======= ======= ======= Operating income (loss).......................... $ (665) 14,113 11,432 ======= ======= ======= Loss from continuing operations before cumulative effect of change in accounting principle........ $ (143) (24,093) (20,644) ======= ======= ======= Net loss (including net losses from development stage enterprises totaling $7,031 in 1993)...... $ (143) (22,575) (20,644) ======= ======= =======
(4) NOTES RECEIVABLE In September 1990, Providence Journal advanced the Lowell Sun Publishing Company and Lowell Sun Realty Company (collectively the "Lowell Sun") $25,650 and agreed to provide a $6,500 revolving credit facility. The loan and revolving credit facility are available through March 1996. As of December 31, 1993 amounts outstanding bear interest at a floating rate of prime plus 1.25%. The advance is collateralized by all the assets of the Lowell Sun and an interest in Lowell Sun stock. As additional consideration for making the advance, the Lowell Sun granted Providence Journal a warrant to acquire a 41.67% interest in the Lowell Sun. The warrant is exercisable by Providence Journal between September 1993 and September 1995. The exercise price is calculated based on the maximum amount F-15 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) advanced by Providence Journal to the Lowell Sun. In the event that the warrant is not exercised, Providence Journal will receive a percentage of the increase in value of the Lowell Sun since September 1990 based upon the warrant formula. (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, consist of the following:
1992 1993 -------- ------- Land........................................................ $ 16,855 17,361 Machinery and equipment..................................... 97,671 93,801 Buildings and improvements.................................. 75,324 75,993 Broadcast equipment......................................... 38,770 37,593 Furniture and fixtures...................................... 16,709 27,003 Construction in progress.................................... 1,536 651 -------- ------- $246,865 252,402 ======== =======
During 1991 and 1992 the Company capitalized interest expense on construction projects totaling $580 and $174, respectively. No interest was capitalized during 1993. Depreciation expense on property, plant and equipment used in continuing operations totaled $16,867, $17,715 and $17,761 in 1991, 1992 and 1993, respectively. In 1993, the Company wrote down its investment in the Washington Street Garage by $2,702. The Company wrote down its investment in the Omni Biltmore Hotel by $5,984 and $561 in 1991 and 1992, respectively. In 1991, Broadcasting wrote down land and buildings and broadcast equipment by $1,438 on its relocation of two television stations to new premises. (6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Significant components of accrued expenses and other current liabilities consisted of the following amounts at December 31:
1992 1993 ------- ------ Purchase price payable on Palmer Communications, Inc. acquisition................................................ $10,717 6,045 Salaries, wages and other employee benefits................. 4,243 7,825 Unearned revenue............................................ 2,639 3,211 Other....................................................... 7,843 8,701 ------- ------ $25,442 25,782 ======= ======
(7) FEDERAL AND STATE INCOME TAXES As discussed in note 1, the Company adopted Statement 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes of $3,371 was determined as of January 1, 1992 and is included in the cumulative effect of changes in accounting principles, net, in the consolidated statement of operations for the year ended December 31, 1992. As a result of applying Statement 109 in 1992, pretax income from continuing operations for the year ended December 31, 1992 was decreased $283 due to the effects of adjustments for prior purchase business combinations. The 1991 financial statements have not been restated to apply the provisions of Statement 109. F-16 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Total income tax expense has been allocated as follows:
1991 1992 1993 ------- ------ ------ Income (loss) from continuing operations............ $ 3,616 11,837 (5,765) Income (loss) from discontinued operations.......... 8,506 2,955 (1,087) Extraordinary item.................................. -- -- 799 Changes in accounting principles.................... (1,532) (4,460) -- ------- ------ ------ $10,590 10,332 (6,053) ======= ====== ======
Income tax expense (benefit) attributable to income from continuing operations consists of:
CURRENT DEFERRED TOTAL -------- -------- ------ Year ended December 29, 1991: U.S. Federal.................................... $ 4,294 (6,118) (1,824) State........................................... 5,440 -- 5,440 -------- ------ ------ $ 9,734 (6,118) 3,616 ======== ====== ====== Year ended December 31, 1992: U.S. Federal.................................... $ 13,316 (3,137) 10,179 State........................................... (386) 2,044 1,658 -------- ------ ------ $ 12,930 (1,093) 11,837 ======== ====== ====== Year ended December 31, 1993: U.S. Federal.................................... $ (547) (4,886) (5,433) State........................................... (372) 40 (332) -------- ------ ------ $ (919) (4,846) (5,765) ======== ====== ======
Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations as a result of the following:
1991 1992 1993 -------- ------ ------ Computed "expected" tax expense (benefit)........ $ (1,021) 6,526 (7,125) Increase (decrease) in income taxes resulting from: Equity in net loss of King Holding Corp........ -- 4,285 2,463 State and local income taxes, net of federal income tax benefit............................ 3,591 1,117 (219) Rehabilitation credit.......................... -- -- (1,248) Amortization of goodwill....................... -- 138 271 Equity in earnings of affiliate not subject to taxation because of dividends received deduction for tax purposes.................... 24 (447) (47) Adjustment of estimated income tax liabilities of prior years................................ 299 -- -- Other, net..................................... 723 218 140 -------- ------ ------ $ 3,616 11,837 (5,765) ======== ====== ======
F-17 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1992 and 1993 are presented below:
1992 1993 -------- ------- Gross deferred tax assets: Deferred compensation.................................. $ 13,062 14,892 State net operating loss carryforwards................. 4,493 4,481 Investment and other reserves.......................... 3,773 5,219 Partnership investment, principally due to book and tax basis differences..................................... 2,093 1,325 Self-insurance reserves................................ 1,178 1,103 Vacation accrual....................................... 813 811 Postretirement benefits................................ 875 942 Accounts receivable, principally due to allowance for doubtful accounts..................................... 575 598 Other.................................................. 3,399 3,364 -------- ------- Total gross deferred tax assets...................... 30,261 32,735 Less valuation allowance............................. (4,141) (4,535) -------- ------- Net deferred tax assets.............................. 26,120 28,200 -------- ------- Gross deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capitalized interest................. (19,538) (19,470) Intangibles, principally due to differences in basis... (11,944) (11,758) Pension income......................................... (4,011) (4,355) Property taxes......................................... (719) (228) Other.................................................. (1,681) (1,501) -------- ------- Total gross deferred liabilities..................... (37,893) (37,312) -------- ------- Net deferred tax liability........................... $(11,773) (9,112) ======== =======
The valuation allowance for deferred tax assets as of January 1, 1992 was $4,723. The net change in the total valuation allowance was a decrease of $582 in 1992 and an increase of $1,339 in 1993. Changes to the valuation allowance relate principally to deferred tax assets recorded for state net operating loss carryforwards. For the year ended December 29, 1991, the deferred income tax benefit results from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The sources and tax effects of those timing differences are presented below: Excess of tax over book depreciation............................... $ 1,365 Pension income..................................................... 236 Write-down of assets............................................... (2,884) Deferred compensation.............................................. (3,815) Change in reserves................................................. (1,689) Other, net......................................................... 669 ------- $(6,118) =======
F-18 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) At December 31, 1993, the Company had net operating loss carryforwards for state income tax purposes of approximately $100,000 which are available to offset future state taxable income, if any, expiring in various years from 1997 through 2008. (8) LONG-TERM DEBT At December 31, 1992 and 1993, long-term debt consists of the following:
1992 1993 -------- -------- Revolving credit and term loan facility at rates of interest averaging 5.4% and 4.8% in 1992 and 1993, respectively............................................ $235,000 $262,000 Bonds payable at various rates of interest averaging 3.5% payable through December 2022........................... 19,600 10,000 Note payable at an annual rate of interest equal to 18% payable through April 2002.............................. 8,904 8,014 Other.................................................... 105 92 -------- -------- Total long-term debt................................... 263,609 280,106 Less current installments................................ 10,503 3,505 -------- -------- Long-term debt, excluding current installments......... $253,106 $276,601 ======== ========
Scheduled principal payments on outstanding debt total $280,106 and are due in the following years: 1994--$3,505; 1995--$13,589; 1996--$26,015; 1997-- $45,525; 1998--$60,035 and thereafter--$131,437. In September of 1992 the Company negotiated a $340,000 revolving credit and term loan facility with a syndicate of banks to refinance existing debt, acquire the assets of Palmer and finance working capital requirements. The agreement consists of a $240,000 two-year revolving credit, converting to a seven-year term loan with a final maturity of September 30, 2001 and a $100,000 eight-year revolving credit with a final maturity of September 30, 2000. The agreement provides for borrowings indexed to the higher of the managing banks' prime rate or federal funds rate, the certificate of deposit rate or eurodollar rate at the option of the Company, plus certain margins as defined in the agreement. A commitment fee of 3/8% per annum is payable on the unused portion of the facilities, quarterly in arrears. At December 31, 1993, the Company had $78,000 available for use under the agreement. Commitments under the $240,000 revolving credit and term loan will reduce on a quarterly basis beginning in the fourth quarter of 1994, beginning at $2,500 and increasing to $10,000 per quarter. The facilities are secured by a pledge of stock of Colony Communications, Inc. and its subsidiaries, Providence Journal Broadcasting Corp. and its subsidiaries, in addition to a pledge of intercompany notes due to the Company from Providence Journal Broadcasting Corp. The revolving credit and term loan facilities contain restrictive covenants which, among other things, include limitations as to levels of indebtedness, capital expenditures, sales of subsidiaries and minimum cash flow requirements. In January 1993, the Company retired an industrial revenue bond with a face value of $9,500 for $7,150. The gain resulting from this transaction, totaling $1,551 net of tax, has been presented as an extraordinary item in the 1993 statement of operations. In addition, during December 1993 the Company settled the 11.25% note payable and incurred a prepayment penalty equal to $546 (included with discontinued operations). Both retirements were funded through additional borrowings under the revolving credit and term loan facility. F-19 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) In November 1992, the Company entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its revolving credit and term loan facilities described above. 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 $200,000 of outstanding debt. The Company recorded additional interest expense during 1993 totaling approximately $6,883 which represents the excess of the swap agreement rate over the original contractual rate. The notional amounts and respective periods covered under the agreement are as follows:
AMOUNT PERIOD ------ ------ $200,000................................ December 30, 1992--December 30, 1996 $175,000................................ December 30, 1996--December 30, 1997 $150,000................................ December 30, 1997--December 30, 1999
The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement, however, the Company does not anticipate nonperformance under the agreement. (9) TELEVISION PROGRAM RIGHTS PAYABLE Television program rights payable consist of the gross value of payments due on the acquisition of program rights. Future payments total $7,497 and are due in the following years: 1994--$5,251; 1995--$1,338; 1996--$735; and 1997-- $173. Prior to 1991, television program rights were recorded at the net present value of the related liabilities and amortized using the straight-line method over the contracted number of showings. The Company changed its accounting policy in 1991 to reflect a better matching of program rights amortization with estimated future revenues. The new method of accounting for program rights was applied retroactively to program rights acquired in prior years. The cumulative effect of the change in method resulted in a charge to 1991 operations totaling $2,974, net of the related income tax benefit. The effect of the change in 1991 was to increase pre-tax income from continuing operations by $310. Television program rights are reviewed periodically and, if necessary, adjusted to estimated net realizable value. Accumulated amortization on television program rights totaled $20,605 and $17,272 at December 31, 1992 and 1993, respectively. (10) OPERATING LEASES The Company has certain noncancelable operating leases with renewal options for land, buildings, machinery and equipment. Future minimum lease payments under noncancelable operating leases are due in the following years: 1994-- $4,897; 1995--$4,273; 1996--$3,702; 1997--$3,593; 1998--$3,191 and thereafter--$18,964. Rental expense for the years ended December 29, 1991 and December 31, 1992 and 1993, was $1,618, $1,604 and $2,173, respectively. (11) PENSIONS AND OTHER EMPLOYEE BENEFITS (a) Defined Benefit Pension Plans The Company has two noncontributory defined benefit retirement plans and several defined contribution plans covering substantially all employees. The Company's funding policy for the defined benefit plans is to F-20 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) contribute such amounts as are deductible for federal income tax purposes. Benefits are based on the employee's years of service and average compensation immediately preceding retirement. The funded status of the defined benefit plans is as follows:
1992 1993 -------- ------- Actuarial present value of benefit obligations: Vested benefit obligations............................. $(42,362) (47,939) ======== ======= Accumulated benefit obligations........................ $(45,282) (51,926) ======== ======= Projected benefit obligations............................ $(59,844) (68,045) Plan assets at fair value (primarily corporate equity and debt securities, government securities and real estate). 89,776 95,230 -------- ------- Excess of plan assets over projected benefit obligations. $ 29,932 27,185 ======== ======= Certain changes in the items shown above are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and amounts included in the consolidated balance sheets are shown below: 1992 1993 -------- ------- Unrecognized net gain.................................... $ 5,123 1,564 Unrecognized net transition asset being amortized princi- pally over 18 years..................................... 14,412 13,184 Unrecognized prior service cost due to plan amendment.... (4,899) (3,856) Prepaid pension cost (included in other assets).......... 15,296 16,293 -------- ------- Excess of plan assets over projected benefit obliga- tions................................................. $ 29,932 27,185 ======== =======
The components of 1991, 1992 and 1993 pension income as determined by the plans' actuary are as follows:
1991 1992 1993 -------- ------ ------ Service cost...................................... $ (1,510) (1,556) (1,971) Interest cost..................................... (4,266) (4,309) (5,022) Actual return on plan assets...................... 14,885 6,594 8,681 Net amortization of unrecognized net assets and deferrals........................................ (7,269) 1,284 (691) -------- ------ ------ Pension income.................................. $ 1,840 2,013 997 ======== ====== ====== The Company recorded additional pension expense, relating to early retirement incentives, totaling $1,147 during the year ended December 31, 1991. The assumptions used in the above valuations are as follows: 1991 1992 1993 -------- ------ ------ Discount rate..................................... 8.0% 8.0% 7.5% Rate of increase in compensation levels........... 4.0 5.5 5.0 Expected long-term rate of return on assets....... 9.0 8.5 8.5 ======== ====== ======
F-21 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (b) Defined Contribution and Incentive Compensation Plans The Company contributes to defined contribution plans based on the amount of each employee's plan contribution, not to exceed a predetermined amount as defined by each plan. The total expense of these plans was $1,165, $1,115 and $1,086 in 1991, 1992 and 1993, respectively. The Company has a deferred incentive compensation plan which is administered by the Executive Committee of the Board of Directors. The expense under this plan was $8,923, $2,492 and $5,330 in 1991, 1992 and 1993, respectively. On October 26, 1994, the Company's Board of Directors voted to terminate and pay- out the aforementioned deferred incentive compensation plan. Payment will be made in 1995 upon revaluation of the Company. As of December 31, 1993, the amount accrued under this plan equaled $23,385. (c) Other Postretirement Benefit Plans In addition to the Company's defined benefit pension plans, Broadcasting provides postretirement medical benefits to a limited group of employees and Journal provides postretirement life insurance benefits to substantially all of its employees. The plans are non-contributory and are not funded. The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1992. The cumulative effect of adopting Statement 106 was recognized in full during 1992 and totaled $2,114 (net of income taxes). Postretirement benefit cost of $103 for the year ended December 29, 1991, which was recorded on a cash basis, has not been restated. The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1992 and 1993:
1992 1993 ------ ----- Accumulated postretirement benefit obligation: Retirees...................................................... $2,669 2,327 Fully eligible active plan participants....................... 522 681 ------ ----- Accrued postretirement benefit cost......................... $3,191 3,008 ====== =====
Net periodic postretirement benefit cost for 1992 and 1993 included the following components:
1992 1993 ---- ---- Service cost........................................................ $ 24 26 Interest cost....................................................... 227 226 ---- --- Net periodic postretirement benefit cost.......................... $251 252 ==== ===
For measurement purposes relating to the medical plan in 1992 and 1993, a medical trend rate of 17.0% for pre-65 year old participants was used grading to 7.0% after ten years and a medical trend rate of 12.0% for post-64 year old participants was used grading to 6.0% after six years. A 1% change in the medical trend rate does not result in a material impact to the Company's reported postretirement benefits. The discount rate used in determining the accumulated postretirement benefit obligation for the medical and life insurance plans was 8.0% in 1992 and 7.5% in 1993. F-22 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (d) Supplemental Retirement Plan The Company maintains an unfunded supplemental retirement plan which provides supplemental benefits to a select group of senior management employees. At December 31, 1993, the vested benefit obligation was $211 and the accumulated benefit obligation was $1,649. The projected benefit obligation totaled $4,154 at December 31, 1993. The net periodic pension cost for 1993 of $1,501 includes service cost and interest cost of $1,255 and $246, respectively. The assumptions used at December 31, 1993 are as follows: Discount rate........................................................... 7.5% Rate of increase in compensation levels................................. 5.0%
(e) Restricted Stock Unit Plan During 1993, the Company established a Restricted Stock Unit Plan for certain key executives. Participants are awarded restricted stock units with each unit being equivalent to either one share of Class A Common Stock or one Class A voting Trust Certificate, as the Executive Committee shall in its own discretion determine. Restricted stock units, including additional units accrued as a result of dividends and reinvested dividends, will be 100% vested at the end of three years from the date of the award. Upon vesting, the restricted stock units will be paid out in actual shares of Class A Common Stock or Class A Voting Certificates. Participants will be offered an opportunity to defer such payout. Vesting is accelerated for death, total disability, termination other than for cause, and for retirement (pro-rata). In connection with the Plan, a total of 680 Class A shares have been reserved. In October 1993, 655 units were awarded and compensation expense totaling $405 was recorded in the consolidated statement of operations for the year ended December 31, 1993. (f) Change in Control Agreements The Company has agreements with certain executives which only become effective upon a change-in-control of the Company. These agreements were executed effective October 11, 1993. In event of a change of control, the agreements offer a three year term of employment with responsibilities, compensation, and benefits at least commensurate as those during the prior six (6) months. If terminated involuntarily, the individuals are entitled to 299% of their highest base pay and average bonus received during the prior three years as a lump sum severance payment. A voluntary resignation provides six month severance. Dismissal for cause results in no severance. In a supplemental agreement also executed on October 11, 1993, the Company committed to paying the severance stated above in event an individual was involuntarily terminated as a result of corporate restructuring, even if prior to a change-in-control. In addition, the agreement specified that severance would be discretionary if the Company wished to retain the executive subsequent to the restructuring (even though diminished responsibilities) and the executive declined. (12) ACQUISITIONS (a) Palmer Communications, Inc. In December 1992, the Company completed the acquisition of the cable television assets of Palmer for approximately $326,000. These cable television systems are located in Naples, Florida and Palm Desert, F-23 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) California and have approximately 168,000 subscribers. The acquisition was completed in two stages. The first, acquiring the Florida assets of Palmer, was completed on November 30, 1992. The second, acquiring the California assets of Palmer, was completed on December 31, 1992. The Company has accounted for this acquisition as a purchase and has included the results of operations in the accompanying consolidated financial statements from the date of acquisition. In December 1990, the Company advanced Palmer $210,500 in cash comprising a six-year term loan of $205,500 and revolving credit commitment of $5,000. In December 1992, the note was settled in full in connection with the acquisition of Palmer's cable television assets. Interest income earned on this note totaled $30,450 and $31,452 during 1991 and 1992, respectively. In December 1990, Colony and Palmer also entered into a management agreement to manage Palmer's cable systems in Naples, Florida and Palm Desert, California through December 1996. Colony received a management fee based on the percentage of budgeted operating income achieved. In 1991 and 1992, management fee income totaled $2,370 and $2,770, respectively. As a result of the acquisition of Palmer, the management agreement was terminated. (b) Other Acquisitions In January 1992, Colony completed the acquisition of Lakewood Cable, Inc. ("Lakewood") in Lakewood, California for $25,473. Lakewood is a provider of cable television services with approximately 14,000 subscribers. The Company has accounted for this acquisition as a purchase and has included the results of operations in the accompanying consolidated financial statements from the date of acquisition. (13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (a) Current Assets and Liabilities The carrying amount of cash, trade receivables, trade accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments. (b) Notes Receivable The fair values of the Company's notes receivable are based on the amount of future cash flows associated with each instrument discounted using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. (c) Long-Term Debt and Obligations for Television Program Rights The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The fair value of obligations for television program rights are based on future cash flows, discounted using the Company's current borrowing rate, over the term of the related contract. (d) Interest Rate Swaps The fair value of interest rate swaps is the amount at which they could be settled, based on estimates obtained from dealers. The amount of payment required to settle outstanding interest rate swaps at December 31, 1993 approximated $12,135. F-24 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The estimated fair value of the Company's financial instruments are summarized as follows:
AT DECEMBER 31, 1992 AT DECEMBER 31, 1993 ---------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ----------- ---------- ----------- Notes receivable.............. $ 26,160 25,128 22,599 22,599 ========== ========= ========== ========== Long-term debt................ $ 278,609 280,246 280,106 283,409 ========== ========= ========== ========== Television program rights payable...................... $ 8,433 7,817 7,497 7,016 ========== ========= ========== ==========
(e) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (14) COMMITMENTS AND CONTINGENCIES The Company has outstanding payment commitments at December 31, 1993 for television programming not yet available for broadcast totaling $16,872. The Company has insurance programs for workers' compensation, general liability, auto and certain health coverages which comprise a form of self- insurance. The Company's liability for large losses is capped, individually and in the aggregate, through contracts with insurance companies. In addition, the Company is self-insured for environmental hazards. An estimate for claims incurred but not paid is accrued annually. The Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material effect on the consolidated financial position or results of operations of the Company. The Company has a letter of credit commitment in an amount not to exceed $12,000 in support of industrial revenue bonds of a wholly-owned subsidiary. In 1987, the Company repurchased approximately 8% of its outstanding shares of common stock from an unaffiliated party. Additional consideration may be payable to the seller in the event of a significant change in the ownership of the Company prior to April 2002. Management does not believe that the merger discussed in note 2 will result in any contingent consideration. In October, 1992, the Congress of the United States passed the Cable Television Consumer Protection and Competition Act of 1992 (Cable Act). As a result the 1992 Cable Act, several cable television systems of the Company are subject to regulation by local franchise authorities and/or the FCC. Regulations imposed by the 1992 Cable Act, among other things, allow regulators to limit and reduce the rates that cable operators can charge for certain basic cable television services and equipment rental charges. The Company has been notified by certain franchise authorities that various regulated rates charged to subscribers were in excess of the rates permitted. The Company has reviewed the notifications as well as the disputed rates and has accrued amounts for refunds it believes will be made. F-25 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Further rules and regulations are being considered by the FCC, however, these regulations have not yet been finalized. The ultimate impact on the operations of the Company resulting from existing rules and regulations and proposed rules and regulations, if any, cannot be determined. (15) STOCKHOLDERS' EQUITY The Company has two classes of common stock: Class A and Class B. Each class has the same rights and privileges, except that Class A common stock is entitled to one vote per share, whereas Class B common stock is entitled to four votes per share. In addition, the transfer of Class B common stock is limited to "Permitted Transferees" only, otherwise the shares convert to Class A common stock upon sale. On December 10, 1990, the Company commenced a tender offer, open to all shareholders, to purchase shares of its Class A and Class B common stock at a price of $7,000 per share in cash. The purpose of the tender offer was to provide liquidity to shareholders. The offer period expired on January 18, 1991, and 6,449 shares were tendered in January 1991 for $45,143. The Company subsequently purchased another 1,134 shares in 1991 for $8,655. In 1991, the Company retired all but 100 shares of treasury stock comprising Class B shares. The retirement had no effect on total stockholders' equity. During 1993 the Company purchased 337 shares for $2,460 and during 1992 the Company purchased and retired 1,311 shares for $10,014. Effective September 26, 1990, pursuant to a shareholder rights agreement, the Company issued to shareholders one common stock right for each share of Class A or Class B common stock then outstanding. The right entitles the holder to purchase one share of Class A or Class B common stock at a purchase price of $35,000 per share. Upon the occurrence of certain events, as defined in the rights agreement, the Board of Directors may order the exchange of three common shares for each right held. The shareholder rights agreement will be terminated in connection with the closing under the Merger Agreement and a substantially similar agreement will be entered into by New Providence Journal. Treasury stock at December 31, 1993, consisted of 221 Class A shares and 206 Class B shares. (16) BUSINESS SEGMENT INFORMATION The Company operates in principally two industries, publishing and broadcast television. Publishing consists primarily of the publication and sale of the only daily newspaper serving Rhode Island and parts of southeastern Massachusetts. Broadcast television has four stations that serve markets in Louisville, Charlotte, Tucson and Albuquerque. Operating results and other financial data for the principal business segments of the Company for 1991, 1992 and 1993 are presented below. Operating income (loss) by business segment is total revenue less operating expenses. In computing operating income (loss) by business segment, none of the following items has been included: other income (expense), income taxes and extraordinary items. F-26 PROVIDENCE JOURNAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Identifiable assets by business segment are those assets used in Company operations in each segment. Capital expenditures are reported exclusive of acquisitions.
1991 1992 1993 -------- -------- -------- Revenues: Publishing.................................. $118,169 $120,515 $124,914 Broadcasting................................ 39,381 42,156 44,532 Other....................................... 9,458 9,782 10,053 -------- -------- -------- $167,008 $172,453 $179,499 ======== ======== ======== Operating income (loss): Publishing.................................. 3,919 10,590 9,891 Broadcasting................................ (11,020) (6,401) (3,188) Corporate................................... (18,237) (14,441) (20,886) Other....................................... (6,455) (647) (2,650) -------- -------- -------- $(31,793) $(10,899) $(16,833) ======== ======== ======== Identifiable assets: Publishing.................................. $159,241 $158,878 $162,327 Broadcasting................................ 114,405 116,837 108,305 Discontinued operations..................... 52,492 390,123 385,165 Investments in affiliated companies......... 15,211 106,648 101,780 Other....................................... 253,017 20,947 18,108 -------- -------- -------- $594,366 $793,433 $775,685 ======== ======== ======== Depreciation and amortization: Publishing.................................. $ 9,080 $ 10,387 $ 11,426 Broadcasting................................ 11,829 10,162 8,682 Other....................................... 1,131 1,017 1,304 -------- -------- -------- $ 22,040 $ 21,566 $ 21,412 ======== ======== ======== Capital expenditures: Publishing.................................. $ 18,269 $ 14,870 $ 9,962 Broadcasting................................ 11,259 3,746 1,368 Other....................................... 10,608 1,414 267 -------- -------- -------- $ 40,136 $ 20,030 $ 11,597 ======== ======== ========
F-27 INDEPENDENT AUDITORS' REPORT King Holding Corp.: We have audited the accompanying consolidated balance sheets of King Holding Corp. and subsidiaries as of December 31, 1992 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period February 25, 1992 (date of commencement of operations) to December 31, 1992 and for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of King Holding Corp. at December 31, 1992 and 1993, and the results of their operations and their cash flows for the periods ended December 31, 1992 and 1993 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Boston, Massachusetts February 11, 1994 (except for the fifth paragraph of Note 1 as to which the date is February 22, 1994, and Note 2 as to which the date is November 18, 1994) F-28 KING HOLDING CORP. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 ------------------ SEPTEMBER 30, 1992 1993 1994 -------- -------- ------------- (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents.............. $ 647 $ 833 $ 3,003 Accounts receivable--net............... 18,956 23,685 21,700 Film and syndication rights, current portion............................... 7,084 10,589 8,060 Prepaid and other current assets....... 2,182 2,137 1,312 -------- -------- -------- Total current assets................. 28,869 37,244 34,075 -------- -------- -------- PROPERTY AND EQUIPMENT--Net.............. 62,407 58,389 56,300 -------- -------- -------- OTHER ASSETS: Film and syndication rights, long-term portion............................... 1,098 4,567 4,599 Deferred financing costs--net.......... 13,590 12,107 10,995 Intangible assets--net................. 137,647 130,887 125,788 Long-term pension asset................ 3,521 3,481 3,151 Other assets........................... 441 94 51 -------- -------- -------- Total other assets................... 156,297 151,136 144,584 NET ASSETS OF DISCONTINUED OPERATIONS.... 309,554 286,930 271,215 -------- -------- -------- TOTAL ASSETS......................... $557,127 $533,699 $506,174 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt...... $ -- $ 15,000 $ 26,405 Current portion of film and syndication rights................................ 7,364 9,614 7,179 Accounts payable and other accrued expenses.............................. 8,854 9,756 5,948 Deferred income taxes.................. 513 -- -- -------- -------- -------- Total current liabilities............ 16,731 34,370 39,532 -------- -------- -------- LONG-TERM OBLIGATIONS: Long-term debt......................... 331,000 300,000 271,945 Film and syndication rights............ 2,087 5,525 5,233 Deferred income taxes.................. 17,417 17,948 19,279 Other.................................. 5,095 5,213 4,881 -------- -------- -------- Total long-term obligations.......... 355,599 328,686 301,338 -------- -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, Class A; $0.10 par value; 200 shares authorized, issued and outstanding........................... Common stock, Class B (nonvoting); $0.10 par value; 240,000 shares authorized; 211,000 issued and outstanding........................... 21 21 21 Additional paid-in capital............. 209,979 210,314 210,314 Accumulated deficit.................... (25,203) (39,692) (45,031) -------- -------- -------- Total stockholders' equity........... 184,797 170,643 165,304 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $557,127 $533,699 $506,174 ======== ======== ========
See notes to consolidated financial statements. F-29 KING HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED PERIOD SEPTEMBER 30 FEBRUARY 25, 1992 YEAR ENDED ------------------ TO DECEMBER 31, 1992 DECEMBER 31, 1993 1993 1994 -------------------- ----------------- -------- -------- (UNAUDITED) REVENUES: Gross broadcast revenues............. $ 97,241 $117,967 $ 81,381 $ 92,783 Less agency commission........... 12,775 15,627 10,752 12,358 -------- -------- -------- -------- Net revenues........ 84,466 102,340 70,629 80,425 -------- -------- -------- -------- COSTS AND EXPENSES: Operating............. 38,666 41,721 30,015 34,287 Selling, general and administrative....... 16,395 27,517 18,621 19,972 Management and other fees paid to related parties.............. 2,131 2,034 1,595 1,526 Depreciation and amortization......... 12,364 14,697 10,717 10,351 -------- -------- -------- -------- Total............... 69,556 85,969 60,948 66,136 -------- -------- -------- -------- OPERATING INCOME........ 14,910 16,371 9,681 14,289 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest expense, net of allocation to discontinued operations........... (7,696) (8,972) (6,694) (6,443) Other--net............ (26,741) 288 497 281 -------- -------- -------- -------- Total other expense. (34,437) (8,684) (6,197) (6,162) -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.... (19,527) 7,687 3,484 8,127 INCOME TAX PROVISION (BENEFIT).............. (5,590) 6,787 2,785 4,406 -------- -------- -------- -------- INCOME (LOSS) FROM CON- TINUING OPERATIONS..... (13,937) 900 699 3,721 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES.................. (11,266) (15,389) (8,973) (9,060) -------- -------- -------- -------- NET LOSS................ $(25,203) $(14,489) $ (8,274) $ (5,339) ======== ======== ======== ======== INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations........... $ (77.45) $ 4.26 $ 3.31 $ 17.62 Discontinued operations........... (62.60) (72.86) (42.49) (42.90) -------- -------- -------- -------- Net loss per common share.................. $(140.05) $ (68.60) $ (39.18) $ (25.28) ======== ======== ======== ======== Weighted average shares outstanding............ 179,952 211,198 211,198 211,198 ======== ======== ======== ========
See notes to consolidated financial statements. F-30 KING HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK -------------- ADDITIONAL TOTAL CLASS CLASS PAID-IN ACCUMULATED STOCKHOLDERS' A B CAPITAL DEFICIT EQUITY ------- ------ ---------- ----------- ------------- CAPITALIZATION OF THE COM- PANY AT THE ACQUISITION DATE (February 25, 1992).. $ -- $ 21 $209,979 $ -- $210,000 Net loss................. -- -- -- (25,203) (25,203) ------- ----- -------- -------- -------- BALANCE, DECEMBER 31, 1992. -- 21 209,979 (25,203) 184,797 Compensation costs re- lated to warrant bo- nuses................... -- -- 335 -- 335 Net loss................. -- -- -- (14,489) (14,489) ------- ----- -------- -------- -------- BALANCE, DECEMBER 31, 1993. -- 21 210,314 (39,692) 170,643 Net loss (unaudited)..... -- -- -- (5,339) (5,339) ------- ----- -------- -------- -------- BALANCE, SEPTEMBER 30, 1994 (Unaudited)............... $ -- $ 21 $210,314 $(45,031) $165,304 ======= ===== ======== ======== ========
See notes to consolidated financial statements. F-31 KING HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 ------------------ PERIOD FEBRUARY 25, 1992 YEAR ENDED TO DECEMBER 31, 1992 DECEMBER 31, 1993 1993 1994 -------------------- ----------------- -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations. $(13,937) $ 900 $ 699 $ 3,721 -------- -------- -------- -------- Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization......... 12,364 14,697 10,717 10,351 Compensation costs related to warrant bonuses.............. 335 251 Deferred income taxes................ (13,603) 18 1,331 Changes in assets and liabilities: Accounts receivable... r5,755 (4,695) 1,339 2,017 Prepaid and other current assets....... 1,124 905 555 914 Accounts payable and other accrued expenses............. (2,422) 838 1,127 (4,138) Other, net............ 1,235 457 1,291 1,611 Film and syndication rights assets and liabilities.......... (1,509) (1,286) (153) (142) -------- -------- -------- -------- Total adjustments.... 2,944 11,269 15,127 11,944 -------- -------- -------- -------- Net cash provided by (used in) continuing operating activities.......... (10,993) 12,169 15,826 15,665 -------- -------- -------- -------- Loss from discontinued operations............. (11,266) (15,389) (8,973) (9,060) Adjustments to derive cash flows from discontinued operating activities: Change in net operating assets................ 25,571 36,500 22,401 25,001 Net cash provided by discontinued operating activities.......... 14,305 21,111 13,428 15,941 -------- -------- -------- -------- Net cash provided by operating activities.......... 3,312 33,280 29,254 31,606 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of short-term investments........... 608 -- -- -- Purchase of property and equipment, net.... (2,705) (3,086) (3,894) (3,275) Increase in other assets, net........... (45) (250) (100) (225) -------- -------- -------- -------- Net cash used in investing activities of continuing operations.......... (2,142) (3,336) (3,994) (3,500) Net cash used in investing activities of discontinued operations.......... (11,859) (13,873) (7,527) (9,286) -------- -------- -------- -------- Net cash used in investing activities.......... (14,001) (17,209) (11,521) (12,786) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of notes payable--net.......... (19,000) (16,000) (16,000) (16,650) Increase in other long- term liabilities...... 28 118 -- -- -------- -------- -------- -------- Net cash used in financing activities.......... (18,972) (15,882) (16,000) (16,650) -------- -------- -------- -------- NET INCREASE (DECREASE). (29,661) 189 1,733 2,170 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (INCLUDING CASH AND CASH EQUIVALENTS INCLUDED IN NET ASSETS OF DISCONTINUED OPERATIONS)............ 30,348 687 687 876 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD: Continuing operations.. 647 833 2,381 3,003 Included in net assets of discontinued operations............ $ 40 $ 43 $ 39 $ 43 ======== ======== ======== ========
See notes to consolidated financial statements. F-32 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business--King Holding Corp. (the Company) owns and operates certain television stations and cable television properties throughout the central and western United States. The Company was formed as a joint venture between the Providence Journal Company and subsidiaries (Providence Journal) and an investment banking organization (the Investor Stockholder). The Providence Journal and Investor Stockholder each own a 50% interest in the Company. On February 25, 1992, the Company acquired the outstanding capital stock of King Broadcasting Company (Broadcasting), the parent company of King Videocable Company (Videocable), for a purchase price of approximately $364,000 plus assumed liabilities aggregating $183,000 (the Acquisition). The Acquisition has been accounted for as a purchase, and accordingly, the accompanying consolidated statements of operations, stockholders' equity, and cash flows include the operations of the Company and its subsidiaries commencing February 25, 1992. The purchase price was funded through the initial capitalization of the Company and proceeds received from debt financing with a syndicate of banks (see Note 5). As part of the initial capitalization of the Company, the Providence Journal was awarded a warrant allowing for the purchase of 2,012 shares of Class B nonvoting common stock at $.10 per share. Summary of Significant Accounting Policies Basis of Presentation--The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The accompanying consolidated financial statements differ from those previously issued by the Company due to the reporting of its discontinued cable operations (see Note 2). All significant transactions between the consolidated entities have been eliminated (see Note 9). Interim Financial Information--The consolidated financial statements for the nine months ended September 30, 1993 and 1994 are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for a fair presentation of the operating results and cash flows for these periods. Results for interim periods are not necessarily indicative of results for the entire year. Revenue Recognition--Revenues from broadcast activities are recognized as advertisements are broadcast. Revenues from cable activities are recognized as the services are provided. In 1993, the Congress of the United States passed the 1992 Cable Act (the Act). Under the provisions of the Act, the Company's cable television revenues became subject to various regulations designed to reduce rates to cable customers. The impact of these regulations reduced Videocable's revenues by approximately $900 for the year ended December 31, 1993. Further, additional regulations were announced during 1994 to be effective July 1, 1994. Management has implemented the rules in a manner it believes to be consistent with the regulations promulgated by the FCC. In addition, it is possible that pursuant to further review by the franchising authorities and the FCC, certain additional rate reductions may be required. Various cable operators have pending litigation challenging certain aspects of the 1992 Cable Act. The outcome of this litigation cannot be predicted. Investment in Nonconsolidated Partnerships--The Company has made certain investments in advertising partnerships. These investments are accounted for using the equity method and are included in other long-term assets. Income attributable to the Company's proportional share of the partnerships' earnings is reported within other expense. F-33 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Allowance for Doubtful Accounts--The allowance for doubtful accounts of the continuing operations at December 31, 1992 and 1993 aggregated $975 and $715, respectively. Property and Equipment--Property and equipment are recorded at cost, or in the case of property and equipment acquired as a result of the Acquisition, at appraised fair value at the date of purchase. Cable system betterments, including materials, labor and interest, are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, generally three to twenty years. In 1993, due to provisions of the Act which effectively transferred ownership of wiring and additional outlets installed in a customer's residence, Videocable wrote off the remaining unamortized cost of these items and will henceforth expense costs of installation and wiring in the home as incurred. The total charge recorded in December 1993 related to these items aggregated $4,607. Deferred Financing Costs--Costs of obtaining debt financing have been deferred and are being amortized using the straight-line method over the amortization period of the related debt (ten years). Included in such costs are $12,000 of fees paid to the Company's stockholders to assist in the arrangement of the financing. Accumulated amortization at December 31, 1992 and 1993 aggregated $1,235 and $2,718, respectively. Intangible Assets--Intangible assets are recorded at their appraised fair value at the date of Acquisition. Amortization is provided using the straight- line method over the estimated useful lives of the related assets, generally fifteen to forty years. The Company periodically assesses the recoverability of intangible assets based on judgements as to future undiscounted cash flows. The Company also evaluates the amortization periods of the intangible assets to determine whether events or circumstances warrant revised estimates of useful lives. Film and Syndication Rights--Assets and liabilities related to film and syndication rights are recorded at cost, when the related film or television series is available for broadcast. Film rights assets are amortized using principally accelerated methods, based on the anticipated value of each film showing and the number of anticipated showings. Syndication rights are amortized ratably over the term of the series expected showing. Cash and Cash Equivalents--The Company considers all short-term, highly liquid investments purchased with remaining maturities of three months or less to be cash equivalents. Supplemental cash flow information for the periods ended December 31, 1992 and 1993 is as follows:
1992 1993 ------- ------- Cash paid for interest expense.............................. $22,765 $25,453 Cash paid for income taxes.................................. 373 3,021
Income Taxes--Deferred income taxes are provided to recognize temporary differences between book and tax bases of the Company's assets and liabilities and the effects of credits and other items not yet recognized for tax purposes. Net Loss Per Common Share--Net loss per common share is computed using the weighted average number of common shares outstanding during the year. F-34 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2. DISCONTINUED OPERATIONS On November 18, 1994, the Providence Journal signed a definitive merger agreement with Continental Cablevision, Inc. (Continental) whereby Continental will acquire all of the Providence Journal's owned and partially owned cable systems in a tax-free merge. The Providence Journal has entered into a Letter of Intent dated October 25, 1994 with its Investor Stockholder whereby both parties have agreed in principle to the acquisition by the Providence Journal of all capital stock of the Company prior to the exchange with Continental. The Company's cable systems will then be included in Continental's acquisition. As part of the merger, outstanding borrowings under the credit agreement (see Note 5) will be repaid out of the proceeds of additional indebtedness to be assumed by Continental. A number of legal and regulatory approvals are required to finalize the merger. Stockholder approval from Continental and the Providence Journal will also be required. The transaction is not expected to close until the second half of 1995. The net assets of Videocable have been segregated in the accompanying consolidated balance sheets as "net assets of discontinued operations". Net assets to be acquired consist primarily of plant and equipment, and intangible assets. The results of operations of Videocable have been reported as discontinued operations in the accompanying consolidated statements of operations. Prior year financial statements have been reclassified to conform to the current year presentation. The condensed statements of operations relating to the discontinued cable operations are presented below:
PERIOD ENDED FEBRUARY 25, NINE MONTHS ENDED 1992 TO YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------ 1992 1993 1993 1994 ------------ ------------ -------- -------- Revenues....................... $ 66,006 $ 83,538 $ 61,862 $ 62,668 Costs and expenses............. (82,602) (106,342) (74,910) (75,853) -------- --------- -------- -------- (Loss) before income taxes..... (16,956) (22,804) (13,048) (13,185) Income tax benefit............. 5,330 7,415 4,075 4,125 -------- --------- -------- -------- Net (loss)..................... $(11,266) $ (15,389) $ (8,973) $ (9,060) ======== ========= ======== ========
The Company does not anticipate a loss on the disposal of its Videocable operations. 3. PROPERTY AND EQUIPMENT Property and equipment of continuing operations consisted of the following at December 31:
1992 1993 ------- -------- Land and buildings........................................ $40,051 $ 40,118 Broadcast equipment....................................... 24,629 27,625 Office equipment.......................................... 1,929 2,749 Leasehold improvements.................................... 1,176 1,176 Construction-in-process................................... 1,303 1,422 ------- -------- Total................................................. 69,088 73,090 Less accumulated depreciation and amortization............ (6,681) (14,701) ------- -------- Property and equipment--net............................... $62,407 $ 58,389 ======= ========
F-35 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 4. INTANGIBLE ASSETS Intangible assets of continuing operations consisted of the following at December 31:
1992 1993 -------- -------- FCC license agreements................................... $ 59,780 $ 59,780 Goodwill................................................. 28,774 28,774 Advertiser relations..................................... 47,200 47,200 Other.................................................... 7,479 7,484 -------- -------- Total................................................ 143,233 143,238 Less accumulated amortization............................ (5,586) (12,351) -------- -------- Intangible assets--net................................... $137,647 $130,887 ======== ========
5. FINANCING AGREEMENTS The Company has a credit agreement (the Credit Agreement) with a syndicate of banks which consists of a revolving credit facility, "swing" loans (as defined), and a term loan. The revolving credit facility provides for borrowings of up to $50,000 of which $5,000 was outstanding on December 31, 1993. Borrowings outstanding under the facility are payable in full in February 2000. The term loan of $310,000 is payable in 32 quarterly installments commencing in March 1994. "Swing" loans are available to the Company from the lead bank of the syndicate. "Swing" loans are available up to a maximum aggregate borrowing level of $5,000 at any one time, and are generally subject to the same repayment terms as the revolving credit facility. Borrowings under the Credit Agreement bear interest at either a bank's CD rate plus an applicable margin (as defined), the LIBOR rate plus the applicable margin or an alternate base rate determined as the greater of a bank's prime rate, the Federal Funds rate plus 1/2% or a secondary market determined rate plus 1 1/4% all determined at the Company's option. At December 31, 1993, the interest rate on the revolving credit facility was 5%. Interest rates on the term loan ranged between 5% and 5.07%, based on the one and three month LIBOR rates, respectively. In connection with the Credit Agreement, the Company is required to pay an annual fee of 3/8 of 1% of the average daily unused availability under the revolving credit facility. In addition, the Company is required to pay the lead bank an annual fee of 3/8 of 1% of the average daily unused "swing" loan availability. Such fees aggregated $97 and $187 for the periods ended December 31, 1992 and 1993, respectively. The Credit Agreement contains certain limitations on additional indebtedness, capital expenditures, payments to affiliates and disposition of assets and requires the Company to maintain certain minimum levels of net worth and debt service coverage, all as defined in the Credit Agreement: At December 31, 1993, long-term debt is due as follows: 1994........................................................ $ 15,000 1995........................................................ 27,500 1996........................................................ 37,500 1997........................................................ 40,000 1998........................................................ 40,000 Thereafter.................................................. 155,000 -------- Total................................................... $315,000 ========
F-36 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) To minimize interest rate risk and access lower rates in certain markets, the Company has entered into interest rate "swap" agreements with unrelated parties covering $250,000 of notional principal amount. The "swap" agreements, which allow the Company to access the fixed rate debt markets, were effective March 25, 1992 and expire March 25, 1999. At December 31, 1993, $250,000 in outstanding debt was covered by these agreements. Interest cost associated with the "swap" position was approximately $6,433 and $9,915, respectively, for the periods ended December 31, 1992 and 1993. Videocable has been allocated interest (including amortization of deferred financing costs) of $16,355, $19,054, $14,234 and $13,765 for the period February 25, 1992 to December 31, 1992, the year ended December 31, 1993 and the nine months ended September 30, 1993 and 1994, respectively. Interest expense has been allocated to Videocable based upon intercompany financing in connection with the Acquisition. The effective interest rate used in these allocations was 8.36% in 1992 and 1993. The common stock and assets of the Company are pledged to secure all external financing arrangements. The Company was required to pay certain lenders to the predecessor owners a prepayment penalty of approximately $19,000 at the date of acquisition. The payment has been reported as other expense in the accompanying 1992 consolidated financial statements. 6. EMPLOYEE BENEFIT PLANS In connection with the Acquisition described in Note 1, the Company assumed a defined benefit pension plan (the Plan). The Plan covers all qualified employees who meet certain employment service and age requirements and are not covered by union pension plans. Net periodic pension cost is comprised of the components listed below, as determined using the actuarial cost aggregate method. The Company's funding policy is to make annual contributions to the Plan in such amounts necessary to fund benefits provided by the Plan on the basis of information provided by the Plan's actuary. Consolidated net periodic pension cost without regard to the effect of the discontinued operations for the periods ended December 31, 1992 and 1993 is as follows:
1992 1993 ------- ------- Service cost for benefits earned during the period......... $ 696 $ 852 Interest cost on projected benefit obligation.............. 1,463 1,804 Return on Plan assets...................................... (412) (2,481) Net deferral............................................... (1,427) 323 ------- ------- Total.................................................. $ 320 $ 498 ======= =======
The following table sets forth the Plan's funded status and obligations at December 31, 1992 and 1993 without regard to the effect of the discontinued operations:
1992 1993 -------- -------- Actuarial present value of accumulated benefit obligations, including vested benefits of $17,838 and $20,753 in 1992 and 1993, respectively................. $(18,259) $(20,787) ======== ======== Projected benefit obligation............................ $(22,862) $(25,110) Plan assets at fair value, consisting of cash and equity securities............................................. 25,872 27,123 -------- -------- Plan assets in excess of projected benefit obligation... 3,010 2,013 Unrecognized net loss................................... 1,427 1,926 -------- -------- Pension asset........................................... $ 4,437 $ 3,939 ======== ========
F-37 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) The discount rate and assumed rate of increase in future compensation levels used in determining the projected benefit obligation was 8% and 5.5%, respectively. The expected long-term rate of return on Plan assets was 8.5%. In 1993, the Company instituted an employee savings plan (401(k) Plan) to provide benefits for substantially all employees of the Company meeting certain eligibility requirements. The Plan requires the Company to match 25% of employee contributions, up to a maximum of 1% of covered compensation. Expense related to the Plan without regard to the effect of the discontinued operations aggregated $228 for the year ended December 31, 1993. Pension expense allocated to Videocable, pursuant to these plans, aggregated $40 and $60 for 1992 and 1993, respectively. Further, prepaid pension costs with respect to the defined benefit plan of $515 and $457 have been allocated to Videocable at December 31, 1992 and 1993, respectively. Prior to the Acquisition (Note 1), Broadcasting maintained an Employee Stock Purchase Plan (the ESPP). At the consummation of the Acquisition, the ESPP was terminated, and a final liquidating distribution was made in September 1992. The Company incurred no cost related to the ESPP for the periods ended December 31, 1992 and 1993. 7. INCOME TAXES The income tax provision (benefit) for continuing operations recorded for the periods ended December 31, 1992 and 1993 consists of the following:
1992 1993 -------- ------- Currently payable: Federal................................................. $ 4,236 $ 5,577 State................................................... 434 579 -------- ------- Total................................................. 4,670 6,156 -------- ------- Deferred: Federal................................................. (9,146) 651 State................................................... (1,114) (20) -------- ------- Total................................................. (10,260) 631 -------- ------- Income tax (benefit) provision............................ $ (5,590) $ 6,787 ======== =======
A reconciliation of the net income tax benefit computed using the U.S. federal statutory rate and the effective rate for the periods ended December 31, 1992 and 1993 is as follows:
1992 1993 ---- ---- Statutory tax rate............................................... (34)% 34% Amortization of goodwill......................................... 8 23 State and local taxes, net of federal tax benefit................ (2) 4 Enacted future rate change....................................... -- 25 Other............................................................ -- 2 --- --- Effective tax rate............................................... (28)% 88% === ===
F-38 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) The significant components of deferred income tax provision (benefit) attributable to income from continuing operations for the periods ended December 31, 1992 and 1993 are as follows:
1992 1993 -------- ------- Deferred income tax (exclusive of the effects of other components below)...................................... $ (9,661) $(1,950) (Increase) decrease in alternative minimum tax.......... (526) 701 State net operating loss benefit, net of federal tax.... (73) -- Enacted future rate change.............................. -- 1,880 -------- ------- Total deferred tax provision (benefit).............. $(10,260) $ 631 ======== =======
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1992 and 1993 are presented below:
1992 1993 ------- ------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts....................................... $ 341 $ 372 Film and syndication rights, principally due to different accounting methods...................................... 1,093 714 Compensated absences, principally due to accrual for financial reporting purposes............................ 328 265 Net operating loss carryforwards......................... 522 321 Alternative minimum tax credit carryforwards............. 3,476 2,574 Other.................................................... 350 (1,035) ------- ------- Gross deferred tax assets.................................. 6,110 3,211 ------- ------- Deferred tax liabilities: Property and equipment, principally due to basis differences............................................. 22,444 18,121 Retirement plan, principally due to accrual for financial reporting purposes...................................... 1,431 1,304 Enacted future rate increases............................ -- 1,880 Other.................................................... 165 (146) ------- ------- Gross deferred tax liabilities............................. 24,040 21,159 ------- ------- Net deferred tax liabilities............................... $17,930 $17,948 ======= =======
At December 31, 1993, the Company has net operating loss carryforwards of $78,000 for state income tax purposes (of which $72,000 relates to carryforwards of discontinued operations) which are available to offset future state taxable income, if any, through 2008. Approximately $54,000 of these net operating loss carryforwards were present at acquisition and, due to uncertainty of eventual realization, a full valuation reserve was provided against these assets at that time. Should these net operating loss carryforwards be realized in the future, the effect would be to reduce the recorded value of certain intangible assets. In addition, the Company has alternative minimum tax credit carryforwards of approximately $2,574 which are available to reduce future federal regular income taxes, if any, over an indefinite period. F-39 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 8. COMMITMENTS Film and Syndication Rights--The Company has entered into certain film and syndication rights agreements which allow for showings of certain programs over various periods. At December 31, 1993, film and syndication rights liabilities related to programs available for broadcast are due as follows: 1994......................................................... $ 9,614 1995......................................................... 4,376 1996......................................................... 516 1997......................................................... 408 1998......................................................... 190 Thereafter................................................... 35 ------- Total.................................................... $15,139 =======
In addition, the Company has entered into film and syndication rights agreements covering programs not yet available for broadcast. No asset or liability related to these programs has been reflected in the consolidated financial statements. At December 31, 1993, the Company had executed contracts aggregating $4,890 (net of deposits) for programs not yet available for broadcast. Operating Leases--The Company leases office and other facilities under operating leases expiring at various dates through 2004. At December 31, 1993, minimum payments required under noncancelable leases with terms in excess of one year for continuing operations are as follows: 1994.......................................................... $ 389 1995.......................................................... 381 1996.......................................................... 372 1997.......................................................... 325 1998.......................................................... 264 Thereafter.................................................... 157 ------ Total..................................................... $1,888 ======
Rent expense under operating leases from continuing operations aggregated $324 and $383 for the periods ended December 31, 1992 and 1993, respectively. 9. RELATED-PARTY TRANSACTIONS The Company has entered into a management agreement (the Management Agreement) with the Providence Journal, under the terms of which the Providence Journal will operate and manage the Company's cable systems and Broadcasting's television stations through February 1997. The Management Agreement provides for a base management fee of $2,525 per year and payment of bonuses based on operating cash flow (as defined in the Management Agreement) at the end of each fiscal year for managing both the Company and Broadcasting. Bonus expense earned by the Providence Journal during 1992 was $745. No bonus was earned for 1993. In addition, the Management Agreement provides for the awarding of certain warrant bonuses, both on an annual and cumulative basis, based on operating cash flow at the end of defined periods. Through December 31, 1993, the Providence Journal had been awarded warrant bonuses providing for the purchase of 1,389 shares, of the Company's Class B nonvoting common stock at $0.10 per share. Compensation expense F-40 KING HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) recorded related to these warrant issuances aggregated $335 in 1993. Based upon the letter of intent whereby the Providence Journal will buy out the Investor Shareholder for a fixed price, it is not probable that the Providence Journal will exercise any outstanding warrants. The Providence Journal is also entitled to compensation for out-of-pocket costs incurred in its capacity as manager of the cable systems for which the Company reimbursed the Providence Journal $2,202 and $2,842 during 1992 and 1993, respectively. The Company is also obligated to pay the Providence Journal an annual $1,000 governance fee, in advance, on December 20 of each year. The Company entered into a consulting and advisory services agreement (the Services Agreement) with the Investor Stockholder. Under the terms of the Services Agreement, the Company is obligated to pay the Investor Stockholder an annual fee of $1,000, in advance, on January 1 of each year. For the periods ended December 31, 1992 and 1993, Videocable has been allocated expenses under the terms of the Management Agreement, and other related fees discussed above, aggregating $2,131 and $2,034, respectively. 10. FAIR VALUE DISCLOSURE Current Assets and Liabilities--The carrying amount of cash, trade receivables, trade accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments. Long-term Debt--The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using current borrowing rates for similar debt instruments of comparable maturity. The fair value of long-term debt approximated carrying value at December 31, 1992 and 1993. Interest Rate Swaps--The fair value of interest rate swaps is the amount at which they could be settled based on estimates obtained from dealers. The amount required to settle outstanding interest rate swaps at December 31, 1993 approximated $17,343. 11. COMMITMENTS AND CONTINGENCIES The Company is the defendant in a number of legal actions, the outcome of which management believes, based upon the advice of counsel, will not have a material effect on the Company's financial position or results of operations. The Company has outstanding letter of credit commitments amounting to $740. Videocable is obligated to make capital improvements of $17,100 on an annualized basis under the terms of the various agreements entered into at the Merger Agreement date (see Note 2). F-41 INDEPENDENT AUDITORS' REPORT The Board of Directors Providence Journal Company: We have audited the accompanying combined balance sheets of Colony Communications, Inc., Copley/Colony, Inc., Colony Cablevision, a division of Providence Journal Company, and King Videocable Company, (collectively "Providence Journal Cable"), as of December 31, 1992 and 1993, and the related combined statements of operations, changes in group equity, and cash flows for the years then ended. These combined financial statements are the responsibility of Providence Journal Cable's management. Our responsibility is to express an opinion for these combined financial statements based on our audits. We did not audit the financial statements of King Videocable Company, which statements reflect total assets constituting 45 percent of the related combined totals in 1992 and 1993, and total revenues constituting 33 percent and 30 percent in 1992 and 1993, respectively, of the related combined totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for King Videocable Company, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion The accompanying combined financial statements are intended to present the cable television businesses owned or partially owned by Providence Journal Company that are to be acquired by Continental Cablevision, Inc., pursuant to an agreement and plan of merger described in note 1. In our opinion, based on our audits and the report of the other auditors, the combined financial statements referred to above present fairly, in all material respects, the financial position of Providence Journal Cable as of December 31, 1992 and 1993, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in notes 1(h) and 9 to the combined financial statements, Providence Journal Cable changed its method of accounting for income taxes in 1992. KPMG Peat Marwick LLP Providence, Rhode Island January 6, 1995 F-42 INDEPENDENT AUDITORS' REPORT King Videocable Company: We have audited the consolidated balance sheets of King Videocable Company and subsidiaries (a wholly owned subsidiary of King Broadcasting Company, a subsidiary of King Holding Corp.) as of December 31, 1992 and 1993, and the related consolidated statements of operations, stockholder's equity, and cash flows for the period February 25, 1992 (date acquired by King Holding Corp.) to December 31, 1992 and for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of King Videocable Company at December 31, 1992 and 1993, and the results of their operations and their cash flows for the periods ended December 31, 1992 and 1993 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Boston, Massachusetts November 30, 1994 F-43 PROVIDENCE JOURNAL CABLE COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ----------------- SEPTEMBER 30, 1992 1993 1994 -------- -------- ------------- (UNAUDITED) ASSETS ------ Cash........................................... $ 396 $ 543 $ 168 Accounts receivable, less allowance for doubtful accounts of $804 and $805 at December 31, 1992 and 1993, respectively, and $491 at September 30, 1994............................ 22,385 23,176 23,837 Inventory (note 4)............................. 4,897 5,914 6,829 Prepaid expenses............................... 4,377 3,629 4,625 Property, plant and equipment, net (note 5).... 273,499 256,199 253,878 Franchise costs and other intangible assets, net (note 6).................................. 557,809 519,553 490,475 Other assets................................... 3,787 4,292 4,676 -------- -------- -------- Total assets................................... $867,150 $813,306 $784,488 ======== ======== ======== LIABILITIES AND GROUP EQUITY ---------------------------- Accounts payable............................... 15,279 16,298 11,190 Accrued expenses............................... 13,434 16,082 19,186 Deferred revenue............................... 13,404 13,456 13,064 Long-term debt (note 7)........................ 15,000 -- -- Deferred income taxes (note 9)................. 79,144 69,030 66,589 Minority interests in combined entities........ 44,670 34,964 27,354 Amounts due to parent companies (note 8)....... 596,885 593,073 587,428 -------- -------- -------- Total liabilities............................ 777,816 742,903 724,811 Commitments and contingencies (notes 2, 10, 11 and 12) Group equity................................... 89,334 70,403 59,677 -------- -------- -------- Total liabilities and group equity........... $867,150 $813,306 $784,488 ======== ======== ========
See accompanying notes to combined financial statements. F-44 PROVIDENCE JOURNAL CABLE COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ----------------------- 1991 1992 1993 1993 1994 ----------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenue (note 2)............ $118,791 $199,684 $281,593 $209,442 $211,320 -------- -------- -------- -------- -------- Operating costs and expenses: Operating............... 48,554 76,523 103,637 77,590 85,459 Selling, general and administrative......... 28,951 45,180 62,446 45,080 43,903 Depreciation and amortization........... 24,640 58,750 92,710 69,656 66,550 Allocated overhead from parent companies (note 8(b)).................. 7,751 6,513 9,651 5,806 5,636 -------- -------- -------- -------- -------- Total operating costs and expenses......... 109,896 186,966 268,444 198,132 201,548 -------- -------- -------- -------- -------- Operating income.......... 8,895 12,718 13,149 11,310 9,772 Interest income (expense) and other income (expense), net (notes 3 and 7)................... 2,567 591 (1,841) (142) 1,716 Allocated interest income (expense) from parent companies, net (note 8(a)).................... 899 (16,516) (39,938) (30,109) (30,694) Loss on abandonment of assets (note 5).......... -- -- (8,244) -- -- -------- -------- -------- -------- -------- Income (loss) before income taxes, cumulative effect of accounting change and minority interests................ 12,361 (3,207) (36,874) (18,941) (19,206) Provision for income taxes (note 9)................. 6,166 694 (11,219) (5,371) (4,995) -------- -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change and minority interests....... 6,195 (3,901) (25,655) (13,570) (14,211) Cumulative effect at January 1, 1992 of change in accounting for income taxes (note 9)........... -- 4,831 -- -- -- -------- -------- -------- -------- -------- Income (loss) before minority interests....... 6,195 930 (25,655) (13,570) (14,211) Minority interests in combined entities........ 72 4,152 6,724 3,782 3,485 -------- -------- -------- -------- -------- Net income (loss)......... $ 6,267 $ 5,082 $(18,931) $ (9,788) $(10,726) ======== ======== ======== ======== ========
See accompanying notes to combined financial statements. F-45 PROVIDENCE JOURNAL CABLE COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (DOLLARS IN THOUSANDS) Balance at December 31, 1990 (unaudited)....................$55,203. Net income (unaudited)......... 6,267 ------- Balance at December 31, 1991 (unaudited)................... 61,470 Capitalization of King Videocable Company, net of minority interest (note 3)............................ 22,782 Net income..................... 5,082 ------- Balance at December 31, 1992... 89,334 Net loss....................... (18,931) ------- Balance at December 31, 1993... 70,403 Net loss (unaudited)............(10,726). ------- Balance at September 30, 1994 (unaudited)....................$59,677. =======
See accompanying notes to combined financial statements. F-46 PROVIDENCE JOURNAL CABLE COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ----------------------- 1991 1992 1993 1993 1994 ----------- ------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Operating activities: Net income (loss)..... $ 6,267 $ 5,082 $(18,931) $(9,788) $(10,726) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Change in accounting for income taxes........ -- (4,831) -- -- -- Depreciation and amortization........ 24,640 58,750 92,710 69,656 66,550 Loss on abandonment of assets........... -- -- 8,244 -- -- Equity in income of affiliates.......... -- (183) (1,187) (1,457) (1,069) Minority interests in combined entities... (72) (4,152) (6,724) (3,782) (3,485) Deferred income taxes............... (1,183) 2,261 (10,114) 352 (2,441) Decrease (increase) in accounts receivable, prepaid expenses and other assets.............. 997 (6,575) (456) (472) (2,012) (Decrease) increase in accounts payable, accrued expenses, and deferred revenue............. (1,717) 3,384 3,719 (1,074) (2,396) -------- ------- -------- ------- -------- Net cash provided by operating activities......... 28,932 53,736 67,261 53,435 44,421 -------- ------- -------- ------- -------- Investing activities: Cash distributions received from affiliates...... -- 50 1,095 885 997 Net property, plant, and equipment and intangibles.......... (18,722) (27,374) (46,415) (31,282) (36,023) -------- ------- -------- ------- -------- Net cash used in investing activities......... (18,722) (27,324) (45,320) (30,397) (35,026) -------- ------- -------- ------- -------- Financing activities: Cash distributions to minority shareholders......... -- (3,085) (2,982) (2,982) (4,125) Principal payments on long-term debt....... (5,583) (5,000) (15,000) -- -- Net decrease in amounts due to parent companies............ (4,680) (18,116) (3,812) (20,401) (5,645) -------- ------- -------- ------- -------- Net cash used in financing activities......... (10,263) (26,201) (21,794) (23,383) (9,770) -------- ------- -------- ------- -------- Increase (decrease) in cash.................. (53) 211 147 (345) (375) Cash at beginning of period................ 238 185 396 396 543 -------- ------- -------- ------- -------- Cash at end of period.. $ 185 $ 396 $ 543 $ 51 $ 168 ======== ======= ======== ======= ========
See accompanying notes to combined financial statements. F-47 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1993 AND 1992 (DOLLARS IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business and Basis of Presentation The combined financial statements are intended to present the cable television businesses owned or partially owned by Providence Journal Company (Journal) that are to be acquired by Continental Cablevision, Inc. (Continental) pursuant to an agreement and plan of merger dated November 18, 1994. The cable television businesses included in the combined financial statements are Colony Communications, Inc. ("Colony"), a wholly owned subsidiary of the Journal; Copley/Colony, Inc. ("Copley"), a joint venture between Colony and Copley Press Electronics Company; Colony Cablevision (formerly Palmer Communications, Inc.) ("Cablevision"), a division of the Journal; and King Videocable Company ("KVC"), (collectively, Providence Journal Cable). KVC is wholly owned by King Broadcasting Company ("Broadcasting"), which in turn is wholly owned by King Holding Corp. ("King Holding"), a joint venture between the Journal and an investment banking organization (the Investor Stockholder). All significant intercompany and affiliated company balances and transactions have been eliminated in combination. The accompanying combined financial statements do not reflect adjustments to the valuation of assets or for the recognition of liabilities that may be required as a consequence of the aforementioned merger. These combined financial statements include certain allocations from the Journal and King Holding (collectively, the parent companies). Investments in 50% joint ventures have been fully combined on the basis that they are managed, together with all wholly-owned and majority owned cable television businesses, by the Journal and its subsidiaries. In connection with the aforementioned merger, the Journal will purchase the 50% joint venture partners interest and therefore, at the date of merger with Continental, all acquired cable television businesses will be wholly-owned. Providence Journal Cable operates cable television systems with approximately 753,000 (unaudited) aggregate subscribers as of September 30, 1994. Cable franchise areas are located in California, Florida, Massachusetts, New York, Rhode Island, Minnesota, Idaho and Washington state. Providence Journal Cables credit risk is limited primarily to outstanding trade accounts receivable from subscribers in these states. (b) Cash Providence Journal Cable participates in the cash management programs of the Journal and King Holding. Under these programs, outstanding checks in excess of cash are not accounted for as reductions of cash until presented to the bank for payment. Consequently, at December 31, 1992 and 1993, Providence Journal Cable reclassified outstanding checks to accounts payable totaling $3,855 and $6,132, respectively. Supplemental cash flow information is as follows:
1991 1992 1993 ----------- ------ ----- (UNAUDITED) Income taxes paid during the year (including federal and certain state taxes paid to the parent companies for returns filed on a combined basis)........................................... $ 9,603 11,863 1,250 ======= ====== ===== Interest paid during the year, net of amounts capitalized...................................... $ 2,636 2,102 2,092 ======= ====== =====
F-48 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) During 1992, Providence Journal Cable acquired certain assets and assumed certain liabilities in connection with purchase business combinations, as follows: Tangible assets (primarily property, plant and equipment).......... $198,418 ======== Intangible assets.................................................. $557,625 ======== Liabilities assumed................................................ $ 84,002 ======== Financing from parent companies.................................... $649,259 ======== Capitalization of KVC (net of minority interest)................... $ 22,782 ========
(c) Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred; major improvements are capitalized. Providence Journal Cable provides for depreciation using the straight-line method over the following estimated useful lives: Buildings and improvements....................................... 15-20 years Cable systems.................................................... 3-10 years Furniture and fixtures........................................... 5-10 years
When assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. When Providence Journal Cable determines that certain property, plant and equipment is impaired, a loss for impairment is recorded for the excess of the carrying value over the fair value of the asset. (d) Franchise Costs and Other Intangible Assets Franchise costs represent the amount paid to acquire the operating franchises of Providence Journal Cable. These costs are amortized using the straight-line method over five to forty years, beginning when the franchise is awarded. Goodwill resulting from the excess of purchase price over fair value of net assets acquired is generally amortized over 15-40 years. Amortization expense on franchise costs and other intangible assets totaled $2,258 (unaudited), $18,968 and $39,814 for the years ended December 31, 1991, 1992 and 1993, respectively. Providence Journal Cable continually reviews its intangible assets to determine whether any impairment has occurred. Providence Journal Cable assesses the recoverability of intangible assets by reviewing the performance of the underlying operations, in particular the future operating cash flows (earnings before income taxes, depreciation, and amortization) of the acquired operation. (e) Investments in Affiliated Companies Providence Journal Cable has investments in three media partnerships which are accounted for using the equity method. The excess of cost of one investment over Providence Journal Cable's share of net partnership assets is being amortized over the life of the related partnership agreement (7 years). These investments are included with other assets in the accompanying combined financial statements. F-49 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) (f) Revenue Recognition Providence Journal Cable bills subscribers one month in advance for certain cable television services. These revenues are deferred and recognized when the related service is provided. (g) Fair Value of Financial Instruments The carrying amount of substantially all of Providence Journal Cable's financial instruments approximates fair value due to the short maturity of the instruments. (h) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Effective January 1, 1992, Providence Journal Cable adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" and it has reported the cumulative effect of that change in the method of accounting for income taxes in the 1992 combined statement of income (loss) (see note 9). Prior to 1992 Providence Journal Cable recorded income taxes in accordance with Accounting Principles Board Opinion No. 11. Under this method, deferred income taxes were recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable in the year of the calculation. Colony and Cablevision are included in the consolidated Federal income tax return of the Journal. KVC is included in the consolidated Federal income tax return of Broadcasting and King Holding. Copley files its own Federal income tax return. Federal income taxes are computed for Colony, Cablevision and KVC as if those entities filed a separate Federal income tax return. (i) Unaudited Combined Interim Financial Statements The combined financial statements as of and for the nine months ended September 30, 1994 and 1993 are unaudited, however, they include all adjustments (consisting of normal recurring adjustments) considered necessary by management for presentation of the financial position and results of operations for these periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. (2) LEGISLATION AND REGULATION In October, 1992, the Congress of the United States passed the Cable Television Consumer Protection and Competition Act of 1992 (Cable Act) which among other matters, provides for the regulation of basic and cable programming services (other than per-event and per-channel services), allows broadcast television stations to choose either "must carry" rights or retransmission consent rights, regulates the sale of cable programming and implements other operational requirements. In April 1993, the Federal Communications Commission (FCC) adopted regulations governing rates for basic and cable programming services which became effective September 1, 1993. Under the provisions of these regulations, certain of Providence Journal Cable's revenues derived from cable television are determined F-50 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) under either a "benchmark" or "cost of service" method. Effective September 1, 1993, all of Providence Journal Cable's systems had set their rates using the bench-mark method which compares Providence Journal Cable's rates to those which are in effect at cable systems deemed to face effective competition by the FCC. The impact of adjusting rates to the bench-mark at September 1, 1993 was a reduction in revenue of approximately $4,896 (unaudited) for the four months ended December 31, 1993. In February 1994, the FCC significantly modified the September 1993 rate regulations. These modifications were designed to further reduce subscriber rates and most annual basic and cable programming service rate increases (other than per-event and per-channel services). Management has implemented the rules in a manner it believes to be consistent with the regulations promulgated by the FCC. As a result of the 1992 Cable Act, several cable television systems of Providence Journal Cable are subject to regulation by local franchise authorities and/or the FCC. Regulations imposed by the 1992 Cable Act, among other things, allow regulators to limit and reduce the rates that cable operators can charge for certain basic cable television services and equipment rental charges. Providence Journal Cable has been notified by certain franchise authorities that various regulated rates charged to subscribers were in excess of the rates permitted. Providence Journal Cable has reviewed the notifications as well as the disputed rates and has accrued for amounts it believes it will be required to refund. Further rules and regulations are being considered by the FCC, however, these regulations have not yet been finalized. The ultimate impact on the operations of Providence Journal Cable resulting from existing rules and regulations and proposed rules and regulations, if any, cannot be determined. (3) ACQUISITIONS Colony Cablevision (Cablevision) In 1992 the Journal completed the acquisition of the cable television assets of Cablevision (formerly Palmer Communications, Inc.) for approximately $326,000. These cable television systems are located in Naples, Florida and Palm Desert, California and have approximately 168,000 subscribers. The acquisition was completed in two stages. The first, acquiring the Florida assets, was completed on November 30, 1992. The second, acquiring the California assets, was completed on December 31, 1992. Prior to the acquisition of Cablevision, Colony managed Cablevision and received a management fee totaling $2,370 in 1991 and $2,770 in 1992 which has been included with interest and other income in the accompanying combined statements of operations. King Videocable Company (KVC) In February 1992, King Holding acquired the outstanding capital stock of Broadcasting for a purchase price of approximately $364,000 plus assumed liabilities aggregating $183,000, resulting in a total purchase price of $547,000. Based upon the initial appraisal of assets acquired, $327,000 of the total purchase price was allocated to KVC. Lakewood Cable, Inc. In January, 1992, Colony completed the acquisition of Lakewood Cable, Inc. ("Lakewood") in Lakewood, California for $25,000. Lakewood is a provider of cable television services with approximately 14,000 subscribers. F-51 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The aforementioned acquisitions were accounted for as purchases, and for purposes of these combined financial statements have been presented as purchases by Providence Journal Cable. The acquisition of KVC in 1992 resulted in the contribution of capital (push-down of equity) to this entity of $22,782 (net of minority interest). The results of operations have been included in the accompanying combined financial statements from the respective dates of acquisition. The following unaudited pro forma summary presents the combined results of operations during 1991 and 1992 as if the aforementioned acquisitions had occurred as of January 1, 1991, and does not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or of results which may occur in the future.
1991 1992 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenue.............................................. $253,000 267,000 Operating income (loss).............................. $ (500) 3,600 Net loss............................................. $(24,000) (13,000)
(4) INVENTORY Inventory is recorded at cost and consists primarily of supplies used in repairs and maintenance and construction inventory used in the construction of cable plant. (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
1992 1993 -------- ------- Cable systems............................................... $371,626 369,636 Land and buildings.......................................... 29,337 29,483 Machinery and equipment..................................... 23,609 23,953 Furniture and fixtures...................................... 7,510 7,543 Construction in progress.................................... 10,557 4,381 -------- ------- 442,639 434,996 Less accumulated depreciation............................... 169,140 178,797 -------- ------- $273,499 256,199 ======== =======
During 1991, 1992 and 1993, Providence Journal Cable capitalized interest expense on construction in progress of $149 (unaudited), $109 and $223, respectively. Depreciation expense on property, plant and equipment totaled $22,382 (unaudited), $39,782 and $52,896 in 1991, 1992 and 1993, respectively. In 1993, due to provisions of the Cable Act (see note 2) which effectively transferred to cable customers ownership of wiring and additional outlets located in cable customers' homes, Providence Journal Cable expensed the remaining undepreciated cost of these assets. The total charge recorded in the fourth quarter of 1993 was $8,244. F-52 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) (6) FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS Franchise costs and other intangible assets consist of the following:
1992 1993 -------- ------- Franchise costs............................................. $445,511 446,760 Goodwill.................................................... 107,299 107,299 Non-compete agreements...................................... 19,633 19,633 Other intangible assets..................................... 16,019 16,328 -------- ------- 588,462 590,020 Less accumulated amortization............................... 30,653 70,467 -------- ------- $557,809 519,553 ======== =======
(7) LONG-TERM DEBT At December 31, 1992, Providence Journal Cable had a note payable outstanding for $15,000, payable in annual installments of $2,500. Interest expense on this note totaled $2,763 (unaudited), $2,268 and $1,546 in 1991, 1992 and 1993, respectively. In December 1993, Providence Journal Cable settled this note payable and incurred a prepayment penalty equal to $546 (included with interest expense). (8) RELATED PARTY TRANSACTIONS (a) Amounts due to parent companies Substantially, all financing arrangements are provided through the parent companies. Amounts due to parent companies are the net result of transactions occurring through the shared cash management systems, additions due to intercompany financing in connection with the acquisitions discussed in note 3, as well as amounts allocated by parent companies for income taxes, interest and overhead. Major activity relating to amounts due to parent companies included the following during 1992 and 1993:
1992 1993 -------- ------- Beginning balance......................................... $ 4,382 596,885 Financing in connection with acquisitions................. 649,259 -- Allocated interest and overhead........................... 23,029 49,589 Repayments and other activity, net........................ (79,785) (53,401) -------- ------- $596,885 593,073 ======== =======
The effective rates on interest allocated on amounts due to parent companies were 8.27% and 7.57% during 1992 and 1993, respectively. (b) Allocated Overhead The parent companies provide certain services to Providence Journal Cable including cash management, human resources, accounting, legal, tax, and other corporate services. For purposes of the accompanying combined financial statements corporate overhead relating to these services, totaling $7,751 (unaudited), $6,513 and $9,651 in 1991, 1992 and 1993, respectively, has been allocated to Providence Journal Cable. In the opinion of management these charges have been made on a basis (revenue of each individual business to total revenue) that is reasonable, 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. F-53 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) KVC, through King Holding, has entered into a consulting and advisory services agreement with the Investor Stockholder and a management agreement with the Journal under which the Journal will operate and manage KVC's cable systems through 1997. In connection with these agreements, King Holding is obligated to pay $1,000 in annual fees to both the Journal and the Investor Stockholder. For purposes of the accompanying combined financial statements, a portion of the expenses incurred in relation to these agreements has been allocated to KVC. Amounts totaling $2,131 and $2,034 were allocated to KVC in 1992 and 1993, respectively. These expenses have been included in the allocation of corporate overhead discussed in the preceding paragraph. (9) INCOME TAXES As discussed in note 1(h), Providence Journal Cable adopted Statement 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes of $4,831 is determined as of January 1, 1992 and is reported separately in the combined statement of operations for the year ended December 31, 1992. Prior years' financial statements have not been restated to apply the provisions of Statement 109. Provision for income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL ------- -------- ------- Year ended December 31, 1991 (unaudited): U.S. Federal.................................... $ 5,562 (1,183) 4,379 State........................................... 1,787 -- 1,787 ------- ------ ------- $ 7,349 (1,183) 6,166 ======= ====== ======= Year ended December 31, 1992: U.S. Federal.................................... $ (453) (496) (949) State........................................... 2,376 (733) 1,643 ------- ------ ------- $ 1,923 (1,229) 694 ======= ====== ======= Year ended December 31, 1993: U.S. Federal.................................... $(4,247) (7,763) (12,010) State........................................... 1,677 (886) 791 ------- ------ ------- $(2,570) (8,649) (11,219) ======= ====== =======
Provision for income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:
1991 (UNAUDITED) 1992 1993 ----------- ------ ------- Computed "expected" tax expense (benefit)...... $ 4,202 (1,090) (12,533) Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal income tax benefit.......................... 1,179 1,085 521 Amortization of goodwill..................... 677 1,211 1,198 Excess of fair value of securities, donated to charitable foundation, over basis in those securities............................ -- (304) -- Utilization of investment tax credit carryforwards............................... -- -- (209) Other, net................................... 108 (208) (196) ------- ------ ------- $ 6,166 694 (11,219) ======= ====== =======
F-54 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1992 and 1993 are presented below:
1992 1993 ------- ------- Deferred tax assets: State net operating loss carryforwards.................. $ 5,241 5,658 Alternative minimum tax credit carryforward............. 1,706 1,489 Uniform capitalization and Section 263A depreciation.... 1,139 1,434 Deferred compensation and vacation accrual.............. 527 655 Self-insurance reserves................................. 365 437 Partnership investment, principally due to basis differ- ences.................................................. 150 1,084 Other................................................... 388 722 ------- ------- Total gross deferred tax assets....................... 9,516 11,479 Less valuation allowance.............................. (4,867) (5,456) ------- ------- Net deferred tax assets............................... 4,649 6,023 ------- ------- Deferred tax liabilities: Intangibles, principally due to differences in amortiza- tion................................................... $52,259 $47,891 Plant and equipment, principally due to differences in depreciation and capitalized interest.................. 30,556 25,895 Installment sale gain................................... 452 250 Other................................................... 526 1,017 ------- ------- Total gross deferred tax liabilities.................. 83,793 75,053 ------- ------- Total net deferred tax liability...................... $79,144 69,030 ======= =======
The 1992 beginning valuation allowance for deferred tax assets was $4,584. The net change in the total valuation allowance was an increase of $283 and $589 in 1992 and 1993, respectively. Changes to the valuation allowance relate principally to deferred tax assets recorded for state net operating loss carryforwards. For the year ended December 31, 1991, deferred income taxes result from temporary differences in the recognition of income and expenses for income tax and financial reporting purposes. The sources and tax effects of those temporary differences are presented below (unaudited): Excess of financial statement over tax depreciation............... $ (1,386) Excess of financial statement over tax amortization............... (467) Uniform capitalization and Section 263A depreciation.............. (350) Gain on sale of assets, due to basis differences.................. 360 Alternative minimum tax carryforward.............................. (561) Tax net operating loss carryforward utilized...................... 1,209 Other, net........................................................ 12 -------- Total deferred income tax benefit............................... $ (1,183) ========
F-55 PROVIDENCE JOURNAL CABLE NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) At December 31, 1993, Providence Journal Cable has net operating loss carryforwards for state income tax purposes of $94,000 which are available to offset future state taxable income, if any, expiring in various years ending in 2008. (10) OPERATING LEASES Providence Journal Cable has certain noncancelable operating leases with renewal options for land, buildings and equipment. Leases for land and buildings are subject to annual consumer price index adjustments. In 1991, 1992 and 1993, rental expense for all leases, including pole rentals, totaled $2,489 (unaudited), $3,973 and $5,081, respectively. At December 31, 1993, commitments under noncancelable lease agreements were as follows: 1994............................................................... $ 2,586 1995............................................................... 2,282 1996............................................................... 1,886 1997............................................................... 1,563 1998............................................................... 1,304 Thereafter......................................................... 4,915 ------- $14,536 =======
(11) RETIREMENT PLANS Providence Journal Cable has three defined contribution retirement plans which include a 401(k) plan and cover substantially all of its employees. Providence Journal Cable matches participants' 401(k) contributions up to a maximum of 1% of participants' compensation. Additionally, KVC participates in a multi-employer defined benefit plan sponsored by Broadcasting, covering substantially all employees of KVC. Expenses recorded under these plans totaled $518 (unaudited), $774 and $1,516 in 1991, 1992 and 1993, respectively. Prepaid pension costs with respect to the defined benefit plan of $515 and $457 have been allocated to KVC at December 31, 1992 and 1993, respectively. (12) COMMITMENTS AND CONTINGENCIES Providence Journal Cable is obligated to make capital improvements of $55,000 on an annualized basis from the date of the merger agreement with Continental until the merger's closing date (see note 1). Providence Journal Cable also has letter of credit commitments amounting to $3,203 at December 31, 1993. Providence Journal Cable has, or participates with its parent companies in, insurance programs for workers compensation, general liability, auto and certain health coverages which are a form of self-insurance. Providence Journal Cables liability for large losses is capped, individually and in the aggregate, through contracts with insurance companies. An estimate for claims incurred but not paid is accrued annually. The Journal has a revolving credit and term loan facility (totaling $262,000 at December 31, 1993) that is secured in part by a pledge of stock of Colony Communications, Inc. and its subsidiaries. King Holding has a credit agreement with a syndicate of banks (totaling $315,000 at December 31, 1993) that is secured in part by a pledge of stock and assets of KVC. Providence Journal Cable is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material effect on the financial position or results of operations of Providence Journal Cable. F-56 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder Colony Communications, Inc.: We have audited the accompanying consolidated balance sheets of Colony Communications, Inc. as of December 31, 1991 and 1990, and the related consolidated statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Colony Communications, Inc. as of December 31, 1991 and 1990, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Coopers & Lybrand Boston, Massachusetts February 12, 1992 F-57 COLONY COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1991 AND 1990 (IN THOUSANDS, EXCEPT SHARE DATA)
1991 1990 -------- -------- ASSETS Current: Cash....................................................... $ 31 $ 69 Accounts receivable, less allowances of $387 in 1991 and $565 in 1990.............................................. 4,801 6,251 Current portion of notes receivable (Note B)............... 508 -- Prepaid expenses........................................... 1,296 886 -------- -------- Total current assets..................................... 6,636 7,206 Loans receivable from parent company......................... 12,912 3,628 Investment in affiliate (Note C)............................. 14,581 14,653 Property, plant and equipment, net (Note D).................. 75,026 78,440 Franchise costs and other intangible assets, net (Notes A and E).......................................................... 16,275 15,979 Notes receivable (Note B).................................... 1,308 -- Other assets................................................. 165 90 -------- -------- $126,903 $119,996 ======== ======== LIABILITIES Current: Accounts payable (Note A).................................. $ 4,108 $ 4,876 Accrued expenses........................................... 4,455 3,886 Accounts payable--Copley/Colony, Inc. (Note C)............. 4,077 2,049 State and local taxes payable.............................. 716 195 Current installments of long-term debt (Note F)............ 2,500 3,083 -------- -------- Total current liabilities................................ 15,856 14,089 Long-term debt (Note F)...................................... 17,500 22,500 Deferred federal income taxes (Note G)....................... 12,423 13,389 Deferred compensation........................................ 504 403 Minority interest in subsidiary (Note E)..................... 14,545 14,410 Commitments and contingencies (Notes H, I, K, L and M)....... STOCKHOLDER'S EQUITY Capital stock, par value $1 per share; authorized 80,000 shares; issued and outstanding 50,000 shares................ 50 50 Capital contributed in excess of par value................... 10,700 10,700 Retained earnings............................................ 55,325 44,455 -------- -------- Total stockholder's equity............................... 66,075 55,205 -------- -------- $126,903 $119,996 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-58 COLONY COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1991 AND 1990 (IN THOUSANDS)
1991 1990 ------- ------- Revenue from CATV services.................................... $94,542 $92,772 ------- ------- Expenses: Operating................................................... 38,481 39,918 Administrative and selling.................................. 19,775 18,139 Depreciation and amortization............................... 17,623 16,193 Taxes, other than income.................................... 3,024 3,464 ------- ------- 78,903 77,714 ------- ------- Operating income.............................................. 15,639 15,058 Interest and other income (Notes A, C, and J)................. 4,511 1,621 Interest expense.............................................. (2,763) (2,793) Equity in loss of affiliate (Note C).......................... (72) (325) ------- ------- 17,315 13,561 Gain on sale of ad sales divisions, (Note B).................. 2,160 -- ------- ------- Income from operations before income taxes.................... 19,475 13,561 Income taxes (Note G)......................................... 8,605 6,124 ------- ------- Net income................................................ 10,870 7,437 Retained earnings--beginning of year.......................... 44,455 37,018 ------- ------- Retained earnings--end of year................................ $55,325 $44,455 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-59 COLONY COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1991 AND 1990 (IN THOUSANDS)
1991 1990 -------- -------- Operating activities: Net income............................................... $ 10,870 $ 7,437 Depreciation and amortization............................ 17,623 16,193 Deferred compensation.................................... 101 (13) Equity in loss of affiliate.............................. 72 325 Deferred federal income taxes............................ (966) (933) Minority interest share of income........................ 195 135 Net gain on disposal of property, plant and equipment.... (1,787) (16) Changes in assets and liabilities: Accounts receivable and prepaid expenses................ 1,040 (646) Accounts payable, accrued expenses and accounts payable--Copley/Colony, Inc. .......................... 1,829 (797) State and local taxes payable........................... 521 (235) Other assets............................................. (7) 5 -------- -------- Cash flows from operating activities................... 29,491 21,455 -------- -------- Investing activities: Purchases of property, plant and equipment............... (14,437) (17,392) Cash proceeds from sale of assets........................ 1,393 73 Buyout of minority interest.............................. (1,167) -- Payments related to franchise costs and other intangible assets.................................................. (451) (124) -------- -------- Cash flows used in investing activities................ (14,662) (17,443) -------- -------- Financing activities: Minority interest capital call contribution.............. -- 286 Intercompany financing................................... (9,284) (3,129) Principal payments on debt............................... (5,583) (1,167) -------- -------- Cash flows used in financing activities................ (14,867) (4,010) -------- -------- Net increase (decrease) in cash............................ (38) 2 Cash at beginning of year.................................. 69 67 -------- -------- Cash at end of year........................................ $ 31 $ 69 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-60 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING POLICIES: The significant accounting policies of Colony Communications, Inc. (a wholly- owned subsidiary of Providence Journal Company) and its subsidiaries (the "Company") are as follows: Basis of Consolidation The consolidated financial statements present the financial position and results of operations of Colony Communications, Inc. and its wholly-owned and majority-owned subsidiaries and partnership. Investment in an affiliate is accounted for using the equity method. Basis of Presentation Certain prior year amounts have been reclassified to conform with the current year presentation. Cash The Company participates in the cash management program of its parent. Under this program, outstanding checks in excess of cash are not accounted for as reductions of cash until presented to the bank for payment. At December 31, 1991 and 1990, the Company reclassified $210,000 and $990,000, respectively, of outstanding checks to accounts payable. Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred; betterments are capitalized. The Company provides for depreciation using the straight-line method over the following estimated useful lives: Buildings................................................. 20 years Cable systems, machinery and equipment.................... 3-10 years Furniture and fixtures.................................... 10 years
When assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Franchise Costs and Other Intangible Assets Franchise costs represent the amount paid to acquire the operating franchises of the Company. These costs are amortized using the straight- line method over the lives of the respective franchises which range from thirteen to twenty-five years beginning when the franchise is awarded. All costs incurred from the award of the franchise until subscriber revenue is earned are capitalized and amortized over five years. Goodwill, primarily resulting from the purchase of stock that was held by minority interests and the fair market value of assets contributed to a partnership by the minority shareholder, is amortized over the life of the franchise agreements. Amortization expense on franchise costs and other intangible assets totaled $1,276,000 and $1,103,000 in 1991 and 1990, respectively. Accumulated amortization on intangible assets totaled $5,902,000 and $4,626,000 at December 31, 1991 and 1990, respectively. F-61 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Intercompany Loans Intercompany loans bear interest at the prime rate and are classified as noncurrent in the financial statements. The Company received interest from its parent of $899,000 and $255,000 in 1991 and 1990, respectively. Income Taxes The Company files a consolidated federal income tax return and (to the extent eligible) consolidated Rhode Island and Massachusetts state income tax returns with its parent. Income taxes are computed based on its effect on the consolidated tax provision. The Company's policies for financial reporting purposes regarding principally depreciation and amortization differ from those used for federal income tax purposes, thereby giving rise to deferred income taxes. In 1990, the Company changed its method of tax accounting for installation revenue to the same method used for financial statement reporting. B. SALE OF AD SALES DIVISIONS: During 1991, the Company sold four of its Ad Sales Divisions resulting in a gain of $2,160,000. The total selling price was $3,500,000, of which $700,000 was received in cash and $2,800,000 in noninterest bearing installment notes, payable from March 1991 through December 1994. The installment notes are included in the balance sheet net of the unamortized discount of $434,000 at December 31, 1991. The discount is based on an imputed interest of 8%. Payments on installment notes due in 1991 totaling $550,000 were received. C. INVESTMENT IN AFFILIATE: The Company owns 50% of Copley/Colony, Inc., a joint venture with Copley Press Electronics Company engaged in cable television operations. The venture has operations in seven franchise areas located in southeastern California. Summarized financial information for Copley/Colony, Inc. for the years ended December 31, 1991 and 1990 is as follows:
1991 1990 ------- ------- (IN THOUSANDS) Assets.............................................. $34,100 $36,679 Liabilities......................................... 4,937 7,373 Revenues............................................ 24,083 22,458 Company's share of losses........................... 72 325
The Company has a management agreement with Copley/Colony, Inc. to operate its cable television systems. In 1991 and 1990, the Company charged Copley/Colony, Inc. $708,000 and $657,000, respectively, in management fees which have been included as a component of interest and other income. In addition, the Company charges Copley/Colony, Inc. processing fees for customer billing. The total amounts charged for this service were $521,000 and $476,000 in 1991 and 1990, respectively, which have been applied as a reduction to administrative and selling expenses. The Company pays all operating expenses on behalf of Copley/Colony and collects all cash receipts. The net balance of these transactions has been included in accounts payable--Copley/Colony, Inc. F-62 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) D. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following:
1991 1990 -------- -------- (IN THOUSANDS) Land.............................................. $ 1,586 $ 1,586 Buildings......................................... 11,592 10,107 Cable systems..................................... 138,691 129,504 Machinery and equipment........................... 13,785 14,464 Furniture and fixtures............................ 3,442 2,984 Construction in progress.......................... 2,135 3,454 -------- -------- 171,231 162,099 Less: accumulated depreciation.................... 96,205 83,659 -------- -------- $ 75,026 $ 78,440 ======== ========
During 1991 and 1990, the Company capitalized interest expense on construction in progress projects of $149,000 and $292,000, respectively. Depreciation expense on property, plant and equipment totaled $16,347,000 and $15,090,000 in 1991 and 1990, respectively. E. MINORITY INTEREST: Effective April 14, 1989, a subsidiary of the Company, Dynamic Cablevision of Florida, Inc. ("Dynamic"), formed a limited partnership with an unrelated partner. Dynamic has approximately a 90% ownership interest and acts as the general partner. The partnership was formed to provide cable television services to various franchises in south Florida. The formation of the partnership has been accounted for as a purchase. Accordingly, the fixed assets, franchise licenses and other intangible assets contributed by the limited partner were recorded at their fair values. Included in the consolidated financial statements is the limited partner's minority interest of $14,446,000 and $14,332,000 in 1991 and 1990, respectively. The minority interest share of income was $127,000 and $57,000 for 1991 and 1990, respectively. In 1991, the Company acquired an additional ten percent of the outstanding shares of one of its subsidiaries from minority shareholders for $1,167,000. The excess of the fair value of the shares acquired over the fair value of the net assets totaled $1,121,000 and has been accounted for as goodwill. The remaining minority interest of the subsidiary totaling $99,000 and $78,000 in 1991 and 1990, respectively, is included in the minority interest account. The minority interest share of income was $68,000 and $78,000 for 1991 and 1990, respectively. F. LONG-TERM DEBT: At December 31, 1991, the Company has a note payable outstanding for $20,000,000, payable in annual installments of $2,500,000. The note bears interest at 11.25%. On December 1, 1991, the Company made an optional prepayment of $2,500,000 on the note payable. This prepayment resulted in a change in the maturity date of the note from December 2000 to 1999. The note payable contains restrictive covenants which, among other things, include limitations as to payment of dividends, levels of indebtedness, lease obligations, sales of subsidiaries and minimum net worth requirements. F-63 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Scheduled principal payments on outstanding debt are (in thousands): 1992......................................................... $ 2,500 1993......................................................... 2,500 1994......................................................... 2,500 1995......................................................... 2,500 1996......................................................... 2,500 Thereafter................................................... 7,500 ------- $20,000 =======
Interest paid, net of capitalized interest, on outstanding debt totaled $2,683,000 and $2,652,000 for 1991 and 1990, respectively. G. FEDERAL AND STATE INCOME TAXES: Income taxes consist of the following:
1991 1990 ------- ------- (IN THOUSANDS) Federal: Current.................................................. $7,373 $5,350 Deferred................................................. (966) (933) State, currently payable................................... 2,198 1,707 ------- ------- $8,605 $6,124 ======= =======
Income taxes differ from expected income taxes computed at the statutory income tax rate of 34% as follows:
1991 1990 ------------ ------------- AMOUNT RATE AMOUNT RATE ------- ---- ------- ----- (AMOUNTS IN THOUSANDS) Income before income taxes.................... $19,475 $13,561 ======= ======= Expected tax.................................. 6,622 34.0% 4,610 34.02% Increase (decrease) in income taxes resulting from: State income taxes, net of federal tax benefit.................................... 1,450 7.4 1,127 8.3 Goodwill amortization....................... 406 2.1 131 1.0 Other, net.................................. 127 .7 256 1.9 ------- ---- ------- ----- $ 8,605 44.2% $ 6,124 45.2% ======= ==== ======= =====
Increases (decreases) in deferred income taxes are as follows:
1991 1990 ------- ------- (IN THOUSANDS) Tax over (under) book depreciation and amortization....... $(650) $ 31 Tax (over) under net gain on sale of assets............... 360 (58) Tax over (under) book depreciation and amortization for Partnership.............................................. (467) (86) Capitalization of inventory costs......................... (223) (208) Other, net................................................ 14 (612) ------- ------- $(966) $(933) ======= =======
F-64 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Federal and certain state income taxes are reimbursed by the Company to its parent through the intercompany account. H. OPERATING LEASES: The Company has certain noncancelable operating leases with renewal options for land, buildings and equipment. In 1991 and 1990, rental expense for all leases totaled $2,134,000 and $2,098,000, respectively. At December 31, 1991, commitments under noncancelable lease agreements are (in thousands): 1992.......................................................... $ 874 1993.......................................................... 618 1994.......................................................... 529 1995.......................................................... 462 1996.......................................................... 289 Thereafter.................................................... 1,250 ------ $4,022 ======
The leases for land and buildings are subject to annual consumer price index adjustments. I. PENSIONS: The Company has a defined contribution retirement plan which includes a 401(k) plan and covers substantially all of its employees. The Company matches participants' contributions up to a maximum of 1% of participants' compensation. Pension costs are funded as accrued. The Company elected, under the plan, to take into income forfeitures totaling $42,000 and $331,000 in 1991 and 1990, respectively. Pension expense, net of forfeitures, totaled $449,000 in 1991, and $332,000 in 1990. J. MANAGEMENT AGREEMENT: As of December 1990, the Company and Palmer Communications, Inc. ("Palmer") entered into a management agreement to manage Palmer's cable systems in the Naples, Florida and the Palm Desert, California areas through December 1996. These systems include approximately 168,000 subscribers. The Company receives a management fee based on the percentage of budgeted operating income achieved. Management fee income totaled $2,370,000 and $101,000 in 1991 and 1990, respectively, and has been included as a component of interest and other income. K. COMMITMENTS AND CONTINGENCIES: The Company has outstanding payment commitments at December 31, 1991, totaling $7,432,000 payable in 1992, primarily for construction of cable systems. The Company has, or participates with its parent in, insurance programs for workers' compensation, general liability, auto and certain health coverages which are a form of self-insurance. The Company's liability for large losses is capped, individually and in the aggregate, through contracts with insurance companies. An estimate for claims incurred but not paid is accrued annually. L. LITIGATION: The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or, if not so F-65 COLONY COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) covered, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material effect on the financial position of the Company. M. SUBSEQUENT EVENTS: On January 31, 1992, the Company acquired a 14,000 subscriber cable system in Lakewood, California, at a purchase price of approximately $25 million. F-66 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Copley/Colony, Inc.: We have audited the accompanying consolidated balance sheets of Copley/Colony, Inc. as of December 31, 1991 and 1990, and the related consolidated statements of operations and accumulated deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Copley/Colony, Inc. as of December 31, 1991 and 1990, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Coopers & Lybrand Boston, Massachusetts February 12, 1992 F-67 COPLEY/COLONY, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1991 AND 1990 ($ IN THOUSANDS)
1991 1990 ------- ------- ASSETS ------ Current: Cash (including restricted cash of $100 in 1991 and 1990).. $ 154 $ 169 Accounts receivable, less allowance for doubtful accounts of $98 in 1991 and $131 in 1990........................... 1,281 1,384 Accounts receivable--Colony Communications, Inc. (Note A).. 4,077 2,049 Prepaid expenses........................................... 174 114 ------- ------- Total current assets..................................... 5,686 3,716 ------- ------- Other investments............................................ 250 250 Property, plant and equipment (Note B): Land and building.......................................... 1,755 1,755 Leasehold improvements..................................... 1,194 1,170 Cable systems.............................................. 49,617 47,620 Machinery and equipment.................................... 3,775 3,515 Furniture and fixtures..................................... 1,088 1,002 Construction in progress................................... 448 975 ------- ------- 57,877 56,037 Less accumulated depreciation................................ 36,853 31,439 ------- ------- 21,024 24,598 Other assets................................................. 24 24 Franchise costs and other intangible assets (Notes B and C).. 7,116 8,091 ------- ------- $34,100 $36,679 ======= ======= LIABILITIES ----------- Current: Accounts payable........................................... $ 1,329 $ 3,801 Accrued expenses........................................... 1,096 985 Federal and state taxes payable............................ 311 177 ------- ------- Total current liabilities................................ 2,736 4,963 ------- ------- Deferred federal income taxes (Note D)....................... 2,166 2,383 Deferred compensation........................................ 35 27 Commitments and contingencies (Notes E, F, G, and H)......... STOCKHOLDERS' EQUITY -------------------- Common stock (Note I): Class A, par value $1 per share; authorized 2,000 shares; issued and outstanding 1,000 shares....................... 1 1 Class B, par value $1 per share; authorized 1,000 shares; issued and outstanding 1,000 shares....................... 1 1 Capital contributed in excess of par value................... 40,721 40,721 Accumulated deficit.......................................... (11,560) (11,417) ------- ------- Total stockholders' equity............................... 29,163 29,306 ------- ------- $34,100 $36,679 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-68 COPLEY/COLONY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1991 AND 1990 ($ IN THOUSANDS)
1991 1990 -------- -------- Revenue from CATV services.................................. $ 23,285 $ 21,764 Management fee income (Note J).............................. 798 694 -------- -------- 24,083 22,458 -------- -------- Expenses: Operating (Note A)........................................ 10,073 10,131 Administrative and selling................................ 5,678 5,453 Depreciation and amortization............................. 7,017 6,986 Taxes, other than income.................................. 1,182 997 -------- -------- 23,950 23,567 -------- -------- Operating income (loss)..................................... 133 (1,109) Interest and other income................................... 432 397 -------- -------- Income (loss) before income taxes (benefits)................ 565 (712) Income taxes (benefits) (Note D)............................ 708 (62) -------- -------- Net loss................................................ (143) (650) Accumulated deficit--beginning of year...................... (11,417) (10,767) -------- -------- Accumulated deficit--end of year............................ $(11,560) $(11,417) ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-69 COPLEY/COLONY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1991 AND 1990 ($ IN THOUSANDS)
1991 1990 ------- ------- Operating activities: Net loss................................................... $ (143) $ (650) Depreciation and amortization.............................. 7,017 6,986 Deferred federal income tax................................ (217) (63) Deferred compensation...................................... 8 5 Loss on disposition of property, plant and equipment....... 229 23 Changes in assets and liabilities: Accounts receivable and prepaid expenses.................. 43 26 Accounts payable and accrued expenses..................... (2,361) 800 Federal and state taxes payable........................... 134 162 Other assets............................................... -- (53) ------- ------- Cash flows from operations................................... 4,710 7,236 ------- ------- Investing activities: Purchases of property, plant and equipment................. (2,703) (3,307) Proceeds from sale of property and equipment............... 13 2 Buy out of minority shareholders........................... -- (1,644) Payments related to franchise costs and other intangible assets.................................................... (7) 53 Purchase of other investments.............................. -- (250) ------- ------- Cash flows used in investing activities...................... (2,697) (5,146) ------- ------- Financing activities: Accounts receivable--Colony Communications, Inc. .......... (2,028) (2,019) ------- ------- Cash flows used in financing activities...................... (2,028) (2,019) ------- ------- Net increase (decrease) in cash.............................. (15) 71 Cash (including restricted cash) at beginning of year........ 169 98 ------- ------- Cash (including restricted cash) at end of year.............. $ 154 $ 169 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-70 COPLEY/COLONY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. JOINT VENTURE: Copley/Colony, Inc. (the "Company") is a joint venture between Copley Press Electronics Company ("Copley") and Colony Communications, Inc. ("Colony") to operate cable television systems. At December 31, 1991, the Company and its wholly-owned subsidiaries have operations in seven franchise areas in California. Colony acts as manager for the Company, earning the greater of 3% of gross revenues or a fixed fee per month. In 1991 and 1990, Colony charged the Company $708,000 and $657,000, respectively, in management fees. In addition, Colony charges the Company processing fees for customer billing. The total amounts charged for this service were $521,000 and $476,000 in 1991 and 1990, respectively. Colony pays all operating expenses on behalf of the Company and collects all cash receipts. The net balance has been included in accounts receivable--Colony Communications, Inc. B. ACCOUNTING POLICIES: The accounting policies of the Company and its subsidiaries are as follows: Basis of Consolidation The consolidated financial statements present the financial position and results of operations of the Company and its wholly-owned subsidiaries. Basis of Presentation Certain prior year amounts have been reclassified to conform with the current year. Restricted Cash The Company is required to maintain a cash account for certain franchise areas in accordance with the franchise agreement. Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred; betterments are capitalized. The Company provides for depreciation using the straight-line method. The estimated useful lives are: Building and leasehold improvements...................... 15-20 years Cable systems, machinery and equipment................... 3-10 years Furniture and fixtures................................... 10 years
Depreciation expense was $6,035,000 and $6,250,000 in 1991 and 1990, respectively. When assets are sold or retired, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is credited or charged to income. Franchise, Goodwill and Other Intangible Assets Franchise costs represent the amount paid to acquire the operating franchises of the Company. These costs are amortized using the straight- line method over the lives of the respective franchises which range from ten to fifteen years beginning when the franchise is awarded. All costs incurred from the award of the franchise until subscriber revenue is earned, are capitalized and amortized over five years. Goodwill, primarily resulting from the purchase of stock held by minority interests (see Note C), is amortized over the life of the franchise agreements. Amortization expense on intangible assets totaled $982,000 and $736,000 in 1991 and 1990, respectively. Accumulated amortization on intangible assets totaled $4,981,000 and $3,999,000 at December 31, 1991 and 1990, respectively. F-71 COPLEY/COLONY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The Company files a consolidated federal income tax return and (to the extent eligible) a consolidated state income tax return. The Company's policies for financial reporting purposes regarding principally depreciation and amortization differ from those used for federal income tax purposes, thereby giving rise to deferred income taxes. C. STOCK REDEMPTION OF MINORITY SHAREHOLDERS: In 1990, the Company acquired the remaining outstanding shares in certain of its subsidiaries from minority shareholders in exchange for full settlement of $2,089,000 of outstanding notes receivable and related accrued interest plus $1,644,000 of cash paid in 1990 and $1,954,000 of cash paid in 1991, which was included in accounts payable at December 31, 1990. The acquisitions have been accounted for as purchases. The excess of the fair value of the shares over the fair value of the net assets totaled $5,575,000 and has been accounted for as goodwill. D. FEDERAL AND STATE INCOME TAXES: Income taxes consist of the following:
1991 1990 ----- ---- Federal: Current....................................................... $ 561 Deferred...................................................... (217) $(62) State, currently payable........................................ 364 -- ----- ---- Income taxes (benefit).......................................... $ 708 $(62) ===== ====
At December 31, 1991, the Company has loss carryforwards for federal tax purposes of $5,392,000, expiring in years through 2005 and federal alternative minimum tax credit carryforwards of $561,000. There are no loss carryforwards for book purposes. Income taxes differ from expected income taxes computed at the statutory income tax rate of 34% as follows:
1991 1990 ------------ ------------- AMOUNT RATE AMOUNT RATE ------ ----- ------ ----- (AMOUNTS IN THOUSANDS) Income (loss) before income taxes.............. $565 $(712) ==== ===== Expected tax expense (benefit)................. 192 34.0% (242) (34.0)% State income tax net of federal benefit........ 240 42.4 Goodwill amortization.......................... 271 48.0 178 25.0 Other.......................................... 5 .9 2 .3 ---- ----- ----- ----- Income taxes (benefit)......................... $708 125.3% $ (62) (8.7)% ==== ===== ===== =====
F-72 COPLEY/COLONY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Increases (decreases) in deferred income taxes are as follows:
1991 1990 ------ ----- (IN THOUSANDS) Tax over (under) book depreciation and amortization.......... $ (736) $(345) Capitalization of inventory costs............................ (128) (117) Tax net operating loss carryforward utilized................. 1,209 441 Alternative minimum taxes.................................... (561) -- Other, net................................................... (1) (41) ------ ----- $ (217) $ (62) ====== =====
E. OPERATING LEASES: The Company has certain noncancelable operating leases with renewal options for buildings and equipment. Rental expense charged to operations totaled $355,000 and $485,000 in 1991 and 1990, respectively. At December 31, 1991, commitments under noncancelable operating lease agreements are (in thousands): 1992.................................................................. $ 237 1993.................................................................. 232 1994.................................................................. 220 1995.................................................................. 210 1996.................................................................. 200 Thereafter............................................................ 527 ------ $1,626 ======
The leases for buildings are subject to annual consumer price index adjustments. F. PENSIONS: The Company has a noncontributory retirement plan which includes a 401(k) plan and covers substantially all of its employees. The Company matches participant contributions up to a maximum of 1% of compensation. Pension costs are funded as accrued. Pension expense charged to operations was $69,000 in 1991 and $106,000 (net of pension forfeitures of $44,000) in 1990. G. COMMITMENTS AND CONTINGENCIES: The Company has commitments as of December 31, 1991 totaling $841,000 payable in 1992, primarily for construction of CATV systems. The Company participates with Colony in insurance programs for workers' compensation, general liability, auto and certain health coverages which are a form of self-insurance. The Company's liability for large losses is capped, individually and in the aggregate, through contracts with insurance companies. An estimate for claims incurred but not paid is accrued annually. H. LITIGATION The Company is party to various legal actions arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or, if not so covered, are without merit F-73 COPLEY/COLONY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) or are of such kind, or involve such amounts that unfavorable disposition would not have a material effect on the financial position of the Company. I. COMMON STOCK: The Company has two classes of common stock: Class A and Class B. The Class A stock is entitled to four votes per share and the Class B stock is entitled to one vote per share. At December 31, 1991 and 1990, Copley held all Class A stock and Colony held all Class B stock. The Class B stock is convertible into an equal number of shares of Class A stock at the option of the holder. J. MANAGEMENT AGREEMENT FOR COMMUNITY CABLEVISION COMPANY: The Company manages a cable system in Newport Beach, California. Management fees are based on a combination of both revenues and profits. The management fees earned during 1991 and 1990 totaled $798,000 and $694,000, respectively, and have been included under the caption, "management fee income," in the statement of operations and accumulated deficit. F-74 INDEPENDENT AUDITORS' REPORT Continental Cablevision, Inc.: We have audited the accompanying consolidated balance sheets of Continental Cablevision, Inc. and its subsidiaries as of December 31, 1992 and 1993 and the related statements of consolidated operations, consolidated shareholders' equity (deficiency) and consolidated cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements of Continental Cablevision, Inc. and its subsidiaries present fairly, in all material respects, the financial position of the companies at December 31, 1992 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 12 to the financial statements, the Company changed its method of accounting for income taxes in 1993. Deloitte & Touche LLP Boston, Massachusetts February 10, 1994 (March 9, 1994 as to Notes 5 and 15 to the consolidated financial statements) F-75 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ SEPTEMBER, 30 1992 1993 1994 ----------- ----------- ------------- (IN THOUSANDS) ASSETS ------ Cash and Cash Equivalents.............. $ 27,352 $ 122,640 $ 28,824 Accounts Receivable--net............... 36,085 44,530 47,414 Prepaid Expenses and Other............. 5,172 4,800 8,037 Supplies............................... 26,598 31,638 48,821 Marketable Equity Securities........... 35,517 58,676 144,558 Investments............................ 35,275 136,186 305,725 Property, Plant and Equipment--net..... 1,213,848 1,211,507 1,273,748 Intangible Assets--net................. 559,269 387,719 392,909 Other Assets--net...................... 64,080 94,157 79,315 ----------- ----------- ----------- Total.............................. $ 2,003,196 $ 2,091,853 $ 2,329,351 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) ------------------------------------------------- Accounts Payable....................... $ 40,851 $ 43,342 $ 45,717 Accrued Interest....................... 56,637 72,424 62,849 Accrued and Other Liabilities.......... 151,315 145,191 185,712 Debt................................... 3,011,669 3,177,178 3,310,520 Deferred Income Taxes.................. 626 105,041 152,110 Minority Interest in Subsidiaries...... 4,613 2,217 2,913 Redeemable Common Stock, $.01 par value; 751,305, 670,682 and 667,366 shares outstanding........................... 223,716 213,548 227,844 Commitments and Contingencies (Notes 3, 5, 8, 14 and 15)...................... -- -- -- Shareholders' Equity (Deficiency): Preferred Stock, $.01 par value; 1,557,142 shares authorized; none outstanding.......................... -- -- -- Series A Convertible Preferred Stock, $.01 par value: 1,142,858 shares authorized and outstanding; liquidation preference $416,861,000, $450,976,000 and $478,301,000......................... 11 11 11 Class A Common Stock, $.01 par value; 7,500,000 shares authorized; 137,373, 248,060 and 280,279 shares outstanding....... 1 2 3 Class B Common Stock, $.01 par value; 7,500,000 shares authorized; 3,665,820, 3,652,420 and 3,611,910 shares outstanding..... 37 37 36 Additional Paid-In Capital............ 558,679 577,249 557,424 Unearned Compensation................. (34,919) (23,577) (14,912) Net Unrealized Holding Gain on Marketable Equity Securities.................... -- -- 60,526 Deficit............................... (2,010,040) (2,220,810) (2,261,402) ----------- ----------- ----------- Shareholders' Equity (Deficiency).... (1,486,231) (1,667,088) (1,658,314) ----------- ----------- ----------- Total.............................. $ 2,003,196 $ 2,091,853 $ 2,329,351 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-76 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ------------------- 1991 1992 1993 1993 1994 ---------- ---------- ---------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................ $1,039,163 $1,113,475 $1,177,163 $ 880,238 $885,636 Costs and Expenses: Operating............. 347,469 365,513 382,195 286,903 300,077 Selling, General and Administrative....... 246,986 259,632 267,376 198,390 195,901 Restricted Stock Purchase Program..... 10,067 9,683 11,004 8,069 8,502 Depreciation and Amortization......... 269,363 279,403 284,563 210,950 210,728 ---------- ---------- ---------- --------- -------- Total............. 873,885 914,231 945,138 704,312 715,208 ---------- ---------- ---------- --------- -------- Operating Income........ 165,278 199,244 232,025 175,926 170,428 ---------- ---------- ---------- --------- -------- Other (Income) Expense: Interest.............. 323,123 289,479 276,698 201,936 223,580 Equity in Net Loss of Affiliates........... 3,380 9,402 12,827 7,812 14,413 Gain on Sale of Marketable Equity Securities........... -- -- (4,322) (4,322) (1,204) Gain on Sale of Investments.......... -- (10,253) (17,067) (1,148) -- Partnership Litigation........... 1,827 10,280 (2,325) 913 -- Minority Interest in Net Income(Loss) of Subsidiaries......... 47 136 184 158 (83) Dividend Income....... (2,281) (330) (650) (477) (676) Other................. (1,037) 1,836 375 837 (258) ---------- ---------- ---------- --------- -------- Total............. 325,059 300,550 265,720 205,709 235,772 ---------- ---------- ---------- --------- -------- Loss From Operations Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes......... (159,781) (101,306) (33,695) (29,783) (65,344) Income Tax Expense (Benefit)............ 1,861 1,654 (7,921) (9,408) (24,752) ---------- ---------- ---------- --------- -------- Loss Before Cumulative Effect of Change in Accounting for Income Taxes......... (161,642) (102,960) (25,774) (20,375) (40,592) Cumulative Effect of Change in Accounting for Income Taxes..... -- -- (184,996) (184,996) -- ---------- ---------- ---------- --------- -------- Net Loss.............. (161,642) (102,960) (210,770) (205,371) (40,592) Preferred Stock Preferences.......... (5,771) (16,861) (34,115) (25,355) (27,325) ---------- ---------- ---------- --------- -------- Loss Applicable to Common Shareholders.. $ (167,413) $ (119,821) $ (244,885) $(230,726) $(67,917) ========== ========== ========== ========= ======== Loss Per Common Share: Loss Before Cumulative Effect of Change in Accounting for Income Taxes.... $ (35.61) $ (25.06) $ (13.13) $ (10.04) $ (14.89) Cumulative Effect of Change in Accounting for Income Taxes.... -- -- (40.55) (40.62) -- ---------- ---------- ---------- --------- -------- Net Loss.............. $ (35.61) $ (25.06) $ (53.68) $ (50.66) $ (14.89) ========== ========== ========== ========= ========
See Notes to Consolidated Financial Statements. F-77 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
NET UNREALIZED SERIES A COMMON STOCK GAIN ON CONVERTIBLE --------------- ADDITIONAL MARKETABLE RETAINED PREFERRED CLASS CLASS PAID-IN UNEARNED EQUITY EARNINGS STOCK A B CAPITAL COMPENSATION SECURITIES (DEFICIT) ----------- ------ ------ ---------- ------------ -------------- ----------- (IN THOUSANDS) Balance, January 1, 1991................... $-- $ 32 $ -- $ -- $(22,685) $ -- $(1,736,882) Net Loss............... -- -- -- -- -- -- (161,642) Preferred Stock Dividends............. -- -- -- (5,771) -- -- -- Accretion of Redeemable Common Stock.......... -- -- -- (207) -- -- (8,556) Common Stock Issued for Acquisition........... -- -- -- 6,401 -- -- -- Restricted Stock Purchase Program: Stock Issued.......... -- -- -- 360 (360) -- -- Stock Vested.......... -- -- -- -- 10,067 -- -- Stock Forfeited....... -- -- -- (783) 501 -- -- ---- ------ ------ --------- -------- -------- ----------- Balance, December 31, 1991................... -- 32 -- -- (12,477) -- (1,907,080) Net Loss............... -- -- -- -- -- -- (102,960) Accretion of Redeemable Common Stock.......... -- -- -- (13,806) -- -- -- Reclassification of Redeemable Common Stock.......... -- 3 1 141,958 -- -- -- Issuance of Series A Convertible Preferred Stock................. 11 -- -- 394,338 -- -- -- Conversion of Class A to Class B Common Stock................. -- (33) 33 -- -- -- -- Issuance of Class B Common Stock.......... -- -- 5 153,834 -- -- -- Restricted Stock Purchase Program: Stock Issued.......... -- 1 -- 32,779 (32,779) -- -- Stock Vested.......... -- -- -- -- 9,683 -- -- Stock Forfeited....... -- -- -- (654) 654 -- -- Stock Exchanged for Loans................. -- -- -- (3,513) -- -- -- Stock Repurchased...... -- (2) (2) (146,257) -- -- -- ---- ------ ------ --------- -------- -------- ----------- Balance, December 31, 1992................... 11 1 37 558,679 (34,919) -- (2,010,040) Net Loss............... -- -- -- -- -- -- (210,770) Accretion of Redeemable Common Stock.......... -- -- -- (14,766) -- -- -- Issuance of Class A Common Stock.......... -- 1 -- 46,499 -- -- -- Reclassification of Redeemable Common Stock to Class A Common Stock.......... -- -- -- 5,085 -- -- -- Restricted Stock Purchase Program: Stock Issued (Class B).................... -- -- -- 544 (544) -- -- Stock Vested.......... -- -- -- -- 11,004 -- -- Stock Forfeited....... -- -- -- (882) 882 -- -- Stock Exchanged for Loans................. -- -- -- (6,526) -- -- -- Stock Repurchased...... -- -- -- (11,384) -- -- -- ---- ------ ------ --------- -------- -------- ----------- Balance December 31, 1993................... 11 2 37 577,249 (23,577) -- (2,220,810) Net Loss............... -- -- -- -- -- -- (40,592) Adjustment due to change in accounting principle for marketable equity securities net of income taxes of $56,434 -- -- -- -- -- 84,650 -- Accretion of Redeemable Common Stock.......... -- -- -- (15,377) -- -- -- Restricted Stock Purchase Program: Stock Vested.......... -- -- -- -- 8,502 -- -- Stock Forfeited....... -- -- -- (163) 163 -- -- Stock Exchanged for Loans................. -- -- -- (611) -- -- -- Conversion of Class B to Class A Common Stock................. -- 1 (1) -- -- -- -- Stock Repurchased...... -- -- -- (3,674) -- -- -- Change in Unrealized Gain, net of income taxes of $14,563...... -- -- -- -- -- (24,124) -- ---- ------ ------ --------- -------- -------- ----------- Balance September 30, 1994................... $ 11 $ 3 $ 36 $ 557,424 $(14,912) $ 60,526 $(2,261,402) ==== ====== ====== ========= ======== ======== ===========
See Notes to Consolidated Financial Statements. F-78 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------- ---------------------- 1991 1992 1993 1993 1994 --------- ----------- ----------- ----------- --------- (IN THOUSANDS) OPERATING ACTIVITIES: Net Loss............... $(161,642) $ (102,960) $ (210,770) $ (205,371) $ (40,592) Adjustments to Reconcile Net Loss to Net Cash Provided from Operating Activities: Cumulative Effect of Change in Accounting for Income Taxes........ -- -- 184,996 184,996 -- Depreciation and Amortization........ 269,363 279,403 284,563 210,950 210,728 Restricted Stock Purchase Program.... 10,067 9,683 11,004 8,069 8,502 Equity in Net Loss of Affiliates.......... 3,380 9,402 12,827 7,812 14,413 Gain on Sale of Marketable Equity Securities.......... -- -- (4,322) (4,322) (1,204) Gain on Sale of Investments......... -- (10,253) (17,067) (1,148) -- Minority Interest in Net Income (Loss) of Subsidiaries........ 47 136 184 158 (83) Deferred Income Taxes............... -- -- (9,788) (11,074) (26,456) Accrued Interest..... (11,086) (10,965) 15,787 4,953 (9,575) Accounts Payable, Accrued and Other Liabilities......... 17,838 40,649 (3,633) (6,400) 15,045 Other Working Capital Changes............. (4,424) (50) (13,277) (21,335) (21,694) --------- ----------- ----------- ----------- --------- NET CASH PROVIDED FROM OPERATING ACTIVITIES... 123,543 215,045 250,504 167,288 149,084 --------- ----------- ----------- ----------- --------- FINANCING ACTIVITIES: Proceeds from Borrowings--net....... 616,950 918,000 1,534,850 1,534,850 291,750 Repayment of Borrowings............ (406,016) (1,292,712) (1,369,341) (1,336,839) (158,408) Redemption of Preferred Stock and Dividends Paid.................. (163,606) -- -- -- -- Increase (Decrease) in Minority Interests.... (1,765) 389 (2,580) (1,013) 779 Issuance of Series A Convertible Preferred Stock................. -- 394,349 -- -- -- Issuance of Common Stock................. -- 153,840 46,500 -- -- Repurchase of Common Stock and Redeemable Common Stock.......... (282) (233,984) (31,232) (107) (4,755) --------- ----------- ----------- ----------- --------- NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES... 45,281 (60,118) 178,197 196,891 129,366 --------- ----------- ----------- ----------- --------- INVESTING ACTIVITIES: Acquisitions, Net of Liabilities Assumed and Cash Acquired..... (5,490) -- -- -- (47,990) Property, Plant and Equipment............. (145,846) (145,189) (185,691) (131,835) (183,818) Investments............ (9,077) (17,908) (106,819) (74,127) (157,587) Other Assets........... (4,523) (12,996) (39,728) (30,649) (424) Purchase of Marketable Equity Securities..... -- -- (8,042) (8,042) -- Proceeds from Sale of Marketable Equity Securities............ -- -- 5,719 5,719 17,553 Proceeds from Sale of Investment--net....... -- 34,253 1,148 1,148 -- --------- ----------- ----------- ----------- --------- NET CASH USED FOR INVESTING ACTIVITIES... (164,936) (141,840) (333,413) (237,786) (372,266) --------- ----------- ----------- ----------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS....... 3,888 13,087 95,288 126,393 (93,816) BALANCE AT BEGINNING OF PERIOD................. 10,377 14,265 27,352 27,352 122,640 --------- ----------- ----------- ----------- --------- BALANCE AT END OF PERIOD................. $ 14,265 $ 27,352 $ 122,640 $ 153,745 $ 28,824 ========= =========== =========== =========== =========
See Notes to Consolidated Financial Statements. F-79 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Continental Cablevision, Inc. (the Company) and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these investments. Supplies and Property, Plant and Equipment Supplies are stated at the lower of cost (first-in, first-out method) or market. Property, plant and equipment are stated at cost and include capitalized interest of $396,000, $766,000 and $908,000 in 1991, 1992 and 1993, respectively, and $517,200 and $1,260,000 for the nine months ended September 1993 and 1994, respectively. Depreciation is provided using the straight-line group method over estimated useful lives as follows: buildings, 25 to 40 years; reception and distribution facilities, 3 to 15 years; and equipment and fixtures, 4 to 12 1/2 years. (See Note 6) Intangible and Other Assets Intangible assets consist primarily of franchise costs and goodwill recorded in various acquisitions. Franchise costs, net of accumulated amortization, at December 31, 1992 and 1993 and September 30, 1994 are $510,973,000, $365,887,000 and $392,909,000, respectively. Other assets represent deferred financing costs and loans to employees (see Note 11). Accumulated amortization aggregated $521,081,000, $622,453,000 and $692,094,000 at December 31, 1992 and 1993 and September 30, 1994, respectively. On an ongoing basis management evaluates the amortization periods and the recoverability of the net carrying value of intangible assets by reviewing the performance of the underlying operations, in particular the future undiscounted operating cash flows of the acquired entities. Allowance for Doubtful Accounts The allowance for doubtful accounts at December 31, 1992 and 1993 and September 30, 1994 is $9,072,000, $9,435,000 and $9,758,000, respectively. Investments The Company implemented Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) as of January 1, 1994. SFAS 115 requires that certain debt and equity securities be categorized as either securities available for sale, securities held to maturity or trading account securities. The Company has classified all investments subject to SFAS 115 as available for sale and as such reports these securities at fair value, with the unrealized gains or losses, net of F-80 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) tax, reported as a separate component of shareholders' equity (deficiency). Realized gains and losses are included in results of operations. Prior to January 1, 1994, marketable equity securities were carried at either the lower of cost or market. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. (See Note 4) Investments in 20-50% owned affiliates are generally accounted for using the equity method. The excess of the cost of equity investments over the underlying value of the net assets is amortized over a period of approximately 10 to 15 years. Investments in less than 20% owned companies whose equity securities do not have a readily determinable market value are generally accounted for using the cost method. Investments in debt securities not subject to SFAS 115 are reported at amortized cost. (See Note 5) Derivative Financial Instruments The Company uses derivative financial instruments as a means of managing interest-rate risk associated with current debt or anticipated debt transactions that have a high probabilty of being executed. Derivative financial instruments used include Interest Rate Exchange Agreements and Interest Rate Cap Agreements. These instruments are matched with either fixed or variable rate debt and are recorded on a settlement basis as an adjustment to interest expense. Derivative financial instruments are not held for trading purposes. Any premiums associated with the instruments are amortized over their term and realized gains or losses as a result of the termination of the instruments are deferred and amortized over the shorter of the remaining term of the instrument or the underlying debt. Income Taxes The Company implemented Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109) as of January 1, 1993. SFAS 109 requires the recognition of deferred tax liabilities and assets for the future tax consequences of temporary differences between the financial reporting and tax bases of existing assets and liabilities. In addition, future tax benefits, such as net operating loss and investment tax credit carryforwards, are recognized to the extent realization of such benefits is more likely than not. (See Note 12) Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1992 and 1993. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein (See Notes 4, 5, 7 and 9). Loss per Common Share Loss per common share is calculated by dividing the loss available to common shareholders by the weighted average number of common shares outstanding of 4,701,000, 4,782,000, 4,562,000, 4,554,000 and 4,560,000 for the years ended December 31, 1991, 1992 and 1993 and the nine months ended September 30, 1993 and 1994, respectively. Shares of the Series A Convertible Preferred Stock were not assumed to be converted into shares of common stock since the result would be anti-dilutive by decreasing the loss per share for the years ended December 31, 1992 and 1993 and the nine months ended September 30, 1993 and 1994. Recent Accounting Pronouncements In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, as amended, Accounting by Creditors for Impairment of a Loan (SFAS 114), which, is F-81 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) effective for fiscal years beginning after December 15, 1994. SFAS 114 addresses the accounting by creditors for impairment of certain loans. The effect of implementing this statement will not be significant to the Company's financial position and results of operation. In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments (SFAS 119), which requires disclosure about amounts, nature and terms associated with the derivative financial instruments held and is effective for fiscal years ending after December 15, 1994. Reclassifications Certain amounts have been reclassified from previous presentation in the accompanying consolidated financial statements. Unaudited Information In the opinion of management, the consolidated financial statements for the unaudited periods include all adjustments (consisting of a normal recurring nature) necessary for a fair presentation of such information. The consolidated results of operations and cash flows for the nine months ended September 30, 1993 and 1994 are not necessarily indicative of results that would be expected for a full year. 2. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS The following represents non-cash investing and financing activities and cash paid for interest and income taxes during the years ended December 31, 1991, 1992 and 1993 and for the nine months ended September 30, 1993 and 1994.
DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------ 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- (IN THOUSANDS) Acquisition: Fair Value of Assets Acquired.................... $ 6,401 $ -- $ -- $ -- $ -- Common Stock Issued for Acquisition................. (6,401) -- -- -- -- -------- -------- -------- -------- -------- Total...................... $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ======== Dispositions: Gain on Sale of Investment (See Note 5)................ $ -- $ 10,253 $ 15,919 $ -- $ -- Deferred Gain on Sale of Investment.................. -- -- 165 -- -- Bases of Assets Sold......... -- -- 429 -- -- Gain on Sale of Marketable Equity Securities........... -- -- 3,471 3,471 -- Bases of Properties Received. -- -- (19,984) (3,471) -- Promissory Note Issued to Buyer....................... -- 24,000 -- -- -- -------- -------- -------- -------- -------- Proceeds Received from Disposition............... $ -- $ 34,253 $ -- $ -- $ -- ======== ======== ======== ======== ======== Accretion of Redeemable Common Stock......................... $ 8,763 $ 13,806 $ 14,766 $ 7,048 $ 15,377 ======== ======== ======== ======== ======== Accretion of Series A Convertible Preferred Stock... $ -- $ 16,861 $ 34,115 $ 25,355 $ 27,325 ======== ======== ======== ======== ======== Cash Paid During the Period for Interest...................... $334,209 $301,210 $261,846 $199,033 $236,411 ======== ======== ======== ======== ======== Cash Paid During the Period for Income Taxes.................. $ 1,801 $ 1,259 $ 2,370 $ 1,962 $ 2,342 ======== ======== ======== ======== ========
F-82 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. ACQUISITIONS During 1991, the Company purchased cable television systems for approximately $5,490,000 and also purchased for stock the non-owned interest in a partnership managed by the Company for approximately $6,401,000. This investment was previously accounted for using the equity method. The effect of these acquisitions on the Company's results of operations was not material. On June 30, 1994, the Company purchased a cable television system for approximately $47,990,000, subject to post closing adjustments. In November, 1994, the Company purchased several cable television systems for approximately $67,000,000, subject to post closing adjustments. The accompanying financial statements reflect the results of operations commencing on the acquisition dates. Subsequent to September 30, 1994, the Company entered into purchase and sale agreements to purchase several cable television systems for approximately $323,500,000. These transactions are expected to close in 1995. During November 1994, the Company, Providence Journal Company and The Providence Journal Company entered into an agreement and plan of merger (the Merger) which provides that Restructured Providence Journal Company (Restructured PJC) (which at the time of the merger, will include only the Providence Journal cable business) will be merged with and into the Company. The Company will issue shares of common stock and preferred stock to shareholders of Providence Journal Company in exchange for shares of Restructured PJC. The Company will also assume approximately $755,000,000 of liabilities of Restructured PJC. The fair value of the shares to be exchanged is $645,000,000. The Merger will be accounted for using the purchase method of accounting and is expected to close in 1995. 4. MARKETABLE EQUITY SECURITIES At December 31, 1992 and 1993, marketable equity securities were carried at cost and had an aggregate market value of $142,538,000 and $199,596,000, respectively. Effective January 1, 1994, the Company adopted SFAS 115 and classified marketable equity securities as available for sale. These investments had a fair value of $183,245,000 and a cost of $42,161,000 at the date of adoption. The unrealized gain of $141,084,000, less income taxes of $56,434,000 was reported as a decrease to shareholders' equity (deficiency). These securities have an aggregate cost basis of $42,161,000 as of September 30, 1994. During the nine months ended September 30, 1994, the Company recognized a gross unrealized holding loss of $38,687,000 and a gross realized gain of $1,204,000. 5. INVESTMENTS Investments consist of the following components (in thousands):
DECEMBER 31, CURRENT ---------------- SEPTEMBER 30, OWNERSHIP 1992 1993 1994 --------- ------- -------- ------------- Equity Method Investments: Teleport Communications Group, Inc. (TCG)...................... 20% $ -- $ 62,631 $ 77,555 TCG Partners..................... 20% -- 4,842 3,740 Regional TCG Partnerships........ 10%-30% -- 19,056 35,423 Fintelco S.A..................... 50% -- -- 136,522 Other............................ 20%-50% 12,646 21,917 19,700 ------- -------- -------- 12,646 108,446 272,940 ------- -------- -------- Cost Method Investments............ 22,629 27,740 32,785 ------- -------- -------- Total.......................... $35,275 $136,186 $305,725 ======= ======== ========
F-83 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Management's estimated fair value of cost method investments are $36,634,000 and $40,543,000 as of December 31, 1992 and 1993, respectively, primarily based on recent private transactions or other valuation methods. In September 1992, the Company completed the disposition of its 50% interest in North Central Cable Communications Corporation (NCCC) to Meredith/New Heritage Strategic Partners, L.P. (Meredith) and simultaneously purchased an ownership interest in Meredith. The Company sold a portion of its interest in NCCC for $48,253,000 in cash and simultaneously invested $14,000,000 of the proceeds in Meredith. In addition, the Company exchanged its remaining interest in NCCC and issued a $24,000,000 promissory note to Meredith and, as a result, currently has approximately a one-third ownership interest in Meredith. The $10,253,000 preliminary gain represented the proceeds received less the basis in NCCC, the cash investment in Meredith and the promissory note. In April 1993, an additional gain of $1,148,000 was recorded due to the receipt of previously escrowed funds. The Company also received $14,000,000 from Meredith as a prepayment for services provided by the Company which is included in accrued and other liabilities on the balance sheet. Meredith operates several cable systems in Minnesota and North Dakota. In October 1993, the Company exchanged its equity interest in Insight Communications Company U.K., L.P. for stock representing less than a 5% interest in International CableTel, Incorporated (CableTel), a telecommunications company operating in the United Kingdom. The Company accounted for the investment in CableTel as a marketable equity security and recorded a gain of $15,919,000. During the nine months ended September 30, 1994, the CableTel marketable equity securities were sold at an additional realized gain of $1,204,000. In addition to its equity investment, the Company has made commitments to TCG to loan up to $46,800,000 through 2003, of which $24,000,000 was outstanding as of September 30, 1994. These loans bear interest at approximately 7 1/4%. TCG and its affiliates are telecommunications companies which operate fiber optic networks in the United States. The initial investment in TCG was acquired in 1993 at a cost of $66,000,000. During the nine months ended September 30, 1994, the Company has advanced $108,300,000 in cash and recorded commitments of $26,365,000 to Fintelco, S.A. which owns and operates cable television systems in Argentina. Upon receipt of all necessary governmental approvals permitting the Company to hold an equity interest in an Argentine cable television company, all advances will be converted into approximately a 50% equity interest in this company. The initial investment in Fintelco was acquired in February 1994 at a cost of $80,000,000. In September 1994, the Company made an initial equity investment in Singapore Cablevision Private Limited (SCV), which will construct, own and operate a cable television system in Singapore. Capital contributions for this 25% ownership interest will be approximately $42,000,000 to be paid through 1996. In addition, the Company has made commitments to SCV to loan up to approximately $42,000,000, if third party debt financing cannot be obtained by SCV. As of September 30, 1994, the Company has an investment of $11,850,000 in PrimeStar Partners, L.P. (PrimeStar), a limited partnership that provides direct broadcast satellite services. During 1994, a wholly owned subsidiary of the Company issued a standby letter of credit of $38,750,000 on behalf of PrimeStar. The standby letter of credit guarantees a portion of the financing PrimeStar incurred to construct a satellite system and is collateralized by certain marketable equity securities with a carrying value of $75,271,000 as of September 30, 1994. As a result of the increase in commitments and other qualitative factors, the Company accounts for its investment in PrimeStar using the equity method. The Company also has various investments in cable television companies which are not individually material to the Company. The Company has approximately a one-third ownership interest in these companies and therefore accounts for these investments using the equity method. F-84 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The major components of all equity method investees' combined financial position as of the balance sheet dates and the results of operations for the years then ended were as follows (reflects the Company's proportionate share for the periods which the investments were owned):
DECEMBER 31, ------------------ SEPTEMBER 30, 1992 1993 1994 -------- --------- ------------- (IN THOUSANDS) Property, Plant and Equipment............... $ 49,000 $ 106,000 $ 190,000 Total Assets................................ 165,000 253,000 412,000 Total Liabilities........................... 165,000 196,000 330,000 Equity...................................... -- 57,000 82,000
NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- (IN THOUSANDS) Revenues.................. $ 39,000 $ 49,000 $ 63,000 $ 46,000 $ 99,000 Depreciation and Amortization............. 20,000 20,000 22,000 16,000 23,000 Operating Loss............ (4,000) (4,000) (5,000) (3,000) (300) Net Loss.................. (15,000) (21,000) (19,000) (14,000) (15,000)
6. PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment are as follows:
DECEMBER 31, --------------------- SEPTEMBER 30, 1992 1993 1994 ---------- ---------- ------------- (IN THOUSANDS) Land and Buildings....................... $ 48,806 $ 50,040 $ 54,498 Reception and Distribution Facilities.... 1,834,816 1,893,925 2,041,162 Equipment and Fixtures................... 223,345 249,192 276,160 ---------- ---------- ---------- Total.................................. 2,106,967 2,193,157 2,371,820 Less-Accumulated Depreciation............ 893,119 981,650 1,098,072 ---------- ---------- ---------- Property, Plant and Equipment-net...... $1,213,848 $1,211,507 $1,273,748 ========== ========== ==========
7. DEBT Total debt outstanding is as follows:
DECEMBER 31, ---------------------- SEPTEMBER 30, 1992 1993 1994 ----------- ---------- ------------- (IN THOUSANDS) Bank Indebtedness: The Company........................... $ 1,717,425 $ 754,550 $ 909,400 Unrestricted Subsidiary............... 195,875 -- -- ----------- ---------- ---------- Total Bank Indebtedness............. 1,913,300 754,550 909,400 ----------- ---------- ---------- Insurance Company Notes................. 191,000 171,500 150,000 Senior Secured Notes.................... 31,231 -- -- Senior Notes and Debentures............. -- 1,400,000 1,400,000 Subordinated Debt....................... 850,000 825,000 825,000 Other................................... 26,138 26,128 26,120 ----------- ---------- ---------- Total............................... $3,011,669 $3,177,178 $3,310,520 =========== ========== ==========
F-85 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At September 30, 1994, the Company's Bank Indebtedness includes the Term Loan and the Credit Agreement. The Term Loan of $722,650,000 bears interest at a rate between the agent bank's prime rate (6% at December 31, 1993 and 7.75% at September 30, 1994) and prime plus 1%, depending on certain financial tests. At September 30, 1994, the Credit Agreement consists of a $497,750,000 revolving credit facility, of which $186,750,000 is outstanding. Borrowings under the Credit Agreement bear interest at a rate between the agent bank's prime rate (6% at December 31, 1993 and 7.75% at September 30, 1994) plus 1/2% and prime plus 1 1/4%, depending on certain financial tests. In October 1994, the Company entered into a $2,200,000,000 unsecured reducing revolver credit agreement (Reducing Revolver), which represents an amendment and restatement of the Term Loan. Borrowings under the Reducing Revolver were utilized to refinance the Credit Agreement. Credit availability under the Reducing Revolver will decrease annually commencing December 31, 1997 with a final maturity in October 2003. Borrowings under the Reducing Revolver bear interest at a rate between the agent bank's prime rate and prime plus 1/2%, depending on certain financial tests. At the Company's option, Borrowings may bear interest at spreads over LIBOR. The Company's obligations under the Reducing Revolver are guaranteed by substantially all of the Restricted Subsidiaries, which represent the Company's owned and operated cable systems. Prepayments are required from the proceeds of certain sales of Restricted Subsidiaries' assets. The Insurance Company Notes are unsecured, bear interest at 10.12%, require increasing semi-annual repayments through July 1, 1999 and rank pari passu in right of payment with the Reducing Revolver. The Company's unsecured Senior Notes and Debentures rank pari passu in right of payment with the Insurance Company Notes and Reducing Revolver (collectively, Senior Debt) and are non-redeemable prior to maturity, except for the 9 1/2% Senior Debentures. The 9 1/2% Senior Debentures are redeemable at the Company's option at par plus declining premiums beginning in 2005. In addition, at any time prior to August 1996, the Company may redeem a portion of the 9 1/2% Senior Debentures at a premium with the proceeds from any offering by the Company of its capital stock. No sinking fund is required for any of the Senior Notes and Debentures. The Senior Notes and Debentures consist of the following:
DECEMBER 31, SEPTEMBER 30, 1993 1994 ------------ ------------- (IN THOUSANDS) 8 1/2% Senior Notes, Due September 15, 2001....... $ 200,000 $ 200,000 8 5/8% Senior Notes, Due August 15, 2003.......... 100,000 100,000 8 7/8% Senior Debentures, Due September 15, 2005... 275,000 275,000 9% Senior Debentures, Due September 1, 2008........ 300,000 300,000 9 1/2% Senior Debentures, Due August 1, 2013....... 525,000 525,000 ---------- ---------- Total................... $1,400,000 $1,400,000 ========== ==========
The Company's Senior Debt limits the Restricted Group with respect to, among other things, dividends and the repurchase of certain capital stock in excess of $440,000,000, the creation of liens and additional indebtedness, property dispositions, investments and leases, and require certain minimum ratios of debt to cash flow and cash flow to related fixed charges. The Company's Subordinated Debt is redeemable at the Company's option at par plus declining premiums at various dates, and is subordinated to the Company's Senior Debt. Subordinated Debt consists of the following: F-86 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, ----------------- SEPTEMBER 30, 1992 1993 1994 -------- -------- ---------------- (IN THOUSANDS) 10 5/8% Senior Subordinated Notes, Due June 15, 2002............................ $100,000 $100,000 $ 100,000 12 7/8% Senior Subordinated Debentures, Due November 1, 2004......................... 350,000 325,000 325,000 Senior Subordinated Floating Rate Debentures, Due November 1, 2004......... 100,000 100,000 100,000 11% Senior Subordinated Debentures, Due June 1, 2007............................. 300,000 300,000 300,000 -------- -------- --------- Total................................... $850,000 $825,000 $ 825,000 ======== ======== =========
In December 1993, the Company repurchased $25,000,000 of the 12 7/8% Senior Subordinated Debentures at a premium of $3,075,000, which was recorded as interest expense. During November 1994, the Company redeemed these debentures for a price equal to 106.438% of their principal amounts plus accrued interest thereon. As a result of the redemption, the Company will record an extraordinary loss of $28,100,000, less an income tax benefit of $11,314,000. The Senior Subordinated Floating Rate Debentures bear interest at LIBOR plus 3% through November 1996, increasing to LIBOR plus 6.5% through maturity. The Company currently has Interest Rate Exchange Agreements (Swaps) pursuant to which it pays fixed interest rates averaging 9.1% on notional amounts of $800,000,000 (expiring 1995 through 2000) and variable interest rates on notional amounts of $1,575,000,000 (expiring 1998 through 2003). The variable interest rates are based on six month LIBOR, which currently is 6%. In addition, the Company has $700,000,000 of Interest Rate Cap Agreements (Caps) expiring in 1995 and 1996, which limit six month LIBOR to approximately 7%. The Company's exposure, if the other parties fail to perform under the agreements, would be limited to the impact of variable interest rate fluctuations and the periodic settlement of amounts due under these agreements. The fair value of total debt is estimated to be $3,137,955,000 and $3,510,020,000 as of December 31, 1992 and 1993, respectively. The fair value is based on recent trades and dealer quotes, adjusted for an unrealized loss of $101,178,000 and $94,547,000, respectively, which represents the fair value of interest rate exchange agreements based on estimates obtained from dealers. Annual maturities of debt (assuming the Credit Agreement and the Term Loan are converted to the Reducing Revolver pursuant to its provisions) for the five years subsequent to December 31, 1993, are as follows:
(IN THOUSANDS) -------------- 1994.......................................................... $ 21,526 1995.......................................................... 24,250 1996.......................................................... 27,250 1997.......................................................... 30,550 1998.......................................................... 33,250 Thereafter.................................................... 3,040,352 ---------- Total....................................................... $3,177,178 ==========
8. COMMITMENTS The Company and its subsidiaries have entered into various operating lease agreements, with total commitments of $37,463,000 as of December 31, 1993. Commitments under such agreements for the years 1994-1998 approximate $8,191,000, $7,403,000, $6,538,000, $4,315,000 and $3,519,000, respectively. The Company and its subsidiaries also rent pole space from various companies under agreements which are F-87 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) generally terminable on short notice. Lease and rental costs charged to operations for the years ended December 31, 1991, 1992, and 1993 were $16,500,000, $17,876,000 and $18,378,000, respectively and $13,973,000 and $15,215,000 for the nine months ended September 30, 1993 and 1994, respectively. 9. REDEEMABLE STOCK Pursuant to a Stock Liquidation Agreement with certain shareholders (the Selling Shareholders), the Company committed to repurchase 1,228,193 shares of its common stock in December 1998 or January 1999 at a defined purchase price (Purchase Price). The Purchase Price is the greater of the estimated amount of net proceeds per share from an underwritten public offering of the Company's common stock or, the net proceeds per share from the liquidation of the Company less a 22.5% discount. The Stock Liquidation Agreement also required the Company to offer to repurchase up to 300,000 shares from all shareholders by October 15, 1993 (the Mandatory Tender Offer). The initial estimated repurchase cost for the entire 1,528,193 shares of Redeemable Common Stock has been adjusted by periodic accretions through the repurchase dates, based on the interest method, of the difference between the initial estimate and the subsequent estimates of the Purchase Price. In the event the Company is unable to meet its commitments under the Stock Liquidation Agreement, the Selling Shareholders may cause the sale of all or substantially all of the assets of the Company. Pursuant to the Company's August 1992 Tender Offer, the Company repurchased 319,022 Redeemable Common shares, 159,437 Class A shares, and 237,302 Class B shares in October 1992 for approximately $239,852,000, of which $5,868,000 was paid in January 1993. This transaction satisfied the Mandatory Tender Offer and, together with agreements with certain shareholders to withdraw from the 1998-1999 Share Repurchase, reduced the number of Redeemable Common shares to 751,305 shares. In December 1993, the Company repurchased 64,176 Redeemable Common shares for approximately $31,125,000. This transaction, together with an agreement with a certain shareholder to withdraw from the 1998-1999 Share Repurchase, reduced the number of Redeemable Common shares to 670,682 shares. The fair value of the Redeemable Common Stock is estimated at $286,721,000 and $339,365,000 as of December 31, 1992 and 1993, respectively, based on the estimate of the Purchase Price at these dates of $382 and $506 per share, respectively, as determined by the Company's investment banker. During 1994, the Company repurchased 8,705 of Class B shares and 1,099 Class A shares. As a result of these repurchases, the Company reduced its future obligation to repurchase shares pursuant to the 1998-1999 Share Repurchase Program to 667,366 shares. The effect of these transactions on certain accounts is as follows:
REDEEMABLE ADDITIONAL COMMON COMMON PAID-IN STOCK STOCK CAPITAL ---------- ------ ---------- (IN THOUSANDS) Repurchase of 715,761 Shares (319,022 were Redeemable Shares).............. $ (93,591) $ (4) $(146,257) Reclassification of 457,866 Shares to Common Stock......................................... (141,962) 4 141,958 --------- ----- --------- Total for the Year Ended December 31, 1992... $(235,553) $ -- $ (4,299) ========= ===== ========= Repurchase of 64,176 Redeemable Shares......... $ (19,848) $ -- $ (11,277) Reclassification of 16,447 Shares to Common Stock......................................... (5,085) -- 5,085 --------- ----- --------- Total for the Year Ended December 31, 1993... $ (24,933) $ -- $ (6,192) ========= ===== ========= Repurchase of 9,804 Shares (3,316 were Redeemable Shares) Total for the Nine Months Ended September 30, 1994........................................ $ (1,081) $ -- $ (3,674) ========= ===== =========
F-88 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1991, the Company redeemed the remaining outstanding shares of Redeemable Preferred Stock for approximately $163,606,000. 10. SHAREHOLDERS' EQUITY (DEFICIENCY) In May 1992, the Company adopted amendments to its Certificate of Incorporation and By-laws which reclassified the Company's outstanding common stock, which has one vote per share, as Class A Common Stock, and created a new class of common stock, Class B Common Stock, which has ten votes per share. At September 30, 1994, there were 282,463 and 4,277,092 Class A and Class B shares of common stock outstanding, respectively. Shareholders' Equity (Deficiency) reflects only 280,279 and 3,611,910 Class A and Class B shares of common stock outstanding, respectively, due to the classification of 667,366 shares as Redeemable Common Stock. During 1992, the Company sold 469,275 shares of Class B Common Stock for approximately $153,839,000 after $1,161,000 of expenses related to the offerings. In November 1993, the Company sold 95,876 shares of Class A Common Stock for approximately $46,500,000. Subsequent to September 30, 1994, the Company sold shares of Class A Common Stock for approximately $30,100,000. In June 1992, the Company sold 1,142,858 shares of Series A Convertible Preferred Stock (Convertible Preferred), $.01 par value, for $350 per share. Net proceeds were approximately $394,349,000 after expenses related to the offering. Each Convertible Preferred share is entitled to ten votes per share, shares equally with each common share in all dividends and distributions, and is convertible into one share of common stock, at any time, at the option of the holder. The Convertible Preferred stockholders have the right, at any time after the third anniversary of the purchase date, to sell their shares in a public offering by causing the Company to register such shares under the Securities Act of 1933. Certain other shareholders of the Company have similar registration rights. The Convertible Preferred has a liquidation preference equal to the greater of its Accreted Value or the amount which would be distributed to common stockholders assuming conversion of the Convertible Preferred. The Accreted Value assumes a yield of 8% per annum, compounded semi-annually in arrears on the $350 purchase price per share. During the nine months ended September 30, 1994, the carrying value of the Convertible Preferred has been increased by $27,325,000 to reflect the Accreted Value of $478,301,000 as of September 30, 1994. After the fifth anniversary of the purchase date, if the value of the common stock is greater than 137.5% of the then Accreted Value, the Company will have the right to convert each outstanding share of Convertible Preferred into one share of common stock. On the tenth anniversary of the purchase date, each outstanding share of Convertible Preferred may be converted at the option of the holder or the Company into a number of common shares which will have a value equal to the Accreted Value. The Company may, at its sole option, purchase for cash at the Accreted Value all or part of the Convertible Preferred instead of accepting or requiring conversion. In connection with the above-referenced sale of shares of Convertible Preferred Stock and Class B Common Stock, the issuance of subordinated debt, senior notes, and debentures, and certain other investment banking services, the Company paid aggregate fees and underwriting discounts to Lazard Freres & Company (Lazard) of approximately $9,000,000 and $7,700,000 in 1992 and 1993, respectively. Two directors of the F-89 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company are general partners of Lazard and are managing directors of Corporate Partners, L.P., which purchased 728,953 shares of Convertible Preferred on the same terms as all other purchasers of Convertible Preferred. 11. RESTRICTED STOCK PURCHASE PROGRAM The Company maintains a Restricted Stock Purchase Program under which certain employees of the Company, selected by the Board of Directors, are permitted to buy shares of the Company's common stock at the par value of one cent per share. The shares remain wholly or partly subject to forfeiture for five years, during which a pro rata portion of the shares becomes "vested" at six-month intervals. Upon termination of employment with the Company, an employee must resell to the Company, for the price paid by the employee, the employee's shares which are not then vested. For financial statement presentation, the difference between the purchase price and the fair market value at the date of issuance (as determined by the Board of Directors) is recorded as additional paid-in capital and unearned compensation, and charged to operations through 1996 as the shares vest. Shares of common stock issued under the program for the years ended December 31, 1991, 1992, and 1993 were 1,200, 108,450 and 1,600, respectively, none were issued during the nine months ended September 30, 1994. At December 31, 1992 and 1993 and September 30, 1994, 119,728, 78,327 and 58,806 shares, respectively, were not yet vested. In connection with the Restricted Stock Purchase Program, a wholly-owned subsidiary of the Company has loaned approximately $20,580,000, $14,035,000 and $13,541,000 at December 31, 1992 and 1993 and September 30, 1994, respectively, to the participating employees to fund their individual tax liabilities. These loans are due through 1996, bear interest at a range from 5% to 8%, and are included in Other Assets in the accompanying financial statements. 12. INCOME TAXES Effective January 1, 1993, the Company implemented the provisions of SFAS 109 and recognized an additional charge of $184,996,000 for deferred income taxes. Such amount has been reflected in the consolidated financial statements as the cumulative effect of change in accounting for income taxes. During 1993, the Company revised its estimated annual effective tax rate to reflect a change in the federal statutory rate from 34% to 35%. The income tax benefit for the year decreased approximately $4,182,000 as a result of applying the newly enacted federal tax rates to deferred tax balances as of January 1, 1993. The provision (benefit) for income taxes is comprised of:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ------------------- 1991 1992 1993 1993 1994 ------- ------- -------- -------- --------- (IN THOUSANDS) Current: Federal..................... $ -- $ -- $ 647 $ 791 $ -- State....................... 1,861 1,654 1,220 875 1,704 Deferred: Federal..................... -- -- (7,968) (6,896) (21,263) State....................... -- -- (1,820) (4,178) (5,193) ------- ------- -------- -------- --------- Total..................... $ 1,861 $ 1,654 $ (7,921) $ (9,408) $ (24,752) ======= ======= ======== ======== =========
F-90 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Differences between the effective income tax rate and the federal statutory rates are summarized as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- --------------- 1991 1992 1993 1993 1994 ------- ------- ------- ------ ------ Federal Statutory Rate...... (34.0)% (34.0)% (35.0)% (35.0)% (35.0)% Enacted Tax Rate Change..... -- -- 12.4 9.8 -- Net Operating Losses without Current Income Tax Benefit. 16.8 14.8 -- -- -- Depreciation and Amortization Not Deductible for Tax Purposes........... 11.1 17.4 -- 1.2 .3 Gain on Sale of Investment.. 6.9 -- -- -- -- State Income Tax, Net of Federal Income Tax Benefit. .8 1.1 (1.2) (4.2) (3.4) Other....................... (.4) 2.3 .3 (3.4) .2 ------- ------- ------- ------ ------ Total..................... 1.2 % 1.6 % (23.5)% (31.6)% (37.9)% ======= ======= ======= ====== ======
Deferred income taxes prior to the implementation of SFAS 109 resulted primarily from timing differences in the recognition of certain expense items for tax and financial reporting purposes. The tax effect of each major component is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1991 1992 ----------- ----------- (IN THOUSANDS) Accelerated Depreciation and Amortization.......... $ 13,051 $ 7,811 Restricted Stock Purchase Program.................. (3,301) 7,469 Gain on Sale of Investment......................... (4,080) 3,486 Deferred Income.................................... -- (4,555) Utilization of Accounting Net Operating Losses..... (1,561) (7,669) Other.............................................. (4,109) (6,542) ----------- ----------- Total............................................ $ -- $ -- =========== ===========
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
DECEMBER 31, SEPTEMBER 30, 1993 1994 ------------ ------------- (IN THOUSANDS) Deferred Tax Liabilities: Depreciation and Amortization.................. $(533,242) $(577,055) Unrealized Holding Gain on Marketable Equity Securities.................................... -- (41,871) Other.......................................... (14,989) (11,103) Deferred Tax Assets: Net Operating Loss Carryforwards............. 490,499 498,414 Tax Credit Carryforwards..................... 60,304 59,730 Other........................................ 49,858 70,956 Valuation Allowance.......................... (157,471) (151,181) --------- --------- Net Deferred Tax Liability..................... $(105,041) $(152,110) ========= =========
The Company and its subsidiaries have net operating loss carryforwards of approximately $959,000,000 at December 31, 1993 for federal income tax purposes expiring through 2008, and investment tax credit carryforwards of approximately $60,000,000 expiring through 2005. F-91 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Valuation allowances have been established for uncertainties in realizing transitional investment tax credit carryforwards and the tax benefit of certain limited use net operating losses for federal and state income tax purposes. If in future periods the realization of tax credit and net operating loss carryforwards acquired as a result of business combinations becomes more likely than not, $27,000,000 of the valuation allowance will be allocated to reduce goodwill and other intangible assets. The net change of the valuation allowance during 1993 and the nine months ended September 30, 1994, was an increase of $34,971,000 and a decrease of $6,290,000, respectively. The 1993 increase relates to state net operating loss carryforwards that were not expected to be realized and the 1994 decrease relates to the expiration of investment tax credit carryforwards. A recently affirmed tax court decision affecting the cable television industry ratified the deductibility of certain franchise cost amortization. As a result, the Company revised the estimated tax bases of certain intangible assets as of December 31, 1993. This resulted in the Company adjusting the carrying values of goodwill, franchise costs and deferred tax relating to specific acquisitions by $16,287,000, $54,506,000 and $70,793,000, respectively. 13. RETIREMENT AND MATCHED SAVINGS PLANS The Company has a non-contributory defined benefit plan covering substantially all employees. Benefits under the plan are determined based on formulas which reflect employees' years of service and the average of the five consecutive years of highest compensation. The Company's policy is to make contributions sufficient to meet the minimum funding requirements of ERISA. The components of net periodic pension expense are as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1991 1992 1993 -------- ------- ------- (IN THOUSANDS) Service Cost-Benefits Earned During the Year..... $ 2,241 $ 2,479 $ 2,584 Interest Cost on Projected Benefit Obligations... 856 1,118 1,336 Actual Return on Plan Assets..................... (1,231) (179) (136) Other Items...................................... 802 (422) (615) -------- ------- ------- Total.......................................... $ 2,668 $ 2,996 $ 3,169 ======== ======= =======
The following table sets forth the funded status and amounts recognized in the Company's balance sheet:
DECEMBER 31, ------------------ 1992 1993 -------- -------- (IN THOUSANDS) Actuarial Present Value of: Vested Benefit Obligation............................. $ (5,757) $ (8,384) Non-Vested Benefit Obligation......................... (1,390) (1,647) -------- -------- Accumulated Benefit Obligation.......................... (7,147) (10,031) Effect of Projected Salary Increases.................... (9,285) (10,553) -------- -------- Projected Benefit Obligation............................ (16,432) (20,584) Plan Assets at Market Value............................. 8,735 11,350 -------- -------- Funded Status........................................... (7,697) (9,234) Deferred Transition Loss................................ 1,335 1,264 Unrecognized Prior Service Cost......................... (95) (89) Unrecognized Net Loss................................... 790 1,884 -------- -------- Accrued Pension Cost................................ $ (5,667) $ (6,175) ======== ========
F-92 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The actuarial assumptions as of the year-end measurement date are as follows:
DECEMBER 31, ------------ 1992 1993 ------------ Discount Rate................................................... 8.5% 7.75% Expected Long-Term Rate of Return............................... 9.0% 9.0% Rate of Increase in Future Salary Levels........................ 5.5% 4.75%
At December 31, 1993, plan assets consist of equity and debt securities, U.S. Government obligations and cash equivalents. The Company sponsors a defined contribution Matched Savings Plan covering substantially all of its employees. The Company's contribution for this plan is based on a percentage of each participant's salary. Total costs for the years ended December 31, 1991, 1992 and 1993 and the nine months ended September 30, 1993 and 1994 were $1,961,000, $2,418,000, $2,550,000, $1,541,000 and $1,604,000, respectively. 14. CONTINGENCIES On March 18, 1993, the Company received a favorable jury verdict in federal district court in Massachusetts determining that the Company properly discharged its fiduciary duties in connection with the redemption of the limited partnership interests in the four limited partnerships acquired in 1989 for an aggregate purchase price of approximately $380,000,000. The plaintiff limited partners had alleged that the Company had acquired the partnership interests at unfairly low prices. The jury also found that the Company had not misrepresented any fact or opinion in making the offers to acquire the partnership interests. An unspecified fact, however, was found to have been omitted. The Company entered into a settlement agreement on May 14, 1993, settling all claims and counterclaims in the suit, which was subsequently approved by the court. Pursuant to the settlement agreement, the Company has contributed to a settlement fund of $6,158,554. The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of such legal proceedings and claims will not have a material effect on the consolidated financial position and results of operations of the Company. 15. LEGISLATION AND REGULATION Pursuant to the Cable Television Consumer Protection and Competition Act of 1992, the FCC in April 1993 promulgated rate regulations that establish 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 may now be reduced as much as 17% below their September 30, 1992 level, adjusted for inflation, if they exceed the new per-channel benchmark. The FCC's regulations require rates for equipment and installations 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 interim standards adopted by the FCC. Under current FCC regulations, a rate complaint or certification of a local franchising authority is required to regulate a system. As a result of such actions, the Company's basic service, equipment, and installation rates are currently regulated in systems serving approximately 45% of its basic subscribers. In accordance with the regulations, the Company elected to follow the FCC's benchmark methodology to determine service rates for approximately 50% of these subscribers, reducing rates in September 1993 and again in July 1994. The rates for the remaining 50% of the subscribers served by the regulated systems are supported by cost-of-service showings. Certain positions taken by the Company in its cost-of-service filings F-93 CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) 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 the Company believes that its showings in this regard are sufficient, the results of these cases are unknown. As a result, the Company has recorded a $10,500,000 revenue reserve as of September 30, 1994. If the Company is not successful in its current and future cost-of-service showings, the FCC rate regulations could have a material adverse impact on the Company's future results of operations. 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly results of operations for 1992, 1993 and 1994 are summarized below:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1992 Revenues....................... $ 267,840 $ 277,887 $ 280,877 $286,871 Depreciation and Amortization.. 67,124 70,208 69,965 72,106 Restricted Stock Purchase Program....................... 2,441 2,427 2,405 2,410 Operating Income............... 47,008 49,573 52,171 50,492 Net Loss....................... (30,802) (27,597) (15,139) (29,422) Loss Applicable to Common Shareholders.................. (30,802) (28,298) (23,205) (37,516) Loss Per Common Share.......... (6.43) (5.90) (4.58) (8.38) 1993 Revenues....................... $ 287,542 $ 297,238 $ 295,458 $296,925 Depreciation and Amortization.. 69,024 69,882 72,044 73,613 Restricted Stock Purchase Program....................... 2,690 2,689 2,690 2,935 Operating Income............... 57,766 62,648 55,512 56,099 Loss Before Cumulative Effect of Change in Accounting for Income Taxes.................. (5,397) (1,491) (13,487) (5,399) Cumulative Effect of Change in Accounting for Income Taxes... (184,996) -- -- -- Net Loss....................... (190,393) (1,491) (13,487) (5,399) Loss Applicable to Common Shareholders.................. (198,602) (9,819) (22,305) (14,159) Loss Per Common Share: Loss Before Cumulative Effect of Change in Accounting for Income Taxes................ (2.99) (2.16) (4.90) (3.08) Cumulative Effect of Change in Accounting for Income Taxes....................... (40.61) -- -- -- Net Loss..................... (43.60) (2.16) (4.90) (3.08) 1994 Revenues....................... $ 290,764 $ 298,626 $ 296,246 Depreciation and Amortization.. 68,767 69,374 72,587 Restricted Stock Purchase Program....................... 2,838 2,837 2,827 Operating Income............... 57,975 60,198 52,255 Net Loss....................... (12,007) (8,348) (20,237) Loss Applicable to Common Shareholders.................. (20,885) (17,357) (29,675) Loss Per Common Share.......... (3.81) (4.57) (6.51)
See Notes to Consolidated Financial Statements. F-94 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Columbia Associates, L.P.: We have audited, in accordance with generally accepted auditing standards, the financial statements of Columbia Associates, L.P. as of December 31, 1993 and 1992, and have issued our report thereon dated February 25, 1994. In connection therewith, we have also audited the statements of assets, liabilities and control account of Columbia Cable of Michigan (a division of Columbia Associates, L.P.) as of December 31, 1993 and 1992, and the related statements of operations and control account and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Columbia Cable of Michigan as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut, February 25, 1994 F-95 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF ASSETS, LIABILITIES AND CONTROL ACCOUNT DECEMBER 31, 1993 AND 1992
1993 1992 ----------- ----------- ASSETS ------ CASH................................................ $ 674,099 $ 281,921 ----------- ----------- SUBSCRIBER RECEIVABLES, net of allowance for doubtful accounts of $213,482 and $118,245 in 1993 and 1992, respectively............................. 573,723 466,142 ----------- ----------- INVESTMENT IN CABLE TELEVISION SYSTEMS (Notes 3 and 4): Property, plant and equipment, at cost............ 54,140,130 48,317,637 Less--Accumulated depreciation.................... (18,032,166) (14,566,182) ----------- ----------- 36,107,964 33,751,455 Franchising costs, net of accumulated amortization of $13,245,295 and $11,598,874 in 1993 and 1992, respectively..................................... 4,257,209 5,886,630 Goodwill and other intangible assets, net of accumulated amortization of $2,390,633 and $2,082,686 in 1993 and 1992, respectively........ 637,415 946,943 ----------- ----------- Total investment in cable television systems.... 41,002,588 40,585,028 ----------- ----------- OTHER ASSETS, net................................... 991,729 779,023 ----------- ----------- $43,242,139 $42,112,114 =========== =========== LIABILITIES AND CONTROL ACCOUNT ------------------------------- LIABILITIES: Accounts payable and accrued expenses............. $ 1,868,647 $ 1,753,350 Subscriber advance payments and deposits.......... 632,171 635,155 ----------- ----------- Total liabilities............................... 2,500,818 2,388,505 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 6) CONTROL ACCOUNT, excess of assets over liabilities.. 40,741,321 39,723,609 ----------- ----------- $43,242,139 $42,112,114 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-96 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF OPERATIONS AND CONTROL ACCOUNT FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992 ----------- ----------- REVENUES.............................................. $25,130,342 $22,452,626 ----------- ----------- EXPENSES: Service costs....................................... 9,402,956 8,454,466 Selling, general and administrative expenses........ 4,168,761 3,617,718 ----------- ----------- Total expenses.................................... 13,571,717 12,072,184 ----------- ----------- Operating income.................................. 11,558,625 10,380,442 ----------- ----------- DEPRECIATION AND AMORTIZATION (Notes 3 and 4)......... 7,046,029 6,081,409 GAIN (LOSS) ON DISPOSAL OF EQUIPMENT, net............. 57,958 (937,241) ----------- ----------- DIVISION INCOME (Note 3).............................. 4,570,554 3,361,792 CONTROL ACCOUNT, beginning of year.................... 39,723,609 33,786,624 ADVANCES FROM (TO) PARENT............................. (3,552,842) 2,575,193 ----------- ----------- CONTROL ACCOUNT, end of year.......................... $40,741,321 $39,723,609 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-97 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Division income (Note 3).......................... $ 4,570,554 $ 3,361,792 ----------- ------------ Adjustments to reconcile division income to net cash provided by operating activities: Depreciation and amortization................... 7,046,029 6,081,408 (Gain) loss on disposal of equipment............ (57,958) 937,241 Change in assets and liabilities-- Net change in subscriber receivables, other assets, accounts payable and accrued expenses and subscriber advance payments and deposits. (208,405) (280,754) ----------- ------------ Total adjustments........................... 6,779,666 6,737,895 ----------- ------------ Net cash provided by operating activities... 11,350,220 10,099,687 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment in existing cable television systems............................... (7,574,365) (12,615,410) Proceeds on disposal of equipment................. 169,165 65,006 ----------- ------------ Net cash used in investing activities....... (7,405,200) (12,550,404) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Advances from (to) parent......................... (3,552,842) 2,575,193 ----------- ------------ Net cash provided by (used in) financing activities................................. (3,552,842) 2,575,193 ----------- ------------ Net increase in cash........................ 392,178 124,476 CASH, beginning of year............................. 281,921 157,445 ----------- ------------ CASH, end of year................................... $ 674,099 $ 281,921 =========== ============
The accompanying notes to financial statements are an integral part of these statements. F-98 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993 AND 1992 (1) PARTNERSHIP FORMATION: Columbia Cable of Michigan ("Michigan") is a division of Columbia Associates, L.P. (the "Partnership"). The Partnership is a limited partnership which was formed on March 7, 1985, under the laws of the State of Delaware and which operates under the terms of the Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") dated as of June 2, 1992. The Partnership will continue until March 1, 1995 unless previously dissolved in accordance with the terms of the Partnership Agreement. (2) CABLE REGULATION: On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "Act") which, among other things, will expand governmental regulation of rates for basic and other cable services. Regulations and interpretations are still being promulgated by the FCC. Michigan is currently unable to predict the ultimate outcome of the proposed cable regulations or the effect on its future operating cash flows. Michigan believes it is in compliance in all material respects with the provisions of the Act and current regulations. (3) SIGNIFICANT ACCOUNTING POLICIES: Basis of financial statement presentation-- Since Michigan is a division of the Partnership, it has no provision for income taxes, interest on debt, management fees under the Partnership Agreement, or management expenses of the Partnership. Therefore, these statements are not indicative of the financial position or the results of operations of Michigan had it been operated as an unaffiliated entity. Property, plant and equipment-- Property, plant and equipment is recorded at purchased cost, together with labor and indirect labor costs amounting to approximately $446,000 and $619,000 in 1993 and 1992, respectively. Intangible assets-- Franchise costs are amortized over the remaining franchise life, while goodwill is amortized over ten years and other intangible assets (primarily subscriber lists) are amortized over the average period that a subscriber is expected to remain connected to the cable system. Amortization of franchise costs, goodwill and other intangible assets amounted to approximately $1,646,000, $263,000 and $48,000, respectively, in 1993 and approximately $1,651,000, $263,000 and $49,000, respectively, in 1992. (4) PROPERTY, PLANT AND EQUIPMENT: As of December 31, 1993 and 1992, property, plant and equipment consisted of:
1993 1992 ----------- ----------- Cable systems and equipment......................... $51,855,580 $46,012,807 Land, buildings and improvements.................... 808,174 796,660 Vehicles............................................ 770,857 749,177 Furniture and fixtures.............................. 705,519 758,993 ----------- ----------- $54,140,130 $48,317,637 =========== ===========
F-99 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) Depreciation is calculated on a straight-line basis over the following useful lives: Cable systems and equipment................................... 5 to 12 years Buildings and improvements.................................... 15 to 20 years Vehicles...................................................... 5 years Furniture and fixtures........................................ 5 to 10 years
In 1993 and 1992, the Partnership invested approximately $370,000 and $7,503,000 to replace existing cable systems and equipment. As a result, the Partnership recorded a loss in 1992 on the disposal of the existing cable systems and equipment of approximately $937,000, which was included in the 1992 loss on disposal of equipment. (5) SALARY DEFERRAL PLAN: The Partnership established a salary deferral plan (the "Plan") in accordance with Internal Revenue Code Section 401(k), as amended, in 1989. The Plan provides for discretionary and matching contributions by Michigan on behalf of participating employees. Discretionary and matching contributions totaled approximately $151,000 and $153,000 in 1993 and 1992, respectively. (6) COMMITMENTS: Under various lease and rental agreements, Michigan had rental expense of approximately $114,000 and $96,000 in 1993 and 1992, respectively. Approximate future minimum annual payments under these agreements are as follows: 1994............................................. $98,000 1995............................................. 47,000 1996............................................. 37,000 1997............................................. 31,000 1998............................................. 16,000 Thereafter....................................... 71,000
In addition, Michigan rents access to utility poles in its operations generally under short-term, but recurring, agreements. Total rental expense for utility poles was approximately $157,000 and $154,000 in 1993 and 1992, respectively. F-100 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF ASSETS, LIABILITIES AND CONTROL ACCOUNT (UNAUDITED) SEPTEMBER 30, 1994 ASSETS ------ CASH......................................................... $ 5,334 ------------ SUBSCRIBER RECEIVABLES, net of allowance for doubtful accounts of $198,970........................................ 537,260 ------------ INVESTMENT IN CABLE TELEVISION SYSTEMS (Note 3): Property, plant and equipment, at cost..................... 57,533,595 Less--Accumulated depreciation............................. (22,049,585) ------------ 35,484,010 Franchising costs, net of accumulated amortization of $14,475,469............................................... 3,037,435 Goodwill and other intangible assets, net of accumulated amortization of $2,607,641................................ 408,758 ------------ Total investment in cable television systems............. 38,930,203 ------------ OTHER ASSETS, net............................................ 810,889 ------------ $ 40,283,686 ============ LIABILITIES AND CONTROL ACCOUNT ------------------------------- LIABILITIES: Accounts payable and accrued expenses...................... $ 1,456,147 Subscriber advance payments and deposits................... 682,667 ------------ Total liabilities........................................ 2,138,814 ------------ COMMITMENTS AND CONTINGENCIES (Note 2) CONTROL ACCOUNT, excess of assets over liabilities........... 38,144,872 ------------ $ 40,283,686 ============
The accompanying notes to financial statements are an integral part of these statements. F-101 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF OPERATIONS AND CONTROL ACCOUNT (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 REVENUES........................................................... $19,514,964 ----------- EXPENSES: Service costs.................................................... 7,568,006 Selling, general and administrative expenses..................... 3,366,129 ----------- Total expenses................................................. 10,934,135 ----------- Operating income............................................... 8,580,829 ----------- DEPRECIATION AND AMORTIZATION (Note 3)............................. 5,669,548 GAIN ON DISPOSAL OF EQUIPMENT, net................................. 26,975 OTHER EXPENSE...................................................... 6,483 ----------- DIVISION INCOME (Note 3)........................................... 2,931,773 CONTROL ACCOUNT, beginning of year................................. 40,741,321 ADVANCES TO PARENT................................................. (5,528,222) ----------- CONTROL ACCOUNT, end of nine months................................ $38,144,872 ===========
The accompanying notes to financial statementsare an integral part of these statements. F-102 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Division income (Note 3)........................................ $ 2,931,773 ----------- Adjustments to reconcile division income to net cash provided by operating activities: Depreciation and amortization................................. 5,669,548 Gain on disposal of equipment................................. (26,975) Change in assets and liabilities-- Net change in subscriber receivables, other assets, accounts payable and accrued expenses and subscriber advance payments and deposits...................................... (144,806) ----------- Total adjustments......................................... 5,497,767 ----------- Net cash provided by operating activities................. 8,429,540 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment in existing cable television systems..... (3,597,058) Proceeds on disposal of equipment............................... 26,975 ----------- Net cash used in investing activities..................... (3,570,083) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances to parent.............................................. (5,528,222) ----------- Net cash used in financing activities..................... (5,528,222) ----------- Net decrease in cash...................................... (668,765) CASH, beginning of period......................................... 674,099 ----------- CASH, end of period............................................... $ 5,334 ===========
The accompanying notes to financial statements are an integral part of these statements. F-103 COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1994 (1) PARTNERSHIP FORMATION: Columbia Cable of Michigan ("Michigan") is a division of Columbia Associates, L.P. (the "Partnership"). The Partnership is a limited partnership which was formed on March 7, 1985, under the laws of the State of Delaware and which operates under the terms and the Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") dated as of June 2, 1992. The Partnership will continue until March 1, 1995 unless previously dissolved in accordance with the terms of the Partnership Agreement. On November 1, 1994, Michigan and the Partnership signed an Agreement providing for the sale of substantially all of the assets of Michigan to Continental Cablevision of Manchester, Inc. The sale is expected to close in 1995. (2) CABLE REGULATION: On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "Act") which, among other things, will expand governmental regulation of rates for basic and other cable services. Regulations and interpretations are still being promulgated by the FCC. Michigan is currently unable to predict the ultimate outcome of the proposed cable regulations or the effect on its future operating cash flows. Michigan believes it is in compliance in all material respects with the provisions of the Act and current regulations. (3) SIGNIFICANT ACCOUNTING POLICIES: Basis of financial statement presentation-- Since Michigan is a division of the Partnership, it has no provision for income taxes, interest on debt, management fees under the Partnership Agreement, or management expenses of the Partnership. Therefore, these statements are not indicative of the financial position or the results of operations of Michigan had it been operated as an unaffiliated entity. In the opinion of management, the financial statements for the unaudited period include all adjustments (consisting of a normal recurring nature) necessary for a fair presentation of such information. The results of operations and cash flow for the period presented are not necessarily indicative of results that would be expected for a full year. Property, plant and equipment-- Property, plant and equipment is recorded at purchased cost, together with labor and indirect labor costs amounting to approximately $245,000 during the nine month period. Intangible assets-- Franchise costs are amortized over the remaining franchise life, while goodwill is amortized over ten years and other intangible assets (primarily subscriber lists) are amortized over the average period that a subscriber is expected to remain connected to the cable system. Amortization of franchise costs, goodwill and other intangible assets amounted to approximately $1,230,000, $196,000 and $33,000 respectively, during the nine month period. F-104 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Cable Income Partners L.P. In our opinion, the accompanying balance sheet and the related statements of operations and of cash flows present fairly, in all material respects, the financial position of Clay Cablevision, a Division of Rifkin Cable Income Partners L.P. (RCIP), at December 31, 1993 and the results of its operations and its cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Division's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP December 7, 1994 Denver, Colorado F-105 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) BALANCE SHEET DECEMBER 31, 1993 ASSETS ------ Cash.............................................................. $ 27,455 Subscriber accounts receivable, net of allowance for doubtful accounts of $92,395.............................................. 259,784 Other receivables................................................. 46,982 Prepaid expenses and deposits..................................... 155,546 Property, plant and equipment, at cost: Cable television transmission and distribution systems and related equipment.............................................. 19,492,264 Land, buildings, vehicles and furniture and fixtures............ 1,747,908 ----------- 21,240,172 Less accumulated depreciation................................... (8,986,564) ----------- Net property, plant and equipment............................. 12,253,608 Franchise costs and other assets, net of accumulated amortization of $10,804,409................................................... 12,922,909 ----------- Total assets.................................................. $25,666,284 =========== LIABILITIES AND DIVISION DEFICIT -------------------------------- Accounts payable and accrued liabilities.......................... $ 1,030,766 Subscriber deposits and prepayments............................... 259,416 Interest payable.................................................. 586,095 Advances from RCIP................................................ 27,917,329 ----------- Total liabilities............................................. 29,793,606 Commitments (Note 4) Division deficit.................................................. (4,127,322) ----------- Total liabilities and division deficit............................ $25,666,284 ===========
The accompanying notes are an integral part of these financial statements. F-106 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 REVENUE Service......................................................... $11,820,418 Installation and other.......................................... 436,000 ----------- Total revenue................................................. 12,256,418 =========== COSTS AND EXPENSES Operating expense............................................... 4,623,746 Selling, general and administrative expense..................... 1,526,100 Depreciation and amortization................................... 3,280,650 Managements fees................................................ 632,939 Loss on retirement of assets.................................... 192,677 ----------- Total costs and expenses...................................... 10,256,112 ----------- Operating income.................................................. 2,000,306 Interest expense.................................................. 2,800,165 ----------- Net loss.......................................................... $ (799,859) ===========
The accompanying notes are an integral part of these financial statements. F-107 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................................ $ (799,859) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................. 3,280,650 Loss on retirement of assets.................................. 192,677 Decrease in accounts payable and accrued liabilities, subscriber deposits and prepayments and interest payable..... (161,645) Increase in subscriber accounts receivables, prepaid expenses and other.................................................... (10,180) ----------- Net cash provided by operating activities................... 2,501,643 ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment...................... (1,615,880) Proceeds from disposal of assets................................ 30,740 ----------- Net cash used in investing activities....................... (1,585,140) ----------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from RCIP.............................................. 5,716,536 Repayments to RCIP.............................................. (6,618,738) Net change in division deficit.................................. (17,658) ----------- Net cash used in financing activities....................... (919,860) ----------- Net decrease in cash.............................................. (3,357) Cash at beginning of year......................................... 30,812 ----------- Cash at end of year............................................... $ 27,455 ===========
Interest paid for the year ended December 31, 1993 was $2,853,640. The accompanying notes are an integral part of these financial statements. F-108 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Information Clay Cablevision (Clay, a Division of Rifkin Cable Income Partners L.P (RCIP)) operates cable television (CATV) systems in Florida. RCIP was formed in 1986 as a limited partnership under the laws of the state of Delaware to acquire and operate CATV systems. Rifkin Cable Management Partners L.P., an affiliate of Rifkin and Associates, Inc., is the general partner of RCIP. On August 24, 1994, RCIP signed an Asset Purchase Agreement ("Agreement") providing for the sale of substantially all of the net assets of Clay to Continental Cablevision of Jacksonville, Inc. On November 7, 1994, the sale was finalized. Basis of Presentation The accompanying financial statements present Clay as if it had existed as a company separate from RCIP and includes the historical assets, liabilities, revenues, and expenses that are directly related to Clay's business. Clay's financial statements include all the direct costs of operating the business. General and administrative expenses specifically incurred by RCIP on behalf of Clay were included while costs which were not incurred specifically for any of RCIP's divisions were allocated to Clay based on Clay's total assets as a percentage of RCIP's total assets. Management believes the foregoing allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect the financial position and results of operations of Clay in the future or what the financial position or results of operations of Clay would have been as a separate stand-alone entity. Revenue and Programming Subscriber fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially viewed by the subscriber. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and interest, if applicable. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings....................................................... 21-30 years Cable television transmission and distribution systems and related equipment.............................................. 3-15 years Vehicles and furniture and fixtures............................. 3- 5 years
Expenditures for maintenance and repairs are expensed as incurred. Franchise Costs Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from four to fifteen years. F-109 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Other Assets Certain loan costs of RCIP have been deferred and are amortized over the term of the related debt. A portion of RCIP's loan costs and related accumulated amortization of $229,741 and $145,356, respectively, have been allocated to Clay (Note 2). Income Taxes RCIP is not an income tax paying entity. Accordingly, no provision is made for income taxes since the effects of RCIP's operations are reportable by its partners on their income tax returns. Advances from RCIP The indebtedness of RCIP is joint and severally secured by the assets of all of its divisions, including Clay, and accordingly, a portion of RCIP's debt has been allocated to Clay (Note 2) as advances from RCIP. Cash The only cash balances allocated to Clay were the nominal cash balances maintained at Clay's operating facilities. Division Deficit The division deficit account consists of accumulated earnings/losses as well as any payable/receivable balance due to/from RCIP resulting from cash transfers. No provision for interest has been made on interdivisional balances. The net change in division deficit shown on the Statement of Cash Flows represents the change in payable/receivable balance due to/from RCIP. 2. RELATED PARTY TRANSACTIONS RCIP has entered into a management agreement with Rifkin and Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall act as manager of RCIP's CATV systems, and shall be entitled to annual compensation of 5% of RCIP's CATV revenues, net of certain CATV programming costs ("net CATV revenue"). In addition, the management agreement provides for the reimbursement by RCIP of certain costs and expenses incurred on its behalf by Rifkin, including the expense of certain employees devoting time of providing services to RCIP. This fee has been allocated to Clay based on Clay's net CATV revenue as a percentage of RCIP's net CATV revenue. The advances from RCIP of $27,917,329 at December 31, 1993, represent a portion of RCIP's third-party debt allocated to Clay based on Clay's total assets as a percentage of RCIP's total assets. The advances from RCIP bear interest at approximately 9.85 percent, which represents RCIP's average monthly overall borrowing rate. Interest allocated to Clay for the year totaled $2,800,165, of which $586,095 is reflected as interest payable at December 31, 1993. 3. LOSS ON RETIREMENT OF ASSETS During 1993, Clay recognized a loss on retirement of assets of $192,677. The majority of the loss was the result of the completion of the distribution system rebuild in Fernandina Beach. 4. COMMITMENTS AND RENTAL EXPENSE Clay leases certain real and personal property under noncancelable operating leases expiring through the year 2002. Future minimum lease payments under such noncancelable leases as of December 31, 1993 F-110 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) are: $21,363 in 1994; $12,991 in 1995; $10,485 in 1996; $6,288 in 1997; $5,092 in 1998; and $17,882 thereafter, totaling $74,101. Total rental expense for the year ended December 31, 1993 was $140,893, including $95,315 relating to cancelable pole rental agreements. 5. CABLE REREGULATION On September 14, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act). On April 1, 1993, the Federal Communications Commission (FCC) adopted, with effect from September 1, 1993, rules for implementing regulation of CATV subscriber rates. The rates may be determined under one of two methods, calculation of benchmark rates or cost of service showings. The Cable Act also gives subscribers and franchisors certain rights with respect to challenging and regulating local rates. Regulations to implement the Cable Act were issued in April 1993, and management, using its best interpretation of regulations, calculated benchmark rates for its systems, which it implemented effective September 1, 1993. On February 22, 1994, the FCC issued a statement regarding regulations and notices of proposed rule-making to implement further the provisions of the Cable Act. These regulations included a number of significant changes to the rules issued in 1993 and were intended to achieve a further overall reduction in cable rates. Clay's calculations of the maximum permitted rates for regulated programming services and equipment are based on management's best estimates. F-111 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1994 ASSETS ------ Cash............................................................. $ 24,383 Subscriber accounts receivable, net of allowance for doubtful accounts of $87,179............................................. 216,384 Other receivables................................................ 29,700 Prepaid expenses and deposits.................................... 144,820 Property, plant and equipment, at cost: Cable television transmission and distribution systems and related equipment............................................. 19,994,782 Land, buildings, vehicles and furniture and fixtures........... 1,731,480 ------------ 21,726,262 Less accumulated depreciation.................................. (10,177,292) ------------ Net property, plant and equipment............................ 11,548,970 Franchise costs and other assets, net of accumulated amortization of $11,965,764.................................................. 11,802,609 ------------ Total assets................................................. $ 23,766,866 ============ LIABILITIES AND DIVISION DEFICIT -------------------------------- Accounts payable and accrued liabilities......................... $ 922,651 Subscriber deposits and prepayments.............................. 262,616 Interest payable................................................. 1,154,445 Advances from RCIP............................................... 26,450,447 ------------ Total liabilities............................................ 28,790,159 Commitments (Note 4) Division deficit................................................. (5,023,293) ------------ Total liabilities and division deficit........................... $ 23,766,866 ============
The accompanying notes are an integral part of these financial statements. F-112 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 REVENUE Service.......................................................... $8,901,680 Installation and other........................................... 451,149 ---------- Total revenue.................................................. 9,352,829 ---------- COSTS AND EXPENSES Operating expense................................................ 3,658,130 Selling, general and administrative expense...................... 1,090,328 Depreciation and amortization.................................... 2,430,245 Management fees.................................................. 503,732 Loss on retirement of assets..................................... 16,544 ---------- Total costs and expenses....................................... 7,698,979 ---------- Operating income................................................... 1,653,850 Interest expense................................................... 2,012,487 ---------- Net loss........................................................... $ (358,637) ==========
The accompanying notes are an integral part of these financial statements. F-113 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 Cash Flows From Operating Activities Net loss........................................................ $ (358,637) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................. 2,430,245 Loss on retirement of assets.................................. 16,544 Increase in accounts payable and accrued liabilities, subscriber deposits and prepayments and interest payable..... 463,435 Decrease in subscriber accounts receivables, prepaid expenses and other.................................................... 71,408 ----------- Net cash provided by operating activities................... 2,622,995 ----------- Cash Flows From Investing Activities Additions to property, plant and equipment...................... (589,797) Proceeds from disposal of assets................................ 12,609 ----------- Net cash used in investing activities....................... (577,188) ----------- Cash Flows From Financing Activities Advances from RCIP.............................................. 2,085,903 Repayments to RCIP.............................................. (3,519,486) Net change in division deficit.................................. (615,296) ----------- Net cash used in financing activities....................... (2,048,879) ----------- Net decrease in cash.............................................. (3,072) Cash at beginning of period....................................... 27,455 ----------- Cash at end of period............................................. $ 24,383 ===========
Interest paid for the nine months ended September 30, 1994 was $1,444,137. The accompanying notes are an integral part of these financial statements. F-114 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Information Clay Cablevision (Clay, a division of Rifkin Cable Income Partners L.P (RCIP)) operates cable television (CATV) systems in Florida. RCIP was formed in 1986 as a limited partnership under the laws of the state of Delaware to acquire and operate CATV systems. Rifkin Cable Management Partners L.P., an affiliate of Rifkin and Associates, Inc., is the general partner of RCIP. On August 24, 1994, RCIP signed an Asset Purchase Agreement ("Agreement") providing for the sale of substantially all of the net assets of Clay to Continental Cablevision of Jacksonville, Inc. On November 7, 1994, the sale was finalized. Basis of Presentation The accompanying financial statements present Clay as if it had existed as a company separate from RCIP and includes the historical assets, liabilities, revenues, and expenses that are directly related to Clay's business. Clay's financial statements include all the direct costs of operating the business. General and administrative expenses specifically incurred by RCIP on behalf of Clay were included while costs which were not incurred specifically for any of RCIP's divisions were allocated to Clay based on Clay's total assets as a percentage of RCIP's total assets. Management believes the foregoing allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect the financial position and results of operations of Clay in the future or what the financial position or results of operations of Clay would have been as a separate stand-alone entity. Revenue and Programming Subscriber fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially viewed by the subscriber. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and interest, if applicable. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings....................................................... 21-30 years Cable television transmission and distribution systems and related equipment.............................................. 3-15 years Vehicles and furniture and fixtures............................. 3- 5 years
Expenditures for maintenance and repairs are expensed as incurred. Franchise Costs Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from four to fifteen years. F-115 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Other Assets Certain loan costs of RCIP have been deferred and are amortized over the term of the related debt. A portion of RCIP's loan costs and related accumulated amortization of $270,795 and $167,581, respectively, have been allocated to Clay (Note 2). Income Taxes RCIP is not an income tax paying entity. Accordingly, no provision is made for income taxes since the effects of RCIP's operations are reportable by its partners on their income tax returns. Advances from RCIP The indebtedness of RCIP is joint and severally secured by the assets of all of its divisions, including Clay, and accordingly, a portion of RCIP's debt has been allocated to Clay (Note 2) as advances from RCIP. Cash The only cash balances allocated to Clay were the nominal cash balances maintained at Clay's operating facilities. Division Deficit The division deficit account consists of accumulated earnings/losses as well as any payable/receivable balance due to/from RCIP resulting from cash transfers. No provision for interest has been made on interdivisional balances. The net change in division deficit shown on the Statement of Cash Flows represents the change in payable/receivable balance due to/from RCIP. 2. RELATED PARTY TRANSACTIONS RCIP has entered into a management agreement with Rifkin and Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall act as manager of RCIP's CATV systems, and shall be entitled to annual compensation of 5% of RCIP's CATV revenues, net of certain CATV programming costs ("net CATV revenue"). In addition, the management agreement provides for the reimbursement by RCIP of certain costs and expenses incurred on its behalf by Rifkin, including the expense of certain employees devoting time of providing services to RCIP. This fee has been allocated to Clay based on Clay's net CATV revenue as a percentage of RCIP's net CATV revenue. The advances from RCIP of $26,450,447 at September 30, 1994, represent a portion of RCIP's third-party debt allocated to Clay based on Clay's total assets as a percentage of RCIP's total assets. The advances from RCIP bear interest at approximately 7.48 percent, which represents RCIP's average monthly overall borrowing rate. Interest allocated to Clay for the nine months totaled $2,012,487, of which $1,154,445 is reflected as interest payable at September 30, 1994. 4. COMMITMENTS AND RENTAL EXPENSE Clay leases certain real and personal property under noncancelable operating leases expiring through the year 2002. Future minimum lease payments under such noncancelable leases as of September 30, 1994 are: $5,341 remaining in 1994; $12,991 in 1995; $10,485 in 1996; $6,288 in 1997; $5,092 in 1998; and $17,882 thereafter, totaling $58,079. F-116 CLAY CABLEVISION (A DIVISION OF RIFKIN CABLE INCOME PARTNERS L.P.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Total rental expense for the nine months ended September 30, 1994 was $127,822, including $94,180 relating to cancelable pole rental agreements. 5. CABLE REREGULATION On September 14, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act). On April 1, 1993, the Federal Communications Commission (FCC) adopted, with effect from September 1, 1993, rules for implementing regulation of CATV subscriber rates. The rates may be determined under one of two methods, calculation of benchmark rates or cost of service showings. The Cable Act also gives subscribers and franchisors certain rights with respect to challenging and regulating local rates. Regulations to implement the Cable Act were issued in April 1993, and management, using its best interpretation of regulations, calculated benchmark rates for its systems, which it implemented effective September 1, 1993. On February 22, 1994, the FCC issued a statement regarding regulations and notices of proposed rule-making to implement further the provisions of the Cable Act. These regulations included a number of significant changes to the rules issued in 1993 and were intended to achieve a further overall reduction in cable rates. Clay's calculations of the maximum permitted rates for regulated programming services and equipment are based on management's best estimates. F-117 REPORT OF INDEPENDENT AUDITORS General and Limited Partners N-COM Limited Partnership II We have audited the accompanying consolidated balance sheets of N-COM Limited Partnership II at September 30, 1994 and 1993, and the related consolidated statements of operations, partners' net capital deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of N-COM Limited Partnership II at September 30, 1994 and 1993, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP December 23, 1994 Detroit, Michigan F-118 N-COM LIMITED PARTNERSHIP II CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, -------------------------- 1994 1993 ------------ ------------ ASSETS ------ Current assets: Cash......................................... $ 1,484,300 $ 1,670,307 Subscriber and other accounts receivable; less allowance for doubtful accounts of $3,965 in 1994 and $3,668 in 1993........... 933,394 1,086,328 Prepaid expenses............................. 184,566 256,645 ------------ ------------ Total current assets....................... 2,602,260 3,013,280 Property, plant and equipment, at cost: Land and improvements........................ 16,000 16,000 Building and improvements.................... 338,921 332,501 Cable television distribution systems........ 16,662,687 14,915,497 Vehicles..................................... 511,167 327,027 Other equipment and furniture................ 375,213 310,621 Construction in progress..................... 975,838 710,744 ------------ ------------ 18,879,826 16,612,390 Less accumulated depreciation.................. (6,856,833) (4,164,921) ------------ ------------ Net property, plant and equipment.............. 12,022,993 12,447,469 Other assets, at cost: Intangible assets, less accumulated amortization................................ 24,408,514 33,662,304 Other assets................................. 22,910 22,960 ------------ ------------ 24,431,424 33,685,264 ------------ ------------ $ 39,056,677 $ 49,146,013 ============ ============ LIABILITIES AND PARTNER'S NET CAPITAL DEFICIENCY: - ------------------------------------------------- Current liabilities: Accounts payable............................. $ 463,774 $ 430,233 Accrued liabilities: Programming costs............................ 473,986 343,479 Compensation and related taxes............... 134,093 166,449 State taxes.................................. 9,200 97,467 Interest..................................... 214,558 169,442 Other........................................ 293,828 392,899 Unearned subscriber revenues................... 947,731 1,071,722 Long-term debt due within one year............. 3,775,000 1,770,366 ------------ ------------ Total current liabilities.................. 6,312,170 4,442,057 Deferred management fee and incentive compensation.................................. 1,480,910 1,200,114 Long-term debt................................. 69,930,001 68,844,857 Partners' net capital deficiency............... (38,666,404) (25,341,015) ------------ ------------ $ 39,056,677 $ 49,146,013 ============ ============
See accompanying notes. F-119 N-COM LIMITED PARTNERSHIP II CONSOLIDATED STATEMENT OF OPERATIONS AND PARTNERS' NET CAPITAL DEFICIENCY
YEAR ENDED SEPTEMBER 30 -------------------------- 1994 1993 ------------ ------------ Revenues: Subscriber....................................... $ 18,830,785 $ 18,607,097 Other............................................ 892,080 676,987 ------------ ------------ 19,722,865 19,284,084 Operating expenses: Direct operating expenses........................ 8,403,794 7,653,673 Selling, general and administrative.............. 3,284,911 3,602,595 ------------ ------------ 11,688,705 11,256,268 ------------ ------------ Operating income before depreciation and amortization...................................... 8,034,160 8,027,816 Depreciation and amortization...................... 12,079,983 11,750,559 ------------ ------------ Operating loss..................................... (4,045,823) (3,722,743) Interest expense................................... 9,279,566 8,233,622 ------------ ------------ Net loss........................................... (13,325,389) (11,956,365) Partner's net capital deficiency at beginning of year.............................................. (25,341,015) (13,384,650) ------------ ------------ Partner's net capital deficiency at end of year.... $(38,666,404) $(25,341,015) ============ ============
See accompanying notes. F-120 N-COM LIMITED PARTNERSHIP II CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, -------------------------- 1994 1993 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss......................................... $(13,325,389) $(11,956,365) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred interest.............................. 6,107,973 5,563,729 Depreciation and amortization.................. 12,079,983 11,750,559 Deferred management fee and incentive compensation.................................. 280,796 469,560 Loss on disposal of equipment.................. 106,806 81,828 Changes in cash due to: Accounts receivable.......................... 152,934 174,663 Prepaid expenses............................. 72,079 (69,952) Accounts payable............................. 33,541 (149,237) Accrued liabilities.......................... (44,071) 68,423 Unearned subscriber revenue.................. (123,991) (174,943) ------------ ------------ Net cash provided by operating activities.. 5,340,661 5,758,265 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............................. (2,402,656) (2,101,790) Other assets..................................... (105,817) (10,527) ------------ ------------ Net cash used in investing activities...... (2,508,473) (2,112,317) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt......... 1,477,450 49,759,502 Principal payment of long-term debt and capital lease obligations............................... (4,495,645) (52,029,872) ------------ ------------ Net cash used in financing activities.............. (3,018,195) (2,270,370) ------------ ------------ Net increase (decrease) in cash............ (186,007) 1,375,578 Cash, beginning of year............................ 1,670,307 294,729 ------------ ------------ Cash, end of year.................................. $ 1,484,300 $ 1,670,307 ============ ============ Supplemental disclosures of cash flow information: Interest paid.................................... $ 3,623,092 $ 4,459,959 ============ ============
See accompanying notes. F-121 N-COM LIMITED PARTNERSHIP II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1994 1. ORGANIZATION AND BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation N-COM Limited Partnership II (the Partnership) owns all of the outstanding capital stock of N-COM Holding Corporation (the Company) which was incorporated on October 9, 1985 and commenced operations on January 2, 1986 with the purchase of the outstanding capital stock of Omnicom of Michigan, Inc. and Clear Cablevision, Inc. In addition, the Company holds 99% partnership interests in Irish Hills Cablevision Limited Partnership and 99.9% partnership interest in Omnicom CATV Limited Partnership. Net income and losses of the Partnership are allocated 17.67% to the General Partner and 82.33% to the Limited Partners. Description of Business The Company operates cable television systems, all of which are located in the state of Michigan. Subscribers served by each of the systems as of September 30, 1994 are as follows:
SUBSCRIBERS ----------- Omnicom of Michigan, Inc....................................... 33,099 Clear Cablevision, Inc......................................... 7,342 Irish Hills Cablevision Limited Partnership.................... 4,149 Omnicom CATV Limited Partnership............................... 8,384 ------ Total subscribers.............................................. 52,974 ======
Summary of Significant Accounting Policies Taxes The Partnership is not a tax paying entity for state and federal income tax purposes. Accordingly, the taxable income, or loss of the Partnership, which may vary substantially from income or loss reported for financial reporting purposes, is included in the state and federal income tax returns of the Partners. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets and is computed on the straight- line method for financial reporting purposes and on accelerated methods for income tax purposes. Unearned Subscriber Revenues Unearned subscriber revenues represent advance billings for future services. The related revenue is recognized as services are provided. F-122 N-COM LIMITED PARTNERSHIP II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. INTANGIBLE ASSETS Intangible assets are being amortized on the straight-line method and consist of the following:
AMORTIZATION CATEGORY PERIOD 1994 1993 -------- ------------ ----------- ----------- Cost in excess of fair value of tangible net assets acquired...................... 5.25 years $46,048,466 $46,048,466 Franchise agreements...................... 12 years 200,254 94,388 Organization costs........................ 5.25 years 832,785 832,785 Refinancing costs......................... 4-5 years 1,778,732 1,778,732 ----------- ----------- 48,860,237 48,754,371 Less accumulated amortization............. 24,451,723 15,092,067 ----------- ----------- $24,408,514 $33,662,304 =========== ===========
3. LONG-TERM DEBT Long-term debt consists of the following:
1994 1993 ----------- ----------- Senior Secured Credit Agreement..................... $45,170,000 $48,875,000 25% subordinated promissory notes to Partners including deferred interest, interest payable quarterly with option for deferral through March 31, 1997, at which time the entire balance is due.. 14,968,264 10,721,965 Subordinated promissory notes to Partners including deferred interest, fixed interest at 21% payable quarterly, with option for deferral through March 31, 1997, at which time the entire balance is due. Additional interest at 4% is payable upon payment of the principal, contingent upon the Partnership exceeding operating cash flow, as defined.......... 13,566,737 11,008,598 Other notes payable................................. -- 9,660 ----------- ----------- 73,705,001 70,615,223 Less current portion due within one year............ 3,775,000 1,770,366 ----------- ----------- $69,930,001 $68,844,857 =========== ===========
Aggregate maturities of long-term debt are as follows:
YEAR AMOUNT ---- ----------- 1995................................................. $ 3,775,000 1996................................................. 3,500,000 1997................................................. 34,785,001 1998................................................. 8,500,000 1999................................................. 11,062,500 Thereafter........................................... 12,082,500 ----------- $73,705,001 ===========
As of December 31, 1992, the Company refinanced its revolving credit agreement and entered into a Senior Secured Credit Facility with a consortium of banks whereby the Company can borrow up to F-123 N-COM LIMITED PARTNERSHIP II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $60,000,000 comprised of a $50,000,000 term loan (Facility A) and a $10,000,000 revolving credit arrangement (Facility B). Interest under the facility (7.125% and 5.3125% at September 30, 1994 and 1993, respectively) is based on a ratio of debt to cash flow and will range from 3/8% to 1 1/8% above prime or 1 5/8% to 2 3/8% above LIBOR rate. Interest on a certain portion of such debt shall not exceed 8% under an interest rate cap agreement. Facility A is charged an agency fee of .125% per annum and Facility B is charged a commitment fee of one-half of one percent per annum on the unused balance. The term loan is payable in quarterly installments through December 31, 2000 and the revolving credit facility has commitment reductions over its term. The Senior Secured Credit Facility Agreement provides that the Company shall prepay the term loan in amounts equal to 100% of excess cash flow, as defined, commencing December 31, 1993. Excess cash flow for calendar year 1994 is anticipated based on the Company's estimate and accordingly, $1,900,000 has been classified as current. The Senior Secured Credit Facility and the subordinated promissory notes include significant restrictive covenants, which include the requirements that the Company maintain certain financial ratios relating to leverage and cash flows. The loans are collateralized by substantially all of the assets of the Company. At March 31, 1994 and September 30, 1994, the Partners elected to defer the quarterly interest payment then due on the subordinated notes, and accordingly, waivers of default were obtained from the Partners. 4. RELATED PARTY TRANSACTIONS N-COM Inc., the Partnership's general partner, charges the Partnership a management fee for administrative salaries and related benefits, legal fees and other administrative expenses. For the year ended September 30, 1994 the management fee amounted to $345,230 ($338,565 for September 30, 1993). At September 30, 1994, certain management fees were deferred totaling $912,400 (of which $184,600 bears interest at prime and $727,800 bears interest at 25%) and is due in 1997. At September 30, 1993 $676,100 of management fees were deferred. Annually, the Company pays to N-Com II Inc., an affiliate of the Company, approximately $70,000 to compensate for certain tax effects of the January, 1992 restructuring transaction. Continental Cablevision Investments, Inc., (Continental) a limited partner of the Partnership, obtains programming services for the Company at rates more favorable than would otherwise be available to the Company. The Company reimburses Continental for such programming services at the higher service costs and receives loans for the difference in programming service costs. Such loans may be up to a maximum of $4,465,250 and bear interest at 25% (see Note 3). At September 30, 1994, the Company had loans together with deferred interest totaling $3,984,881 ($1,808,176 at September 30, 1993). 5. COMMITMENTS AND CONTINGENCIES Leases The Company leases tower sites, vehicles and administrative facilities under noncancelable operating leases. Rent expense amounted to $278,000 and $273,400 for the year ended September 30, 1994 and 1993, respectively. Minimum future lease commitments are as follows:
YEAR AMOUNT ---- -------- 1995.................................................... $114,410 1996.................................................... 99,388 1997.................................................... 75,210 1998.................................................... 10,195 1999.................................................... 20,351 Thereafter.............................................. 39,408 -------- $358,962 ========
F-124 N-COM LIMITED PARTNERSHIP II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Incentive Plan The Company provides an incentive compensation plan to key employees which is contingent upon certain conditions including continuous employment through December 31, 1996. The amount of the incentive payment for each employee is based on the results of operations. Estimated incentive compensation is being accrued over the period of the Plan. Incentive compensation expense amounted to $0 and $324,792 for the years ended September 30, 1994 and 1993, respectively. Payments under the plan are payable at the termination of the plan (1997) or earlier upon certain sale transactions. Franchise Renewal Since 1992, the Company has been engaged in negotiations with a consortium of four municipalities (representing approximately 25,000 of the Company's cable subscribers), for the long term renewal of their respective cable television franchises. Under the provisions of the Federal Cable Communications Policy Act of 1984 (the "Cable Act"), the Company has submitted formal proposals for these franchise renewals. In the context of the continuing negotiations, each of the municipalities has made a preliminary assessment not to accept the Company's formal proposal. If the negotiations do not result in mutually acceptable franchise renewals, the municipalities are required to convene an Administrative Hearing at which they would have to establish by a preponderance of the evidence that the Company's formal proposals are not entitled to the strong presumption of renewal provided under the Cable Act. One of the municipalities has postponed its Administrative Hearing to an indefinite date, and none of the other municipalities has scheduled an Administrative Hearing. If necessary, the Company intends to pursue vigorously the franchise renewals in any Administrative Hearings and, if needed, through its rights of appeal in the federal or state courts, as provided under the Cable Act. The Company expects in the near term to reach mutually agreeable franchise renewal terms with the communities. In any event, it is the Company's opinion, based on the opinion of legal counsel, that it is probable that the franchises will ultimately be renewed. Authority to Sell As a result of the failure of the Partnership in 1994 to meet cash flow levels, as defined, and failure to make quarterly interest payment due on September 30, 1994, certain of the partners have the right to elect to cause the business of the partnership to be sold during a period of one year from such election subject to approval of terms of sale by a majority in interest of the partners electing to sell. To date such election has not been made or waived. Other The Company has performance bonds outstanding at September 30, 1994 aggregating $384,000 representing obligations under franchise and utility license agreements. 6. CALL OPTION Continental has the right to purchase 80% of the Partnership's interests at a formula price based on cash flow anytime from December 31, 1996 through January 31, 1997 or in the event that the partnership is sold. If Continental exercises the Call Option, the remaining Partners shall have the right to sell to Continental the remaining 20% interest in the Partnership. F-125 INDEPENDENT AUDITORS' REPORT The Partners Cablevision of Chicago: We have audited the accompanying balance sheets of Cablevision of Chicago (a limited partnership) as of December 31, 1993 and 1992, and the related statements of operations and partners' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cablevision of Chicago as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP March 4, 1994, except for note 11, which is as of June 21, 1994. Jericho, New York F-126 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 1993 AND 1992
1993 1992 ------------ ------------ ASSETS ------ Cash and cash equivalents.......................... $ 338,921 $ 279,234 Accounts receivable-subscribers (less allowance for doubtful accounts of $134,359 and $191,618)....... 406,088 543,444 Other receivables.................................. 492,404 257,463 Prepaid expenses................................... 138,221 174,836 Prepaid franchise fees............................. 26,751 102,945 Property, plant and equipment, net................. 21,439,681 22,859,887 Deferred acquisition and development costs (less accumulated amortization of $1,303,910 and $1,185,458)....................................... 153,459 271,911 Deferred financing costs (less accumulated amortization of $882,733 and $596,045)............ 1,887,570 1,138,727 Other intangibles (less accumulated amortization of $981,128 and $797,167)............................ 306,603 490,564 Deposits and other assets.......................... 103,567 84,069 ------------ ------------ $ 25,293,265 $ 26,203,080 ============ ============ LIABILITIES AND PARTNERS' DEFICIENCY ------------------------------------ Accounts payable................................... $ 4,554,299 $ 4,612,970 Accounts payable to affiliates, net................ 290,490 784,092 Subordinated amounts payable to affiliates......... 26,128,491 29,954,443 Accrued liabilities: Interest......................................... 621,086 556,317 Franchise fees................................... 800,171 782,260 Payroll and related benefits..................... 1,315,645 897,794 Other............................................ 1,855,132 2,104,045 Debt: Affiliates....................................... 12,314,460 22,386,094 Other............................................ 65,574,730 48,414,947 ------------ ------------ Total liabilities.............................. 113,454,504 110,492,962 ------------ ------------ Commitments & contingencies Partners' deficiency General partners................................. (1,149,108) (1,110,394) Limited partners................................. (87,012,131) (83,179,488) ------------ ------------ Total partners' deficiency..................... (88,161,239) (84,289,882) ------------ ------------ $ 25,293,265 $ 26,203,080 ============ ============
See accompanying notes to financial statements. F-127 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIENCY YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992 ------------ ------------ Revenues--net...................................... $ 34,562,384 $ 33,233,263 Technical expenses (including affiliate amounts of $1,482,000 and $1,361,000)........................ 14,044,681 13,600,510 Selling, general and administrative expenses (including affiliate amounts of $2,432,000 and $2,195,000)....................................... 9,054,082 8,898,674 Depreciation and amortization...................... 5,593,100 5,751,320 ------------ ------------ Operating income............................... 5,870,521 4,982,759 ------------ ------------ Other income (expense): Interest income.................................. 30,607 18,057 Interest expense (including affiliate amounts of $3,977,000 and $5,925,000)...................... (9,760,220) (10,442,456) Miscellaneous, net............................... (12,265) (136,741) ------------ ------------ (9,741,878) (10,561,140) ------------ ------------ Net loss....................................... $ (3,871,357) $ (5,578,381) ============ ============ Partners' deficiency: Beginning of year................................ $(84,289,882) $(78,711,501) Net loss allocated to general partners........... (38,714) (55,784) Net loss allocated to limited partners........... (3,832,643) (5,522,597) ------------ ------------ End of year...................................... $(88,161,239) $(84,289,882) ============ ============
See accompanying notes to financial statements. F-128 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992 ------------ ----------- Cash flows from operating activities: Net loss.......................................... $ (3,871,357) $(5,578,381) ------------ ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization................... 5,593,100 5,751,320 Amortization of deferred financing costs........ 286,688 102,199 Loss (gain) on sale of equipment................ (3,745) 11,957 Changes in asset and liability accounts: Accounts receivable--subscribers.............. 137,356 (50,740) Other receivables............................. (234,941) (98,810) Prepaid expenses and franchise fees........... 112,809 268,537 Deposits and other assets..................... (19,498) (60) Accounts payable and accrued liabilities...... 192,947 1,807,217 Accounts payable and subordinated amounts payable to affiliates, net................... (4,319,554) 6,328,727 ------------ ----------- Total adjustments........................... 1,745,162 14,120,347 ------------ ----------- Net cash provided by (used in) operating activities................................. (2,126,195) 8,541,966 ------------ ----------- Cash flows from investing activities: Capital expenditures.............................. (3,871,749) (3,816,651) Proceeds from sale of equipment................... 5,013 1,066 ------------ ----------- Net cash used in investing activities....... (3,866,736) (3,815,585) ------------ ----------- Cash flows from financing activities: Proceeds from bank debt........................... 70,750,000 1,250,000 Repayment of bank debt............................ (53,510,980) (5,429,020) Payment of debt to affiliates..................... (10,071,634) -- Payments on capital lease obligations............. (79,237) (159,359) Additions to deferred financing costs............. (1,035,531) (425,000) ------------ ----------- Net cash provided by (used in) financing activities................................. 6,052,618 (4,763,379) ------------ ----------- Net increase (decrease) in cash and cash equivalents........................................ 59,687 (36,998) Cash and cash equivalents at beginning of year...... 279,234 316,232 ------------ ----------- Cash and cash equivalents at end of year............ $ 338,921 $ 279,234 ============ ===========
See accompanying notes to financial statements. F-129 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993 AND 1992 1. THE COMPANY Cablevision of Chicago (the "Company") is a limited partnership, organized in January 1979, under the provisions of the Uniform Limited Partnership Act of the State of Illinois, for the purpose of constructing and operating cable television systems. The partnership will terminate December 31, 2020, unless earlier termination occurs as provided in the partnership agreement. The partnership consists of two general partners and three limited partners. The general partners are one individual and Cablevision Systems Services Corporation (CSSC), a corporation wholly-owned by the individual general partner. The limited partners of the Company are Cablevision of Illinois (C of I), Chicago Cablevision Investments (CCI) and Cablevision Headquarters Investment (CHI) which are all limited partnerships. The individual general partner of the Company is also a general partner in C of I, CCI and CHI while CSSC is a general partner in C of I. In addition, a subsidiary of Cablevision Systems Corporation (CSC), a corporation controlled by the individual general partner of the Company, is a general partner in CHI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Prepaid Franchise Fees The Company has prepaid franchise fees to certain municipalities. Such prepaid amounts are amortized to expense as the appropriate franchise fee is earned by the municipality. Property, Plant and Equipment Property, plant and equipment, including construction materials, are recorded at cost, which includes all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems and the costs of new subscriber installations. Property, plant and equipment is depreciated on the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the shorter of their useful lives or the terms of the related leases. Revenue Recognition The Company recognizes revenues as cable television services are provided to subscribers. Deferred Acquisition, Development Costs and Intangible Assets Costs incurred to acquire cable television franchises and expenses incurred during the initial development period were deferred until the date the first subscriber was connected. Such costs are being amortized on the straight-line basis over the average lives of the franchises. Intangible assets are being amortized over periods ranging from seven to fifteen years on the straight line basis. Deferred Financing Costs Costs incurred to obtain debt are deferred and amortized on the straight-line basis over the term to maturity of the related debt. F-130 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The Company operates as a limited partnership; accordingly, its taxable income or loss is includable in the tax returns of the individual partners and no provision for income taxes is made on the books of the Company. The partners are required to report their share of income or loss in their income tax returns. The Company's income or loss is allocated to the partners in accordance with the terms of the partnership agreement. At December 31, 1993, the carrying amount of net assets for financial statement purposes was less than their tax bases by approximately $7,433,000. Cash Flows For purposes of the statements of cash flows, the Company considers all short term investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company paid cash interest of approximately $14,444,000 (of which approximately $8,500,000 represents interest on the CSSC subordinated demand note) and $5,220,000 during the years ended December 31, 1993 and 1992, respectively. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following items with their estimated useful lives shown below:
DECEMBER 31, ----------------------- ESTIMATED 1993 1992 USEFUL LIVES ----------- ----------- ------------- Cable television transmission and distribution systems: Converters............................ $11,495,679 $11,609,974 5 years Headends.............................. 4,293,869 4,034,201 9 years Distribution systems.................. 60,552,666 57,928,693 12 years Program, service and test equipment... 3,977,009 3,870,334 7 years Microwave equipment and satellite receivers............................ 2,771,254 2,771,254 7 1/2 years Construction materials and supplies... 99,347 92,956 ----------- ----------- 83,189,824 80,307,412 Land.................................... 410,464 410,464 Building................................ 3,185,848 3,185,848 25 years Furniture and fixtures.................. 622,250 613,265 8 years Vehicles................................ 2,168,845 2,152,020 4 years Leasehold improvements.................. 1,722,247 1,642,867 Term of Lease ----------- ----------- 91,299,478 88,311,876 Less accumulated depreciation and amortization........................... 69,859,797 65,451,989 ----------- ----------- $21,439,681 $22,859,887 =========== ===========
At December 31, 1993 and 1992, property, plant and equipment include approximately $32,000 and $123,000 respectively, of net assets recorded under capital leases. F-131 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. DEBT Debt at December 31, 1993 and 1992 consists of the following:
1993 1992 ----------- ----------- Partners: C of I subordinated note, due July 31, 1994, bearing interest at 10%.......................... $ -- $ 2,611,970 CSC subordinated demand note, bearing interest at 14% (Note 6)..................................... 12,314,460 12,314,460 CCI subordinated note, due July 31, 1994, bearing interest at 18%.................................. -- 2,366,362 CSSC subordinated demand note, bearing interest at 14%.............................................. -- 5,093,302 ----------- ----------- Total partners.................................. $12,314,460 $22,386,094 =========== =========== Other: Bank debt......................................... $65,550,000 $48,310,980 Capital lease obligations (Note 5)................ 24,730 103,967 ----------- ----------- Total other..................................... $65,574,730 $48,414,947 =========== ===========
On February 5, 1993, the Company entered into a third amended and restated credit agreement (the "New Credit Agreement") with a group of banks led by Bank of Montreal, as agent. The Company may borrow up to $83,500,000 under the New Credit Agreement, of which $7,555,000 is restricted for certain letters of credit. Undrawn funds available to the Company under the New Credit Agreement as of December 31, 1993 amount to approximately $10,395,000. The New Credit Agreement includes a $58,500,000 term loan, of which $58,000,000 is outstanding at December 31, 1993, and a $25,000,000 revolving line of credit, of which $7,550,000 is outstanding at December 31, 1993. Repayment of the term loan commenced March 31, 1993 with quarterly payments continuing through December 31, 2000. The amount available under the revolving line of credit will be reduced by $2,500,000 on each of December 31, 1996 and 1997, $3,125,000 on December 31, 1998 and $5,625,000 on December 31, 1999. The New Credit Agreement provides that the revolving line of credit may be used for general and working capital purposes, and also to pay an aggregate amount not to exceed $8,255,352 (less any amount drawn under a letter of credit issued in respect of an obligation relating to subordinated amounts payable to an affiliate) of additional accrued but unpaid management fees and accrued interest thereon to Cablevision Systems Company on or before December 31, 1994. Based on the outstanding borrowings as of December 31, 1993, future payments under the terms of the New Credit Agreement are as follows: 1994--$2,100,000; 1995--$4,200,000; 1996--$7,800,000; 1997--$9,900,000; 1998--$11,100,000; thereafter--$23,400,000. The Credit Agreement contains various restrictive covenants, among which are limitations on various payments and the maintenance of various financial ratios. The Company was in compliance with the covenants of its credit agreement on December 31, 1993 after obtaining a waiver on December 16, 1993 for the ratio of Senior Debt to Annualized Operating Cash Flow. Borrowings bear interest at varying rates depending on the ratio of the Company's debt to annualized cash flow, as defined in the new Credit Agreement. The Company has the option of selecting either the bank's F-132 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) prime rate or the London Interbank Offering Rate (LIBOR) as the borrowing base rate. At December 31, 1993, the weighted average interest rate on the bank debt was 6.95%. The Company is obligated to pay fees to the banks of 3/8 of 1% per annum on the unused portion of the loan commitment. The Company has entered into interest rate swap agreements with three banks on a notional amount of $35,000,000 whereby the Company pays a fixed rate of interest and receives a variable rate. Interest rates and terms vary in accordance with each of the agreements. The lengths of the agreements range from three to five years. As of December 31, 1993, the agreements have a weighted average remaining life of two years. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements; however, the Company does not anticipate nonperformance by the counterparties. Substantially all of the assets of the Company have been pledged to secure the borrowings under the Credit Agreement. On December 31, 1992 the Company had subordinated notes outstanding to C of I and CCI, of $2,611,970 and $2,366,362, respectively. Accrued interest payable on these notes at December 31, 1992 was approximately $344,000 which was included in accounts payable to affiliates in the accompanying balance sheet at December 31, 1992. In 1993, the Company borrowed approximately $5,300,000 under the credit agreement to redeem the outstanding notes and accrued interest thereon. The subordinated demand note in the amount of $5,093,302 at December 31, 1992 bore interest at 14% and was payable to CSSC. During 1993 and 1992, the Company accrued interest of approximately $195,000 and $1,720,000, respectively. Cumulative unpaid interest on this demand note amounted to approximately $8,282,000 at December 31, 1992 and was included in subordinated amounts payable to affiliates in the accompanying balance sheet. On February 8, 1993, the Company borrowed $14,300,000 to retire the note, including interest thereon through February 8, 1993 and to pay a portion of the accrued interest outstanding on unpaid management fees (see note 6). 5. LEASES The Company leases certain office and production facilities under terms of leases expiring at various dates through 1999. Rent expense for operating leases amounted to approximately $457,000 in 1993 and $484,000 in 1992. In addition, the Company rents space on utility poles in its operations. The Company's pole rental agreements are for varying terms, and management anticipates renewals as they expire. Rental expense under these agreements was approximately $196,000 in 1993 and $188,000 in 1992. The Company's capital lease obligation of approximately $25,000 is due in its entirety in 1994. Future minimum payments under all noncancelable operating leases, including pole rentals through December 31, 1998, at rates currently in force as of December 31, 1993, are as follows:
OPERATING LEASES ---------- 1994.................................................. $ 650,893 1995.................................................. 539,802 1996.................................................. 511,508 1997.................................................. 444,357 1998.................................................. 445,507 Thereafter............................................ 389,309 ---------- Total future minimum lease payments................... $2,981,376 ==========
F-133 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. RELATED PARTY TRANSACTIONS The Company has an agreement with Cablevision Systems Company to provide the Company with management services. Cablevision Systems Company is owned by the individual general partner of the Company and certain trusts established for the benefit of his family members. The agreement can be renewed indefinitely at the option of Cablevision Systems Company and generally provides for the payment, in addition to expense reimbursement, of a fee equal to 3 1/2% of the Company's gross revenues. The fees accrued for 1993 and 1992 were approximately $1,209,000 and $1,163,000, respectively. In addition, interest accrues on the unpaid balance at prime (6% for 1993) plus two percent. For 1993 and 1992 the Company accrued approximately $1,097,000 and $1,002,000, respectively, for interest on unpaid management fees. Cumulative unpaid management fees and interest thereon at December 31, 1993 and 1992 amounted to $15,458,000 and $13,882,000, respectively. Unpaid management fees and interest are included in subordinated amounts payable to affiliates in the accompanying balance sheets. On February 8, 1993, the Company paid approximately $730,000 of accrued interest outstanding on unpaid management fees. Subsequent payments are subject to certain limitations and restrictions as defined in the New Credit Agreement. CSSC entered into an agreement with a program supplier allowing all cable systems managed by CSSC or CSC to offer certain programming to their subscribers. The contract is for a ten-year period and requires minimum yearly payments escalating to approximately $12,838,000 in 1994. Each of the related cable systems offering this program service to its subscribers, including the Company, pays its proportionate share of the minimum yearly payment based on the relative number of subscribers. Charges to the Company in respect of this agreement in 1993 and 1992 were approximately $514,000 and $531,000 respectively. CSC has made advances to or incurred expenses on behalf of the Company. Unpaid amounts bear interest at the rate of 14% per annum. A portion of this amount was converted to a subordinated demand note (the "CSC Demand Note"). The principal balance of the CSC Demand Note at December 31, 1993 and 1992 amounted to $12,314,460 (see note 4), and accrued interest thereon approximated $10,089,000 and $7,209,000 at December 31, 1993 and 1992, respectively. The CSC Demand Note is subordinated to bank debt and is restricted in accordance with certain provisions of the New Credit Agreement. The amounts of unpaid interest are included in subordinated amounts payable to affiliates in the accompanying balance sheets. CSC also has interests in several companies engaged in providing cable television programming and other services to the cable television industry, including the Company. During 1993 and 1992 the Company was charged approximately $1,482,000 and $1,361,000, respectively, by these companies primarily for programming services. One of these companies subleases space in the Company's main studio production facility, for which the Company was paid approximately $567,000 in 1993 and $581,000 in 1992. Amounts owed these companies at December 31, 1993 and 1992 were approximately $830,000 and $879,000, respectively of which approximately $161,000 and $297,000, respectively are included in accounts payable to affiliates and approximately $582,000 in each year is included in subordinated amounts payable to affiliates in the accompanying balance sheets. The Company is charged for certain selling, general and administrative expenses by CSC. For the years ended December 31, 1993 and 1992, these expenses amounted to approximately $1,223,000 and $1,032,000, respectively. Amounts owed CSC at December 31, 1993 and 1992 were approximately $264,000 and $308,000, respectively, and are included in accounts payable to affiliates in the accompanying balance sheets. 7. PENSION PLAN Prior to January 1, 1993, the Company was a participant, with other affiliates, in a defined contribution pension plan covering substantially all employees. The Company contributed three percent of each eligible F-134 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) employee's annual compensation, and employees could voluntarily contribute up to ten percent of their annual compensation. Employee contributions were fully vested. Employer contributions became vested in years three through seven. Effective January 1, 1993, the Board of Directors of CSC approved the adoption of an amended and restated Pension and 401(K) Savings Plan (the "Plan"), in part to permit employees of CSC and its affiliates to make contributions to the Plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(K) of the Internal Revenue Code, and to introduce new investment options under the Plan. The Company contributes 1 1/2% of eligible employees' annual compensation, as defined, to the defined contribution portion of the Pension Plan (the "Pension Plan") and an equivalent amount to the Section 401(K) portion of the plan (the "Savings Plan"). Employees may voluntarily contribute up to 15% of eligible compensation, subject to certain restrictions, to the Savings Plan, with an additional matching contribution by the Company of 1/4 of 1% for each 1% contributed by the employee, up to a maximum contribution by the Company of 1/2 of 1% of eligible base pay. Employee contributions are fully vested as are employer base contributions to the Savings Plan. Employer contributions to the Pension Plan and matching contributions to the Savings Plan become vested in years three through seven. At December 31, 1993 and 1992, the cost associated with these plans was approximately $130,000. The Company does not provide any postretirement benefits for its employees. 8. CONTINGENCY The Company has obtained thirty one franchises authorizing it to construct and operate cable television systems in the suburban areas of Chicago, Illinois. Certain franchises contain provisions granting the municipalities an option, at the expiration of the franchise, to purchase the cable television system for $1 plus any outstanding debt attributable to the system. 9. FINANCING Since its inception, the Company has incurred substantial losses. Not withstanding such losses, the Company's cash flow from operations and available borrowings under its New Credit Agreement (note 4) have been sufficient to meet its current obligations as a result of the deferral of payment of management fees and interest thereon and the deferral of interest payments on the subordinated demand note (note 4 and 6). Payment of the subordinated demand note, including interest thereon, is restricted in accordance with certain provisions of the New Credit Agreement. The Company believes that internally generated funds as well as borrowings under the revolving lines of credit are sufficient through year end 1995 to fund its requirements for existing cable operations and meet its debt service requirements but the company will be required at various times through year end 1995 to obtain amendments to or waivers of the debt to cash flow covenant in order to borrow under the Credit Agreement. (See Note 11) 10. RECENT CABLE TELEVISION REGULATIONS On October 5, 1992, Congress enacted the 1992 Cable Act which represents a significant change in the regulatory framework under which cable television systems operate. The principal provisions of the 1992 Cable Act were phased in through October 1993. As a result of the initial FCC rate regulations significant rate reductions were required. The Company is currently in the process of attempting to analyze the additional impact of the recently released FCC rate regulations. Although it is not possible at this time to predict the ultimate financial impact F-135 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) of these rate regulations on the Company, the Company expects further significant rate reductions will be required. In connection with the implementation of its revised rate structure resulting from the initial FCC rate regulation, the Company introduced a number of measures, including the provision of alternate service offerings and repackaging of certain services in order to mitigate the negative impact of FCC regulation on the Company's rate structure. Following the latest FCC rate regulation the Company intends to introduce additional marketing measures. The Company is not able to predict fully the extent of the effect any of such measures will have in mitigating the impact of rate regulation. Additionally, because the FCC has not yet released the rules establishing the specific methodologies to be used to arrive at acceptable cost of service rate structures, the Company cannot predict whether it will utilize a cost of service methodology to determine rates. 11. SUBSEQUENT EVENTS On June 21, 1994 the Company executed the First Amendment to the New Credit Agreement with the Bank of Montreal and several other banks which modifies certain restrictive covenants principally relating to financial ratios through the maturity date of the loan. 12. TAX INFORMATION (UNAUDITED) The following represents a reconciliation of the losses allocated to the partners for financial reporting purposes and that utilized for tax purposes.
YEAR ENDED DECEMBER 31, ------------------------ 1993 1992 ----------- ----------- Losses allocated to partners for financial reporting purposes............................................ $(3,871,357) $(5,578,381) Depreciation and amortization adjustments for tax purposes............................................ 2,347,793 3,004,019 Management fees and related interest................. 1,575,798 2,164,765 Interest payments on debt to affiliates.............. -- (6,459,850) Other................................................ (385,026) (173,409) ----------- ----------- Tax loss allocable to partners....................... $ (332,792) $(7,042,856) =========== =========== Tax loss allocable to general partners............... $ (3,328) $ (70,429) =========== =========== Tax loss allocated to limited partners............... $ (329,464) $(6,972,427) =========== ===========
F-136 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) BALANCE SHEET (DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, 1994 ------------- ASSETS ------ Cash and cash equivalents........................................ $ 430 Accounts receivable-subscribers (less allowance for doubtful accounts of $197)............................................... 511 Other receivables................................................ 577 Prepaid expenses................................................. 78 Prepaid franchise fees........................................... 9 Property, plant and equipment, net............................... 22,231 Deferred acquisition and development costs (less accumulated amortization of $1,393)......................................... 64 Deferred financing costs (less accumulated amortization of $1,106)......................................................... 1,868 Other intangibles (less accumulated amortization of $1,119)...... 169 Deposits and other assets........................................ 147 -------- $ 26,084 ======== LIABILITIES AND PARTNERS' DEFICIENCY ------------------------------------ Liabilities: Accounts payable and accrued expenses.......................... $ 9,523 Accounts payable to affiliates, net............................ 127 Subordinated amounts payable to affiliates..................... 22,171 Debt: Affiliates..................................................... 12,314 Other.......................................................... 73,516 -------- Total liabilities............................................ 117,651 Partners' deficiency............................................. (91,567) -------- $ 26,084 ========
See accompanying notes to financial statements F-137 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) STATEMENT OF OPERATIONS AND PARTNERS' DEFICIENCY (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994 ------------------ Revenues--net................................................ $ 25,656 Operating expenses: Technical.................................................. 10,624 Selling, general and administrative........................ 6,870 Depreciation and amortization.............................. 3,981 -------- Operating profit......................................... 4,181 -------- Other deductions: Interest expense, net...................................... 7,537 Miscellaneous.............................................. 50 -------- 7,587 -------- Net loss................................................. (3,406) Partners' deficiency: Beginning of year.......................................... (88,161) -------- End of period.............................................. $(91,567) ========
See accompanying notes to financial statements F-138 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, 1994 ------------- Cash flows from operating activities: Net loss....................................................... $(3,406) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................ 3,981 Amortization of deferred financing costs..................... 223 Amortization of prepaid franchise fees....................... 18 Gain on sale of equipment.................................... (5) Changes in asset and liabilities: Accounts receivable--subscribers........................... (105) Other receivables.......................................... (85) Prepaid expenses........................................... 60 Deposits and other assets.................................. (44) Accounts payable and accrued expenses...................... 377 Accounts payable and subordinated amounts payable to affiliates, net........................................... 4,134 ------- Total adjustments........................................ 8,554 ------- Net cash provided by operating activities................ 5,148 Cash flows from investing activities: Capital expenditures........................................... (4,550) Proceeds from sale of equipment................................ 11 ------- Net cash used in investing activities.................... (4,539) ------- Cash flows from financing activities: Proceeds from bank debt........................................ 10,635 Repayment of bank debt......................................... (2,670) Payment of capital lease obligations........................... (25) Payment of subordinated amounts payable to affiliates.......... (8,255) Additions to deferred debt financing........................... (203) ------- Net cash provided by financing activities................ (518) ------- Net increase in cash and cash equivalents........................ 91 Cash and cash equivalents at beginning of year................... 339 ------- Cash and cash equivalents at end of period....................... $ 430 =======
See accompanying notes to financial statements F-139 CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 1. THE COMPANY AND BASIS OF PRESENTATION Cablevision of Chicago (the "Company") is a limited partnership organized in January 1979, under the provisions of the Uniform Limited Partnership Act of the State of Illinois, for the purpose of constructing and operating cable television systems. The partnership will terminate December 3, 2020, unless earlier termination occurs as provided in the partnership agreement. The accompanying unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. NOTE 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS The financial statements as of September 30, 1994 and for the nine month period then ended are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the period presented. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the fiscal year ended December 31, 1993. The results of operations for the interim period are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 1994. NOTE 3. DEBT Debt at September 30, 1994 consists of : Affiliates: Subordinated demand note, bearing interest at 14%.................... $12,314 ------- Total affiliates................................................. 12,314 ------- Other: Senior bank notes: Bearing interest at 1.00% over prime rate.......................... 3,516 LIBO Rate notes.................................................... 70,000 ------- Total other...................................................... 73,516 ------- $85,830 =======
F-140 INDEPENDENT AUDITORS' REPORT MARCH 29, 1994, EXCEPT FOR NOTES 7 AND 10 AS TO WHICH THE DATE IS DECEMBER 1, 1994 The Board of Directors, United Broadcasting Company, Inc. and Subsidiaries, Bethesda, Maryland We have audited the accompanying consolidated balance sheet of United Broadcasting Company, Inc. and Subsidiaries as of December 31, 1993, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Corporations' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Broadcasting Company, Inc. and Subsidiaries as of December 31, 1993, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 10 to the financial statements, the Corporations' provision for income taxes on continuing operations previously reported as $1,077,972 should have been $1,075,580. In addition, the income from subsidiaries of continuing operations previously reported as $2,777 should have been eliminated. These discoveries were made subsequent to the issuance of the financial statements. The financial statements have been restated to reflect these corrections. Further, the amounts previously reported in Note 7 for gross revenues of the discontinued segment during 1993 and gain on the sale of assets of $51,819,460 and $34,262,364, respectively, should have been $53,800,977 and $34,257,568, respectively. Also, dollar amounts of the remaining assets and liabilities have been added to Note 7. As indicated in Note 10 to the financial statements, income from continuing operations previously reported as $874,848 should have been $1,520,689, net income from operations of discontinued segment previously reported as $620,990 should have been a loss of ($426,609), gain on disposal of segment previously reported as $19,928,856 should have been $20,330,614, and total discontinued operations previously reported as $20,549,846 should have been $19,904,005. These discoveries were made subsequent to the issuance of the financial statements. The financial statements have been restated to reflect these corrections. Councilor, Buchanan & Mitchell, P.C. Bethesda, Maryland F-141 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993
ASSETS ------ CURRENT ASSETS: Cash and Cash Equivalents (Including Certificates of Deposit, Commercial Paper and Money Market Funds of $30,265,314) (Note 1)................. $31,792,507 Investments (Municipals) (Note 1)................. 5,850,000 Accounts Receivable (Net of Allowance for Uncollectible Accounts of $177,603) (Note 1)....... 3,333,512 Notes Receivable Current (Notes 1 and 3).......... 1,000,000 Accrued Interest Receivable............... 123,743 Inventory (Note 1)........ 137,460 Deferred Tax Asset (Note 5)....................... 806,170 Prepaid Expenses Cash..................... 312,994 Trade.................... 412,314 ----------- Total Current Assets.... $43,768,700 ----------- PROPERTY AND EQUIPMENT, AT COST, LESS ACCUMULATED DEPRECIATION OF $12,796,853 (NOTES 1, 2 AND 4)......... $10,156,917 ----------- EXCESS OF COST OVER NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF $458,333 (NOTE 1).......... $ 1,518,537 ----------- OTHER ASSETS: Capitalized Legal Fees and Contract Costs (Less Accumulated Amortization of $180,981)............. $ 1,072,595 Note Receivable Long-Term (Notes 1 and 3)............ 137,934 Miscellaneous............. 27,941 ----------- Total Other Assets...... $ 1,238,470 ----------- TOTAL ASSETS................ $56,682,624 ===========
See Accompanying Notes to Consolidated Financial Statements. F-142 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable.................................................. $ 730,641 Notes Payable--Due Within One Year (Note 4)....................... 253,333 Prepaid Cable Television Revenue.................................. 480,214 Income Taxes Payable.............................................. 7,665,732 Other............................................................. 997,173 ----------- Total Current Liabilities....................................... $10,127,093 ----------- DEFERRED REVENUES (NOTE 1) Deferred Covenant Revenue......................................... $ 4,027,778 Other Deferred Revenues Cash............................................................ 53,577 Trade........................................................... 208,040 ----------- Total Deferred Revenues......................................... $ 4,289,395 ----------- LONG-TERM LIABILITIES Notes Payable--Due After One Year (Note 4)........................ $ 871,684 Deferred Income Taxes (Notes 1 and 5)............................. 9,496,166 ----------- Total Long-Term Liabilities..................................... $10,367,850 ----------- STOCKHOLDERS' EQUITY: Capital Stock--$100 Par Value, 311 Shares Authorized, 180.27 Shares Issued and Outstanding.................................... $ 18,027 Nonvoting Capital Stock--$100 Par Value, 2,000 Shares Authorized, 677.68 Shares Issued, 543.68 Shares Outstanding.................. 67,768 Additional Paid-in Capital........................................ 6,000 Retained Earnings (Exhibit C)..................................... 33,925,165 ----------- Total........................................................... $34,016,960 Less Cost of 134 Shares of Nonvoting Treasury Stock (Note 1)... 2,118,674 ----------- Total Stockholders' Equity...................................... $31,898,286 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $56,682,624 ===========
See Accompanying Notes to Consolidated Financial Statements. F-143 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993 OPERATING REVENUES: Cable Advertising: Cash.......................................................... $ 561,271 Trade......................................................... 157,848 Cable Television................................................ 11,392,974 Other (Rental, Converter Charges)............................... 497,641 ----------- Total....................................................... $12,609,734 ----------- OPERATING EXPENSES: Cash............................................................ $ 9,845,872 Trade........................................................... 124,086 ----------- Total....................................................... $ 9,969,958 ----------- Operating Income.................................................. $ 2,639,776 Other Revenues.................................................... 159,627 ----------- Income Before Interest Expense and Provision for Income Taxes..... $ 2,799,403 Interest Expense.................................................. (203,134) ----------- Income From Continuing Operations Before Provision for Income Taxes............................................................ $ 2,596,269 ----------- PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT) (NOTES 1 AND 5): Currently Payable............................................... $ 1,138,010 Deferred (Benefit).............................................. (62,430) ----------- Total Provision for Income Taxes.............................. $ 1,075,580 ----------- Income from Continuing Operations............................. $ 1,520,689 ----------- DISCONTINUED OPERATIONS (NOTE 7): Net Loss from Operations of Discontinued Segment (Net of Income Tax Benefit of $213,582)......................................... $ (426,609) Gain on Disposal of Segment (Less Applicable Income Taxes of $14,996,772)..................................................... $20,330,614 ----------- Total Discontinued Operations............................... $19,904,005 ----------- NET INCOME........................................................ $21,424,694 ===========
See Accompanying Notes to Consolidated Financial Statements. F-144 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1993 Retained Earnings, January 1....................................... $15,254,771 Net Income (Exhibit B)............................................. 21,424,694 Stock Redemption (Note 9).......................................... (2,000,172) Stock Cancellation (Note 1)........................................ (754,128) ----------- RETAINED EARNINGS, DECEMBER 31..................................... $33,925,165 ===========
See Accompanying Notes to Consolidated Financial Statements. F-145 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1993 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................ $ 21,424,694 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization................... $ 2,184,405 Trade Revenues and Expenses..................... (28,625) Gain on Sale of Assets.......................... (34,143,766) Loss from Limited Partnership................... 8,761 Changes in Assets and Liabilities: Decrease in Accounts Receivable-Affiliates and Other........................................ 606,831 Increase in Accrued Interest Receivable....... (104,261) Increase in Inventory......................... (16,744) Increase in Deferred Tax Asset................ (272,212) Decrease in Prepaid Expenses.................. 64,371 Decrease in Miscellaneous Assets.............. 30,744 Decrease in Accounts Payable.................. (350,938) Increase in Prepaid Cable Television Revenue.. 95,990 Increase in Income Taxes--Current............. 7,606,839 Decrease in Other Liabilities................. (153,027) Increase in Deferred Covenant Revenue......... 4,027,778 Decrease in Deferred Revenue.................. (11,862) Increase in Deferred Income Taxes Payable..... 8,082,434 ----------- Total Adjustments........................... ($12,373,282) ------------ Net Cash Provided by Operating Activities..... 9,051,412 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sale of Assets...................... $36,517,144 Capital Expenditures.............................. (1,594,703) Increase in Notes Receivable...................... (637,934) Purchases of Investments.......................... (22,569,400) Maturities of Investments......................... 18,104,890 ----------- Net Cash Provided by Investing Activities....... $ 29,819,997 CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments on Notes Payable............... ($8,057,083) Stock Redemptions................................. (2,001,627) ----------- Net Cash Used in Financing Activities........... ($10,058,710) ------------ Net Increase in Cash and Cash Equivalents........... 28,812,699 Cash and Cash Equivalents at Beginning of Year...... 2,979,808 ------------ Cash and Cash Equivalents at End of Year............ $ 31,792,507 ============ Cash Paid During the Year for: Interest.......................................... $ 397,538 Income Taxes...................................... $ 524,025
See Accompanying Notes to Consolidated Financial Statements. F-146 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following comments comprise the significant accounting policies the Corporations follow in preparing and presenting their financial statements. Basis of Presentation The consolidated financial statements include the accounts of United Broadcasting Company, Inc. (UBC) and Subsidiaries:
PRINCIPAL CORPORATION ACTIVITY LOCATION ----------- --------- --------------- PARENT: United Broadcasting Company, Inc................. Radio Washington, DC WHOLLY-OWNED SUBSIDIARIES: United Broadcasting Company of Eastern Maryland, Inc............................................. Radio Baltimore, MD United Broadcasting Company of New York, Inc..... Radio New York, NY Friendly Broadcasting Company.................... Radio Cleveland, OH United Television Company of New Hampshire, Inc.. Inactive Manchester, NH United Cable Company of New Hampshire, Inc....... Cable-TV Manchester, NH G. O. Enterprises, Inc........................... Cable-TV Bradford, VT Tele-Broadcasters of California, Inc............. Radio San Gabriel, CA Intercontinental Radio, Inc...................... Radio San Mateo, CA
During 1993, United Broadcasting Company of Eastern Maryland, Inc. and United Broadcasting Company of New York, Inc. were liquidated under section 332 of the Internal Revenue Code and merged into United Broadcasting Company, Inc. On December 31, 1993, United Television Company of New Hampshire, Inc. was liquidated under section 332 of the Internal Revenue Code and merged into Friendly Broadcasting Company. All significant intercompany balances and transactions between the Corporation and its subsidiaries have been eliminated in the consolidation. Cash Equivalents and Investments In accordance with Statement of Financial Accounting Standards No. 95, the Corporation considers certificates of deposit and commercial paper with original maturities to the Corporation of three months or less to be cash equivalents, and those with original maturities of more than three months to be investments. Investments are stated at cost which approximates market value. Significant Concentrations of Credit Risk Financial instruments that potentially subject the Corporation and its subsidiaries to credit risk include cash deposits, cash equivalents, temporary investments, accounts receivable and notes receivable. The cash deposits and cash equivalents are in demand and time deposit accounts, certificates of deposit, money market accounts, commercial paper and tax exempt common trust funds and are substantially all in one financial institution which is federally insured and located in the Washington, D.C., metropolitan area. The temporary investments are in municipal debt instruments under the custody of the same financial institution. The current notes receivable are unsecured and are with the same financial institution. The long-term note is secured by radio broadcasting assets and Stock of the Corporation and is with another party located in the Washington, F-147 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) D.C., area. The accounts receivable consist primarily of radio and cable advertising revenues in the areas served by the Corporation's present and former properties. Inventory Inventory is stated at cost, with cost determined under the first-in, first out method. The inventory consists of items held by United Cable Company of New Hampshire, Inc. and G. O. Enterprises, Inc. to be used in cable installations and repairs and maintenance. Excess of Cost Over Net Assets Acquired Goodwill in the amount of $976,870 in 1993, which relates to assets acquired prior to November 1, 1970, is included in excess of cost over net assets acquired and is not being amortized. Goodwill in the amount of $1,000,000 acquired subsequent to October 31, 1970, is being amortized by the straight- line method over twenty years. During 1993, goodwill in the amount of $749,112 was written off in conjunction with the sale of assets to which it related. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to depreciable assets (use of different depreciation methods and lives for financial statement and income tax purposes), allowance for doubtful receivables (deductible for financial statement purposes but not for income tax purposes), accrued vacation expense (deductible for financial statement purposes but not for income tax purposes) and initial hook-up revenues (deferred for financial statement purposes but recognized for income tax purposes). The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses and tax credits that are available to offset future taxable income. Depreciation Depreciation of property and equipment is provided for by the declining- balance and straight-line methods as follows:
ESTIMATED USEFUL LIFE ----------- Buildings...................................................... 10-33 Years Leasehold Improvements......................................... 5-33 Years Radio Broadcasting Equipment................................... 5-20 Years Cable Broadcasting Equipment................................... 5-20 Years Furniture and Equipment........................................ 5-10 Years Automobiles and Trucks......................................... 3-5 Years
Nonvoting Treasury Stock As of December 31, 1992, nonvoting treasury stock consisted of 182 shares of nonvoting capital stock which was owned by two of the Corporation's subsidiaries. As explained above, during 1993, United Broadcasting Company of Eastern Maryland, Inc. was liquidated under section 332 of the Internal Revenue Code. Consequently, 48 shares of treasury stock held by the subsidiary were canceled. As a result, nonvoting treasury stock consists of 134 shares of nonvoting capital stock as of December 31, 1993, which is owned by one of the Corporation's subsidiaries. F-148 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred Revenues The sale of the assets of one of the radio properties during 1993 was accompanied by a covenant not to compete. The deferred revenue as of December 31, 1993, associated with the covenant is being amortized over 29 months, the remaining life of the covenant. The Company intends to transfer the covenant and the related deferred revenues to a successor entity. Other deferred revenues include deferred revenues related to initial hook-up fees of the cable television operations, which are amortized by the straight- line method over five years. Deferred advertising revenues are recognized when the related services are rendered. Changes in Classification and Reclassifications Capitalized Legal Fees and Contract Costs which were previously included in Property Plant and Equipment have been reclassified to other assets. Uncollectible Accounts The allowance for uncollectible accounts is based upon estimated actual collectibility as determined by periodic management review of outstanding accounts receivable. Investment in Partnership The sale of the assets of Intercontinental Radio, Inc. (Intercontinental) during 1993 included a 25% interest in a general partnership, Mt. Diablo Group. Intercontinental accounted for its investment in the partnership under the equity method. The following is a summary of activity for 1993: Capital account, January 1, 1993................................. $ 29,739 Loss from Rental Activities...................................... (8,781) Interest Income.................................................. 20 Distribution..................................................... (20,978) -------- Capital account, December 31, 1993............................... $ -- ========
NOTE 2--PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: Land......................................................... $ 1,666,425 Buildings.................................................... 1,546,238 Leasehold Improvements....................................... 214,567 Radio Broadcasting Equipment................................. 1,027,520 Cable Television Equipment................................... 17,096,088 Furniture and Equipment...................................... 1,097,818 Automobiles and Trucks....................................... 305,114 ------------ Total Property and Equipment............................... $ 22,953,770 Less Accumulated Depreciation and Amortization............. (12,796,853) ------------ Net........................................................ $ 10,156,917 ============
Depreciation and amortization expenses in 1993 are $2,184,405. F-149 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--NOTES RECEIVABLE During 1992 and 1993, the Corporation agreed to lend $1,000,000 to NationsBank of Maryland, N.A., Trustee U/W Richard Eaton, the majority shareholder. Under the terms of the unsecured notes, interest is paid at a rate equal to the highest effective rate of interest among the per annum rates of interest in effect, either fixed rate or variable rate, under the Corporation's loan facility with American Security Bank dated May 23, 1991, calculated using the same method for calculating interest used in the loan facility. The interest income related to the notes was $52,478 and $10,163 during 1993 and 1992 respectively, all of which is outstanding. The notes are due on December 31, 1994, and the interest rate in effect as of December 31, 1993, was 6.5%. During 1993, in connection with the sale of the assets of radio station WINX, the Corporation took back a promissory note for $145,000. The note, which is from a stockholder of the Corporation, is collateralized by certain radio broadcasting assets and the Stock of the Corporation pursuant to a Pledge and Security Agreement. The note bears interest at 10%, payable monthly, commencing April 1, 1993, with the principal balance and all unpaid interest due on April 1, 1995. The principal balance has been reduced by $7,066 from the redemption of common stock. NOTE 4--NOTES PAYABLE Notes payable are as follows: TYPE OF LOAN ------------ Loans Secured by Property and Equipment: American Security Bank, Due March 31, 2001, Interest Currently floating at the Bank's Base Rate plus .25% but may be fixed for terms of 5 years at option of the Corporation, Monthly Payments of Interest Only and Quarterly Principal Installments of $13,333..................................... $ 375,017 NationsBank of Maryland Trustee U/A Richard Eaton Dated 9/11/72, Interest at the Prime Rate as published in The Wall Street Journal plus one percent (1%), Interest Payable Quarterly, Quarterly Principal Payments of $50,000 commencing July 1, 1993, with a Balloon Payment due May 15, 1995........................................................ $ 750,000 ---------- Total Notes Payable........................................ $1,125,017 Less Notes Payable--Due Within One Year.................... (253,333) ---------- Notes Payable--Due After One Year.......................... $ 871,684 ==========
The American Security Bank loan in the amount of $375,017 is secured by the land and premises on East Industrial Park Drive of United Cable Company of New Hampshire, Inc. The rate of interest as of December 31, 1993, was 6.25%. The NationsBank loan is secured by the mortgage on the property at Carlstadt, New Jersey. The rate of interest as of December 31, 1993, was 7%. The total interest expense in relation to the mortgage was $60,159 and $40,825 for 1993 and 1992 respectively. During December 1993, a six and one-half year term loan with American Security Bank was paid in full. The rate of interest was tied to the bank's base rate and varied between the bank's base rate and the bank's base rate plus one percent. F-150 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Maturities of notes payable are as follows: 1994............................................................ $ 253,333 1995............................................................ 603,333 1996............................................................ 53,333 1997............................................................ 53,333 1998............................................................ 53,333 1999 and Thereafter............................................. 108,352 ---------- Total......................................................... $1,125,017 ==========
NOTE 5--INCOME TAXES The Company's total deferred tax liabilities, deferred tax assets, and deferred tax asset valuation allowances are as follows: Total deferred tax assets..................................... $ 1,820,571 Less valuation allowance...................................... -- ----------- $ 1,820,571 Total deferred tax liabilities................................ (10,510,567) ----------- Net deferred tax liability.................................... ($8,689,996) =========== These amounts have been presented in the Company's financial statements as follows: Current deferred tax asset.................................... $ 806,170 Non-Current deferred tax liability............................ (9,496,166) ----------- Net deferred tax liability.................................... ($8,689,996) ===========
Total provision for income taxes differs from the amount that would result from applying the regular tax rates to income from continuing operations before provision for income taxes due to the Federal Alternative Minimum Tax, and state income taxes on subsidiaries having taxable income. During 1993, the Internal Revenue Service completed an examination of the Corporation's income tax returns for the years 1989, 1990 and 1991. No change to the returns resulted from this examination. NOTE 6--COMMITMENTS AND CONTINGENT LIABILITIES As previously reported, on May 28, 1987, a complaint was filed seeking declaratory and injunctive relief from the Corporation. The relief requested encompasses recognition and enforcement of Plaintiff's alleged right of first refusal with respect to the indirect sale or transfer of the assets of United Cable Company of New Hampshire, Inc. ("United Cable") by way of the sale of capital stock of United Broadcasting Company, Inc. ("United"). The parties to this action have entered into a settlement agreement as of August 27, 1993, pursuant to which the assets of United Cable are scheduled to be transferred to the Plaintiff on June 30, 1994, by way of its purchase of the stock of United. On December 29, 1992, one of the Corporation's radio stations was served with a Summons and Complaint naming that station as one of several contributory infringers in a copyright infringement claim against a recording artist and record company. In essence, the complaint alleges that a certain recording by a F-151 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) national artist broadcast on the Corporation's station infringed Plaintiff's copyright in its song. The Corporation's station broadcast the alleged infringing recording under its blanket license with the performing rights society Broadcast Music International (BMI) and thus has tendered the suit to BMI for defense and indemnification pursuant to the terms of its license. This litigation is presently in the discovery phase. According to the Corporation's counsel, the likelihood of liability for the Corporation cannot be assessed at this time. As previously reported, on or about April 2, 1993, one of the Corporation's radio stations was served with a Summons and Complaint by a former employee of that station claiming breach of employment contract, fraud and breach of the implied covenant of good faith and fair dealing against the station and its General Manager. The Corporation and the General Manager agreed to joint representation by the Corporation's outside counsel. Subsequently, the Corporation agreed to settle this matter for a nuisance value of $3,000 whereby all claims will be dismissed with prejudice as against the Corporation and the General Manager. A class action lawsuit has been filed in Superior Court of California, County of San Francisco against the Corporation, present and former employees and other non-employees. The Plaintiffs claim to have been subjected to traffic delays on the San Francisco Bay Bridge on May 26, 1993 ("Bay Bridge incident"), as a result of a certain alleged obstruction of traffic involving employees of the Corporation. They bring the suit on behalf of themselves and similarly situated individuals claiming special and general damages of not less than $4,000,000, interest, punitive damages, attorneys' fees and costs as a result of such delays. Recently, defendants moved to dismiss the second-amended complaint for failure to state a permissible cause of action. Consequently, the Court dismissed the second-amended complaint on February 14, 1994 without leave to amend. Plaintiffs may decide to appeal from the trial court's order. According to the Corporation's counsel, the outcome of any such appeal, if taken, cannot be predicted with certainty at this time. A second claim based upon the Bay Bridge incident also was filed in San Francisco Superior Court but has not to date been served upon the Corporation. This claim is on behalf of an individual claiming, among other things, damages for emotional distress. A third claim based upon the Bay Bridge incident from another individual was filed in Municipal Court. No lawsuit is currently pending, however, because the Plaintiff failed to serve the Defendants properly and the Court dismissed the action. As reported in the notes to the Consolidated Financial Statements for the year ending December 31, 1992, the litigation involving a dispute relating to insurance coverage for a previously settled third party action was settled on terms which are subject to a confidentiality provision. By virtue of this settlement, there will be no further trials or appeals of either the Complaint or Cross-complaint in that litigation. Pursuant to the terms of certain sale agreements conveying the assets of the Corporation's radio stations to various buyers, the Corporation has agreed to indemnify such buyers under various circumstances, including, but not limited to, indemnification for liability arising from the operation of the stations by the Corporation prior to sale. As a requirement of the Franchise agreement ("The Agreement") with the City of Manchester, United Cable Company of New Hampshire, Inc. is required to maintain a letter of credit in the amount of $50,000 to ensure the faithful performance of and compliance with the Agreement. The Corporation has entered into an employment agreement with its President. This agreement terminates on the earlier of (a) the date on which occurs closing of the purchase, merger, consolidation or F-152 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) otherwise of more than 50% of the voting stock of the Corporation or (b) December 31, 1994. The agreement includes the following provisions, among others: (a) payment to the President of a base salary and related benefits appropriate to the President's position in the Corporation; and (b) purchase by the Corporation in cash and promissory note payable over 24 months of any and all capital stock of the Corporation owned by the President on the date of termination. The estimated total potential commitment for future salary payments described in this paragraph is approximately $162,500 as of December 31, 1993. As of December 31, 1993, the Corporation had committed to make severance payments totaling $53,231 to certain employees of radio stations WJMO-AM and WJMO-FM. United Broadcasting Company, Inc. and its Subsidiaries are obligated as lessees under various leases for broadcast and office facilities which have remaining terms of more than one year. The leases expire on various dates from June 30, 1994, through February 29, 2009. The annual lease payments will increase in accordance with various amounts stipulated in the leases and changes in the Consumer Price Index. The minimum future annual rental commitments are as follows: 1994.............................................................. $163,360 1995.............................................................. 116,122 1996.............................................................. 79,988 1997.............................................................. 29,400 1998.............................................................. 29,400 1999 and Thereafter............................................... 298,900 -------- Total........................................................... $717,170 ========
Rental expense for 1993 was $691,940. The contingent rental expense was $62,576. NOTE 7--SALE OF CORPORATE ASSETS On March 10, 1993, the Board of Directors adopted a formal plan for the disposal of the radio broadcasting segment of the Corporation's business. As of December 31, 1993, the assets of radio stations WJZE (Washington, D.C.), WERQ- AM and WERQ-FM (Baltimore, MD), WINX (Rockville, MD) and KSOL (San Mateo, CA) had been sold. On February 17, 1994, the assets of radio stations WJMO-AM and WJMO-FM (Cleveland, OH) were sold. As of the date of the auditors' report, contracts are pending or letters of intent have been signed with respect to the sales of the assets of the remaining stations, for which closing is estimated to occur by August 31, 1994. Gross revenues of the discontinued segment during 1993 were $53,800,977, which include $34,257,568 resulting from the gain on the sale of assets. The remaining assets in the amount of $44,103,365 which excludes the investment in United Cable of New Hampshire, Inc. and liabilities in the amount of $20,931,834 of the discontinued segment consist principally of cash and cash equivalents, accounts receivable, prepaid expenses, notes receivable, deferred tax assets, radio broadcasting equipment, accounts payable, notes payable, deferred revenues, current and deferred income taxes payable and accrued expenses. Pursuant to a Stock Purchase Agreement dated August 27, 1993, by and between the Shareholders of the Company and Continental Cablevision, Inc., the Management of the Company intends to transfer all Non-United Cable Company of New Hampshire, Inc. assets and liabilities to a successor entity. F-153 UNITED BROADCASTING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--EMPLOYEES' PROFIT SHARING PLAN United Broadcasting Company, Inc. and Subsidiaries, with the exception of United Television Company of New Hampshire, Inc., have in effect a defined contribution profit sharing plan for all employees who meet eligibility requirements. Pursuant to collective bargaining, current union employees are not participants in the Profit Sharing Plan. Currently, contributions to the Profit Sharing Plan are made solely by the Company and are at the discretion of the Board of Directors. The total contribution to the plan for 1993, which was funded in January 1994, was $400,000. All funds are held by a bank as trustee under the trust agreement. There is no unfunded liability. The Corporation has reserved the right to modify, amend, or terminate the plan. In the event of termination, the entire amount contributed and the accumulated earnings under the plan must be applied to the payment of benefits to the participants or their beneficiaries. NOTE 9--REDEMPTION OF CAPITAL STOCK During 1993, UBC redeemed 3.63 shares of voting and 10.92 shares of nonvoting capital stock for $2,000,000. Under Maryland law, corporations may not reflect treasury stock on their balance sheets. Accordingly, the par value of voting and nonvoting capital stock issued has been reduced by $1,455, and retained earnings has been reduced for the remainder of the redemption price plus legal fees of $1,627 incurred in connection with the redemption. NOTE 10--RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of the financial statements, the allocation of taxes between continuing and discontinued operations has changed. Taxes on continuing operations decreased by $2,392 and correspondingly taxes on discontinued operations increased by the same amount. In addition, the income from subsidiaries of continuing operations has been eliminated. Subsequent to the issuance of the financial statements, the results of operations of the discontinued segment from January 1, 1993, to March 10, 1993, have been reclassified from continuing operations to net loss from operations of discontinued segment. In addition, the results of operations of the discontinued segment from March 10, 1993, to December 31, 1993, have been reclassified to gain on disposal of segment. F-154 ANNEX I AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER BY AND AMONG PROVIDENCE JOURNAL COMPANY, THE PROVIDENCE JOURNAL COMPANY, KING HOLDING CORP., KING BROADCASTING COMPANY, AND CONTINENTAL CABLEVISION, INC. DATED AS OF NOVEMBER 18, 1994 I-1 TABLE OF CONTENTS ARTICLE 1. The Merger 1.1 The Merger.......................................................... 6 1.2 Effect of the Merger on Capital Stock............................... 7 1.3 Dissenters' Rights.................................................. 8 1.4 Adjustment.......................................................... 9 1.5 Effective Time of the Merger........................................ 9 1.6 Exchange of Certificates............................................ 9 Distribution with Respect to Shares Represented by Unexchanged 1.7 Certificates........................................................ 10 1.8 No Fractional Shares................................................ 11 1.9 No Liability........................................................ 11 1.10 Lost Certificates................................................... 11
ARTICLE 2. Certain Pre-Merger Transactions 2.1 New Indebtedness..................................................... 12 2.2 Kelso Acquisition.................................................... 12 2.3 Dissolution of Holding............................................... 12 2.4 Dissolution of the Company........................................... 12 2.5 Contribution of Assets to and Assumption of Liabilities by NPJ; Distribution of NPJ Common Stock.................................... 13 2.6 Certain Other Actions................................................ 14
ARTICLE 3. Representations and Warranties Regarding the Company, NPJ, Holding and Broadcasting 3.1 Organization; Authority; Company/Kelso Agreement..................... 14 3.2 No Breach or Conflict................................................ 15 3.3 Consents and Approvals............................................... 15 3.4 Approval of the Boards; Fairness Opinions............................ 16 3.5 Vote Required........................................................ 16 3.6 Capitalization....................................................... 16 3.7 Financial Statements................................................. 17 3.8 Absence of Undisclosed Liabilities................................... 17 3.9 Absence of Certain Changes........................................... 17 3.10 Compliance With Laws................................................. 17 3.11 Tax Matters.......................................................... 18 3.12 Litigation........................................................... 18 3.13 Employee Benefits; ERISA Matters..................................... 18 3.14 Full Disclosure...................................................... 19 3.15 Brokers and Finders.................................................. 19
I-2 ARTICLE 4. Representations and Warranties Regarding the Cable Subsidiaries 4.1 Organization and Authority........................................... 20 4.2 No Breach or Conflict................................................ 20 4.3 Capitalization....................................................... 20 4.4 Financial Statements................................................. 20 4.5 Absence of Undisclosed Liabilities................................... 21 4.6 Absence of Certain Changes........................................... 21 4.7 Compliance with Laws................................................. 21 4.8 Franchises and Material Agreements................................... 21 4.9 Title to Properties; Encumbrances.................................... 23 4.10 Labor Matters........................................................ 23 4.11 Litigation........................................................... 23 4.12 Employee Benefits; ERISA Matters..................................... 24
ARTICLE 5. Representations and Warranties of Acquiror 5.1 Organization and Authority........................................... 26 5.2 No Breach or Conflict................................................ 27 5.3 Consents and Approvals............................................... 27 5.4 Approval of the Board................................................ 27 5.5 Vote Required........................................................ 27 5.6 Capitalization....................................................... 28 5.7 Financial Statements................................................. 28 5.8 Absence of Undisclosed Liabilities................................... 28 5.9 Absence of Certain Changes........................................... 29 5.10 Compliance with Laws................................................. 29 5.11 Franchises and Material Agreements................................... 29 5.12 Tax Matters.......................................................... 30 5.13 Litigation........................................................... 31 5.14 Title to Properties; Encumbrances.................................... 31 5.15 Employee Benefits; ERISA Matters..................................... 31 5.16 Labor Matters........................................................ 34 5.17 Full Disclosure...................................................... 34 5.18 Brokers and Finders.................................................. 34
ARTICLE 6. Other Agreements 6.1 No Solicitation....................................................... 34 6.2 Conduct of Business of the Company; Ownership of Cable Subsidiaries... 35 6.3 Conduct of Business of the Cable Subsidiaries......................... 36 6.4 Conduct of Business of Acquiror....................................... 38 6.5 Access to Information................................................. 38 6.6 SEC Filings........................................................... 38 6.7 Reasonable Best Efforts............................................... 41
I-3 6.8 Public Announcements................................................. 41 6.9 Board Recommendation................................................. 41 6.10 Tax Matters.......................................................... 42 6.11 Notification......................................................... 44 6.12 Employee Benefits.................................................... 45 6.13 Meeting of Stockholders of the Company; Other Agreements............. 47 6.14 Meeting of Stockholders of Acquiror.................................. 47 6.15 Regulatory and Other Authorizations.................................. 48 6.16 Further Assurances................................................... 48 6.17 Internal Revenue Service Ruling...................................... 49 6.18 Records Retention.................................................... 49 6.19 No Related Party Agreements with NPJ................................. 49 6.20 Company Name......................................................... 49 6.21 Undertakings Relating to a Public Offering; Registration Rights...... 50 6.22 Matters Relating to Shareholders and Liquidity....................... 50 6.23 Acquiror Board of Directors.......................................... 51 6.24 Effect of Certain Events............................................. 51 6.25 Acquiror Schedules................................................... 52 6.26 Employee Stock Options............................................... 52 6.27 Rights Plan.......................................................... 52
ARTICLE 7. Closing and Closing Date; Conditions to Closing 7.1 Closing and Closing Date............................................. 53 Conditions to the Obligations of the Company, NPJ, Holding, 7.2 Broadcasting and Acquiror............................................ 53 Conditions to the Obligations of the Company, NPJ, Holding and 7.3 Broadcasting......................................................... 54 7.4 Conditions to Obligations of Acquiror................................ 54
ARTICLE 8. Termination 8.1 Termination........................................................... 56 8.2 Effect of Termination................................................. 57 8.3 Fees and Expenses..................................................... 57
ARTICLE 9. Survival; Indemnification 9.1 Survival.............................................................. 58 9.2 Indemnification by NPJ................................................ 59 9.3 Indemnification by Acquiror........................................... 59 9.4 Indemnification by the Company........................................ 59 9.5 Additional Indemnification Relating to Certain Litigation and Claims.. 59 9.6 Notification of Claims................................................ 59 9.7 Indemnification Procedures............................................ 60 9.8 Working Capital Adjustment............................................ 60
I-4 ARTICLE 10. Miscellaneous 10.1 Entire Agreement.................................................... 61 10.2 Notices............................................................. 61 10.3 Governing Law....................................................... 62 10.4 Descriptive Headings................................................ 62 10.5 Parties in Interest................................................. 62 10.6 Counterparts........................................................ 62 10.7 Expenses............................................................ 62 10.8 Personal Liability.................................................. 63 10.9 Binding Effect; Assignment.......................................... 63 10.10 Amendment........................................................... 63 10.11 Extension; Waiver................................................... 63 10.12 Legal Fees; Costs................................................... 63 10.13 Specific Performance................................................ 63 10.14 Severability........................................................ 63 10.15 Further Agreements Relating to the Original Agreement............... 63
ARTICLE 11. Definitions EXHIBITS Exhibit A Certificate of Designation Relating to Acquiror Preferred Stock Exhibit B Form of Contribution and Assumption Agreement Exhibit C Voting Agreement Exhibit D Non-Competition Agreement I-5 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER This Amended and Restated Agreement and Plan of Merger (this "Agreement"), dated as of November 18, 1994, is made by and among Providence Journal Company, a Rhode Island corporation (the "Company"), The Providence Journal Company, a Delaware corporation and a wholly owned subsidiary of the Company ("NPJ"), King Holding Corp., a Delaware corporation ("Holding"), King Broadcasting Company, a Washington corporation ("Broadcasting"), and Continental Cablevision, Inc., a Delaware corporation ("Acquiror"). RECITALS WHEREAS, the Company, NPJ and Acquiror have entered into that certain Agreement and Plan of Merger dated as of November 18, 1994 (the "Original Agreement"); WHEREAS, as contemplated by the terms of the Original Agreement, the parties have agreed to amend and restate the Original Agreement and to enter into this Amended and Restated Agreement and Plan of Merger; WHEREAS, the Boards of Directors of the Company, NPJ, Holding, Broadcasting and Acquiror each have determined that it is in the best interests of their respective stockholders for (i) Holding to contribute to Broadcasting all of the assets of Holding and, in connection therewith, Broadcasting to assume all of the obligations and liabilities of Holding in exchange for shares of the common stock of Broadcasting (the "Holding Contribution"); (ii) Holding to be dissolved under applicable Delaware law such that the sole remaining asset of Holding, consisting of shares of Broadcasting common stock, becomes an asset of the Company as Holding's sole stockholder (the "Holding Dissolution"); (iii) the Company (following the Holding Dissolution) to contribute to Broadcasting all of the assets of the Company and, in connection therewith, Broadcasting to assume all of the obligations and liabilities of the Company in exchange for shares of the common stock of Broadcasting; (iv) the Company to be dissolved under applicable Rhode Island law, and the sole remaining asset of the Company, consisting of shares of Broadcasting's common stock of the same class and consisting of the same number of shares as that outstanding for the Company immediately prior to such dissolution, to be distributed to holders of the Company Common Stock in proportion to the class and number of shares of the Company Common Stock so owned by such holders; (v) Broadcasting (following such dissolution) to contribute to NPJ substantially all of the assets then held by Broadcasting (other than those assets described in the Contribution Agreement as being retained by Broadcasting) and to distribute to its stockholders the outstanding shares of NPJ Common Stock so that the stockholders of Broadcasting will become the stockholders of NPJ; and (vi) Broadcasting (immediately following all of the events described above) to merge with and into Acquiror, as a result of which the stockholders of Broadcasting immediately prior to such merger will become stockholders of Acquiror; and WHEREAS, for federal income tax purposes, it is intended that such transactions will variously qualify as tax-free dissolutions, liquidations and reorganizations as provided in the Code. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties and agreements set forth below, the parties hereto agree as follows: ARTICLE 1. THE MERGER 1.1 THE MERGER. Subject to the terms and conditions hereof, at the Effective Time, (i) Broadcasting shall be merged with and into Acquiror (the "Merger"), and the separate existence of Broadcasting shall cease and Acquiror shall continue as the surviving corporation in the Merger (the "Surviving Corporation"), I-6 (ii) the Acquiror Restated Certificate, as in effect immediately prior to the Effective Time, shall continue as the Certificate of Incorporation of the Surviving Corporation, (iii) the Acquiror Restated By-Laws, as in effect immediately prior to the Effective Time, shall continue as the By-Laws of the Surviving Corporation, and (iv) the officers and directors of Acquiror immediately prior to the Effective Time shall continue as the officers and directors of the Surviving Corporation (except that the two persons listed on Schedule 1.1 shall be appointed or elected as directors (of the Class of directors specified on such Schedule) of the Surviving Corporation), each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation. From and after the Effective Time, the Merger will have all the effects provided by applicable Law. Prior to the Closing Date, the Company shall have the right to change the persons listed on Schedule 1.1 by written notice to Acquiror, in which case said Schedule 1.1 shall be amended to reflect the names of such persons, PROVIDED, that such persons shall be reasonably satisfactory to Acquiror and its Board of Directors. 1.2 EFFECT OF THE MERGER ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock: (a) Each share of Broadcasting Common Stock issued and outstanding immediately prior to the Merger (subject to paragraph (g) of this Section 1.2 and Section 1.3 and except shares subject to Section 1.2(b)) shall be converted into and shall become (i) that number equal to the Common Stock Conversion Number of fully paid and nonassessable shares of Acquiror Class A Common Stock, and (ii) if Acquiror elects to issue Acquiror Preferred Stock pursuant to paragraph (f) of this Section 1.2, that number equal to the Preferred Stock Conversion Number of fully paid and nonassessable shares of Series B Cumulative Redeemable Preferred Stock of Acquiror, the terms of which shall be substantially the same as those set forth in the Certificate of Designation attached hereto as EXHIBIT A ("Acquiror Preferred Stock"). (b) Each share of the capital stock of Broadcasting issued and outstanding immediately prior to the Merger and owned directly or indirectly by Broadcasting as treasury stock, by NPJ or by any of their respective Subsidiaries shall be cancelled, and no consideration shall be delivered in exchange therefor. (c) Each share of the capital stock of Acquiror issued and outstanding immediately prior to the Merger shall remain outstanding. (d) "Common Stock Conversion Number" shall mean the quotient obtained by dividing (i) the difference between the Maximum Common Stock Amount and the Preferred Stock Amount by (ii) the product obtained by multiplying $485.00 times the number of shares of Company Common Stock issued and outstanding immediately prior to the Dissolution (excluding shares of Company Common Stock owned directly or indirectly by the Company as treasury stock or by any of its Subsidiaries). (e) "Preferred Stock Conversion Number" shall mean the quotient obtained by dividing (i) the Preferred Stock Amount by (ii) the product obtained by multiplying $485.00 times the number of shares of Company Common Stock issued and outstanding immediately prior to the Dissolution (excluding shares of Company Common Stock owned directly or indirectly by the Company as treasury stock or by any of its Subsidiaries). (f) "Preferred Stock Amount" shall mean the aggregate issue price of shares of Acquiror Preferred Stock to be issued by Acquiror in connection with the Merger, if any, and shall equal $0 if Acquiror, at its sole option, determines not to issue any Acquiror Preferred Stock in connection with the Merger, or $96,750,000 if Acquiror, at its sole option, determines to issue Acquiror Preferred Stock in connection with the Merger; PROVIDED, HOWEVER, that Acquiror shall notify the Company of its determination as to whether or not it will issue Acquiror Preferred Stock in connection with the Merger no later than thirty days prior to the mailing of the Joint Proxy Statement/Prospectus to the stockholders of the Company. (g) The parties hereto agree that, if Acquiror elects to issue Acquiror Preferred Stock in connection with the Merger, the Joint Proxy Statement/Prospectus may, at the Company's option, grant to the Company's stockholders the right to elect, subject to the proviso in the immediately following sentence (the "Preferred Stock Election"), between the percentage of Acquiror Class A Common Stock and I-7 Acquiror Preferred Stock which such stockholder shall be entitled to receive in respect of each share of Broadcasting Common Stock held by such stockholder (for example, subject to the proviso in the immediately following sentence, a stockholder may elect to receive all Acquiror Class A Common Stock or all Acquiror Preferred Stock in respect of each share of Company Common Stock owned by such stockholder on the date of the Preferred Stock Election). Any holder of Company Common Stock who fails to make such election will be deemed to have elected to receive all Acquiror Class A Common Stock. Notwithstanding the provisions of paragraph (a) of this Section 1.2, the amount of Acquiror Class A Common Stock and Acquiror Preferred Stock (if any) issued in respect of a share of Broadcasting Common Stock pursuant to paragraph (a) of this Section 1.2 shall be adjusted to give effect to the election by the holder of each share of Company Common Stock (which election shall be binding upon any and all subsequent transferees of such share and the holder of shares of Broadcasting Common Stock issued in respect of such share pursuant to the Dissolution); PROVIDED, HOWEVER, (i) if the stockholders of the Company elect to receive shares of Acquiror Preferred Stock having an aggregate value of less than the Preferred Stock Amount (the difference between such amounts being referred to herein as the "Shortfall Amount"), then, in addition to any shares of Acquiror Preferred Stock issued to each such stockholder as a result of such stockholder's election, shares of Acquiror Preferred Stock having an aggregate value equal to the Shortfall Amount shall be issued to all holders of the Broadcasting Common Stock, pro rata in accordance with the percentage of Broadcasting Common Stock held by each such holder at the Effective Time, and (ii) the maximum amount of Acquiror Preferred Stock to be issued by Acquiror pursuant to the Merger shall in no event exceed the Preferred Stock Amount, so that if the Company's stockholders elect to receive shares of Acquiror Preferred Stock having an aggregate value in excess of the Preferred Stock Amount, then the shares of Acquiror Preferred Stock a stockholder shall receive in the Merger shall be reduced proportionately (based upon the amount of Acquiror Preferred Stock elected by such stockholder as compared to the amount of Acquiror Preferred Stock elected by all stockholders) and the shares of Acquiror Class A Common Stock such stockholder shall receive shall be correspondingly increased. 1.3 DISSENTERS' RIGHTS. The holder of any shares of Company Common Stock outstanding immediately prior to the Dissolution which has validly exercised such holder's dissenter's rights, if any, under the Rhode Island Business Corporations Act ("Dissenting Shares") shall not be entitled to receive, in respect of the shares of Company Common Stock as to which such holder has validly exercised dissenters' rights, shares of Broadcasting Common Stock or, in turn, Acquiror Merger Securities and shall not be entitled to receive shares of NPJ Common Stock pursuant to the Distribution 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 Company Common Stock under the Rhode Island Business Corporations Act. In such event, such holder shall be entitled to receive the Transaction Securities such holder would have been entitled to had such holder not exercised dissenters' rights. The Company shall give Acquiror prompt notice upon receipt by the Company (i) prior to or at the meeting of stockholders at which the Merger Transactions is voted upon of any written objection to the Merger Transactions (any stockholder duly making such objection being hereinafter called a "Dissenting Stockholder") and (ii) any other notices or communications made after such time by a Dissenting Stockholder which pertains to dissenters' rights. The Company and Broadcasting each agrees that prior to the Effective Time, except with the written consent of Acquiror, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand. Each Dissenting Stockholder who becomes entitled under the Rhode Island Business Corporations Act to payment for such holder's shares of Company Common Stock shall receive payment therefor after the Effective Time from the Surviving Corporation, and NPJ shall reimburse the Surviving Corporation for all payments to Dissenting Stockholders in respect of their shares of Company Common Stock, PROVIDED THAT the amounts thereof shall have been agreed upon by the Surviving Corporation, NPJ and the Dissenting Stockholders or finally determined pursuant to the Rhode Island Business Corporations Act. Any Acquiror Merger Securities that would have been issued to Dissenting Stockholders had they not exercised their dissenters' rights shall be issued to NPJ after NPJ's reimbursement of all payments made by the Surviving Corporation to such Dissenting Stockholders in respect of their shares of Company Common Stock. In the event that, as a result of the I-8 Merger Transactions, the holders of Company Common Stock or Broadcasting Common Stock become entitled to avail themselves of the Laws of any state other than Rhode Island with respect to appraisal or dissenters' rights, the parties hereto, to the extent permitted by applicable Law, agree to abide by the provisions of this Section 1.3 in connection with any such holder claiming dissenters' rights thereunder. 1.4 ADJUSTMENT. (a) If between November 18, 1994 and the Effective Time the outstanding shares of Acquiror Common Stock, Acquiror Series A Preferred Stock or Company Common Stock shall have been changed into a different number of shares (other than in the case of Company Common Stock) or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, (i) the number of shares of Broadcasting Common Stock to be converted into Acquiror Merger Securities or the number of Acquiror Merger Securities into which Broadcasting Common Stock is to be converted, as applicable, and (ii) the amounts set forth in Section 1.8 hereof with respect to the calculation of cash payments in lieu of fractional shares and Section 6.23(b) with respect to the determination whether a transaction will be considered an "Extraordinary Transaction" as a result of the per share price of Acquiror Class A Common Stock, shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. (b) If at the Effective Time any of the Cable Subsidiaries set forth below are not wholly owned, directly or indirectly, by Broadcasting, the Maximum Common Stock Amount shall be decreased as follows: (i) if Copley/Colony, Inc. is not then wholly owned by Broadcasting, the Maximum Common Stock Amount shall be reduced by $42,610,000; (ii) if Vision Cable Company of Rhode Island, Inc. is not then wholly owned by Broadcasting, the Maximum Common Stock Amount shall be reduced by $2,430,000; (iii) if Dynamic Cablevision of Florida, Ltd. is not then wholly owned by Broadcasting, the Maximum Common Stock Amount shall be reduced by $11,300,000; and (iv) if California CATV Partners is not then wholly owned by Broadcasting, the Maximum Common Stock Amount shall be reduced by $1,490,000. 1.5 EFFECTIVE TIME OF THE MERGER. Subject to the terms and conditions set forth in this Agreement, a certificate of merger shall be duly prepared, executed and acknowledged by Acquiror and Broadcasting and thereafter delivered to the Secretary of State of Delaware and articles of merger shall be duly prepared, executed and acknowledged by Acquiror and Broadcasting and thereafter delivered to the Secretary of State of Washington (together, the "Certificate of Merger") for filing pursuant to the Delaware General Corporation Law and the Washington Business Corporation Act, respectively, as soon as practicable after the Closing Date. The Merger shall become effective upon the date (the "Effective Date") and at the time of the filing of the Certificate of Merger with such Secretaries of State or at such later time in accordance with the provisions of applicable Law as specified in the Certificate of Merger (the "Effective Time"). 1.6 EXCHANGE OF CERTIFICATES. (a) By no later than ten (10) days prior to the Closing Date, the Company shall retain a bank or trust company reasonably acceptable to Acquiror to act as exchange agent (the "Exchange Agent") in connection with the delivery of shares of NPJ Common Stock pursuant to the Distribution and the surrender of certificates evidencing, in accordance with Section 2.4(c) hereof, shares of Broadcasting Common Stock converted into Acquiror Merger Securities pursuant to the Merger. Prior to the Closing Date, (i) NPJ shall deposit with the Exchange Agent the shares of NPJ Common Stock to be issued in the Distribution and (ii) Acquiror shall deposit with the Exchange Agent the amount of Acquiror Merger Securities to be issued in the Merger, all of which Acquiror Merger Securities shall be deemed to be issued at the Effective Time. At and following the Effective Time, the Surviving Corporation shall deliver to the Exchange Agent such cash I-9 as may be required from time to time to make payment of cash in lieu of fractional shares in accordance with Section 1.8 hereof. (b) As soon as practicable after the Effective Time, NPJ and Acquiror shall instruct the Exchange Agent to mail to each Person who was, at the Effective Time, a holder of record of a certificate or certificates that, in accordance with Section 2.4(c), immediately prior to the Effective Time evidenced outstanding shares of Broadcasting Common Stock (the "Certificates") other than Broadcasting, NPJ or any of their respective Subsidiaries, (i) a letter of transmittal (which shall specify that delivery of the Certificates shall be effective, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and shall have such other provisions as Acquiror and NPJ shall reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing the Transaction Securities. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent(s) as may be appointed by NPJ and reasonably acceptable to Acquiror, together with such letter of transmittal, duly executed and such other documents as may be required by the Exchange Agent or such other agent(s), the holder of such Certificate shall be entitled to receive in exchange therefor the number of Transaction Securities that such holder has the right to receive pursuant to the terms hereof (together with any cash paid in lieu of fractional shares pursuant to Section 1.8), and the Certificate so surrendered shall be cancelled. In the event of a transfer of ownership of Company Common Stock that is not registered in the stock transfer records of the Company, the proper number of Transaction Securities may be issued to a transferee if the Certificate representing such Broadcasting Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence reasonably satisfactory to NPJ and Acquiror that any applicable stock transfer tax has been paid. (c) After the Effective Time, each outstanding Certificate which theretofore, in accordance with Section 2.4(c), represented shares of Broadcasting Common Stock shall, until surrendered for exchange in accordance with this Section 1.6, be deemed for all purposes to evidence solely the right to receive the Merger Securities to which such Certificate is entitled pursuant to the Merger. (d) Except as otherwise expressly provided herein, the Surviving Corporation and NPJ shall share equally in the payment of all charges and expenses, including those of the Exchange Agent, in connection with the exchange of shares of Broadcasting Common Stock for Transaction Securities. Any Transaction Securities deposited with the Exchange Agent that remain unclaimed by the former stockholders of Broadcasting after six months following the Effective Time shall be delivered to the Surviving Corporation or NPJ, as applicable (as the context may require, the "Issuer") upon demand and any former stockholders of Broadcasting who have not then complied with the instructions for exchanging their Certificates shall thereafter look only to the Issuer for exchange of Certificates. (e) Effective upon the Closing Date, the stock transfer books of the Company and Broadcasting shall be closed, and there shall be no further registration of transfers of shares of Company Common Stock or Broadcasting Common Stock, as the case may be, thereafter on the records of the Company and Broadcasting (other than as a result of the Dissolution). (f) All Acquiror Merger Securities issued upon conversion of shares of Broadcasting Common Stock and NPJ Common Stock distributed pursuant to the Distribution, each in accordance with the terms hereof, shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Broadcasting Common Stock. 1.7 DISTRIBUTION WITH RESPECT TO SHARES REPRESENTED BY UNEXCHANGED CERTIFICATES. No dividend or other distribution declared or made (i) after the Distribution by NPJ with respect to shares of NPJ Common Stock issued pursuant to the Distribution with a record date after the Distribution or (ii) after the Effective Time by the Surviving Corporation with respect to the Acquiror Merger Securities with a record date after the I-10 Effective Time, shall be paid to the holder of any unsurrendered Certificate with respect to any shares of NPJ Common Stock distributed pursuant to the Distribution or any of the Acquiror Merger Securities issuable upon surrender of a Certificate until the holder of such Certificate shall surrender such Certificate in accordance with Section 1.6. Subject to the effect of applicable Law, following surrender of any such Certificate there shall be paid, without interest, by the Surviving Corporation or NPJ, as the case may be, to the record holder of Transaction Securities issued in exchange therefor: (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Distribution or the Effective Time, as the case may be, theretofore paid by NPJ or the Surviving Corporation, as the case may be, with respect to such Transaction Securities; and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date declared by NPJ or the Surviving Corporation, as the case may be, after the Distribution or the Effective Time, as the case may be, but prior to surrender of such Certificate and a payment date subsequent to such surrender payable with respect to such Transaction Securities. No interest shall be paid on any of the Transaction Securities. 1.8 NO FRACTIONAL SHARES. (a) No fraction of a share of Acquiror Class A Common Stock or of Acquiror Preferred Stock shall be issued upon surrender of Certificates pursuant to Section 1.6. In lieu of any such fractional interests, each holder of Broadcasting Common Stock entitled to receive Acquiror Merger Securities pursuant to the Merger shall be entitled to receive an amount in cash (without interest), rounded to the nearest cent, determined by multiplying $485.00 by the fractional interest in the share of Acquiror Class A Common Stock or Acquiror Preferred Stock, as the case may be, to which such holder would otherwise be entitled (after taking into account all shares of Acquiror Common Stock and Acquiror Preferred Stock such holder is entitled to receive pursuant to the Merger). (b) Immediately prior to the Effective Time, Acquiror shall deposit with the Exchange Agent cash in the required amounts and the Exchange Agent will pay such amounts without interest to such holders; PROVIDED, HOWEVER, that no such amount will be paid to any holder of Certificates prior to the surrender by such holder of such holder's Certificates. Any such amounts that remain unclaimed by the former stockholders of Broadcasting after six months following the Effective Time shall be delivered to the Surviving Corporation by the Exchange Agent upon demand and any former stockholders of Broadcasting who have not then surrendered their Certificates shall thereafter look only to the Surviving Corporation for payment in lieu of any fractional interests. 1.9 NO LIABILITY. None of Acquiror, NPJ, the Company, Holding or Broadcasting will be liable to any holder of shares of Broadcasting Common Stock for any shares of Transaction Securities, dividends or distributions with respect thereto or cash payable in lieu of fractional shares delivered to a state abandoned property administrator or other public official pursuant to any applicable abandoned property, escheat or similar law. 1.10 LOST CERTIFICATES. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Transaction Securities (and any dividend or distribution with respect thereto made after the Distribution or the Effective Time and prior to such issuance and any cash payable in lieu of fractional shares pursuant to Section 1.8) deliverable in respect thereof as determined in accordance with the terms hereof. When authorizing such payment in exchange for any lost, stolen or destroyed Certificate, the Person to whom the Transaction Securities are to be issued, as a condition precedent to the issuance thereof, shall give the Issuer a bond satisfactory to the Issuer against any claim that may be made against the Issuer with respect to the Certificate alleged to have been lost, stolen or destroyed. I-11 ARTICLE 2. CERTAIN PRE-MERGER TRANSACTIONS The following transactions shall occur on or prior to the Effective Time: 2.1 NEW INDEBTEDNESS. (a) Prior to the Holding Contribution, Acquiror and the Company shall use their reasonable best efforts to cooperate in obtaining for the Company, Broadcasting and/or one or more Cable Subsidiaries financing (the "New Company Debt") in a minimum principal amount equal to Seven Hundred Fifty-Five Million Dollars ($755,000,000). The New Company Debt shall be on terms which fall within the parameters of those set forth on Schedule 2.1 attached hereto. After the New Company Debt becomes available to the Company and such other borrowers and immediately prior to the Holding Contribution, the Company or such other borrowers shall draw down $755,000,000 of the New Company Debt in order to, among other things, finance the acquisition described in Section 2.2, finance the acquisition of interests not owned, directly or indirectly, by the Company in the Persons identified in Section 1.4(b) hereof and repay the existing indebtedness of the Company and Broadcasting. (b) Prior to the Effective Time, the Company or NPJ shall obtain financing, which shall be the sole obligation of NPJ and its Subsidiaries after the Contribution (the "NPJ Debt"), in a minimum principal amount equal to Two Hundred Million Dollars ($200,000,000). After the NPJ Debt becomes available to the Company or NPJ and immediately prior to the Distribution, the Company or NPJ, as the case may be, shall draw down at least $200,000,000 of the NPJ Debt in order to, among other things, finance certain of the transactions described in the last sentence of Section 2.1(a) as to which the New Company Debt is insufficient to fund. 2.2 KELSO ACQUISITION. Prior to the Holding Contribution, the Company or Holding shall acquire from Kelso Investment Associates IV, L.P., Kelso Partners IV, L.P. and Kelso Equity Partners II, L.P., each a Delaware limited partnership (collectively, the "Kelso Partnerships"), all shares of capital stock and other interests owned of record or beneficially by the Kelso Partnerships in Holding (the "Kelso Interests") in accordance with the terms of the Company/Kelso Agreement. As a result of such acquisition, Holding will be a wholly owned subsidiary of the Company. 2.3 DISSOLUTION OF HOLDING. (a) Following the Holding Contribution, Holding shall contribute and transfer to Broadcasting all of Holding's right, title and interest in and to any and all assets then held by Holding, whether tangible or intangible and whether fixed, contingent or otherwise, in exchange for one hundred (100) shares of Broadcasting Class A Common Stock. In consideration for such contribution and transfer and concurrently therewith, Broadcasting shall assume any and all liabilities of Holding, whether fixed, contingent or otherwise. (b) Immediately following the Holding Contribution and prior to the Holding Dissolution, Holding shall cease to do business and shall be dissolved in accordance with Sections 275 ET. SEQ. of the Delaware General Corporation Law. As a result of the Holding Dissolution, the sole remaining asset of Holding, consisting of one hundred (100) shares of Broadcasting Class A Common Stock, shall become an asset of the Company as the sole shareholder of the capital stock of Holding. The distribution of shares of Broadcasting Class A Common Stock pursuant to the Holding Dissolution shall be in exchange solely for, and in complete redemption and cancellation of, and in payment for, all outstanding shares of capital stock of Holding. 2.4 DISSOLUTION OF THE COMPANY. (a) Following the Holding Dissolution and prior to the Contribution, the Company shall contribute and transfer to Broadcasting all of the Company's right, title and interest in and to any and all assets then held by the Company, whether tangible or intangible and whether fixed, contingent or otherwise, including the I-12 stock of all Subsidiaries of the Company (including, without limitation, all of the outstanding capital stock of Broadcasting), in exchange for shares of Broadcasting Class A Common Stock and Broadcasting Class B Common Stock in amounts equal to shares of such Broadcasting Common Stock the Company will distribute to its stockholders in accordance with paragraph (b) below. In consideration for such contribution and transfer and concurrently therewith, Broadcasting shall assume any and all liabilities of the Company, whether fixed, contingent or otherwise. (b) Immediately following such contribution and transfer and prior to the Contribution, the Company shall cease to do business and shall be dissolved in accordance with Sections 7-1.1-77, ET. SEQ., of the Rhode Island Business Corporations Act. The contribution, assumption and dissolution contemplated by this Section 2.4 are hereinafter referred to as the "Dissolution". Subject to Section 1.3 hereof, as a result of the Dissolution, the sole remaining asset of the Company, consisting of shares of Broadcasting Common Stock of the same class and consisting of the same number of shares of each such class as that outstanding for the Company immediately prior to the Dissolution, shall be distributed to the holders of Company Common Stock so that one fully paid and nonassessable share of Broadcasting Class A Common Stock will be distributed to the holder of each share of Company Class A Common Stock outstanding immediately prior to the Dissolution and one fully paid and nonassessable share of Broadcasting Class B Common Stock will be distributed to the holder of each share of Company Class B Common Stock outstanding immediately prior to such Dissolution. Subject to Section 1.3 hereof, the distribution of shares of Broadcasting Common Stock pursuant to the Dissolution shall be in exchange solely for, and in complete redemption and cancellation of, and in payment for, all outstanding shares of capital stock of the Company. As a result of the Dissolution, subject to Section 1.3 hereof, each holder of the Company Common Stock immediately prior to the Dissolution will own the same number and class of shares of Broadcasting Common Stock as such holder owned in the Company. (c) In order to facilitate the exchange of certificates for Transaction Securities and to avoid requiring that certificates representing shares of Company Common Stock be exchanged for shares of Broadcasting Common Stock prior to the Merger, for all purposes of this Agreement the certificates representing shares of Company Class A Common Stock and Company Class B Common Stock immediately prior to the Dissolution (other than any such certificate which represents Dissenting Shares or shares owned directly or indirectly by the Company or any of its Subsidiaries) shall be deemed to represent the equivalent number of shares of Broadcasting Class A Common Stock and Broadcasting Class B Common Stock issued in connection with the Dissolution. 2.5 CONTRIBUTION OF ASSETS TO AND ASSUMPTION OF LIABILITIES BY NPJ; DISTRIBUTION OF NPJ COMMON STOCK. (a) Prior to the Effective Time and pursuant to the terms of the Contribution and Assumption Agreement to be entered into by Broadcasting and NPJ in the form attached hereto as EXHIBIT B (the "Contribution Agreement"), Broadcasting shall contribute and transfer (the "Contribution") to NPJ all of Broadcasting's right, title and interest in and to any and all assets then held by Broadcasting, whether tangible or intangible and whether fixed, contingent or otherwise, including the stock of all Subsidiaries of Broadcasting; PROVIDED, HOWEVER, that Broadcasting shall not contribute to NPJ (i) the issued and outstanding capital stock of any Cable Subsidiary, (ii) Broadcasting's rights created pursuant to the Contribution Agreement, (iii) cash sufficient to pay all expenses relating to the transactions described in this Agreement that are the responsibility of the Company, Holding or Broadcasting hereunder, and (iv) the Palmer Systems, the Related Assets and the assets of Westerly or Colony, as the case may be, to the extent the transactions contemplated by the last sentence of Section 2.6 shall have been consummated. (b) In partial consideration for the Contribution, concurrently therewith and pursuant to the Contribution Agreement, NPJ shall assume any and all liabilities of Broadcasting, whether fixed, contingent or otherwise; PROVIDED, HOWEVER, that NPJ will not assume, and will have no liability with respect to, (i) the New Company Debt, (ii) any liabilities associated with the business operations of the Cable Subsidiaries or the cable operations of Broadcasting except as provided in the Contribution Agreement, (iii) Broadcasting's I-13 obligations created pursuant to the Contribution Agreement, and (iv) the liabilities set forth on Schedule 2.5(b) hereto. Concurrently with the Contribution, NPJ will cause Broadcasting and its Subsidiaries (other than NPJ and its Subsidiaries) to be released by all applicable third parties from any liability (including, if applicable, the NPJ Debt) assumed by NPJ pursuant to this Section 2.5(b) that is (A) debt for borrowed money and similar monetary obligations evidenced by bonds, notes, debentures or other instruments, other than trade accounts payable in the ordinary course of business and other than as set forth on Schedule 2.5(b), or (B) guaranties, endorsements, and other contingent obligations, whether direct or indirect, in respect of liabilities of others of any of the types described in clause (A). (c) Following the Contribution and prior to the Effective Time, Broadcasting shall distribute (the "Distribution") one fully paid and nonassessable share of NPJ Class A Common Stock to the holder of each share of Broadcasting Class A Common Stock outstanding immediately prior to the Distribution and one fully paid and nonassessable share of NPJ Class B Common Stock to the holder of each share of Broadcasting Class B Common Stock outstanding immediately prior to the Distribution. Each share of the capital stock of NPJ issued and outstanding immediately prior to the Distribution and owned directly or indirectly by Broadcasting or any of its Subsidiaries (other than those to be distributed in accordance with the first sentence of this paragraph) shall be cancelled at the time of the Distribution. Anything herein to the contrary notwithstanding, NPJ shall have the right at any time to alter its capital structure; PROVIDED, HOWEVER, that any such amendment shall not unreasonably delay the effective time of the Registration Statements. 2.6 CERTAIN OTHER ACTIONS. If the private letter ruling contemplated by Section 6.17 hereof is based upon or indicates its approval of the transactions identified in this sentence, prior to the Contribution (i) the Palmer Systems, together with all accounts receivable, inventory, supplies, machinery, plant and equipment, tools, customer lists, contracts, goodwill and all other assets, tangible or intangible, of Broadcasting used or usable in connection with Broadcasting's ownership and operation (on and after the Dissolution) of the Palmer Systems (the "Related Assets") and the stock of King Videocable shall be contributed to Colony Communications, Inc., a Rhode Island corporation ("Colony"), and (ii) Westerly Cable Television, Inc., a Rhode Island corporation ("Westerly"), will be merged with and into Colony. If such letter ruling is not based upon or does not approve such transactions, prior to the Contribution, Westerly will be merged with and into Colony and either (as the Company and Acquiror may agree upon) the assets of Westerly will be distributed to the Company or Broadcasting, as the case may be, or Colony will be merged with and into the Company or Broadcasting, as the case may be. ARTICLE 3. REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY, NPJ, HOLDING AND BROADCASTING The Company and NPJ jointly and severally represent and warrant to Acquiror (such representations and warranties to be effective as of November 18, 1994 and the schedules to the Original Agreement shall be the schedules to this Agreement) as follows: 3.1 ORGANIZATION; AUTHORITY; COMPANY/KELSO AGREEMENT. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Rhode Island. Each of NPJ and Holding is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Broadcasting is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Each of the Company, NPJ, Holding and Broadcasting has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All necessary action, corporate or otherwise, required to have been taken by or on behalf of the Company, NPJ, Holding or Broadcasting, as the case may be, by applicable Law, their respective charter documents or otherwise to authorize (i) the approval, execution and delivery on behalf of the Company, NPJ, Holding and Broadcasting of this Agreement, (ii) the approval, execution and delivery on I-14 behalf of the Company of, and the performance by the Company of its obligations under, the Company/Kelso Agreement, and (iii) the performance by the Company, NPJ, Holding and Broadcasting of their respective obligations under this Agreement, the Plan of Reorganization, the Contribution Agreement, the Non- Competition Agreement, and all other documents and instruments contemplated herein (each a "Transaction Document" and, collectively, the "Transaction Documents") and the consummation of the transactions contemplated hereby and thereby has been taken, except that the Merger Transactions must be approved by the stockholders of the Company. Each Transaction Document to which the Company, NPJ, Holding or Broadcasting, as the case may be, is or will be a party constitutes or will constitute, as the case may be, a valid and binding agreement of the Company, NPJ, Holding or Broadcasting, as the case may be, enforceable against it in accordance with its terms, except (x) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including without limitation, the effect of statutory or other laws regarding fraudulent conveyances and preferential transfers, and (y) for the limitations imposed by general principles of equity. The foregoing exceptions are hereinafter referred to as the "Enforceability Exceptions." The Company has all requisite corporate power and authority to execute and deliver the Company/Kelso Agreement and to consummate the transactions contemplated thereby. The Company/Kelso Agreement is the validly existing, legally enforceable obligation of the Company and, to the knowledge of the Company, of the other parties thereto, subject to the Enforceability Exceptions. 3.2 NO BREACH OR CONFLICT. The execution and delivery of the Company/Kelso Agreement by the Company and the execution and delivery of each Transaction Document to which it is or will be a party by each of the Company, NPJ, Holding and Broadcasting, do not or will not, as the case may be, and the consummation of the transactions contemplated hereby and thereby by each of the Company, NPJ, Holding and Broadcasting will not, (i) violate or conflict with the charter documents or By-Laws of the Company, NPJ, Holding or Broadcasting; (ii) except as set forth on Schedule 3.2 hereto (which Schedule shall be delivered by the Company to Acquiror not later than 45 days following the initial filing of the Registration Statement with the SEC) and except for the approvals described in Section 3.3 hereof, constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) of, result in the creation or imposition of any Lien upon the property or assets of the Company or its Subsidiaries or NPJ or its Subsidiaries, give rise to any third party right of termination, cancellation, material modification or acceleration under, or require any approval, waiver or consent under, any note, bond, mortgage, pledge, indenture, deed of trust, lease, agreement, indemnity, obligation, commitment or instrument to which the Company or any of its Subsidiaries or NPJ or any of its Subsidiaries is a party or by which any of them or their respective properties or assets are bound, except as would not result in a Material Adverse Effect on the Company and its Subsidiaries taken as a whole; or (iii) subject to obtaining the approvals and making the filings described in Section 3.3 hereof, violate any Law, judgment, decree, order or writ of any judicial, arbitral, public, or governmental authority having jurisdiction over the Company or any of its Subsidiaries or NPJ or any of its Subsidiaries or any of their respective properties or assets except as would not result in a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. 3.3 CONSENTS AND APPROVALS. Neither the execution and delivery by the Company of the Company/Kelso Agreement, the execution and delivery by the Company, NPJ, Holding and Broadcasting of each Transaction Document to which it is, or will be, a party nor the consummation of the transactions contemplated hereby or thereby will require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except for (i) filings required under the Securities Act, (ii) filings required under the Exchange Act, (iii) filings under state securities or "blue sky" laws, (iv) the filing of a premerger notification report pursuant to, and expiration or termination of the waiting period under, the HSR Act, (v) the filing of certificates or articles, as the case may be, of merger, statements of intent to dissolve and articles of dissolution and other documents or instruments which may be required to be filed with any Secretary of State in connection with the Merger, the Holding Dissolution or the Dissolution, and appropriate documents with the relevant authorities of other states in which the Company and its Subsidiaries are qualified to do business, (vi) such filings, authorizations, orders and approvals from the FCC I-15 (the "FCC Approvals") as may be required in connection with FCC Licenses of the Cable Subsidiaries, (vii) such authorizations, consents, approvals and waivers ("Local Approvals") of state and local authorities, as may be required in connection with the Franchises to operate the cable television systems of the Cable Subsidiaries, and (viii) such other consents or filings as, if not obtained or made, would not have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole or as would not prevent the Company, NPJ, Holding or Broadcasting from performing their respective obligations under each Transaction Document to which it is a party or consummating the transactions contemplated hereby. 3.4 APPROVAL OF THE BOARDS; FAIRNESS OPINIONS. The Boards of Directors of the Company, NPJ, Holding, Broadcasting and Westerly have each, by resolutions duly adopted at meetings duly called and held, unanimously approved and adopted this Agreement, the Merger Transactions and the other transactions contemplated hereby on the terms and conditions set forth herein. The Company Board of Directors has received the favorable opinion of Bear, Stearns & Co., Inc., as financial advisor to the Board of Directors of the Company, with respect to such transactions. 3.5 VOTE REQUIRED. The affirmative votes or actions by written consent of a majority of the votes that holders of the outstanding shares of Company Common Stock, voting together as a single class, are entitled to cast are the only votes of any class or series of the capital stock of the Company necessary to approve the Merger Transactions under applicable Law and the Company's Articles of Organization and By-laws. The affirmative votes or actions by written consent of a majority of the votes that holders of the outstanding shares of each class of Company Common Stock, voting separately as a single class, are entitled to cast are the only votes of the holders of any class of series of the capital stock of the Company necessary to approve the Plan of Reorganization under applicable Law and the Company's Articles of Organization and By-laws. 3.6 CAPITALIZATION. (a) The authorized capital stock of the Company consists of (i) 600,000 shares of Company Class A Common Stock and (ii) 300,000 shares of Company Class B Common Stock. As of November 18, 1994, there are issued and outstanding 37,728 shares of Company Class A Common Stock and 46,961 shares of Company Class B Common Stock. The authorized capital stock of Holding consists of 200 shares of Class A Common Stock and 240,000 shares of Class B Common Stock. As of November 18, 1994, there are issued and outstanding 200 shares of Class A Common Stock, par value $.10 per share, of Holding and 209,998 shares of Class B Common Stock, par value $.10 per share, of Holding. The authorized capital stock of Broadcasting consists of 1,000 shares of Common Stock, par value $.01 per share. As of November 18, 1994, there are issued and outstanding 1,000 shares of Broadcasting's Common Stock. All shares referenced in the preceding six sentences which are outstanding as of November 18, 1994, are duly authorized, validly issued and fully paid and nonassessable. Other than as set forth on Schedule 3.6(a) and in connection with the transactions contemplated by this Agreement, there are no outstanding options, warrants, rights, puts, calls, commitments, or other contracts, arrangements, or understandings issued by or binding upon the Company, Holding or Broadcasting requiring or providing for, and there are no outstanding debt or equity securities of the Company or its Subsidiaries which upon the conversion, exchange or exercise thereof would require or provide for the issuance by the Company, Holding or Broadcasting of any new or additional equity interests in the Company, Holding or Broadcasting (or any other securities of the Company, Holding or Broadcasting which, with notice, lapse of time and/or payment of monies, are or would be convertible into or exercisable or exchangeable for equity interests in the Company, Holding or Broadcasting, as the case may be). Other than as set forth on Schedule 3.6(a), there are no preemptive or other similar rights available to the existing holders of the capital stock of the Company, Holding or Broadcasting. Except as set forth on Schedule 3.6(a), there are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of capital stock of the Company. The Company, on the one hand, and the Kelso Partnerships, on the other hand, each own 50% of the outstanding shares of each class of capital stock of Holding; Holding owns all of the outstanding shares of capital stock of Broadcasting; and Broadcasting owns all of the outstanding shares of capital stock of King Videocable. I-16 (b) Upon the filing of its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, the authorized capital stock of NPJ will consist of (i) 600,000 shares of NPJ Class A Common Stock and (ii) 300,000 shares of NPJ Class B Common Stock. As of November 18, 1994, there is issued and outstanding one share of NPJ Class A Common Stock which is held of record and beneficially owned by the Company, and no shares of NPJ Class B Common Stock. (c) Upon the filing of its Restated Articles of Incorporation with the Secretary of State of the State of Washington, the authorized capital stock of Broadcasting will consist of (i) 50,000 shares of Broadcasting Class A Common Stock and (ii) 40,000 shares of Broadcasting Class B Common Stock. (d) The Company has delivered to Acquiror a full and complete copy of the Rights Agreement. Neither a Rights Distribution Date nor a Stock Acquisition Date has occurred under the Rights Agreement. Neither the execution and delivery of this Agreement nor the consummation of the Merger Transactions (including, without limitation, the Merger, the Dissolution and the Distribution) are events which would (with notice or lapse of time or both) (i) permit the holders of Rights to exercise such Rights to acquire shares of Company Common Stock, (ii) require the Company, in accordance with Section 11(a)(ii) of the Rights Agreement, to exchange any or all of the outstanding Rights for shares of Company Common Stock, or (iii) prevent, or limit in any manner, the Company's right to amend the terms of the Rights Agreement in accordance with the first sentence of Section 26 of the Rights Agreement without the approval of its stockholders or the holders of the Rights. At the Effective Time, after giving effect to the amendment required pursuant to Section 6.27 hereof, (i) the holders of Rights shall not have any rights to acquire shares of Broadcasting Common Stock or Acquiror Common Stock, and (ii) neither Broadcasting nor Acquiror shall be liable for, or assume by virtue of the Dissolution or the Merger, any obligation or duty of the Company pursuant to the Rights Agreement. 3.7 FINANCIAL STATEMENTS. The financial statements of the Company included herewith as Schedule 3.7 were prepared in accordance with GAAP and present fairly as of their respective dates, in all material respects, the consolidated financial position of the Company and its Subsidiaries as at the dates thereof and the consolidated results of their operations and their consolidated cash flows (PROVIDED, HOWEVER, that such consolidated cash flows do not include any amounts relating to the operations of Holding or its Subsidiaries) for each of the respective periods covered thereby, in conformity with GAAP. 3.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on Schedule 3.8, the Company does not have any indebtedness, liability or obligation of the type required by GAAP to be reflected on a balance sheet, or in the notes, schedules or exhibits thereto, that is not reflected or reserved against in the balance sheet of the Company dated as of September 30, 1994 previously delivered to Acquiror (the "Company Balance Sheet") and since the Balance Sheet Date, the Company has not incurred any such liabilities or obligations other than in the ordinary course of business. Schedule 3.8 also lists all outstanding letters of credit and guarantees of the Company. 3.9 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule 3.9, since the Balance Sheet Date, the Company has conducted its business operations in the ordinary course and there has not occurred (i) any Material Adverse Effect on the Company and its Subsidiaries taken as a whole except for Material Adverse Effects due to general economic or industry-wide conditions (including, without limitation, determinations by the FCC or local franchising authorities affecting or applicable to the offering or packaging of a la carte channels or cost-of-service showings and any rate adjustments pursuant to such determinations), or (ii) other events or conditions of any character that, individually or in the aggregate, have or would reasonably be expected to have, a Material Adverse Effect on the Company and its Subsidiaries taken as a whole or on the ability of the Company, NPJ, Holding or Broadcasting to perform their respective material obligations under the Transaction Documents to which they are a party. 3.10 COMPLIANCE WITH LAWS. The Company holds all Franchises and Licenses necessary for the lawful conduct of its business, except where the failure to hold any such Franchise or License would not have a I-17 Material Adverse Effect on the Company and its Subsidiaries taken as a whole. To the Company's knowledge, it has not violated, and is not in violation of, any such Franchises or Licenses or any applicable Law (including, without limitation, any of the foregoing related to occupational safety, storage, disposal, discharge into the environment of hazardous wastes, environmental protection, conservation, unfair competition, labor practices or corrupt practices), except where such violations do not, and insofar as reasonably can be foreseen will not, have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole, and the Company has not received any notice from a governmental or regulatory authority within three years of November 18, 1994 of any such violation. 3.11 TAX MATTERS. (a) All Company Consolidated Income Tax Returns and Cable Tax Returns (as defined in Section 6.10(h)), required to be filed on or before November 18, 1994 have been filed with the appropriate governmental agencies in all jurisdictions in which such Tax Returns are required to be filed; all of the foregoing Tax Returns are true, correct and complete in all material respects; and all Taxes (as defined in Section 6.10(h)) required to have been paid in connection with such Tax Returns have been paid. All material Taxes payable by or with respect to the Company and its Subsidiaries but not reflected on any Tax Return required to be filed prior to the Balance Sheet Date have been fully paid or adequate provision therefor has been made and reflected on the Company Balance Sheet. (b) Except as set forth on Schedule 3.11 hereto, there is no claim or investigation involving an amount greater than $250,000 pending or threatened against the Company or any Cable Subsidiary for past Taxes, and adequate provision for the claims or investigations set forth on Schedule 3.11 has been made as reflected on the Company's financial statements. Except as set forth on Schedule 3.11 hereto, the Company and its Cable Subsidiaries have not waived or extended any applicable statute of limitations relating to the assessment of federal, state or local Taxes relating to the Company or any Cable Subsidiary. 3.12 LITIGATION. Except as set forth on Schedule 3.12, there is no suit, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company (other than in connection with its cable operations) or any of its Subsidiaries (other than any Cable Subsidiary) that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on NPJ and its Subsidiaries taken as a whole or prevent, hinder, or materially delay the ability of the Company, NPJ, Holding or Broadcasting to consummate the transactions contemplated by this Agreement, nor is there any judgment, decree, inquiry, rule or order outstanding against the Company (other than in connection with its cable operations) or any of its Subsidiaries (other than any Cable Subsidiary) which, insofar as can reasonably be foreseen, would have any such effect in the future. 3.13 EMPLOYEE BENEFITS; ERISA MATTERS. (a) COMPANY EMPLOYEE PLANS. Schedule 3.13(a) lists each Company Employee Plan. The Company has made available to Acquiror true and complete copies of (i) all written documents comprising such Company Employee Plans (including amendments and individual agreements relating thereto); (ii) the most recent Federal Form 5500 series (including all schedules thereto) filed with respect to each Company Employee Plan; (iii) the most recent financial statements and actuarial reports, if any, pertaining to the Company Employee Plans; and (iv) the summary plan description currently in effect and all material modifications thereto, if any, for each such Company Employee Plan. (b) PENSION PLAN FUNDING AND TERMINATION. With respect to each Company Employee Plan that is subject to Title IV of ERISA, within the six year period preceding the Closing Date: (i) No such Company Employee Plan has been terminated so as to subject, directly or indirectly, any asset of the Company or NPJ to any liability, contingent or otherwise, or the imposition of any Lien under Title IV of ERISA; I-18 (ii) No proceeding has been initiated or threatened by any Person, including the PBGC, nor, to the Company's knowledge, is any such proceeding expected, to terminate any such Company Employee Plan; (iii) No condition or event exists or is reasonably expected to occur that could subject, directly or indirectly, any assets of the Company or NPJ to any liability, contingent or otherwise, or the imposition of any Lien under Title IV of ERISA, whether to the PBGC or to any other Person; (iv) No Reportable Event has occurred and is continuing with respect to any such Company Employee Plan; (v) No such Company Employee Plan which is subject to Section 302 of ERISA or Section 412 of the Code has incurred an Accumulated Funding Deficiency, whether or not such deficiency has been waived; (vi) Neither the Company, NPJ nor any ERISA Affiliate of either of them has incurred any Withdrawal Liability or any liability based on the withdrawal from any union-sponsored multiemployer welfare benefit fund; and (vii) Neither the Company, NPJ nor any ERISA Affiliate of either of them has been notified by the sponsor of a Multiemployer Plan to which the Company, NPJ or any ERISA Affiliate of either of them is required to make or accrue a contribution, or has within the six year period preceding the Closing Date been required to make or accrue a contribution, that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA. (c) COBRA. The Company and NPJ have complied in all material respects with the continuation coverage requirements of COBRA with respect to any Group Health Plan sponsored by the Company or NPJ. (d) CONTRIBUTION TO COMPANY EMPLOYEE PLANS. The Company, NPJ and their ERISA Affiliates have made full and timely payment of all amounts required to be contributed under the terms of each Company Employee Plan and applicable Law or required to be paid as expenses under each Company Employee Plan. 3.14 FULL DISCLOSURE. All of the statements made by the Company, NPJ, Holding and Broadcasting in this Agreement (including, without limitation, the representations and warranties made by the Company and NPJ herein and in the schedules and exhibits hereto which are incorporated by reference herein and which constitute an integral part of this Agreement) do not (and on the Closing Date shall not) include or contain any untrue statement of a material fact, and do not (and on the Closing Date shall not) omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.15 BROKERS AND FINDERS. None of the Company, NPJ, Holding or Broadcasting nor any officer, director, employee or Affiliate of the Company, NPJ, Holding or Broadcasting has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated herein, except that the Company has employed Bear, Stearns & Co., Inc. as its financial advisor and for whose fees and expenses the Company is responsible. ARTICLE 4. REPRESENTATIONS AND WARRANTIES REGARDING THE CABLE SUBSIDIARIES The Company and NPJ jointly and severally represent and warrant to Acquiror (such representations and warranties to be effective as of November 18, 1994 and the schedules to the Original Agreement shall be the schedules to this Agreement) as follows: I-19 4.1 ORGANIZATION AND AUTHORITY. Each Cable Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each Cable Subsidiary has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to have such power or authority would not have a Material Adverse Effect on the Cable Subsidiaries taken as a whole. 4.2 NO BREACH OR CONFLICT. The execution and delivery of the Company/Kelso Agreement by the Company and the execution and delivery of each Transaction Document to which it is or will be a party by each of the Company, NPJ, Holding and Broadcasting do not or will not, as the case may be, and the consummation of the transactions contemplated hereby or thereby by each of the Company, NPJ, Holding and Broadcasting will not, (i) violate or conflict with any term or provision of the certificate of incorporation, by-laws or other organizational documents of any Cable Subsidiary; (ii) except as set forth on Schedule 4.2 and except for the approvals described in Section 3.3 hereof, constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) of, result in the creation or imposition of any Lien upon the property or assets of any Cable Subsidiary, give rise to any third party right of termination, cancellation, material modification or acceleration under, or require any approval, waiver or consent under, any note, bond, mortgage, pledge, indenture, deed of trust, lease, agreement, indemnity, obligation, commitment or instrument to which any Cable Subsidiary is a party or by which it or its properties is bound, except as would not result in a Material Adverse Effect on the Cable Subsidiaries taken as a whole; or (iii) subject to obtaining the approvals and making the filings described in Section 3.3 hereof, violate any Law, judgment, decree, order or writ of any judicial, arbitral, public, or governmental authority having jurisdiction over any Cable Subsidiary or any of its properties or assets except as would not result in a Material Adverse Effect on the Cable Subsidiaries taken as a whole. Except as set forth on Schedule 4.2 hereto, and except for the Non-Competition Agreement, neither the Company nor any of the Cable Subsidiaries is a party to or bound by any agreement that restricts or purports to restrict the ability of any of them or any Affiliate of any of them to engage in any location in the business of cable television or any other business engaged in by the Cable Subsidiaries or by Acquiror and its Subsidiaries. 4.3 CAPITALIZATION. Schedule 4.3 sets forth the name, jurisdiction of organization and the authorized and issued and outstanding capital stock, partnership interests or other equity interests of each Cable Subsidiary and the registered holders thereof. All such shares outstanding are duly authorized, validly issued and fully paid and nonassessable. Other than in connection with the transactions contemplated by this Agreement, there are no outstanding options, warrants, rights, puts, calls, commitments, or other contracts, arrangements, or understandings issued by or binding upon any Cable Subsidiary requiring or providing for, and there are no outstanding debt or equity securities of any Cable Subsidiary which upon the conversion, exchange or exercise thereof would require or provide for, the issuance or transfer of any shares of capital stock, partnership interests or other equity interests of any Cable Subsidiary (or any other securities which, with notice, lapse of time and/or payment of monies, are or would be convertible into or exercisable or exchangeable for shares of capital stock, partnership interests or other equity interests of any Cable Subsidiary). There are no voting trusts or other agreements or understandings to which the Company or any Cable Subsidiary is a party with respect to the voting of capital stock, partnership interests or other equity interests of any Cable Subsidiary. 4.4 FINANCIAL STATEMENTS. The balance sheets and financial statements of the Cable Subsidiaries and the notes thereto identified on Schedule 4.4, which include the unaudited balance sheets of the Cable Subsidiaries as of the Balance Sheet Date (the "Cable Balance Sheets"), are hereinafter defined as the "Cable Financial Statements". The Cable Financial Statements which are audited were prepared in accordance with GAAP and present fairly the financial position of the Cable Subsidiaries as at the dates thereof and the results of their operations and their cash flows for each of respective periods covered thereby in accordance with GAAP. The Cable Financial Statements which are not audited, in the opinion of management, present fairly the financial position of the Cable Subsidiaries as at the dates thereof and the results of their operations and their cash flows for each of the respective periods covered thereby. The Cable Balance Sheets and the I-20 unaudited statements of income and cash flow for the period ended September 30, 1994 included in the Cable Financial Statements were prepared on a basis consistent with prior interim periods and, except as set forth on Schedule 4.4 hereto, include all adjustments (consisting only of normal recurring accruals), other than adjustments for corporate overhead and interest expense, that management of the Company considers necessary for a fair presentation of the results of operations for such periods. The Cable Subsidiaries alone generated approximately $64,000,000 in operating cash flow (before expenses allocated to corporate and divisional/regional overhead, management and similar fees, MIS/cable billing and administration and unusual and non-recurring items) for the six months ended June 30, 1994. 4.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on Schedule 4.5, no Cable Subsidiary has any indebtedness, liability or obligation of the type required by GAAP to be reflected on a consolidated balance sheet of the Cable Subsidiaries, or in the notes, schedules or exhibits thereto, that is not reflected or reserved against in the Cable Balance Sheet, and since the Balance Sheet Date, no Cable Subsidiary has incurred any such liabilities or obligations other than in the ordinary course of business. 4.6 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 4.6, since the Balance Sheet Date, the Cable Subsidiaries have conducted their business operations in the ordinary course and there has not occurred (i) any Material Adverse Effect on the Cable Subsidiaries taken as a whole except for Material Adverse Effects due to general economic or industry-wide conditions (including, without limitation, determinations by the FCC or local franchising authorities affecting or applicable to the offering or packaging of a la carte channels or cost-of-service showings and any rate adjustments pursuant to such determinations), or (ii) other events or conditions of any character that, individually or in the aggregate, have or would reasonably be expected to have, a Material Adverse Effect on the Cable Subsidiaries taken as a whole. 4.7 COMPLIANCE WITH LAWS. (a) Each of the Cable Subsidiaries holds all Franchises and Licenses necessary for the lawful conduct of its business, except where the failure to hold any such Franchise or License would not have a Material Adverse Effect on the Cable Subsidiaries taken as a whole. To the Company's knowledge, none of the Cable Subsidiaries has violated, nor is any Cable Subsidiary in violation of, any such Franchises or Licenses or any applicable Law (including, without limitation, any of the foregoing related to occupational safety, storage, disposal, discharge into the environment of hazardous waste, environmental protection, conservation, unfair competition, labor practices or corrupt practices), except where such violations do not, and insofar as reasonably can be foreseen will not, have a Material Adverse Effect on the Cable Subsidiaries taken as a whole. Except as otherwise set forth on Schedule 4.7 hereto, no Cable Subsidiary has received any notice from a governmental or regulatory authority within three years of November 18, 1994 of any such violation. (b) Each Cable Subsidiary has made all submissions (including, without limitation, registration statements) required under the Communications Act, and has, to the Company's knowledge, obtained all necessary FCC authorizations, Licenses, registrations, permits and tower approvals. The cable television systems of the Cable Subsidiaries have complied in all material respects with the Communications Act. 4.8 FRANCHISES AND MATERIAL AGREEMENTS. (a) As of September 30, 1994, the cable television systems owned by the Cable Subsidiaries (i) had approximately 753,153 Basic Subscribers and 506,148 premium subscriptions and (ii) passed approximately 1,248,743 dwelling units. Each Franchise of the Cable Subsidiaries and each other agreement, contract or arrangement which is material to the ownership and operation of the business of the Cable Subsidiaries to which any Cable Subsidiary is a party or by which any of its properties or assets are bound (the "Material Cable Agreements") is the validly existing, legally enforceable obligation of each Cable Subsidiary party thereto and, to the knowledge of the Company, of the other parties thereto, subject to the Enforceability Exceptions. Each Cable Subsidiary is validly and lawfully operating under its Franchises and the Material Cable Agreements to which it is a party, and each Cable Subsidiary has duly complied in all material respects with all of the terms and conditions of each of its Franchises and each Material Cable Agreement to which it is a party. I-21 (b) Except as previously disclosed to Acquiror in writing, no Person (including any governmental authority) has any right to acquire any interest in any cable television system or assets of the Company or the Cable Subsidiaries (including any right of first refusal or similar right) upon an assignment or transfer of control of a Franchise, other than rights of condemnation or eminent domain afforded by Law and, to the knowledge of the Company, no other Person (i) has been granted or has applied for the consent or approval of any governmental authority for the installation, construction, development, ownership, or operation of a cable television system (as defined in the Cable Communications Policy Act of 1984, as amended) within all or part of the geographic area served by any cable television system of the Cable Subsidiaries or (ii) operates, or has commenced the construction, installation or development of, any cable television system (as defined in the Cable Communications Policy Act of 1984, as amended) within all or part of the geographic area served by any cable television system of the Cable Subsidiaries, regardless of whether the consent or approval of any governmental authority is required or has been obtained. (c) Neither the Company nor any of its Cable Subsidiaries has made any material commitments in writing to any state, municipal, local or other governmental commission, agency or body with respect to the operation and construction of their respective systems which are not fully reflected in the Franchises or any Material Cable Agreement. Neither the Company nor any of its Cable Subsidiaries has entered into any written agreements with community groups or similar third parties restricting or limiting the types of programming that may be shown on such systems. (d) No Franchising Authority has advised the Company or any Cable Subsidiary in writing, or otherwise formally notified the Company or any Cable Subsidiary in accordance with the terms of the applicable Franchise, of its intention to deny renewal of an existing Franchise. The Company and the Cable Subsidiaries have timely filed notices of renewal in accordance with the Communications Act with all Franchising Authorities with respect to each Franchise expiring within 36 months after the date of this Agreement. Such notices of renewal have been filed pursuant to the formal renewal procedures established by Section 626(a) of the Communications Act. As of the Closing Date, (i) the Company will have maintained a controlling ownership in each system in its entirety for at least 36 consecutive months following the initial construction or acquisition of each such system by the Company or a Subsidiary, or (ii) the consummation of the transactions contemplated by this Agreement will not violate the three-year holding period requirement set forth in Section 617 of the Communications Act and the FCC rules and regulations promulgated thereunder. (e) The Company and the Cable Subsidiaries are operating the systems in compliance in all material respects with the provisions of the Communications Act and the rules and regulations of the FCC relating to carriage of signals, syndicated exclusivity, network non-duplication, and retransmission consent except where the failure to comply, individually or in the aggregate, would not result in a Material Adverse Effect on the Cable Subsidiaries taken as a whole. Except as previously disclosed to Acquiror in writing, no written notices or demands have been received from any television station or from any other Person claiming to have a right, or objecting to or challenging the right of the systems, to carry any signal or deliver the same, or challenging the channel position on which any television station is carried. (f) Schedule 4.8(f) indicates which television signals carried by the systems are carried without retransmission consent agreements (other than stations which have elected must-carry status). The Company has delivered or made available to Acquiror full and complete copies of all retransmission consent agreements. For each commercial television signal on each system that has elected must-carry status, but that is not being carried because of signal quality problems or potential copyright liability, Schedule 4.8(f) lists the signal and the reason for non-carriage. (g) The Company has delivered or made available to Acquiror true, correct, and complete specimen copies of (i) all FCC Forms 393, 1200, 1205, 1210, 1215 and 1220s that have been prepared with respect to the systems, (ii) all material correspondence with any governmental body, subscriber, or other interested party relating to rate regulation generally or specific rates charged to subscribers of the systems, including, without I-22 limitation, any complaints filed with the FCC with respect to any rates charged to subscribers of the systems, and (iii) any documentation supporting an exemption from the rate regulation provisions of the Communications Act claimed by the Company or a Cable Subsidiary with respect to the systems. Schedule 4.8(g) sets forth (i) a list of all rate complaints filed pursuant to the Communications Act and received by the Company or any of its Cable Subsidiaries which have not been deemed invalid by the FCC, and further sets forth those Franchises that have been certified or, to the Company's knowledge, filed for certification under the Communications Act with respect to rate regulation and (ii) a list of all letters of inquiry from the FCC received by the Company or any Cable Subsidiary since September 1, 1993 with regard to rate restructuring. 4.9 TITLE TO PROPERTIES; ENCUMBRANCES. Except as set forth on Schedule 4.9, (a) the Cable Subsidiaries are the exclusive holders of all rights in or to all real and personal, tangible and intangible, property and assets of the Company or its Subsidiaries (other than any such assets held by the Company or its Subsidiaries pursuant to leases or licenses with a Person other than the Company or another of its Subsidiaries) used or useful in the ownership and operation of the cable television systems owned or operated by the Company or the Cable Subsidiaries, and (b) each Cable Subsidiary has good and valid title to its respective assets, free and clear of all defects and Liens except: (i) materialmen's, mechanics', carriers', workmen's, warehousemen's, repairmen's, or other like Liens arising in the ordinary course of business, or deposits to obtain the release of such Liens; (ii) Liens for current taxes not yet due and payable; and (iii) Liens or minor imperfections of title that do not interfere with the use or detract from the value of such property and taken in the aggregate, have a Material Adverse Effect on the Cable Subsidiaries taken as a whole. Except as would not result in any Material Adverse Effect on the Cable Subsidiaries taken as a whole, each Cable Subsidiary owns or has the lawful right to use all assets, properties, operating rights, easements, contracts, leases, and other instruments necessary to operate its business lawfully and to maintain the same as presently conducted. 4.10 LABOR MATTERS. (a) Except as set forth on Schedule 4.10(a), none of the Cable Subsidiaries is party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of any of the Cable Subsidiaries. (b) Except as set forth on Schedule 4.10(b), (i) no employees of any of the Cable Subsidiaries are represented by any labor organization and (ii) as of November 18, 1994, no labor organization or group of employees of any of the Cable Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the knowledge of the Company, threatened to be brought or filed, with the NLRB or any other labor relations tribunal or authority. To the knowledge of the Company, there are no formal organizing activities involving a material number of employees of the Cable Subsidiaries pending with, or threatened by, any labor organization. (c) Except as would not result in a Material Adverse Effect on the Cable Subsidiaries taken as a whole, (i) there are no strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or, to the knowledge of the Company, threatened against or involving any of the Cable Subsidiaries and (ii) there are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of the Company, threatened by or on behalf of any employee or group of employees of any of the Cable Subsidiaries. 4.11 LITIGATION. Except as set forth on Schedule 4.11, there is no suit, action or proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting any Cable Subsidiary (except for proceedings or investigations affecting the cable television industry generally) that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on the Cable Subsidiaries taken as a whole or prevent, hinder, or materially delay the consummation of the transactions contemplated by this Agreement, nor is there any judgment, decree, inquiry, rule or order outstanding against any Cable Subsidiary which, insofar as can reasonably be foreseen, would have any such effect in the future. I-23 4.12 EMPLOYEE BENEFITS; ERISA MATTERS. (a) CABLE PLANS AND COMPANY BENEFIT ARRANGEMENTS. Schedule 4.12(a) lists each Cable Employee Plan, Cable Benefit Arrangement and Company Benefit Arrangement covering Cable Employees. The Company has made available to Acquiror with respect to each Cable Employee Plan, Cable Benefit Arrangement and Company Benefit Arrangement covering Cable Employees true and complete copies of (i) all written documents comprising such plans and arrangements (including amendments and individual agreements relating thereto); (ii) the two most recent Federal Form 5500 series (including all schedules thereto) filed with respect to each Cable Employee Plan; (iii) the most recent financial statements and actuarial reports, if any, pertaining to each such plan or arrangement; and (iv) the summary plan description currently in effect and all material modifications thereto, if any, for each Cable Employee Plan. (b) MULTIEMPLOYER PLANS. (i) Neither the Company, NPJ nor any ERISA Affiliate of either of them has incurred any unsatisfied Withdrawal Liability with respect to any Multiemployer Plan to which the Company, NPJ or any ERISA Affiliate of either of them is required to make or accrue a contribution or has, within the six year period preceding the Closing Date, been required to make or accrue a contribution, nor, to the knowledge of the Company or NPJ, is the Company, NPJ or any ERISA Affiliate of either of them reasonably expected to incur any Withdrawal Liability with respect to any such Multiemployer Plan. (ii) Neither the Company, NPJ nor any ERISA Affiliate of either of them has been notified by the sponsor of any Multiemployer Plan to which the Company, NPJ or any ERISA Affiliate of either of them is required to make or accrue a contribution or has, within the six year period preceding the Closing Date, been required to make or accrue a contribution, that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and to the knowledge of the Company and NPJ, no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (c) UNION WELFARE FUNDS. Neither the Company, NPJ nor any ERISA Affiliate of either of them has incurred any liability based on withdrawal from any union- sponsored multiemployer welfare benefit fund maintained pursuant to any Welfare Benefit Plan to which the Company, NPJ or any ERISA Affiliate of either of them contributes pursuant to the terms of a collective bargaining agreement. (d) WELFARE PLANS. Neither the Company, NPJ nor any ERISA Affiliate maintains any plan which is funded through a "welfare benefit fund" as defined in Section 419(e) of the Code. (e) RETIREE WELFARE BENEFITS PLANS. Except as set forth in Schedule 4.12(e) and pursuant to the provisions of COBRA, neither the Company, NPJ nor any ERISA Affiliate of either of them maintains any Cable Employee Plan or Company Employee Plan that provides benefits described in Section 3(l) of ERISA to any former employees or retirees of any Cable Subsidiary. Any disclosure in Schedule 4.12(e) shall indicate the present value of accumulated plan liabilities calculated in a manner consistent with FAS 106 and actual annual expense for such benefits for each of the last two years. (f) PENSION PLANS. All Cable Employee Plans that are Pension Plans intended to be qualified under Section 401 of the Code maintained by the Company, NPJ or any ERISA Affiliate of either of them have received favorable determinations with respect to such qualified status from the IRS. To the knowledge of the Company and NPJ, nothing has occurred since such determinations to affect adversely such determinations, and true and correct copies of such determination letters have been made available to Acquiror. (g) PROHIBITED TRANSACTIONS AND FIDUCIARY RESPONSIBILITY. None of the Cable Employee Plans has participated in, engaged in or been a party to any Prohibited Transaction which could result in the imposition of a material liability upon the Company, NPJ or any ERISA Affiliate of either of them. To the knowledge of the Company and NPJ, no officer, director or employee of the Company, NPJ or any of their ERISA I-24 Affiliates has committed a material breach of any responsibility or obligation imposed upon fiduciaries by Title I of ERISA with respect to any Cable Employee Plan. (h) REPORTING AND DISCLOSURE. Except with respect to any violation relating to any Multiemployer Plan where such violation could not result in any liability to the Company, NPJ or any ERISA Affiliate of either of them, there are no material violations of any reporting or disclosure requirements under ERISA with respect to any Cable Employee Plan. (i) ANNUAL REPORTS. The Company has made available to Acquiror a copy of (i) the two (2) most recently filed Federal Form 5500 series and accountant's opinion, if applicable, for each Cable Employee Plan other than Multiemployer Plans and (ii) the two (2) most recent actuarial valuation reports for each Cable Employee Plan that is a Pension Plan subject to Title IV of ERISA. To the knowledge of the Company and NPJ, all information provided by the Company or NPJ, as applicable, to any actuary in connection with the preparation of such actuarial valuation report was true, correct and complete in all respects. (j) FUNDING OBLIGATIONS. No Cable Employee Plan that is a Pension Plan subject to Title IV of ERISA (other than any Multiemployer Plan) has (i) incurred an Accumulated Funding Deficiency, whether or not waived, (ii) an accrued benefit obligation that exceeds the assets of the plan by more than $50,000, determined as of the last applicable annual valuation date, using the actuarial methods, factors and assumptions used for the most recent actuarial report with respect to such plan, (iii) been a plan with respect to which a Reportable Event has occurred and is continuing, or (iv) to the knowledge of the Company and NPJ, been a plan with respect to which any termination liability to the PBGC has been or is expected to be incurred or with respect to which there exist conditions or events which have occurred presenting a significant risk of termination by the PBGC. (k) LIENS AND PENALTIES. Neither the Company, NPJ nor any of their ERISA Affiliates has any liability with respect to any Cable Employee Plan (i) for the termination of any Cable Employee Plan that is a single employer plan under ERISA Section 4062 or a multiple employer plan under ERISA Section 4063, (ii) for any lien imposed under Section 302(f) of ERISA or Section 412(n) of the Code, (iii) for any interest payments required under Section 302(e) of ERISA or Section 412(m) of the Code, (iv) for any excise tax imposed by Sections 4971, 4972, 4974, 4975, 4976, 4977, 4978, 4978B, 4979, 4979A, 4980 or 4980B of the Code, or (v) for any failure to make any minimum funding contributions under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code. (l) ACTS OR OMISSIONS. There have been no acts or omissions with respect to any Cable Plan by the Company or any ERISA Affiliate which have given rise to or may give rise to fines, penalties or related charges under Sections 502 or 4071 of ERISA or Chapter 43 of the Code for which the Company or any ERISA Affiliate may be liable. (m) COBRA. The Company, NPJ and their ERISA Affiliates have complied in all material respects with the provisions of COBRA with respect to all Cable Employee Plans that are Group Health Plans. (n) ADDITIONAL BENEFITS. Except as set forth on Schedule 4.12(n), no Cable Employee shall accrue or receive additional benefits, service or accelerated rights to payments of benefits under any Cable Plan or Company Benefit Arrangement, including the right to receive any parachute payment, as defined in Section 280G of the Code, or become entitled to severance, termination allowance or similar payments as a direct result of the transactions contemplated by this Agreement. (o) CLAIMS. Other than claims for benefits in the ordinary course, there is no claim pending or, to the knowledge of the Company or NPJ, threatened involving any Cable Plan by any Person against such plan or the Company, NPJ or any of their ERISA Affiliates. There is no pending or, to the knowledge of the Company or NPJ, threatened proceeding involving any Cable Employee Plan before the IRS, the United States Department of Labor or any other governmental authority. I-25 (p) COMPLIANCE WITH LAWS; CONTRIBUTIONS. Each Cable Plan has at all times prior hereto been maintained in all material respects, by its terms and in operation, in accordance with all applicable Law (including Section 1862(b)(1) of the Social Security Act). The Company, NPJ and their ERISA Affiliates have made full and timely payment of all amounts required to be contributed under the terms of each Cable Plan and applicable Law or required to be paid as expenses under such Cable Plan, and the Company, NPJ and their ERISA Affiliates shall continue to do so through the Closing, except as the Company, NPJ and Acquiror may otherwise agree. (q) DEFINITIONS. (i) "Benefit Arrangement" means any material benefit arrangement that is not an Employee Benefit Plan, including (i) any employment or consulting agreement, (ii) any arrangement providing for insurance coverage or workers' compensation benefits, (iii) any incentive bonus or deferred bonus arrangement, (iv) any arrangement providing termination allowance, severance or similar benefits, (v) any equity compensation plan, (vi) any deferred compensation plan and (vii) any compensation policy and practice. (ii) "Cable Benefit Arrangement" means any Benefit Arrangement that covers exclusively one or more of the employees, former employees, directors and former directors of the Cable Subsidiaries and the beneficiaries of any of them. (iii) "Cable Employee" means any employee or former employee of any Cable Subsidiary. (iv) "Cable Employee Plan" means any Employee Benefit Plan that is sponsored or contributed to by the Company, NPJ or any ERISA Affiliate of either of them that covers any Cable Employees. (v) "Cable Plan" means any Cable Employee Plan or Cable Benefit Arrangement. (vi) "Company Benefit Arrangement" means any Benefit Arrangement covering any employees, former employees, directors or former directors of the Company, NPJ or the ERISA Affiliates of either of them, and the beneficiaries of any of them, other than any Cable Benefit Arrangement. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF ACQUIROR Acquiror represents and warrants to the Company and NPJ as follows (such representations and warranties to be effective as of November 18, 1994 and the schedules to the Original Agreement shall be the schedules to this Agreement): 5.1 ORGANIZATION AND AUTHORITY. Acquiror and each of its corporate Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Acquiror and its Subsidiaries have all requisite power and authority to own, lease and operate their properties and to carry on their business as now being conducted, except where the failure to have such power or authority would not have a Material Adverse Effect on Acquiror and its Subsidiaries taken a whole. Acquiror has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All necessary action, corporate or otherwise, required to have been taken by or on behalf of Acquiror by applicable Law, its charter documents or otherwise to authorize (i) the approval, execution and delivery on behalf of Acquiror of this Agreement and (ii) the performance by Acquiror of its obligations under the Transaction Documents and the consummation of the transactions contemplated hereby and thereby has been taken, except that the Merger Transactions and the Recapitalization Amendment must be approved by the stockholders of Acquiror to the extent described in Section 5.5. Each Transaction Document to which Acquiror is or will be a party constitutes or will constitute, as the case may be, a valid and binding agreement of Acquiror, enforceable against it in accordance with its terms, subject to the Enforceability Exceptions. I-26 5.2 NO BREACH OR CONFLICT. The execution and delivery of each Transaction Document to which it is or will be a party by Acquiror does not or will not, as the case may be, and the consummation of the transactions contemplated hereby and thereby by Acquiror will not, (i) violate or conflict with the Certificate of Incorporation of Acquiror (as in effect on November 18, 1994 and after giving effect to the Recapitalization Amendment) or the Acquiror Restated By- Laws; (ii) except as set forth on Schedule 5.2 hereto and except for the approvals described in Section 5.3 hereof, constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) of, result in the creation or imposition of any Lien upon the property or assets of Acquiror or its Subsidiaries, give rise to any third party right of termination, cancellation, material modification or acceleration under, or require any approval, waiver or consent under, any note, bond, mortgage, pledge, indenture, deed of trust, lease, agreement, indemnity, obligation, commitment or instrument to which Acquiror or any of its Subsidiaries is a party or by which any of them or their respective properties or assets is bound, except as would not result in a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole; or (iii) subject to obtaining the approvals and making the filings described in Section 5.3 hereof, violate any Law, judgment, decree, order or writ of any judicial, arbitral, public, or governmental authority having jurisdiction over Acquiror, any of its Subsidiaries or any of their respective properties or assets except as would not result in a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole. 5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by Acquiror of each Transaction Document to which it is, or will be, a party nor the consummation of the transactions contemplated hereby and thereby will require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except for (i) filings required under the Securities Act, (ii) filings required under the Exchange Act, (iii) filings under state securities or "blue sky" laws, (iv) the filing of a premerger notification report pursuant to, and expiration or termination of the waiting period under, the HSR Act, (v) the filing of the Certificate of Merger with the Secretaries of State of Washington and Delaware, the Recapitalization Amendment with the Secretary of State of Delaware and appropriate documents with the relevant authorities of other states in which Acquiror and its Subsidiaries are qualified to do business, (vi) such FCC Approvals as may be required in connection with FCC Licenses of Acquiror and its Subsidiaries, (vii) such Local Approvals as may be required in connection with the Franchises to operate the cable television systems of Acquiror and its Subsidiaries, and (viii) such other consents or filings as, if not obtained or made, would not have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole or as would not prevent Acquiror from performing its obligations under each Transaction Document to which it is a party. 5.4 APPROVAL OF THE BOARD. The Board of Directors of Acquiror has, by resolutions duly adopted at a meeting duly called and held, unanimously approved and adopted this Agreement, the Merger Transactions, the Recapitalization Amendment and the other transactions contemplated hereby on the terms and conditions set forth herein. 5.5 VOTE REQUIRED. The affirmative vote or action by written consent of a majority of the votes that holders of the outstanding shares of Acquiror Common Stock (treating the Acquiror Series A Preferred Stock as if it were converted into Acquiror Class B Common Stock), voting together as a class, are entitled to cast is the only vote of the holders of any class or series of the capital stock of Acquiror necessary to approve the Merger Transactions under applicable Law and the Certificate of Incorporation of Acquiror (as in effect on November 18, 1994 and after giving effect to the Recapitalization Amendment) or the Acquiror Restated By-Laws. The affirmative vote or action by written consent of Sixty-Six and Two-Thirds percent of the votes that holders of the outstanding shares of Acquiror Common Stock (treating the Acquiror Series A Preferred Stock as if it were converted into Acquiror Class B Common Stock), voting together as a class, are entitled to cast is the only vote of the holders of any class or series of the capital stock of Acquiror necessary to approve the Recapitalization Amendment. I-27 5.6 CAPITALIZATION. (a) As of November 18, 1994, the authorized capital stock of Acquiror consists of (i) 7,500,000 shares of Acquiror Class A Common Stock, (ii) 7,500,000 shares of Acquiror Class B Common Stock, and (iii) 2,700,000 shares of Preferred Stock, 1,142,858 shares of which have been designated Series A Participating Convertible Preferred Stock (the "Acquiror Series A Preferred Stock"), the terms of which are set forth in the Certificate of Designation filed by Acquiror with the Secretary of State of the State of Delaware on June 16, 1992. As of November 18, 1994, there are 345,348 shares of Acquiror Class A Common Stock, 4,277,092 shares of Acquiror Class B Common Stock and 1,142,858 shares of Acquiror Series A Preferred Stock issued and outstanding. As a result of the Recapitalization Amendment, the authorized capitalization of Acquiror as of the Closing Date will consist of not less than: 187,500,000 shares of Acquiror Class A Common Stock, 187,500,000 shares of Acquiror Class B Common Stock, and 6,000,000 shares of Preferred Stock. All such shares outstanding on November 18, 1994 are, and any shares that will be issued under the Acquiror Restated Certificate, when issued, will be, duly authorized, validly issued and fully paid and nonassessable. Other than in connection with the transactions contemplated by this Agreement and except as set forth in Schedule 5.6(a), there are no outstanding options, warrants, rights, puts, calls, commitments, or other contracts, arrangements, or understandings issued by or binding upon Acquiror or any of its Subsidiaries requiring or providing for, and there are no outstanding debt or equity securities of Acquiror or any of its Subsidiaries which upon the conversion, exchange or exercise thereof would require or provide for the issuance by Acquiror or any of its Subsidiaries of any new or additional equity interests in Acquiror or any of its Subsidiaries (or any other securities of Acquiror which, with notice, lapse of time and/or payment of monies, are or would be convertible into or exercisable or exchangeable for equity interests in Acquiror or any of its Subsidiaries). There are no preemptive or other similar rights available to the existing holders of the capital stock of Acquiror. Except as set forth on Schedule 5.6(a), there are no voting trusts or other agreements or understandings to which Acquiror is a party with respect to the voting of capital stock of Acquiror. (b) Schedule 5.6(b) sets forth the name, jurisdiction of organization and the percentage of each class of capital stock, partnership interests or other equity interests of each of Acquiror's Subsidiaries owned by Acquiror or one of its Subsidiaries. All outstanding shares of the capital stock of each Subsidiary have been duly authorized, validly issued and are fully paid and nonassessable. (c) The shares of Acquiror Class A Common Stock and Acquiror Preferred Stock, if any, to be issued in the Merger, upon their issuance in accordance with the terms hereof, will be duly authorized, validly issued, fully paid and nonassessable. 5.7 FINANCIAL STATEMENTS. The consolidated balance sheets of the Acquiror and its Subsidiaries and the notes thereto as of December 31, 1993, 1992 and 1991 and consolidated statements of income, shareholder's equity and cash flows and the notes thereto for the three fiscal years ended December 31, 1993, 1992 and 1991 certified by Deloitte & Touche LLP, whose reports thereon are included therewith, and the unaudited condensed consolidated balance sheet of the Acquiror and its Subsidiaries as of the Balance Sheet Date (the "Acquiror Balance Sheet") and unaudited consolidated statements of income and cash flow for the nine months then ended, were prepared in accordance with GAAP and present fairly as of their respective dates, in all material respects, the consolidated financial position of Acquiror and its Subsidiaries as at the dates thereof and the consolidated results of their operations and their consolidated cash flows for each of the respective periods covered thereby, in conformity with GAAP. 5.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on Schedule 5.8, neither Acquiror nor any of its Subsidiaries has any indebtedness, liability or obligation of the type required by GAAP to be reflected on a consolidated balance sheet of Acquiror or in the notes, schedules or exhibits thereto, that is not reflected or reserved against in the Acquiror Balance Sheet , and since the Balance Sheet Date, neither Acquiror nor any of its Subsidiaries has incurred any such liabilities or obligations other than in the ordinary course of business. I-28 5.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule 5.9 or in Acquiror's Annual Report on Form 10-K for the year ended December 31, 1993, since the Balance Sheet Date, Acquiror and its Subsidiaries have conducted their business operations in the ordinary course and there has not occurred (i) any Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole except for Material Adverse Effects due to general economic or industry- wide conditions (including, without limitation, determinations by the FCC or local franchising authorities affecting or applicable to the offering or packaging of a la carte channels or cost-of-service showings and any rate adjustments pursuant to such determinations), or (ii) other events or conditions of any character that, individually or in the aggregate, have or would reasonably be expected to have, a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole or on the ability of Acquiror to perform its material obligations under the Transaction Documents to which it is a party. 5.10 COMPLIANCE WITH LAWS. (a) Each of Acquiror and its Subsidiaries holds all Franchises and Licenses necessary for the lawful conduct of its business, except where the failure to hold any such Franchise or License would not have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole. To Acquiror's knowledge, none of Acquiror or any of its Subsidiaries has violated, nor is Acquiror or are any of them in violation of, any such Franchises or Licenses or any applicable Law (including, without limitation, any of the foregoing related to occupational safety, storage, disposal, discharge into the environment of hazardous wastes, environmental protection, conservation, unfair competition, labor practices or corrupt practices), except where such violations do not, and insofar as reasonably can be foreseen will not, have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole, and neither Acquiror nor any of its Subsidiaries has received any notice from a governmental or regulatory authority within three years of November 18, 1994 of any such violation. (b) Each Subsidiary of Acquiror has made all submissions (including, without limitation, registration statements) required under the Communications Act, and has, to Acquiror's knowledge, obtained all necessary FCC authorizations, Licenses, registrations, permits and tower approvals. The cable television systems of Acquiror's Subsidiaries have complied in all material respects with the Communications Act. 5.11 FRANCHISES AND MATERIAL AGREEMENTS. (a) As of September 30, 1994, the cable television systems owned by Acquiror's Subsidiaries (i) had approximately 2,890,000 Basic Subscribers and 2,493,000 premium subscriptions and (ii) passed approximately 5,055,000 dwelling units. Each Franchise of Acquiror's Subsidiaries and each other agreement, contract or arrangement which is material to the ownership and operation of the cable systems of Acquiror's Subsidiaries to which any Acquiror Subsidiary is a party or by which any of its properties or assets are bound (the "Acquiror Material Cable Agreements") is the validly existing, legally enforceable obligation of each Acquiror Subsidiary party thereto and, to the knowledge of Acquiror, of the other parties thereto, subject to the Enforceability Exceptions. Each Acquiror Subsidiary is validly and lawfully operating under its Franchises and the Acquiror Material Cable Agreements to which it is a party, and each Acquiror Subsidiary has duly complied in all material respects with all of the terms and conditions of each of its Franchises and each Acquiror Material Cable Agreement to which it is a party. (b) Except as previously disclosed to the Company in writing, no Person (including any governmental authority) has any right to acquire any interest in any cable television system or assets of Acquiror or its Subsidiaries (including any right of first refusal or similar right), other than rights of condemnation or eminent domain afforded by Law and, to the knowledge of Acquiror, no other Person (i) has been granted or has applied for the consent or approval of any governmental authority for the installation, construction, development, ownership, or operation of a cable television system (as defined in the Cable Communications Policy Act of 1984, as amended) within all or part of the geographic area served by any cable television system of Acquiror or its Subsidiaries or (ii) operates, or has commenced the construction, installation or development of, any cable television system (as defined in the Cable Communications Policy Act of 1984, as amended) within all or part of the geographic area served by any cable television system of Acquiror's I-29 Subsidiaries, regardless of whether the consent or approval of any governmental authority is required or has been obtained. (c) Neither Acquiror nor any of its Subsidiaries has made any material commitments in writing to any state, municipal, local or other governmental commission, agency or body with respect to the operation and construction of their respective cable systems which are not fully reflected in the Franchises or any Acquiror Material Cable Agreement. Neither Acquiror nor any of its Subsidiaries has entered into any written agreements with community groups or similar third parties restricting or limiting the types of programming that may be shown on such systems. (d) No Franchising Authority has advised Acquiror or any of its Subsidiaries in writing, or otherwise formally notified Acquiror or any of its Subsidiaries in accordance with the terms of the applicable Franchise, of its intention to deny renewal of an existing Franchise. Acquiror and its Subsidiaries have timely filed notices of renewal in accordance with the Communications Act with all Franchising Authorities with respect to each Franchise expiring within 36 months after the date of this Agreement. Such notices of renewal have been filed pursuant to the formal renewal procedures established by Section 626(a) of the Communications Act. As of the Closing Date, (i) Acquiror will have maintained a controlling ownership in each system in its entirety for at least 36 consecutive months following the initial construction or acquisition of each such system by Acquiror or an Acquiror Subsidiary, or (ii) the consummation of the transactions contemplated by this Agreement will not otherwise violate the three-year holding period requirement set forth in Section 617 of the Communications Act and the FCC rules and regulations promulgated thereunder. (e) Acquiror and its Subsidiaries are operating the systems in compliance in all material respects with the provisions of the Communications Act and the rules and regulations of the FCC relating to carriage of signals, syndicated exclusivity, network non-duplication, and retransmission consent except where the failure to comply would not, individually or in the aggregate, result in a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole. No written notices or demands have been received from any television station or from any other Person claiming to have a right, or objecting to or challenging the right of the systems, to carry any signal or deliver the same, or challenging the channel position on which any television station is carried. (f) Schedule 5.11(f) indicates which television signals carried by the systems are carried without retransmission consent agreements (other than stations which have elected must-carry status). For each commercial television signal on each system that has elected must-carry status, but that is not being carried because of signal quality problems or potential copyright liability, Schedule 5.11(f) lists the signal and the reason for non-carriage. (g) Acquiror has made available to the Company true, correct, and complete specimen copies of (i) all FCC Forms 393, 1200, 1205, 1210, 1215 and 1220s that have been prepared with respect to the systems, (ii) all material correspondence with any governmental body, subscriber, or other interested party relating to rate regulation generally or specific rates charged to subscribers of the systems, including, without limitation, any complaints filed with the FCC with respect to any rates charged to subscribers of the systems, and (iii) any documentation supporting an exemption from the rate regulation provisions of the Communications Act claimed by Acquiror or a Subsidiary of Acquiror with respect to the systems. Schedule 5.11(g) sets forth (i) a list of all complaints filed pursuant to the Communications Act and received by Acquiror or any of its Subsidiaries which have not been deemed invalid by the FCC, and further sets forth those Franchises that have been certified or, to Acquiror's knowledge, filed for certification under the Communications Act with respect to rate regulation and (ii) a list of all letters of inquiry from the FCC received by Acquiror or any Subsidiary of Acquiror since September 1, 1993 with regard to rate restructuring. 5.12 TAX MATTERS. (a) All Tax Returns required to be filed by Acquiror or any of its Subsidiaries on or before November 18, 1994 have been filed with the appropriate governmental agencies in all jurisdictions in which such Tax I-30 Returns are required to be filed; all of the foregoing Tax Returns are true, correct and complete in all material respects; and all Taxes required to have been paid in connection with such Tax Returns have been paid. All material Taxes payable by or with respect to Acquiror and its Subsidiaries but not reflected on any Tax Return required to be filed prior to the Balance Sheet Date have been fully paid or adequate provision therefor has been made and reflected on the Acquiror Balance Sheet. (b) Except as set forth on Schedule 5.12 hereto, there is no claim or investigation involving an amount greater than $250,000 pending or threatened against Acquiror or any of its Subsidiaries for past Taxes, and adequate provision for the claims or investigations set forth on Schedule 5.12 has been made as reflected on Acquiror's financial statements. Except as set forth on Schedule 5.12, Acquiror and its Subsidiaries have not waived or extended any applicable statute of limitations relating to the assessment of federal, state or local Taxes relating to Acquiror. 5.13 LITIGATION. There is no suit, action, proceeding or investigation pending or, to the knowledge of Acquiror, threatened against or affecting Acquiror or any of its Subsidiaries (except for proceedings or investigations affecting the cable television industry generally) that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole, or prevent, hinder, or materially delay the ability of Acquiror to consummate the transactions contemplated by this Agreement, nor is there any judgment, decree, inquiry, rule or order outstanding against Acquiror or any of its Subsidiaries which, insofar as can reasonably be foreseen, would have any such effect in the future. 5.14 TITLE TO PROPERTIES; ENCUMBRANCES. Acquiror and its Subsidiaries are the exclusive holders of all rights in or to all real and personal, tangible and intangible, property and assets of Acquiror and its Subsidiaries (other than any such assets held pursuant to leases or licenses) used or useful in the ownership and operation of the cable television systems which are wholly owned by Acquiror or any of its Subsidiaries. Except as set forth on Schedule 5.14, each of Acquiror and its Subsidiaries has good and valid title to its respective assets, free and clear of all defects and Liens except: (a) materialmen's, mechanics', carriers', workmen's, warehousemen's, repairmen's, or other like Liens arising in the ordinary course of business, or deposits to obtain the release of such Liens; (b) Liens for current taxes not yet due and payable; and (c) Liens or minor imperfections of title that do not interfere with the use or detract from the value of such property and, taken in the aggregate, would not have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole. Except as would not result in any Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole, each of Acquiror and its Subsidiaries owns or has the lawful right to use all assets, properties, operating rights, easements, contracts, leases, and other instruments necessary to operate its business lawfully and to maintain the same as presently conducted. 5.15 EMPLOYEE BENEFITS; ERISA MATTERS. (a) ACQUIROR BENEFIT PLANS AND ACQUIROR BENEFIT ARRANGEMENTS. Schedule 5.15(a) lists each Acquiror Employee Plan and Acquiror Benefit Arrangement. Acquiror has made available to the Company and NPJ with respect to each Acquiror Employee Plan and Acquiror Benefit Arrangement true and complete copies of (i) all written documents comprising such plans and arrangements (including amendments and individual agreements relating thereto); (ii) the two most recent Federal Form 5500 series (including all schedules thereto) filed with respect to each Acquiror Employee Plan; (iii) the most recent financial statements and actuarial reports, if any, pertaining to each such plan or arrangement; and (iv) the summary plan description currently in effect and all material modifications thereto, if any, for each Acquiror Employee Plan. (b) MULTIEMPLOYER PLANS. (i) Neither Acquiror nor any of its ERISA Affiliates has incurred any unsatisfied Withdrawal Liability with respect to any Multiemployer Plan to which the Acquiror or any of its ERISA Affiliates is required to make or accrue a contribution or has, within the six year period preceding the Closing Date, been required to make or accrue a contribution, nor, to the knowledge of Acquiror, is Acquiror or I-31 any of its ERISA Affiliates reasonably expected to incur any Withdrawal Liability with respect to any such Multiemployer Plan. (ii) Neither Acquiror nor any of its ERISA Affiliates has been notified by the sponsor of any Multiemployer Plan to which Acquiror or any of its ERISA Affiliates is required to make or accrue a contribution or has, within the six year period preceding the Closing Date, been required to make or accrue a contribution, that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and to the knowledge of Acquiror, no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of the Title IV of ERISA. (c) UNION WELFARE FUNDS. Neither Acquiror nor any of its ERISA Affiliates has incurred any liability based on withdrawal from any union-sponsored multiemployer welfare benefit fund maintained pursuant to any Welfare Benefit Plan to which Acquiror or any of its ERISA Affiliates contributes pursuant to the terms of a collective bargaining agreement. (d) WELFARE PLANS. Neither Acquiror nor any of its ERISA Affiliates maintains any plan which is funded through a "welfare benefit fund" as defined in Section 419(e) of the Code. (e) RETIREE WELFARE BENEFITS PLANS. Except as set forth in Schedule 5.15(e) and pursuant to the provisions of COBRA, neither Acquiror nor any of its ERISA Affiliates maintains any Acquiror Employee Plan that provides benefits described in Section 3(l) of ERISA to any former employees or retirees of Acquiror. Any disclosure in Schedule 5.15(e) shall indicate the present value of accumulated plan liabilities calculated in a manner consistent with FAS 106 and actual annual expense for such benefits for each of the last two years. (f) PENSION PLANS. All Acquiror Employee Plans that are Pension Plans intended to be qualified under Section 401 of the Code maintained by Acquiror or any of its ERISA Affiliates have received favorable determinations with respect to such qualified status from the IRS. To the knowledge of Acquiror, nothing has occurred since such determinations to affect adversely such determinations, and true and correct copies of such determination letters have been made available to the Company and NPJ. (g) PROHIBITED TRANSACTIONS AND FIDUCIARY RESPONSIBILITY. None of the Acquiror Employee Plans has participated in, engaged in or been a party to any Prohibited Transaction which could result in the imposition of a material liability upon Acquiror or any of its ERISA Affiliates. To the knowledge of Acquiror, no officer, director or employee of Acquiror or any of its ERISA Affiliates has committed a material breach of any responsibility or obligation imposed upon fiduciaries by Title I of ERISA with respect to any Acquiror Employee Plan. (h) REPORTING AND DISCLOSURE. Except with respect to any violation relating to any Multiemployer Plan where such violation could not result in any liability to Acquiror or any of its ERISA Affiliates, there are no material violations of any reporting or disclosure requirements under ERISA with respect to any Acquiror Employee Plan. (i) ANNUAL REPORTS. Acquiror has made available to the Company and NPJ a copy of (i) the two (2) most recently filed Federal Form 5500 series and accountant's opinion, if applicable, for each Acquiror Employee Plan other than Multiemployer Plans and (ii) the two (2) most recent actuarial valuation reports for each Acquiror Employee Plan that is a Pension Plan subject to Title IV of ERISA. To the knowledge of Acquiror, all information provided by Acquiror to any actuary in connection with the preparation of such actuarial valuation report was true, correct and complete in all respects. (j) FUNDING OBLIGATIONS. No Acquiror Employee Plan that is a Pension Plan subject to Title IV of ERISA (other than any Multiemployer Plan) has (i) incurred an Accumulated Funding Deficiency, whether I-32 or not waived, (ii) an accrued benefit obligation that exceeds the assets of the plan by more than $50,000, determined as of the last applicable annual valuation date, using the actuarial methods, factors and assumptions used for the most recent actuarial report with respect to such plan, (iii) been a plan with respect to which a Reportable Event has occurred and is continuing, or (iv) to the knowledge of Acquiror, been a plan with respect to which any termination liability to the PBGC has been or is expected to be incurred or with respect to which there exist conditions or events which have occurred presenting a significant risk of termination by the PBGC. (k) LIENS AND PENALTIES. Neither Acquiror nor any of its ERISA Affiliates has any liability with respect to any Acquiror Employee Plan (i) for the termination of any Acquiror Employee Plan that is a single employer plan under ERISA Section 4062 or a multiple employer plan under ERISA Section 4063, (ii) for any lien imposed under Section 302(f) of ERISA or Section 412(n) of the Code, (iii) for any interest payments required under Section 302(e) of ERISA or Section 412(m) of the Code, (iv) for any excise tax imposed by Sections 4971, 4972, 4974, 4975, 4976, 4977, 4978, 4978B, 4979, 4979A, 4980 or 4980B of the Code, or (v) for any failure to make any minimum funding contributions under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code. (l) ACTS OR OMISSIONS. There have been no acts or omissions with respect to any Acquiror Plan by Acquiror or any of its ERISA Affiliates which have given rise to or may give rise to fines, penalties or related charges under Sections 502 or 4071 of ERISA or Chapter 43 of the Code for which the Acquiror or any of its ERISA Affiliates may be liable. (m) COBRA. The Acquiror and its ERISA Affiliates have complied in all material respects with the provisions of COBRA with respect to all Acquiror Employee Plans that are Group Health Plans. (n) ADDITIONAL BENEFITS. Except as set forth on Schedule 5.15(n), no Acquiror Employee shall accrue or receive additional benefits, service or accelerated rights to payments of benefits under any Acquiror Plan or Acquiror Benefit Arrangement, including the right to receive any parachute payment, as defined in Section 280G of the Code, or become entitled to severance, termination allowance or similar payments as a direct result of the transactions contemplated by this Agreement. (o) CLAIMS. Other than claims for benefits in the ordinary course, there is no claim pending or, to the knowledge of Acquiror, threatened involving any Acquiror Plan by any Person against such plan or Acquiror or any of its ERISA Affiliates. There is no pending or, to the knowledge of Acquiror, threatened proceeding involving any Acquiror Employee Plan before the IRS, the United States Department of Labor or any other governmental authority. (p) COMPLIANCE WITH LAWS; CONTRIBUTIONS. Each Acquiror Plan has at all times prior hereto been maintained in all material respects, by its terms and in operation, in accordance with all applicable Law (including Section 1862(b)(1) of the Social Security Act). Acquiror and its ERISA Affiliates have made full and timely payment of all amounts required to be contributed under the terms of each Acquiror Plan and applicable Law or required to be paid as expenses under such Acquiror Plan, and Acquiror and its ERISA Affiliates shall continue to do so through the Closing, except as the Company, NPJ and Acquiror may otherwise agree. (q) DEFINITIONS. (i) "Acquiror Benefit Arrangement" means any material benefit arrangement that is not an Employee Benefit Plan, including (i) any employment or consulting agreement, (ii) any arrangement providing for insurance coverage or workers' compensation benefits, (iii) any incentive bonus or deferred bonus arrangement, (iv) any arrangement providing termination allowance, severance or similar benefits, (v) any equity compensation plan, (vi) any deferred compensation plan and (vii) any compensation policy and practice maintained by Acquiror or any of its ERISA Affiliates covering any employees, former I-33 employees, directors or former directors of Acquiror or its ERISA Affiliates, and the beneficiaries of any of them. (ii) "Acquiror Employee" means any employee or former employee of Acquiror or any of its Subsidiaries. (iii) "Acquiror Employee Plan" means any Employee Benefit Plan that is sponsored or contributed to by Acquiror or any of its ERISA Affiliates that covers any employees or former employees of Acquiror or its ERISA Affiliates. (iv) "Acquiror Plan" means any Acquiror Employee Plan or Acquiror Benefit Arrangement. 5.16 LABOR MATTERS. (a) Except as set forth on Schedule 5.16(a), neither Acquiror nor any of its Subsidiaries is party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of Acquiror or any of its Subsidiaries. (b) Except as set forth on Schedule 5.16(b), (i) no employees of Acquiror or any of its Subsidiaries are represented by any labor organization and (ii) as of November 18, 1994, no labor organization or group of employees of Acquiror or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the knowledge of Acquiror, threatened to be brought or filed, with the NLRB or any other labor relations tribunal or authority. To the knowledge of Acquiror, there are no formal organizing activities involving a material number of employees of Acquiror or any of its Subsidiaries pending with, or threatened by, any labor organization. (c) Except as would not result in a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole, (i) there are no strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or, to the knowledge of Acquiror, threatened against or involving Acquiror or any of its Subsidiaries and (ii) there are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of Acquiror, threatened by or on behalf of any employee or group of employees of Acquiror or any of its Subsidiaries. 5.17 FULL DISCLOSURE. All of the statements made by Acquiror in this Agreement (including, without limitation, the representations and warranties made by Acquiror herein and in the schedules and exhibits hereto which are incorporated by reference herein and which constitute an integral part of this Agreement) do not (and on the Closing Date shall not) include or contain any untrue statement of a material fact, and do not (and on the Closing Date shall not) omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.18 BROKERS AND FINDERS. Neither Acquiror nor any of its officers, directors, employees or Affiliates has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated herein, except that Acquiror has employed Lazard Freres & Co. as its financial advisor and for whose fees and expenses Acquiror is responsible. ARTICLE 6. OTHER AGREEMENTS 6.1 NO SOLICITATION. Neither the Company nor any of its Subsidiaries, officers, directors, representatives and agents shall, directly or indirectly, knowingly encourage, solicit, initiate or, except if the Company 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, participate in any way in discussions or negotiations with, or knowingly provide any confidential information to, any Person (other than Acquiror or any Affiliate or associate of Acquiror and I-34 their respective directors, officers, employees, representatives and agents) concerning any merger, consolidation, share exchange or similar transaction involving the Company or any of the Cable Subsidiaries or any purchase of any portion of the operating assets of (other than in the ordinary course of business), or any equity interests in, the Cable Subsidiaries; PROVIDED, HOWEVER, that nothing contained in this Section 6.1 shall prohibit the Company Board of Directors from (i) taking and disclosing to the Company's stockholders a position with respect to a tender offer for Company Common Stock by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act, (ii) making such disclosure to the Company's stockholders as, in the judgment of the Company Board of Directors, with the written advice of outside counsel, may be required under applicable Law, or (iii) responding to any unsolicited proposal or inquiry by advising the Person making such proposal or inquiry of the terms of this Section 6.1. The Company will promptly communicate to Acquiror the fact that it has received any proposal or inquiry in respect of any such transaction, or of any such information requested from it or of any such negotiations or discussions being sought to be initiated with the Company and will furnish Acquiror with a true and complete copy of any proposal that the Board of Directors of the Company has determined is a Superior Proposal (as defined below). Notwithstanding anything to the contrary set forth herein, the Board of Directors of the Company may respond to any Superior Proposal and may provide information to, and negotiate with, any Person, group or entity in connection therewith if the Board of Directors of the Company determines, with the advice of outside counsel, that it is required to do so in the exercise of its fiduciary duties. For purposes of this Section 6.1, a "Superior Proposal" means a BONA FIDE, written, unsolicited proposal relating to a possible transaction described in this Section 6.1 by any Person other than Acquiror that, in the reasonable good faith judgment of the Board of Directors of the Company, with the advice of outside financial advisers, is reasonably likely to be consummated and is financially more favorable to the stockholders of the Company than the terms of the transactions contemplated by this Agreement. 6.2 Conduct of Business of the Company; Ownership of Cable Subsidiaries. (a) Except as contemplated by this Agreement and except for the Company's operation of the Palmer Systems which shall be governed by the provisions of Section 6.3, during the period from November 18, 1994 to the Effective Time, none of the Company, Holding or Broadcasting shall, without the prior written consent of Acquiror: (i) amend its Articles of Incorporation or Certificate of Incorporation, as the case may be, or By-laws or the Rights 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 (A) on the part of the Company, for dividends declared and paid, or redemptions or other acquisitions made, consistent with the principles and restrictions described on Schedule 6.2(a) or in connection with the Units Plan, the Stock Plan, the Directors Option Plan and the Option Plan and (B) that Holding and Broadcasting may from time to time declare dividends to their respective stockholders; PROVIDED, HOWEVER, that (I) if Acquiror elects to issue Acquiror Preferred Stock and (II) the Company elects to grant to its stockholders the right to make a Preferred Stock Election, no such redemption or acquisition of the Company's capital stock may be made after the Preferred Stock Election; (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 NPJ pursuant to Section 2.5 and the Contribution Agreement, make any acquisition of the assets of any Person, except through a Subsidiary other than a Cable Subsidiary; (v) except to the extent any of the following are transferred to or assumed by NPJ pursuant to Section 2.5 and the Contribution Agreement, (i) create, incur or assume any long-term debt not currently outstanding (including obligations in respect of capital leases), (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations I-35 of any other Person, (iii) enter into any material agreement, commitment or understanding, (iv) make any acquisition of the stock or other equity interests, by means of merger, consolidation or otherwise, of any Person or (v) make any loans, advances or capital contributions to, or investments in, any Person other than a Subsidiary; (vi) issue, sell, deliver or agree to 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 such securities or agreements outstanding on November 18, 1994, PROVIDED THAT a maximum of one thousand (1,000) shares of Company Common Stock in the aggregate may be issued with respect to the Stock Plan and the Units Plan and a maximum of four thousand (4,000) shares of Company Common Stock may be issued in connection with each of the Option Plan and the Directors Option Plan; (vii) terminate, amend, modify or waive compliance with any of the provisions, terms or conditions of the Contribution Agreement directly or indirectly respecting the Retained Assets or the Retained Liabilities or affecting the rights or obligations of Broadcasting from and after the Effective Time; or (viii) take, or agree in writing or otherwise to take, any of the foregoing actions or any actions that would (a) make any representation or warranty of the Company or NPJ contained in this 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 Article 7 of this Agreement not being satisfied or (c) be inconsistent with the terms of this Agreement or the transactions contemplated hereby. (b) The Company covenants and agrees to use its best efforts to cause all of the Cable Subsidiaries to be wholly owned, directly or indirectly, by the Company on or prior to the Effective Date. 6.3 CONDUCT OF BUSINESS OF THE CABLE SUBSIDIARIES. Except as contemplated by this Agreement, during the period from November 18, 1994 to the Effective Time, the Company shall conduct its operation of the Palmer Systems, and shall cause the Cable Subsidiaries to conduct their operations, according to their ordinary and usual course of business consistent with past practices. Without limiting the generality of the foregoing, except as otherwise contemplated by this Agreement, without the prior written consent of Acquiror, the Company shall not permit any Cable Subsidiary to: (a) amend its charter or By-laws or alter through merger, liquidation, dissolution, reorganization, restructuring or in any other fashion the ownership of any Cable Subsidiary except as permitted by this Agreement; (b) 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 such securities or agreements outstanding on November 18, 1994; (c) 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 (i) any Cable Subsidiary may declare and pay dividends to any other Cable Subsidiary, and (ii) the Cable Subsidiaries may declare and pay dividends to the Company in an aggregate amount not to exceed the Cable Subsidiaries' consolidated adjusted net income for the period from November 18, 1994 to the Closing Date; for purposes of this paragraph, the Cable Subsidiaries' consolidated adjusted net income for such period means the Cable Subsidiaries' consolidated net income, determined in accordance with GAAP, (i) increased by the sum of the amount of depreciation and amortization deductions taken during such period, and the amount of accrued but unpaid Company Consolidated Income Taxes deducted in calculating the Cable Subsidiaries' consolidated net income to the extent not otherwise paid pursuant to tax sharing arrangements, and (ii) decreased by the sum of (A) the greater of (x) the amount of capital expenditures to be made during such period in accordance with the capital expenditure budget attached as Schedule 6.3(g) or (y) the amount of capital expenditures actually made by the Cable Subsidiaries during such period; I-36 (d)(i) create, incur or assume any long-term debt not currently outstanding (including obligations in respect of capital leases), (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other Person, or (iii) make any loans, advances or capital contributions to, or investments in, any Person other than a Cable Subsidiary; (e) acquire, sell, lease or dispose of any assets material to such Cable Subsidiary, other than sales of inventory and equipment in the ordinary and usual course of business consistent with past practice; (f) mortgage, pledge or subject to any Lien any of its properties or assets, tangible or intangible, material to such Cable Subsidiary; (g) fail to effect capital expenditures substantially in accordance with the capital expenditure budget attached hereto as Schedule 6.3(g); (h) without the consent of Acquiror, which shall not be withheld or delayed unreasonably, (i) except as required by applicable Law or as disclosed to Acquiror in writing prior to November 18, 1994, implement any rate change, retiering or repackaging of cable television programming offered by any of the Cable Subsidiaries, (ii) except as disclosed in writing to Acquiror prior to November 18, 1994, make any cost-of-service or hardship election under the rules and regulations adopted under the Cable Television Consumer Protection and Competition Act of 1992, or (iii) 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, waiver, order or approval of any governmental authority necessary for the transfer of control of any Franchise; (i) (i) 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, (ii) pay or agree to pay any pension, retirement allowance or other material employee benefit not required or contemplated by any of the existing benefit, severance, pension or employment plans, agreements or arrangements as in effect on November 18, 1994 to any such director, officer or key employee, whether past or present, (iii) enter into any new or materially amend any existing employment agreement 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, (iv) enter into any new or materially amend any existing severance agreement with any such director, officer or key employee or (v) 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; (j) except as set forth on Schedule 6.3(j), 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 cancelable without penalty on 30 days or less notice; (k) except as set forth on Schedule 6.3(k), enter into any collective bargaining agreement or any successor collective bargaining agreement to any existing collective bargaining agreement; (l) take, or agree in writing or otherwise to take, any of the foregoing actions or any actions that would (i) make any representation or warranty of the Company or NPJ contained in this Agreement untrue or incorrect as of the date when made or as of the Closing Date, (ii) result in any of the conditions of this Agreement not being satisfied or (iii) be inconsistent with the terms of this Agreement or the transactions contemplated hereby. The Company shall not be deemed to have breached clauses (ii), (iii) of (iv) of Section 6.3(i) if any such payment, agreement or amendment prohibited by such clauses is, in the case of a prohibited payment, paid in its entirety by the Company prior to the Closing Date or, in the case of a prohibited agreement or amendment, will not impose continuing obligations on Acquiror or any of the Cable Subsidiaries after the I-37 Effective Time. The provisions of paragraphs (d) through and including (l) of this Section 6.3 shall be applicable to and bind the Company with respect to its operation of the Palmer Systems as if the Company were a Cable Subsidiary. 6.4 CONDUCT OF BUSINESS OF ACQUIROR. Except as contemplated by this Agreement, during the period from November 18, 1994 to the Effective Time, Acquiror and its Subsidiaries will conduct their operations according to their ordinary and usual course of business consistent with past practices, keep available the services of their current officers and employees and preserve their relationship with customers, franchising authorities, suppliers and others having business dealing with them with the objective that the goodwill and on-going business of Acquiror and its Subsidiaries shall not be impaired in any material respect at the Effective Time. Without limiting the generality of the foregoing, except as otherwise contemplated by this Agreement, Acquiror will not, without the prior written consent of the Company: (a) amend the Acquiror Restated Certificate or the Acquiror Restated By- Laws; (b) declare, set aside or pay any dividend or other distribution (except (i) in the form of shares of capital stock of Acquiror or (ii) any dividend required to be paid by the terms of any preferred stock of the Company which is 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 667,366 shares of Acquiror Common Stock (as such quantity shall be increased to give effect to the stock dividend, split or other action contemplated by Section 6.22(b) hereof) which are subject to Acquiror's 1998-1999 Share Repurchase Program, or (ii) other repurchases of shares of Acquiror Common Stock for an aggregate amount not to exceed $50,000,000; or (c) take, or agree in writing or otherwise to take, any of the foregoing actions or any actions that would (i) subject to the provisions of Section 6.25 hereof, make any representation or warranty of Acquiror contained in this Agreement untrue or incorrect as of the date when made or as of the Closing Date, (ii) result in any of the conditions to Closing in Article 7 of this Agreement not being satisfied or (iii) be inconsistent with the terms of this Agreement or the transactions contemplated hereby. 6.5 ACCESS TO INFORMATION. Between the date of this Agreement and the Effective Time, the Company and Acquiror will each (a) give the other party and its authorized representatives reasonable access, during regular business hours upon reasonable notice, to all offices, warehouses and other facilities of such party and its Subsidiaries and to all books and records of such party and its Subsidiaries, (b) permit the other party to make such reasonable inspections of the offices, warehouses, facilities, books and records described in clause (a) as it may require, and (c) cause its officers and those of its Subsidiaries to furnish the other party with such financial and operating data and other information with respect to the business and properties of the Company, the Cable Subsidiaries, Holding and Broadcasting or Acquiror and its Subsidiaries, as the case may be, as the other party may from time to time reasonably request. All such access and information obtained by either the Company or Acquiror and their respective authorized representatives shall be subject to the terms and conditions of the Confidentiality Agreement. No investigation pursuant to this Section 6.5 or otherwise shall affect any representations or warranties of the parties hereto or the conditions to the obligations of the parties hereto. 6.6 SEC FILINGS. (a) As promptly as practicable after November 18, 1994, Acquiror and NPJ (with all necessary assistance and cooperation of each other and the Company) will prepare and file with the SEC registration statements (collectively, the "Registration Statements") in connection with, in the case of Acquiror's Registration Statement, the registration under the Securities Act of the Acquiror Merger Securities to be issued pursuant to the Merger, and, in the case of NPJ's Registration Statement, the registration under the Securities Act of the NPJ Common Stock to be distributed pursuant to the Distribution, which Registration Statements shall contain a preliminary joint proxy statement to be mailed by the Company and Acquiror to their respective stockholders in connection with the vote of such stockholders with respect to, in the case of I-38 the Company, the Merger Transactions, and, in the case of Acquiror, the Merger and the Recapitalization Amendment and a preliminary prospectus of Acquiror and NPJ in connection with such registration under the Securities Act (the "Joint Proxy Statement/Prospectus"). (b) The Company, NPJ and Acquiror will thereafter use their respective best efforts to respond to any comments of the SEC with respect to the Registration Statements and to have the Registration Statements declared effective as promptly as practicable, and also will take any other action required to be taken under federal or state securities laws (including, without limitation, the delivery to the Company and Acquiror, as appropriate, of a letter from each party's independent auditors in form and substance reasonably satisfactory to the Company or Acquiror, as the case may be, and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statements). (c) As promptly as practicable after November 18, 1994, the Company, NPJ and Acquiror shall prepare and file any other filings required to be filed by each under the Securities Act, the Exchange Act or any other federal or state laws relating to the Merger Transactions and the transactions contemplated hereby (collectively "Other Filings") and will use their reasonable best efforts to respond to any comments of the SEC or any other appropriate government official with respect thereto. (d) The Company, NPJ and Acquiror shall cooperate with each other and provide to each other all information necessary in order to prepare the Registration Statement, the Joint Proxy Statement/Prospectus and the Other Filings, including, without limitation, a registration statement by Acquiror on Form 8-A under the Exchange Act with respect to the Acquiror Merger Securities and the registration statement of Acquiror under the Securities Act and the Exchange Act in connection with any other registered public offering (collectively "SEC Filings") and shall provide promptly to the other parties any information that such party may obtain that could necessitate amending any such document. (e) The Company, NPJ and Acquiror will notify the other parties promptly of the receipt of any comments from the SEC or its staff or any other appropriate government official and of any requests by the SEC or its staff or any other appropriate government official for amendments or supplements to any of the SEC Filings or for additional information and will supply the other parties with copies of all correspondence between the Company or any of its representatives, NPJ or any of its representatives, or Acquiror or any of its representatives, as the case may be, on the one hand, and the SEC or its staff or any other appropriate government official, on the other hand, with respect thereto. If at any time prior to the Effective Time, any event shall occur that should be set forth in an amendment of, or a supplement to, any of the SEC Filings, the Company, NPJ and Acquiror agree promptly to prepare and file such amendment or supplement and to distribute such amendment or supplement as required by applicable Law, including, in the case of an amendment or supplement to the Joint Proxy Statement/Prospectus, mailing such supplement or amendment to the Company's stockholders and, if required, Acquiror's stockholders, as the case may be. (f) The information provided and to be provided by the Company, NPJ and Acquiror for use in SEC Filings shall at all times prior to the Effective Time be true and correct in all material respects and shall not omit to state any material fact required to be stated therein or necessary in order to make such information not false or misleading, and the Company, NPJ and Acquiror each agree to correct any such information provided by it for use in the SEC Filings that shall have become false or misleading. Each SEC Filing, when filed with the SEC or any other appropriate government official, shall comply as to form in all material respects with all applicable Law. (g) Acquiror shall indemnify, defend and hold harmless the Company and NPJ, each of their officers and directors and each other Person, if any, who controls any of the foregoing within the meaning of the Exchange Act against any Losses and Expenses, to which any of the foregoing may become subject under the Securities Act or the Exchange Act or otherwise, insofar as such Losses and Expenses arise out of or are I-39 based upon (i) an untrue statement or alleged untrue statement of a material fact contained in any SEC Filing or (ii) the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, PROVIDED that Acquiror was responsible for such misstatement or omission, and Acquiror shall reimburse, upon request from time to time, the Company, NPJ and each such officer, director and controlling Person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such Losses and Expenses. (h) The Company and, from and after the Effective Time, NPJ (individually and not jointly with the Company) shall indemnify, defend and hold harmless Acquiror, each of its officers and directors and each other Person, if any, who controls any of the foregoing within the meaning of the Exchange Act against any Losses and Expenses to which any of the foregoing may become subject under the Securities Act or the Exchange Act or otherwise, insofar as such Losses and Expenses arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in any SEC Filing or (ii) the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, PROVIDED that the Company or NPJ was responsible for such misstatement or omission, and the Company or NPJ (as the case may be), upon request from time to time, shall reimburse Acquiror and each such officer, director and controlling Person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such Losses and Expenses. (i) For the purpose of this Section 6.6, the term "Indemnifying Party" shall mean the party having an obligation hereunder to indemnify the other party pursuant to this Section 6.6, and the term "Indemnified Party" shall mean the party having the right to be indemnified pursuant to this Section 6.6. Whenever any claim shall arise for indemnification under this Section 6.6, the Indemnified Party shall promptly notify the Indemnifying Party in writing of such claim and, when known, the facts constituting the basis for such claim (in reasonable detail). Failure by the Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability hereunder unless such failure materially prejudices the Indemnifying Party. (j) After such notice, if the Indemnifying Party undertakes to defend any such claim, it shall take control of the defense and investigation with respect to such claim and employ and engage attorneys of its own choice to handle and defend the same, at the Indemnifying Party's cost, risk and expense, upon written notice to the Indemnified Party of such election, which notice acknowledges the Indemnifying Party's obligation to provide indemnification hereunder. The Indemnifying Party shall not settle any third-party claim that is the subject of indemnification without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that the Indemnifying Party may settle a claim without the Indemnified Party's consent if such settlement (i) makes no admission or acknowledgment of liability or culpability with respect to the Indemnified Party, (ii) includes a complete release of the Indemnified Party and (iii) does not require the Indemnified Party to make any payment or forego or take any action. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of any lawsuit or action with respect to such claim and any appeal arising therefrom (including the filing in the Indemnified Party's name of appropriate cross claims and counterclaims). The Indemnified Party may, at its own cost, participate in any investigation, trial and defense of such lawsuit or action controlled by the Indemnifying Party and any appeal arising therefrom. If, after receipt of a claim notice pursuant to Section 6.6(i), the Indemnifying Party does not undertake to defend any such claim the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such claim and the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party (including, without limitation, the settlement thereof without the consent of the Indemnifying Party). If there are one or more legal defenses available to the Indemnified Party that conflict with those available to the Indemnifying Party, the Indemnified Party shall have the right, at the expense of I-40 the Indemnifying Party, to assume the defense of the lawsuit or action; PROVIDED, HOWEVER, that the Indemnified Party may not settle such lawsuit or action without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. At any time after the commencement of defense of any lawsuit or action, the Indemnifying Party may request the Indemnified Party to agree in writing to the abandonment of such contest or to the payment or compromise by the Indemnifying Party of such claim whereupon such action shall be taken unless the Indemnified Party determines that the contest should be continued and so notifies the Indemnifying Party in writing within 15 days of such request from the Indemnifying Party. If the Indemnified Party determines that the contest should be continued, the Indemnifying Party shall be liable hereunder only to the extent of the lesser of (i) the amount which the other party(ies) to the contested claim had agreed to accept in payment or compromise as of the time the Indemnifying Party made its request therefor to the Indemnified Party or (ii) such amount for which the Indemnifying Party may be liable with respect to such claim by reason of the provisions hereof. (k) If the indemnification provided for in this Section 6.6 shall for any reason be unavailable to the Indemnified Party in respect of any loss, claim, damage or liability, or action referred to herein, then the Indemnifying Party shall, in lieu of indemnifying the Indemnified Party, contribute to the amount paid or payable by the Indemnified Party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement or omission of a material fact relates to information supplied by the Indemnifying Party on the one hand or the Indemnified Party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by the Indemnified Party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by the Indemnified Party in connection with investigating or defending any such action or claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 6.7 REASONABLE BEST EFFORTS. Each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Law to consummate and make effective the transactions contemplated by this Agreement in the most expeditious manner practicable (including, but not limited to, the consummation of all conditions to the Merger Transactions and seeking to remove promptly any injunction or other legal barrier that may prevent or delay such consummation). Each of the parties shall promptly notify the other whenever a material consent is obtained and shall keep the other informed as to the progress in obtaining such material consents. 6.8 PUBLIC ANNOUNCEMENTS. No party hereto shall make any public announcements or otherwise communicate with any news media with respect to this Agreement or any of the transactions contemplated hereby without prior consultation with the other parties as to the timing and contents of any such announcement as may be reasonable under the circumstances; PROVIDED, HOWEVER, that nothing contained herein shall prevent any party from promptly making all filings with governmental authorities as may, in its judgment, be required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 6.9 BOARD RECOMMENDATION. The Joint Proxy Statement/Prospectus shall include (i) the recommendation of the Company Board of Directors to the Company's stockholders to vote in favor of the Merger Transactions and (ii) the recommendation of Acquiror's Board of Directors to Acquiror's stockholders to vote in favor of the Merger; PROVIDED, HOWEVER, that either the Company Board of Directors I-41 or Acquiror's Board of Directors may modify or withdraw its recommendation if it determines, with the written advice of outside counsel, to do so in the exercise of its fiduciary duties. 6.10 TAX MATTERS. (a) NPJ INDEMNIFICATION OBLIGATIONS. (i) COMPANY CONSOLIDATED INCOME TAXES. NPJ shall be liable for, shall pay and shall indemnify and hold Acquiror and its Subsidiaries harmless against all Company Consolidated Income Taxes attributable to any taxable period ending on or before the Closing Date, and any and all liabilities, losses, damages, costs and expenses (including, without limitation, court costs and reasonable professional fees incurred in the investigation, defense or settlement of any claims covered by this indemnity) attributable to any such Company Consolidated Income Taxes. For this purpose, any taxable period for Company Consolidated Income Taxes that includes but does not end on the Closing Date shall be treated as ending on the Closing Date, and the income attributable to the period before and including the Closing Date shall be determined based on the permanent books and records maintained for federal income tax purposes. Except as specifically provided in this Section 6.10, any tax sharing agreement or policy of the Company Group shall be terminated at the Effective Time, and the Surviving Corporation and the Cable Subsidiaries shall have no obligations under such agreements after the Effective Time. Without limiting the foregoing, NPJ shall be liable for any Company Consolidated Income Taxes resulting from the failure of the Contribution and issuance of NPJ Common Stock to the Company's stockholders to qualify as a tax-free reorganization within the meaning of Sections 368(a)(1)(D) and 355 of the Internal Revenue Code, unless such failure to qualify is the result of Acquiror's breach of Section 6.10(i). (ii) REFUNDS AND CREDITS OF COMPANY CONSOLIDATED INCOME TAXES. NPJ shall be entitled to (and shall indemnify and hold harmless Acquiror and its Subsidiaries against any subsequent disallowance of) any credits or refunds of Company Consolidated Income Taxes payable with respect to any taxable period ending on or before the Closing Date. (iii) CONTROL OF TAX PROCEEDINGS. (A) Except as provided in Section 6.10(a)(iii)(C), the parties agree that NPJ shall be designated as the agent for the Company Group pursuant to Section 1.1502-77(d) of the Treasury Regulations and any similar provisions of any state income or franchise tax laws, and NPJ shall have the sole authority to deal with any matters relating to Company Consolidated Income Taxes, including but not limited to the filing of amended returns. (B) Whenever any taxing authority asserts a claim, makes an assessment, or otherwise disputes the amount of Company Consolidated Income Taxes for which NPJ is or may be liable in whole or in part, under this Agreement, Acquiror shall promptly inform NPJ. Except as provided in Section 6.10(a)(iii)(C), NPJ, at its cost and expense, shall have the right to control any resulting proceedings and to determine whether and when to settle any such claim, assessment or dispute; PROVIDED, HOWEVER, that NPJ shall not have the right to settle any such claim, assessment or dispute without Acquiror's prior written consent if such settlement would have a Material Adverse Effect on Acquiror or any of its Subsidiaries. (C) If a taxing authority asserts a claim, makes an assessment or otherwise disputes the amount of the Company Consolidated Income Taxes attributable to a Cable Subsidiary (a "Cable Dispute"), Acquiror and NPJ shall immediately inform each other of the Cable Dispute. Acquiror, at its cost and expense may, by written notice to NPJ, elect to control any Cable Dispute and to determine whether and when to settle any such Cable Dispute, which election shall be made within 15 days after the later of (1) the date of the notice transmitted by the taxing authority describing the Cable Dispute, or (2) in the case of a notice transmitted by the taxing authority to NPJ, the date NPJ informs Acquiror of such Cable Dispute. If Acquiror duly elects, as provided herein, to contest a Cable Dispute, it shall have the sole responsibility to conduct any resulting proceedings, and shall be responsible for, and shall indemnify NPJ against, any Taxes ultimately imposed with respect to such Cable Dispute. I-42 (b) OTHER TAXES. Except as otherwise provided in Section 6.10(a), all Taxes shall be the responsibility of the taxpayer on which they are imposed, and any refunds and credits of Taxes shall be for the account of the taxpayer responsible for such Taxes. (c) TAX RETURNS. (i) NPJ shall be responsible for the preparation and filing of all Company Consolidated Income Tax Returns for all taxable periods that end on or before the Closing Date, including Tax Returns of the Company Group for such periods that are due after the Closing Date, and of all Cable Tax Returns required to be filed on or before the Closing Date, and NPJ shall be responsible for the contents of such Tax Returns and the payment of all Taxes shown to be due thereon. Within thirty days following the filing of Company Consolidated Income Tax Returns, NPJ shall furnish Acquiror with (i) copies of such Tax Returns as if prepared for the Cable Subsidiaries on a separate company basis, and (ii) information concerning (a) the tax basis of the assets of the Cable Subsidiaries as of the Closing Date; (b) the net operating loss carryover, capital loss carryover and alternative minimum tax credit carryover available, if any, to Acquiror and its Subsidiaries as of the Closing Date; and (c) all elections with respect to Company Consolidated Income Taxes in effect for the Cable Subsidiaries as of the Closing Date. (ii) Acquiror shall be responsible for the preparation and filing of all Cable Tax Returns (other than Company Consolidated Income Tax Returns) required to be filed after the Closing Date. (d) COOPERATION. Acquiror and NPJ shall cooperate with each other in a timely manner in the preparation and filing of any Tax Returns, payment of any Taxes in accordance with this Agreement, and the conduct of any audit or other proceeding. Each party shall execute and deliver such powers of attorney and make available such other documents as are necessary to carry out the intent of this Section 6.10. Each party agrees to notify the other party of any audit adjustments that do not result in tax liability but can reasonably be expected to affect Tax Returns of the other party. (e) RETENTION OF RECORDS. Acquiror and NPJ shall (i) retain records, documents, accounting data and other information (including computer data) necessary for the preparation and filing of all Tax Returns or the completion of the audit of such returns, and (ii) give to the other reasonable access to such records, documents, accounting data and other information (including computer data) and to its personnel (insuring their cooperation) and premises, for the purpose of the review or audit of such returns to the extent relevant to an obligation or liability of a party under this Agreement. (f) PAYMENTS; DISPUTES. Except as otherwise provided in this Section 6.10, any amounts owed by any party ("Indemnitor") to any other party ("Indemnitee") under this Section 6.10 shall be paid within ten days of notice from the Indemnitee; PROVIDED that if the Indemnitee has not paid such amounts and such amounts are being contested before the appropriate governmental authorities in good faith, the Indemnitor shall not be required to make payment until it is determined finally by an appropriate governmental authority that payment is due. If Acquiror and NPJ cannot agree on any calculation of any liabilities under this Section 6.10, such calculation shall be made by any independent public accounting firm acceptable to both such parties. The decision of such firm shall be final and binding. The fees and expenses incurred in connection with such calculation shall be borne equally by the disputing parties. (g) TERMINATION OF LIABILITIES. Notwithstanding any other provision in this Agreement, the liabilities of NPJ for any Tax under this Section 6.10 shall apply only to Taxes assessed before the expiration of the applicable statute of limitations for such Tax or any extension thereof. (h) DEFINITIONS. (i) "Company Group" means the affiliated group of corporations, within the meaning of Section 1504(a) of the Internal Revenue Code, of which the Company or, after the Dissolution, Broadcasting is I-43 the common parent and any member of such group determined as of the Effective Date, which shall, in any event, include Copley/Colony, Inc. and its Subsidiaries. (ii) "Company Consolidated Income Taxes" means the federal and state income taxes of the Company Group or any of its members, whether calculated on a consolidated, combined, unitary or separate basis, including such income taxes of a member of the Company Group before such member became such a member, together with any interest and any penalty, addition to tax or additional amount imposed by any governmental authority responsible for the imposition of any such tax. (iii) "Tax" (including with correlative meaning, the terms "Taxes" and "Taxable") means any income, gross receipts, ad valorem, premium, excise, value-added, sales, use, transfer, franchise, license, severance, stamp, occupation, service, lease, withholding, employment, payroll, premium, property or windfall profits tax, alternative or add-on-minimum tax, or other tax, fee or assessment, together with any interest and any penalty, addition to tax or additional amount imposed by any governmental authority responsible for the imposition of any such tax. (iv) "Tax Return" means any return, report, statement, information statement and the like required to be filed with any authority with respect to Taxes. (v) "Company Consolidated Income Tax Returns" means any Tax Return of the Company Group or any of its members with respect to Company Consolidated Income Taxes. (vi) "Cable Tax Returns" means any Tax Return of any Cable Subsidiary. (i) ADDITIONAL COVENANTS. For a period of two years after the Closing Date, without the prior written consent of NPJ: (i) Acquiror shall not sell, transfer, distribute or otherwise dispose of any assets of the Cable Subsidiaries or any shares of capital stock of any corporation that was a Subsidiary of Broadcasting immediately prior to the Merger, whether by merger or otherwise, unless such transferred assets and stock in the aggregate constitute less than thirty percent (30%) by value of the business and assets of the Cable Subsidiaries at the time of such transfer; (ii) Acquiror shall not cause or permit any corporation that was a Subsidiary of Broadcasting immediately prior to the Merger to sell any shares of capital stock of such Subsidiary to any Person; (iii) Acquiror shall not adopt a plan of liquidation or enter into an agreement of merger or other transaction pursuant to which the corporate legal existence of Acquiror would terminate or the outstanding stock of Acquiror would be converted into cash, other property or the stock or securities of any other issuer; (iv) Acquiror and its Affiliates shall not offer to purchase, make a tender offer, or otherwise enter into any agreement to acquire any shares of capital stock of Acquiror issued to any former shareholder of the Company in connection with the Merger or any shares of capital stock of NPJ; and (v) Acquiror and its Affiliates shall not engage in any transaction if, prior to the date on which Acquiror or any Affiliate of Acquiror enters into a binding agreement to engage in such transaction, NPJ shall have informed Acquiror that it has received an opinion of legal counsel that as a result of any controlling legal or administrative precedent issued after November 18, 1994, the consummation of a transaction such as the contemplated transaction would create a material risk that the Contribution and issuance of NPJ Common Stock to the Company's stockholders would not qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code. 6.11 NOTIFICATION. Each party hereto shall, in the event of, or promptly after obtaining knowledge of, the occurrence or threatened occurrence of, any fact or circumstance that would cause or constitute a breach of any of its representations and warranties set forth herein, give notice thereof to the other parties and shall use its reasonable best efforts to prevent or promptly to remedy such breach. I-44 6.12 EMPLOYEE BENEFITS. (a) As part of the assumption of liabilities of Broadcasting by NPJ pursuant to Section 2.5 and the Contribution Agreement, effective as of the Effective Time, NPJ agrees to accept all past, present and future liabilities and responsibilities as plan sponsor, within the meaning of Section 3(16)(B) of ERISA, of any Company Employee Plan, and to accept all past, present and future liabilities and responsibilities as employer under any other benefit arrangement, including without limitation: (i) employment and consulting agreements, (ii) arrangements providing for insurance coverage and workers' compensation benefits, (iii) incentive bonus and deferred bonus arrangements, (iv) arrangements providing for termination allowance, severance, and similar benefits, (v) equity compensation plans, (vi) deferred compensation plans, and (vii) compensation policies and practices maintained by the Company or any ERISA Affiliate covering the Company Employees and their beneficiaries as of the Effective Time ("Company Benefit Arrangement"), except as otherwise provided in Section 6.12(c). NPJ agrees that Acquiror shall have no liability for any period with respect to any such plans, except as otherwise provided in Section 6.12(c). (b) Acquiror acknowledges that, as a result of the transactions contemplated by this Agreement, as of the Effective Time, Acquiror shall become the employer of all employees of the Cable Subsidiaries as of 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 other than any corporate, regional or divisional employee which Acquiror has informed the Company not less than thirty (30) days prior to the Effective Time it does not wish to employ following the Effective Time, in which case said employee shall, at the option of the Company, become an employee of NPJ or shall be discharged by the Company ("Cable Employees"); PROVIDED, HOWEVER, that this paragraph (b) shall in no way obligate Acquiror to continue the employment of any person. (c) Acquiror agrees that, upon succeeding as employer of the Cable Employees effective upon the Effective Time, Acquiror shall be responsible for payments under (i) the Employee Continuation Plans for Exempt and Non-Exempt Employees designated as such on Schedule 4.12(n) respecting matters arising after the Effective Time, to the extent such payments are owed to system level employees formerly employed by a Cable Subsidiary, and (ii) those certain Agreements dated as of October 11, 1993 with Eileen Martin and Peter Eliason (true, correct and complete copies of which have been delivered to Acquiror) to the extent payments under such Agreements do not exceed the severance payments Acquiror would have been liable for in respect of such employees under the Employee Continuation Plan (it being understood that NPJ shall be responsible for all liabilities and responsibilities under such Agreements in excess of what is provided for under the Employee Continuation Plans). NPJ agrees that it shall be responsible for any benefits payable under any such Employee Continuation Plan, or any other severance benefits or payments which may otherwise be owed, to any corporate, regional and divisional personnel, or to any other person not described in the preceding two sentences. (d) Subject to the rules for qualification of plans under Section 401(a) of the Code, Acquiror agrees to grant credit to the Cable Employees for service accrued by such Cable Employees as employees of the Company and its ERISA Affiliates for purposes of calculating eligibility and vesting service under the "employee pension benefit plans" (within the meaning of Section 3(2) of ERISA) of Acquiror and its Subsidiaries that are intended to be qualified under Section 401(a) of the Code. NPJ agrees that each such Cable Employee shall, as of the Effective Time, become fully vested in his accrued benefits (if any) under each Company Employee Plan that is intended to be qualified under Code Section 401(a). (e) Acquiror shall, as soon as practicable after the Effective Time, establish, 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 Code Section 401(k) ("a 401(k) Plan"), and that covers the Cable Employees, subject to minimum eligibility service requirements permitted under the Code. NPJ shall cause each Cable Employee to be able to choose between a distribution to himself of his account balance as of the Effective Time in any Company or NPJ 401(k) Plan or the direct transfer of such account balance to the Acquiror 401(k) Plan described in the preceding sentence. The Acquiror 401(k) Plan I-45 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 Acquiror's 401(k) Plan, except to the extent the terms of such loan are not compatible with applicable Law, including ERISA. Prior to any such transfer, each party hereto shall furnish the other party hereto with a copy of the most recent determination letter issued by the IRS with respect to the qualification of each 401(k) Plan in which a Cable Employee has an account as of the Effective Time or may have after the Effective Time. (f) NPJ or the Company and Broadcasting, as applicable, agrees to continue coverage of Cable Employees under existing group health plans through the Effective Time and to reimburse covered Cable Employees for eligible health care expenses and services incurred through the Effective Time in accordance with the terms of any such plan. (g) Subject to Section 6.12(j), effective from and after the Effective Time, subject to reasonable eligibility requirements, Acquiror agrees to provide coverage under a comprehensive group health care plan to all Cable Employees (and their covered dependents), who are still employed by Broadcasting at the Effective Time, taking into account for eligibility purposes under such plan the service accrued by any such Cable Employee while an employee of the Company or any of its ERISA Affiliates and PROVIDED, HOWEVER, that any Cable Employee who was, as of the Effective Time, eligible under any Company or NPJ Group Health Plan, shall not be subject to such eligibility requirements for initial coverage. Any such comprehensive group health care plan shall provide medical, hospitalization, prescription drug, mental health, substance abuse, employee assistance program, dental and vision care benefits that are comparable, as defined in Section 6.12(i) below, to those provided to such Cable Employee under an existing group health plan prior to the Closing or comparable to Acquiror's existing plans, and shall contain no exclusions or limitations for preexisting conditions applicable to covered Cable Employees or the covered dependents of such Cable Employees except to the extent such preexisting condition exclusions or limitations apply to any such Cable Employee or covered dependent under the applicable group health plan at the Effective Time PROVIDED, HOWEVER, that the Cable Employees shall not be deemed to be third- party beneficiaries of this Section 6.12(g). For the calendar year in which the Effective Time occurs, any Acquiror group health plan which provides coverage to Cable Employees shall give credit for deductibles, co-payments and similar amounts which any such Cable Employee had paid or satisfied for such year under a Company Group Health Plan. (h) Subject to reasonable eligibility requirements, Acquiror agrees to provide coverage under (a) retirement plans qualified under Code Section 401(a) and (b) welfare benefit plans, within the meaning of Section 3(l) of ERISA, providing other than health benefits, including life insurance, vacation, accidental death and dismemberment insurance, short and long term disability benefits, to all Cable Employees, taking into account for eligibility purposes under such plans the service accrued by any such Cable Employee while an employee of the Company or any of its ERISA Affiliates. Any such retirement or welfare benefit plan shall provide benefits that are comparable, as defined in Section 6.12(i) hereof, to those provided to Cable Employees prior to the Effective Time or comparable to Acquiror's existing plans. (i) "Comparable" shall mean benefits that are substantially similar in type, scope, benefits coverage, eligibility requirements and employee cost sharing requirements to the benefits as of the Effective Time under the plan or plans which are being compared. Acquiror agrees to amend, and to use its best efforts to cause its Subsidiaries to amend, the eligibility requirements of any welfare benefit plan under which coverage is extended to Cable Employees pursuant to the provisions of Sections 6.12(g) and (h), to provide for eligibility effective from and after the Effective Time for such Cable Employees. (j) NPJ 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(f)(3) of the Code, with respect to whom a qualifying event within the meaning of Section 4980B(f)(3) of the Code, has occurred prior I-46 to the Effective Time; (iii) for the 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 (iv) the provision and payment of: (A) medical and dental benefits for the period after the Effective Date 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 Date; and (C) short- and long-term disability benefits for a period of not more than three months following the Effective Date; 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; PROVIDED, that Acquiror shall from time to time, within 30 days of receipt by Acquiror of invoices and other documentation reasonably satisfactory to Acquiror, reimburse NPJ for the reasonable, direct costs incurred in providing the benefits referred to in this subparagraph (iv). (k) Acquiror agrees to cooperate, and agrees to use its best efforts to cause its Subsidiaries to cooperate, in a complete, diligent and timely manner to provide NPJ or its ERISA Affiliates with such compensation, service and other pertinent census data as may be required by any of them for purposes of calculating or effecting distribution of benefits to which any Cable Employees may be entitled under any employee benefit plan, within the meaning of Section 3(3) of ERISA, established, maintained or contributed to by any of them. (l) NPJ agrees to cooperate, and agrees to use its best efforts to cause its Subsidiaries to cooperate, in a complete, diligent and timely manner to provide Acquiror or its ERISA Affiliates with such compensation, service and other pertinent census data as may be required by any of them for purposes of calculating or effecting distribution of benefits to which any Cable Employees may be entitled under any employee benefit plan, within the meaning of Section 3(3) of ERISA, established, maintained or contributed to by any of them. 6.13 MEETING OF STOCKHOLDERS OF THE COMPANY; OTHER AGREEMENTS. The Company shall take all action necessary, in accordance with applicable Law and its Articles of Incorporation and By-laws, to duly call, give notice of, convene and hold a meeting of its stockholders as promptly as practicable to consider and vote upon the adoption and approval of this Agreement and the Merger Transactions. The only stockholder votes required for the adoption and approval of the Merger Transactions by the Company are the votes required under Section 3.5. Subject to the fiduciary duty of the Company Board of Directors under applicable Law, as advised in writing by outside counsel, the Company shall use its reasonable best efforts to solicit from stockholders proxies in favor of adoption and approval of the Merger Transactions and to take all other action necessary to secure the vote of stockholders required by applicable Law and the Company's Articles of Incorporation to effect the Merger Transactions. At any such meeting, Acquiror shall vote, or cause to be voted, all of the shares (if any) of Company Class A Common Stock and Company Class B Common Stock then owned by Acquiror or any Subsidiary of Acquiror or subject to proxies held by Acquiror in favor of the Merger Transactions. 6.14 MEETING OF STOCKHOLDERS OF ACQUIROR. Acquiror shall take all action necessary, in accordance with applicable Law and Acquiror's Certificate of Incorporation and Acquiror Restated By-Laws, to duly call, give notice of, convene and hold a meeting of its stockholders as promptly as practicable to consider and vote upon the adoption of this Agreement, the Merger Transaction (to the extent necessary) and the Recapitalization Amendment. The only stockholder vote required for the adoption and approval of the Merger Transactions by Acquiror is the vote required under Section 5.5. Subject to the fiduciary duty of the Acquiror Board of Directors under applicable Law, as advised in writing by outside counsel, Acquiror shall use its reasonable best efforts to solicit from stockholders proxies in favor of adoption and approval of the Merger Transactions and the Recapitalization Amendment and to take all other action necessary to secure the vote of stockholders required by applicable Law and Acquiror's Certificate of Incorporation to effect the Merger Transactions. At any such meeting, the Company shall vote, or cause to be voted, all shares, if any, of Acquiror Common Stock then owned by the Company or any Subsidiary of the Company or subject to I-47 proxies held by the Company in favor of the adoption and approval of the Merger Transactions and the Recapitalization Amendment. 6.15 REGULATORY AND OTHER AUTHORIZATIONS. (a) Each of the parties hereto agrees to use its best efforts to obtain all authorizations, consents, waivers, orders and approvals of federal, state, local and foreign regulatory bodies and officials and non-governmental third parties that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement, and will cooperate fully with the other parties in promptly seeking to obtain all such authorizations, consents, waivers, orders and approvals. Without limitation, the Company and Acquiror shall each make an appropriate filing of a Notification and Report Form pursuant to the HSR Act promptly, and in any event by not later than February 10, 1995. Each such filing shall request early termination of the waiting period imposed by the HSR Act. (b) Any application to any governmental authority for any authorization, consent, waiver, order or approval necessary for the transfer of control of any License or Franchise shall be mutually acceptable to the Company and Acquiror and, if applicable, shall request that the relevant governmental authority agree that no further consent, waiver or approval of such governmental authority will be required if a security interest is granted in such License or Franchise to any lender. Without limiting the obligations of the Company, NPJ, Holding, Broadcasting and Acquiror under Section 6.15(a), each of the Company, NPJ, Holding, Broadcasting and Acquiror agrees, upon reasonable prior notice, to make appropriate representatives available for attendance at meetings and hearings before applicable governmental authorities in connection with the transfer of control of any License or Franchise. (c) If any authorization, consent, waiver, order or approval of any governmental authority necessary for the transfer of control of any License or Franchise shall not have been obtained prior to the Effective Time, NPJ and Acquiror shall cooperate with each other and use their respective best efforts (i) to restructure the ownership and control of such License or Franchise from and after the Effective Time in such a manner that, to the extent feasible, prevents any violation of the terms of such License or Franchise that would have a Material Adverse Effect on Acquiror and its Subsidiaries or on NPJ and its Subsidiaries yet preserves the intent of the parties as set forth in this Agreement with respect to the terms and conditions of the Merger, and (ii) notwithstanding the Closing, to continue to seek any authorization, consent, waiver, order or approval necessary for the transfer of control of such License or Franchise. (d) If any governmental authority acquires any interest in any cable television system of the Company or the Cable Subsidiaries on or prior to the Effective Date, (i) such governmental authority shall be deemed not to have granted its consent to transfer the Franchise relating to such system and, therefore, the Cable Franchise Area relating to such system shall not be considered a Transferable Franchise Area, (ii) the proceeds (the "Proceeds") received by the Company or a Cable Subsidiary, as the case may be, in connection with such acquisition shall be held in escrow by the Company or such Cable Subsidiary and, in the event the Company receives the Proceeds, shall not be contributed to NPJ as part of the Contribution, and (iii) the Proceeds shall not be counted as a current asset for purposes of the definition of Working Capital. Notwithstanding the foregoing, the Company, NPJ and Acquiror agree to use their respective best efforts to contest any attempt to so acquire a cable television system or assets, including, without limitation, by commencing and prosecuting such legal actions as may be necessary to prevent such acquisition in circumstances where such action is appropriate. 6.16 FURTHER ASSURANCES. Each of the parties hereto shall execute such documents and other instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and consummate and evidence the transactions contemplated hereby or, at and after the Closing Date, to evidence the consummation of the transactions contemplated by this Agreement. Upon the terms and subject to the conditions hereof, each of the parties hereto shall take or cause to be taken all actions and to do or cause to be done all other things necessary, proper or advisable to consummate and make I-48 effective as promptly as practicable the transactions contemplated by this Agreement and to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary registrations and filings. 6.17 INTERNAL REVENUE SERVICE RULING. As promptly as practicable after November 18, 1994, the Company shall prepare and submit to the IRS a request for a private letter ruling from the IRS that the transactions contemplated by the Contribution Agreement will qualify as a tax-free reorganization within the meaning of Sections 368(a)(1)(D) and 355 of the Code and that the transactions contemplated by Sections 2.3 and 2.4 hereof will qualify as tax free reorganizations, liquidations and dissolutions under the applicable sections of the Code. Such request (and any subsequent submissions to the IRS) shall be true and correct in all material respects and all facts material to the ruling shall be disclosed in such request. The Company shall afford Acquiror with reasonable opportunity to review and comment on such request prior to its submission to the IRS, and such request as filed shall be reasonably acceptable to Acquiror. The Company shall provide Acquiror with copies of all materials submitted to the IRS. Acquiror shall participate in all meetings and conferences with IRS personnel, whether telephonically or in person, as requested by the Company. Acquiror shall reasonably cooperate in good faith with the Company in seeking to obtain such ruling. 6.18 RECORDS RETENTION. (a) For a period of five years after the Closing, NPJ shall retain all books and records relating to the Cable Subsidiaries currently in the possession of the Company or any of its Subsidiaries (or which come into the possession of the Company or any of its Subsidiaries after November 18, 1994) for the period from ten years prior to the Closing Date to the Closing Date, and Acquiror shall have the right to inspect such books and records during normal business hours, upon five days' prior notice, in connection with the preparation of financial statements, reports and filings and any other reasonable purpose. (b) For a period of five years after the Closing Date, Acquiror shall retain all of its books and records relating to the Cable Subsidiaries for periods subsequent to the Closing Date and NPJ shall have the right to inspect such books and records during normal business hours, upon five days' prior notice, in connection with the preparation of financial statements, reports and filings and any other reasonable purpose. 6.19 NO RELATED PARTY AGREEMENTS WITH NPJ. Except for the Contribution Agreement, neither NPJ nor any of its Subsidiaries will at the Effective Time be a party to any material agreement, arrangement or understanding with the Company, Broadcasting or any of the Cable Subsidiaries, including, without limitation, any material contract providing for the furnishing of services or rental of real or personal property to or from, or otherwise relating to the business or operations of, the Company, Broadcasting or any of the Cable Subsidiaries or pursuant to which the Company, Broadcasting or any of the Cable Subsidiaries may have any obligation or liability. After the Effective Time, none of the Company, Broadcasting or any of the Cable Subsidiaries will have any liability whatsoever, direct or indirect, contingent or otherwise, in any way relating to the business, operations, indebtedness, assets or liabilities of NPJ or any of its Subsidiaries, except as contemplated by the Contribution Agreement. 6.20 COMPANY NAME. (a) Acquiror acknowledges that (i) the name "Providence Journal", whether alone or in combination with one or more other words, is an asset of the Company and, after the Dissolution, Broadcasting being transferred to NPJ in the Contribution and (ii) the name "King", whether alone or in combination with one or more other words, is an asset of Holding and its Subsidiaries being transferred to NPJ in the Contribution. Promptly after the Closing Date, Acquiror shall (i) cause all of its affected Subsidiaries to change their names to delete any reference therein to "Providence Journal" or "King" and (ii) reasonably cooperate in assisting NPJ to change its name to "The Providence Journal Company". (b) Between the consummation of the Contribution and the Closing (and for as long thereafter as is required for Acquiror to comply with Section 6.20(a)), the Company and all of the Cable Subsidiaries shall have a non-exclusive license to use the names "Providence Journal" and "King". I-49 6.21 UNDERTAKINGS RELATING TO A PUBLIC OFFERING; REGISTRATION RIGHTS. (a) Acquiror agrees to use best efforts to consummate a registered public offering of shares of Acquiror Class A Common Stock (which, at Acquiror's option, may be a primary offering and/or a secondary offering) prior to the first anniversary of the Effective Date for aggregate consideration (before underwriting discounts) of not less than $150,000,000 (the "Offering"); PROVIDED, HOWEVER, that (i) Acquiror shall not be required to consummate the Offering if it has issued, on or before the first anniversary of the Effective Date, shares of its capital stock for an aggregate consideration of not less than $1,000,000,000 pursuant to a binding agreement or agreements (the "Stock Sale Agreement") and (ii) if Acquiror has failed to enter into a Stock Sale Agreement by the 180th day following the Effective Date and Acquiror has failed to commence the Offering prior to such date, Acquiror shall file a registration statement with respect to such Offering with the SEC within 60 days of receipt of the written request of NPJ unless Acquiror's investment banker shall have advised Acquiror in writing following receipt of such written request that because of then- current market conditions it is not advisable for Acquiror to conduct the Offering at that time, in which case Acquiror's obligation to use its best efforts to conduct the Offering shall be extended until such time as such investment banker, or such other investment banker as Acquiror shall select, advises Acquiror in writing that market conditions no longer render it inadvisable to conduct the Offering. (b) On or prior to the Closing Date, subject to the receipt by Acquiror of the consent of any stockholders of Acquiror which may be necessary to grant the registration rights contemplated by this paragraph (b) (it being understood that Acquiror shall use its best efforts to obtain such consents on or prior to the Closing Date but that Acquiror shall be under no obligation to pay any fee or grant any other accommodation to any such stockholder in connection with obtaining such consent), Acquiror and NPJ hereby agree to enter into a mutually acceptable registration rights agreement (the "Registration Rights Agreement") relating to the Acquiror Class A Common Stock to be issued pursuant to the Merger containing terms and conditions which are substantially similar to those contained in the Registration Rights Agreement dated as of July 15, 1992 among Acquiror, Boston Ventures Limited Partnership, III and certain other Purchasers defined therein; PROVIDED, HOWEVER, that (i) the registration rights granted under the Registration Rights Agreement shall not be available to any former stockholder of the Company (collectively, the "Rights Holders") to the extent that shares of Acquiror Class A Common Stock are then freely transferable by the Rights Holder requesting such registration rights in the manner in which such Rights Holders propose to sell such shares without violation of the registration requirements of the Securities Act; (ii) the Registration Rights Agreement will provide for two demand registrations and unlimited so-called "piggyback" registrations with respect to primary public issuances by Acquiror of Acquiror Class A Common Stock (provided that Acquiror shall only be required to include shares of Acquiror Class A Common Stock then held by the Rights Holders to the extent that, in Acquiror's reasonable judgment, such registration would not interfere with such offering by Acquiror or violate or conflict with any registration rights which may then be held by holders of Acquiror's capital stock); and (iii) the Rights Holders shall not be entitled to assign their rights under the Registration Rights Agreement. 6.22 MATTERS RELATING TO SHAREHOLDERS AND LIQUIDITY. (a) Subject to applicable Law, Acquiror agrees to conduct a shareholder relations program prior to the Closing, in form and substance reasonably satisfactory to the parties hereto, informing potential investors about the business and financial condition of the Surviving Corporation. (b) Acquiror covenants and agrees that, prior to the Effective Time, it will effect a stock dividend, split or other recapitalization of the Acquiror Common Stock in such amount and in such form as Acquiror, with the advice of its investment bankers, determines will improve the marketability and liquidity of the Acquiror Class A Common Stock. (c) By agreement dated the date hereof, a form of which is attached hereto as EXHIBIT C, and pursuant to joinders to such agreement, certain stockholders of the Company and Acquiror have agreed to vote, or cause to be voted, all of the shares of capital stock, whether now owned or hereafter acquired, of the Company I-50 or Acquiror, as the case may be, held by each such stockholder in favor of the Merger Transactions (the "Voting Agreement"). The Company agrees to use its best efforts to cause each director of the Company who is not a party to such Voting Agreement (either as an original signatory thereto or pursuant to a joinder thereto) to execute a joinder thereto as soon as practicable after November 18, 1994. 6.23 ACQUIROR BOARD OF DIRECTORS. (a) From November 18, 1994 to the Effective Time, the persons listed on Schedule 1.1 hereto or such other person designated in accordance with Section 1.1 hereof (the "Company Nominees") shall be given copies of all written consents circulated for approval to Acquiror's Board of Directors, shall be entitled to notice of and to attend all meetings of Acquiror's Board of Directors, and shall receive copies of all materials prepared for and distributed at or prior to such meetings; PROVIDED, HOWEVER, that each Company Nominee shall, as a condition to receiving certain of such information and attending certain of such meetings, first enter into a confidentiality agreement with Acquiror containing customary terms. (b) If, at any such meeting, a resolution is submitted to Acquiror's Board of Directors for voting thereon, then: (i) if (A) such resolution is approved by Acquiror's Board of Directors by a margin of only one vote, and (B) each Company Nominee states in writing that such Company Nominee would have voted against such resolution if such Company Nominee had been a member of Acquiror's Board of Directors, Acquiror agrees to act upon such resolution as though it had not been approved by its Board of Directors; and (ii) if, with respect to an Extraordinary Transaction, (A) at least two members of Acquiror's Board of Directors vote against such resolution and (B) each Company Nominee states in writing that such Company Nominee would have voted against such resolution if such Company Nominee had been a member of Acquiror's Board of Directors, then Acquiror agrees to act upon such resolution as though it had not been approved by its Board of Directors. For purposes of this clause (ii), an "Extraordinary Transaction" shall mean (x) any proposed issuance by Acquiror of Acquiror Class A Common Stock (other than issuances in connection with the compensation of Acquiror's employees, including, without limitation, issuances of stock under Acquiror's restricted stock purchase plan) at a price per share less than $485.00, or (y) any proposed acquisition or disposition by Acquiror or any of its Subsidiaries of assets having a fair market value of more than $500,000,000 which, in the reasonable judgment of the Company Nominees and the Company's investment banker submitted to Acquiror in writing, is reasonably likely to cause the per share value of the Acquiror Class A Common Stock to be less than $485.00. (c) At the expiration of the initial term of the Company Nominees as members of Acquiror's Board of Directors, such Board (or any nominating committee of such Board) will exercise all authority under applicable Law to nominate for membership on such Board two persons designated by NPJ, for a term which (if such persons are elected by Acquiror's stockholders) will commence and expire together with other members of the Board of the same Class as that set forth on Schedule 1.1 hereto; PROVIDED, HOWEVER, that (unless such designees are the Company Nominees) such designees shall be reasonably satisfactory to Acquiror and its Board of Directors. In the event that a Company Nominee or any other person designated as a director by NPJ dies, resigns or ceases to serve as such for any other reason, the vacancy resulting therefrom shall be filled by Acquiror's Board of Directors with a substitute designated by NPJ who is reasonably satisfactory to Acquiror and its Board of Directors. 6.24 EFFECT OF CERTAIN EVENTS. If at any time prior to the approval by the Company's stockholders of the Merger Transactions (a) Acquiror has elected to issue Acquiror Preferred Stock in connection with the Merger and (b) the Joint Proxy Statement/Prospectus has been prepared, then the Company shall use its best efforts to cause the holders of not less than 50.1% of the voting power of each class of Company Common Stock (when aggregated with the voting power represented by direct signatories to the Voting Agreement I-51 and Persons who have theretofore executed joinder agreements pursuant to which they are bound by the Voting Agreement) to execute joinder agreements pursuant to which such holders shall agree to be bound by the terms of the Voting Agreement. At such time as (i) the Company delivers to Acquiror notification that each of the foregoing events has occurred and executed originals of such joinder agreements, and (ii) Acquiror has delivered to the Company an executed joinder agreements as a result of which stockholders of Acquiror holding not less than two-thirds of the combined voting power of Acquiror Common Stock and Acquiror Series A Preferred Stock (when aggregated with the voting power represented by direct signatories to the Voting Agreement) have agreed to be bound by the terms of the Voting Agreement then, from and after such date, Sections 8.1(e) and 8.3 of this Agreement shall be deemed null and void and of no further force and effect, PROVIDED, HOWEVER, that if, at any time prior to the approval by the Company's stockholders of the Merger Transactions, (x) the enforceability of the obligations under the Voting Agreement of any of the Company stockholders who are parties thereto, or the enforceability of any of the joinder agreements executed by Company stockholders, is challenged in any respect, (y) any provision of any such agreement is breached in any respect, or (z) such agreements, taken in the aggregate, cease to represent the obligations of the holders of at least 50.1% of the voting power of each class of Company Common Stock, then the provisions of Sections 8.1(e) and 8.3 shall be reinstated AB INITIO into this Agreement. 6.25 ACQUIROR SCHEDULES. Acquiror shall deliver to the Company from time to time information supplementing or amending Schedules 5.6 and 5.8 hereto to reflect changes with respect thereto occurring after November 18, 1994 and prior to the Closing Date (it being understood by the parties that such changes may not relate to matters which occurred or were in existence on or prior to November 18, 1994). Any covenant, representation or warranty of Acquiror to which any such supplemented or amended Schedule pertains shall be deemed to have been so amended as of November 18, 1994. 6.26 EMPLOYEE STOCK OPTIONS. Effective upon the Distribution, (i) NPJ shall assume in their entirety the Units Plan, the Stock Plan, the Option Plan and the Directors Option Plan; (ii) each stock option outstanding under the Option Plan and the Directors Option Plan and each unit outstanding under the Units Plan that is not exercised for, or converted into, Company Common Stock shall be assumed by NPJ, and all references in any such plan to the Company and to Company Common Stock shall be deemed to refer to NPJ and NPJ Common Stock; and (iii) each restricted stock award subject to vesting conditions under the Stock Plan shall be assumed by NPJ and all references in any such restricted stock award to the Company and to Company Common Stock shall be deemed to refer to NPJ and NPJ Common Stock. The Company, Broadcasting and NPJ covenant that as of the Distribution, there shall be no options or units (or rights with respect thereto) outstanding under the Option Plan, the Directors Option Plan or the Units Plan or any unvested stock awards outstanding under the Stock Plan. 6.27 RIGHTS PLAN. The Company agrees that as soon as practicable after the date hereof it will enter into an amendment to the Rights Agreement in form and substance reasonably satisfactory to the Company and Acquiror pursuant to which, among other things, the Rights Agreement will be amended to provide for the following: (i) that the execution and delivery of this Agreement, and the consummation of the Merger Transactions (including, without limitation, the Merger, the Dissolution and the Distribution) are not events which would (x) permit the holders of Rights to exercise such Rights to acquire shares of the Company Common Stock, or (y) require the Company, in accordance with Section 11(a)(ii) of the Rights Agreement, to exchange any or all of the outstanding Rights for shares of the Company Common Stock; (ii) in no event will the provisions of Sections 11(n) and 13 of the Rights Agreement apply to the Merger Transactions (including, without limitation, if a Rights Distribution Date or Stock Acquisition Date has occurred between the date of the Original Agreement and the Holding Effective Time); (iii) that effective upon the Dissolution, the Rights Agreement will terminate and be of no further force and effect; and (iv) such other amendments to the Rights Agreement as Acquiror may reasonably request. In addition, the Company will not take any action resulting in the application of the Rights Agreement to the Merger Transactions. I-52 ARTICLE 7. CLOSING AND CLOSING DATE; CONDITIONS TO CLOSING 7.1 CLOSING AND CLOSING DATE. As soon as practicable after the satisfaction or waiver of the conditions set forth herein (but no later than ten Business Days thereafter) and prior to the filing of the Certificate of Merger, a closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Sullivan & Worcester, One Post Office Square, Boston, Massachusetts 02109, or on such other date and at such other location as the parties may agree in writing. The date on which the Closing occurs is referred to as the "Closing Date." 7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY, NPJ, HOLDING, BROADCASTING AND ACQUIROR. The respective obligations of the Company, NPJ, Holding and Broadcasting, on the one hand, and Acquiror, on the other hand, to consummate the transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) The Merger Transactions shall have been approved and adopted by the stockholders of the Company as contemplated by Section 6.13; (b) The Merger Transactions and the Recapitalization Amendment shall have been approved and adopted by the stockholders of Acquiror as contemplated by Section 6.14; (c) The transactions contemplated by Article 2 hereof shall have been consummated as contemplated herein and in accordance with applicable Law, and each of the conveyancing instruments, liability assumption instruments and other instruments, documents and agreements executed in connection with such transactions shall be in a form reasonably satisfactory to Acquiror and its counsel; (d) Any waiting period applicable to the consummation of the transactions contemplated hereby under the HSR Act shall have expired or been terminated and all notices to, or permits, consents, waivers, approvals, authorizations and orders of, third parties which are material to the conduct after the Effective Time of the business of the Surviving Corporation and its Subsidiaries and governmental authorities required with respect to the transactions contemplated hereby shall have been filed or obtained (without any material modification to the Licenses, Franchises or agreements to which they pertain as would dilute the benefits to Acquiror of the transactions contemplated hereby) and be in full force and effect, and all appeal periods for challenging any such permit, consent, waiver, approval, authorization or order shall have expired and no such challenge shall be pending, 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 Franchise if the condition in Section 7.4(f) has been satisfied or waived by Acquiror; (e) 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 Law, injunction or other order (whether temporary or preliminary or permanent) which remains in effect and which has the effect of making the transactions contemplated hereby illegal or otherwise prohibiting the transactions contemplated by the Transaction Documents, or which questions the validity or the legality of the transactions contemplated hereby and which could reasonably be expected to have a Material Adverse Effect on the business of the Cable Subsidiaries or Acquiror and its Subsidiaries taken as a whole; (f) The Registration Statements shall have been declared effective under the Securities Act and no stop orders with respect thereto shall have been issued; (g) The Company shall have received from (i) the IRS a private letter ruling as contemplated by Section 6.17 hereof and (ii) an opinion of Edwards & Angell to the effect that the Merger constitutes a tax-free reorganization under Section 368 of the Code; and (h) There shall not have occurred and be continuing (i) a nationwide moratorium on commercial banking activities in the United States or (ii) any general suspension of trading for more than one I-53 Business Day in securities on any United States national securities exchange or in the over-the-counter market. 7.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY, NPJ, HOLDING AND BROADCASTING. The obligations of the Company, NPJ, Holding and Broadcasting to consummate the transactions contemplated hereby (other than the Company's obligation to mail the Joint Proxy Statement/Prospectus, if required by applicable Law or the Company's Articles of Incorporation) are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) The representations and warranties of Acquiror contained in this Agreement or in any other document delivered pursuant hereto 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 Acquiror shall have delivered to NPJ a certificate to that effect; (b) Each of the obligations of Acquiror to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date and at the Closing Acquiror shall have delivered to NPJ a certificate to that effect; (c) The Company and NPJ shall have received an opinion of Sullivan & Worcester, counsel for Acquiror, dated as of the Closing Date, in form and substance reasonably satisfactory to the Company, NPJ and their counsel; and (d) The Acquiror Class A Common Stock and the Acquiror Preferred Stock (if any is issued pursuant to the Merger) shall have been approved for listing on the National Association of Securities Dealers Automated Quotation National Market System or a national securities exchange, subject to official notice of issuance. Anything in this Section 7.3 to the contrary notwithstanding, the conditions set forth in Section 7.3(a) to the obligation of the Company, NPJ, Holding and Broadcasting to effect the transactions contemplated hereby shall be deemed satisfied (a) notwithstanding any failure of any representation or warranty of Acquiror to be true and correct as of the Closing Date, if (i) the aggregate amount of Losses and Expenses which 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 $10,000,000 (the "Threshold Amount") or (ii) in the event such Losses and Expenses exceed the Threshold Amount but are less than $100,000,000, Acquiror agrees at or prior to the Effective Time to indemnify and hold harmless NPJ immediately prior to the Effective Time against any such Losses and Expenses in excess of the Threshold Amount on terms and conditions reasonably satisfactory to NPJ and (b) notwithstanding any failure of any representation or warranty of Acquiror as it relates to any Subsidiary or cable television system of Acquiror or any of its Subsidiaries acquired by Acquiror or any of its Subsidiaries after November 18, 1994 to be true and correct as of the Closing Date unless such failure, individually or in the aggregate, would have a Material Adverse Effect on Acquiror and its Subsidiaries taken as a whole. 7.4 CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of Acquiror to effect the transactions contemplated hereby (other than the Acquiror's obligation to mail the Joint Proxy Statement/Prospectus, if required by applicable Law or the Acquiror Restated Certificate) are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) The representations and warranties of the Company and NPJ contained in this Agreement or in any other document delivered pursuant hereto 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 NPJ shall have delivered to Acquiror a certificate to that effect; (b) Each of the obligations of the Company, NPJ, Holding and Broadcasting to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date and at the Closing NPJ shall have delivered to Acquiror a certificate to that effect; I-54 (c) Broadcasting shall have no assets except (i) all the capital stock of the Cable Subsidiaries (either directly or indirectly), (ii) the contract rights referred to in Section 2.5(a)(ii), (iii) the cash referred to in Section 2.5(a)(iii) to the extent such cash has not previously been used to pay other expenses of the Company, Holding or Broadcasting described therein, (iv) the Palmer Systems, the Related Assets and the assets of Westerly or Colony, as the case may be, to the extent the transactions contemplated by the last sentence of Section 2.6 hereof shall have been consummated, and (v) assets that in the aggregate are not material to Broadcasting and its Subsidiaries (excluding the Cable Subsidiaries) taken as a whole and are associated with the operation of the cable systems of Broadcasting and its Subsidiaries; (d) Immediately prior to the Effective Time (after giving effect to NPJ's assumption of liabilities pursuant to the Contribution Agreement), Broadcasting shall have no liabilities except (i) any liabilities associated with the operations of the Cable Subsidiaries or the cable operations of Broadcasting, (ii) the New Company Debt, (iii) the contractual obligations referred to in Section 2.5(b)(iii), and (iv) the liabilities set forth on Schedule 2.5(b) hereto; (e) Acquiror shall have received an opinion of Edwards & Angell, counsel for the Company and NPJ, dated as of the Closing Date, in form and substance reasonably satisfactory to Acquiror and its counsel; (f) The aggregate number of cable television subscribers in the Cable Franchise Areas that are Transferable Franchise Areas (as defined below) shall be ninety-five percent (the "Required Percentage") of the aggregate number of cable television subscribers in all Cable Franchise Areas; PROVIDED, HOWEVER, that the condition set forth in this Section 7.4(f) shall not be deemed to be satisfied until the earlier to occur of (x) thirty (30) days following the date on which the Required Percentage is obtained, (y) the date on which the condition set forth in this Section 7.4(f) would be satisfied if the Required Percentage were one hundred percent or (z) December 31, 1995. For purposes of this Section 7.4(f): (i) A Cable Franchise Area means any of the geographic areas in which the Company or the Cable Subsidiaries are authorized to provide cable television service pursuant to a Franchise or provide cable television service without a Franchise; (ii) A Cable Franchise Area is a Transferable Franchise Area if (a) any authorization, consent, waiver, order or approval of any governmental authority necessary for the transfer of control of the Franchise for such Cable Franchise Area in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained; (b) no authorization, consent, waiver, order or approval of any governmental authority is necessary for the transfer of control of the Franchise for such Cable Franchise Area in connection with the consummation of the transactions contemplated by this Agreement; or (c) no Franchise is required for the provision of cable television service in the Cable Franchise Area; (iii) If, at any time prior to the Closing Date, any governmental authority exercises any right reserved to it in a Franchise for any Cable Franchise Area to acquire the Franchise upon the actual or proposed transfer of control of such Franchise, then during the pendency of any proceeding with respect to the acquisition of the Franchise by such governmental authority, and notwithstanding any other action taken by the governmental authority, (a) such Franchise shall be deemed to be one with respect to which consent is required for the transfer of control of such Franchise in connection with the consummation of the transactions contemplated by this Agreement and (b) the governmental authority shall be deemed not to have granted its consent to the transfer of control of such Franchise; and (iv) In calculating the number of cable television subscribers in a Cable Franchise Area, the number of Basic Subscribers in such Cable Franchise Area on September 30, 1994 shall be used. (g) Broadcasting and NPJ shall have entered into a non-competition agreement with Acquiror in substantially the form attached hereto as EXHIBIT D; (h) NPJ shall have delivered to Acquiror a certificate signed by the chief executive officer and the chief financial officer of NPJ certifying that there are no outstanding options to acquire any capital stock I-55 of the Company, Holding and Broadcasting and as to the number of shares of capital stock of the Company, Holding and Broadcasting outstanding as of the Closing Date, indicating the class and series of such shares; and (i) Neither Broadcasting nor Acquiror shall, pursuant to the terms of the Rights Agreement or otherwise, be liable for, or be required to assume, any obligation or duty of the Company under the Rights Agreement and the holders of Rights shall not have any right to acquire any shares of Broadcasting Common Stock or Acquiror Common Stock pursuant to the exercise of such Rights. Anything in this Section 7.4 to the contrary notwithstanding, the conditions set forth in Section 7.4(a) to the obligation of Acquiror to effect the transactions contemplated hereby shall be deemed satisfied notwithstanding any failure of any representation or warranty (other than the representations and warranties set forth in Sections 3.6 and 4.3(a)) of the Company or NPJ to be true and correct as of the Closing Date, if (i) the aggregate amount of Losses and Expenses which 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 $5,000,000 (the "Threshold Amount") or (ii) in the event such Losses and Expenses exceed the Threshold Amount but are less than $50,000,000, NPJ agrees at or prior to the Effective Time to indemnify and hold harmless Acquiror and its Subsidiaries against any such Losses and Expenses in excess of the Threshold Amount on terms and conditions reasonably satisfactory to Acquiror. ARTICLE 8. TERMINATION 8.1 TERMINATION. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date: (a) by mutual written consent duly authorized by the Boards of Directors of the Company, NPJ and Acquiror; (b) by either the Company or Acquiror, (i) if at the stockholders' meeting of Acquiror referred to in Section 6.14 (including any postponement or adjournment thereof), the Merger Transactions and the Recapitalization Amendment shall fail to be approved and adopted by the affirmative vote specified herein, (ii) if at the stockholders' meeting of the Company referred to in Section 6.13 (including any postponement or adjournment thereof), the Merger Transactions shall fail to be approved and adopted by the affirmative vote specified herein, or (iii) so long as the terminating party has not breached its obligations hereunder, after December 31, 1995 (the "Termination Date"), if the Merger or the transactions contemplated hereby shall not have been consummated on or before such date; (c) by the Company, provided it has not breached any of its obligations hereunder, if either (A) Acquiror fails to perform any covenant in this Agreement when performance thereof is due and does not cure the failure within 20 Business Days after the Company delivers written notice thereof, or (B) any condition in Sections 7.2 and 7.3 of this Agreement is not satisfied or capable of being satisfied prior to the Termination Date; (d) by Acquiror, provided it has not breached any of its obligations hereunder, if either (i) the Company or NPJ fails to perform any covenant in this Agreement when performance thereof is due, and does not cure the failure within 20 Business Days after written notice by Acquiror thereof, (ii) any condition in Sections 7.2 and 7.4 of this Agreement is not satisfied or capable of being satisfied prior to the Termination Date, or (iii) the Company Board of Directors materially modifies or withdraws the approval, determination or recommendation referred to in Section 3.4 and Section 6.9; or (e) by the Company, whether or not the conditions set forth in Section 7.3 have been satisfied, if the Board of Directors of the Company determines, with the written advice of counsel provided to Acquiror, that it may be required to do so in the exercise of its fiduciary duties. I-56 8.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 8.1 hereof, this Agreement, except for the provisions of Section 6.6(e)--(g), Section 8.3 and Section 10.12, shall forthwith become null and void and have no effect, without any liability on the part of any party or its directors, officers or stockholders. Nothing in this Section 8.2 shall relieve any party to this Agreement of liability for breach of this Agreement. 8.3 FEES AND EXPENSES. (a) In order to induce Acquiror to, among other things, enter into this Agreement, the Company agrees as follows: If this Agreement is terminated (A) by Acquiror pursuant to Section 8.1(d)(iii) hereof, (B) by the Company pursuant to Section 8.1(e) hereof, or (C) by the Company or Acquiror pursuant to Section 8.1(b)(ii) hereof and the Company Board of Directors shall have materially modified or withdrawn the approval, determination or recommendation referred to in Sections 3.4 and 6.9, then the Company shall promptly pay to Acquiror a fee of $42,000,000, plus an amount equal to the actual reasonable fees and expenses paid or payable by or on behalf of Acquiror to its attorneys, accountants, environmental consultants, management consultants, and other consultants and advisors in connection with the negotiation, execution and delivery of this Agreement and the transactions contemplated hereby; PROVIDED, HOWEVER, that such payment for fees and expenses shall in no event exceed $10,000,000. If this Agreement is terminated by Acquiror pursuant to Section 8.1(d)(i) or 8.1(d)(ii) hereof, other than as a result of any condition in Section 7.2 or the condition in Section 7.4(f) not being satisfied and not being capable of being satisfied prior to the Termination Date (except if the failure of the condition in Section 7.4(f) results from the refusal of one or more governmental authorities to consent to the transfer of control of one or more Franchises to Acquiror for reasons other than the qualifications or fitness of Acquiror), then the Company shall promptly pay to Acquiror an amount equal to the actual reasonable fees and expenses paid or payable by or on behalf of Acquiror to its attorneys, accountants, environmental consultants, management consultants, and other consultants and advisors in connection with the negotiation, execution and delivery of this Agreement and the transactions contemplated hereby; PROVIDED, HOWEVER, that the payment described in this sentence shall in no event exceed $10,000,000. The $42,000,000 payment (the "Break-Up Fee Payment") described in the first sentence of this Section 8.3(a) shall be made in same day funds no later than five business days after the termination of this Agreement. The payment for fees and expenses described in the first and second sentences of this Section 8.3(a) shall be made in same day funds no later than five business days after receipt by the Company of detailed written statements describing the fees and expenses. (b) In order to induce the Company and NPJ to, among other things, enter into this Agreement, Acquiror agrees as follows: If this Agreement is terminated (i) by the Company pursuant to Section 8.1(c), other than as a result of any condition in Section 7.2 not being satisfied and not being capable of being satisfied prior to the Termination Date, or (ii) by Acquiror pursuant to Section 8.1(d)(ii) as a result of the condition in Section 7.4(f) not being satisfied and not being capable of being satisfied prior to the Termination Date (if the failure of the condition in Section 7.4(f) results from the refusal of one or more governmental authorities to consent to the transfer of control of one or more Franchises to Acquiror for reasons relating to the qualifications or fitness of Acquiror), Acquiror shall pay promptly to the Company an amount equal to the actual reasonable fees and expenses paid or payable by or on behalf of the Company and NPJ to their attorneys, accountants, environmental consultants, management consultants, and other consultants and advisors in connection with the negotiation, execution and delivery of this Agreement; PROVIDED, HOWEVER, that such payment shall in no event exceed the sum of $10,000,000. Such payment shall be made in same day funds no later than five business days after receipt by Acquiror of detailed written statements describing the fees and expenses. (c) (i) The Company hereby grants to Acquiror or any nominee designated by Acquiror (in such capacity, "Buyer") an irrevocable option (the "Option"), exercisable in accordance with clause (iii) below, to purchase and acquire, at a purchase price of $68,500,000 (the "Option Purchase Price"), all of the right, title and interest of the Company and the Cable Subsidiaries (collectively, the "Seller") in and to the cable television system operated in Palm Springs, California and the surrounding communities previously identified I-57 in writing by the Company to Acquiror as the "Palm Springs Cluster", together with all accounts receivable, inventory, supplies, machinery, plant and equipment, tools, customer lists, contracts, intangible assets, goodwill and all other assets, tangible or intangible, used or usable in connection therewith (the "Palm Springs System"), free and clear of all Liens. (ii) Such transfer and assignment shall be free and clear of all liabilities and obligations of Seller, and Buyer shall be under no obligation to assume or perform, and shall not assume or perform, any obligation, liability or indebtedness of Seller. All of the representations and warranties made by the Company and NPJ herein which are applicable to the Palm Springs System shall be deemed made by the Company and Seller in connection with Buyer's purchase of the Palm Springs System, PROVIDED that such representations and warranties shall not survive beyond the Option Closing (as defined below) except that the representations and warranties in Section 4.9 which pertain to the Seller's title to the Palm Springs System (the "Palm Springs Title Representation") shall survive indefinitely. The Company hereby agrees to indemnify, defend and hold harmless Acquiror and Buyer against any Losses and Expenses to the extent such Losses and Expenses are based upon or arise out of any untruthful or inaccurate representation made by the Company or NPJ in the Palm Springs Title Representation. Any claim for indemnification in respect of the transfer and assignment of the Palm Springs System shall be conducted in accordance with the provisions of Sections 9.6 and 9.7 hereof. (iii) Acquiror may exercise the Option at any time within 45 days following the date on which Acquiror becomes entitled to a Break-Up Fee Payment by notice in writing to the Company (the "Option Notice"). Such Option Notice shall specify a date not less than 180 days from the date of the Option Notice for the purchase of the Palm Springs System. The Company agrees to, and shall cause Seller to, 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 Buyer and to make any filings required by any governmental authority or applicable Law. (iv) The closing of the exercise of the Option (the "Option Closing") shall take place at the offices of Sullivan & Worcester at the address specified in Section 7.1, on the date specified in the Option Notice, or on such other date and at such other location as Acquiror and the Company may agree in writing. At such closing, (A) Acquiror shall make payment of the Option Purchase Price to the Company, (B) the Company and Seller shall deliver to Buyer evidence reasonably satisfactory to Buyer and its counsel that all necessary authorizations, consents, orders, waivers and approvals have been obtained to vest in Buyer all of the right, title and interest of the Company and Seller in and to the Palm Springs System, (C) the Company and Seller shall deliver to Buyer such conveyancing instruments and documents reasonably necessary or appropriate to vest in Buyer ownership of Seller as contemplated by this paragraph (c), which instruments and documents shall be in a form reasonably satisfactory to Buyer and its counsel, and (D) the Company and Seller shall deliver to Acquiror all books and records regarding the operation of the Palm Springs Systems and such other information and materials as shall ensure a smooth transition of the operation of the Palm Springs System from the Seller to Buyer. (v) The Option shall terminate upon the earlier of the Effective Time or the termination of this Agreement in accordance with Section 8.1 (other than a termination pursuant to which Acquiror becomes entitled to a Break-Up Fee Payment). ARTICLE 9. SURVIVAL; INDEMNIFICATION 9.1 SURVIVAL. All representations, warranties, covenants, agreements and obligations in this Agreement or in any certificate required to be delivered by this Agreement shall not survive beyond the Closing Date except that (i) any covenant, agreement or obligation to be performed after the Closing Date shall survive I-58 until such covenant, agreement or obligation has been fully performed, and (ii) the provisions of this Article 9 and the representations and warranties contained in Sections 3.6 and 4.3 of this Agreement shall survive indefinitely. 9.2 INDEMNIFICATION BY NPJ. NPJ hereby agrees to indemnify, defend and hold harmless Acquiror, each of Acquiror's Subsidiaries, each of their respective successors-in-interest and each of their respective past and present officers and directors against any Losses and Expenses to the extent such Losses and Expenses (i) arise out of or relate to the Assumed Liabilities or the Contributed Assets (each as defined in the Contribution Agreement) or the operations of any of the businesses contributed to NPJ pursuant to the Contribution Agreement, (ii) are based upon or arise out of any untruthful or inaccurate representation made by the Company and NPJ in Section 3.6 or 4.3 hereof, (iii) are based upon or arise out of any inaccurate information in the certificate to be delivered by the Company, Holding and Broadcasting pursuant to Section 7.4(h), or (iv) are based upon or arise out of the failure of the Company to comply with the covenant set forth in Section 6.3(g) or 6.26. 9.3 INDEMNIFICATION BY ACQUIROR. Acquiror hereby agrees to indemnify and hold harmless NPJ, each of NPJ's Subsidiaries and their respective successors-in- interest and each of their respective past and present officers and directors against any and all Losses and Expenses to the extent such Losses and Expenses are based upon or arise out of any untruthful or inaccurate representation made by Acquiror in Section 5.6 hereof. 9.4 INDEMNIFICATION BY THE COMPANY. The Company (and from and after the Dissolution, Broadcasting) hereby agrees to indemnify, defend and hold harmless NPJ, each of NPJ's Subsidiaries and their respective successors-in-interest and each of their respective past and present officers and directors against any Losses and Expenses, joint or several, arising out of or in connection with the business operations of the Cable Subsidiaries, the Retained Liabilities or the Retained Assets. 9.5 ADDITIONAL INDEMNIFICATION RELATING TO CERTAIN LITIGATION AND CLAIMS. (a) The Company and, from and after the Effective Time, NPJ (individually and not jointly with the Company) and Acquiror each agrees to indemnify and hold harmless the other against any and all Losses and Expenses to the extent such Losses and Expenses are based upon or arise out of any suit, action or proceeding brought by the holders of the Indemnifying Party's (and, when NPJ is the indemnifying party, the Company's, Holding's and Broadcasting's) debt or equity securities as a result of, or in connection with, the execution and delivery of this Agreement and the transactions contemplated hereby; PROVIDED, HOWEVER, that the Company or Acquiror, as the case may be, shall not be entitled to indemnification under this Section 9.5 to the extent (i) such Losses and Expenses (or actions in respect thereof) arise out of or are based upon (A) an untrue statement or alleged untrue statement of a material fact contained in any SEC Filing or (B) the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) it was responsible for such misstatement or omission. (b) The Company and, from and after the Effective Time, NPJ (individually and not jointly with the Company) agrees to indemnify and hold harmless Acquiror and its Subsidiaries against any and all Losses and Expenses to the extent such Losses and Expenses are based upon or arise out of any action or claim of any nature whatsoever asserted by (i) any holder listed on Schedule 4.3 of any of the equity securities of any of the Cable Subsidiaries, or (ii) any holder listed on Schedule 3.6 of any of the equity securities of Holding or Broadcasting listed on Schedule 3.6, including, without limitation, any action or claim asserted in connection with or relating to the purchase by any Cable Subsidiary or the Company of the equity securities of any such holder. 9.6 NOTIFICATION OF CLAIMS. For the purpose of this Article 9, the term "Indemnifying Party" shall mean the party having an obligation hereunder to indemnify the other party or parties) pursuant to this Article 9, and the term "Indemnified Party" shall mean the party having the right to be indemnified pursuant to this Article 9. Whenever any claim shall arise for indemnification under this Article 9, the Indemnified I-59 Party shall promptly notify the Indemnifying Party in writing of such claim and, when known, the facts constituting the basis for such claim (in reasonable detail). Failure by the Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability hereunder unless such failure materially prejudices the Indemnifying Party. 9.7 INDEMNIFICATION PROCEDURES. (a) After the notice required by Section 9.6, if the Indemnifying Party undertakes to defend any such claim, it shall be required to take control of the defense and investigation with respect to such claim and to employ and engage attorneys of its own choice to handle and defend the same, at the Indemnifying Party's cost, risk and expense, upon written notice to the Indemnified Party of such election, which notice acknowledges the Indemnifying Party's obligation to provide indemnification hereunder. The Indemnifying Party shall not settle any third-party claim that is the subject of indemnification without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that the Indemnifying Party may settle a claim without the Indemnified Party's consent if such settlement (i) makes no admission or acknowledgment of liability or culpability with respect to the Indemnified Party, (ii) includes a complete release of the Indemnified Party and (iii) does not require the Indemnified Party to make any payment or forego or take any action. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of any lawsuit or action with respect to such claim and any appeal arising therefrom (including the filing in the Indemnified Party's name of appropriate cross claims and counterclaims). The Indemnified Party may, at its own cost, participate in any investigation, trial and defense of such lawsuit or action controlled by the Indemnifying Party and any appeal arising therefrom. (b) If, after receipt of a claim notice pursuant to Section 9.6, the Indemnifying Party does not undertake to defend any such claim, the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such claim and the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party (including, without limitation, the settlement thereof without the consent of the Indemnifying Party). If there are one or more legal defenses available to the Indemnified Party that conflict with those available to the Indemnifying Party, the Indemnified Party shall have the right, at the expense of the Indemnifying Party, to assume the defense of the lawsuit or action; PROVIDED, HOWEVER, that the Indemnified Party may not settle such lawsuit or action without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. (c) At any time after the commencement of defense of any lawsuit or action, the Indemnifying Party may request the Indemnified Party to agree in writing to the abandonment of such contest or to the payment or compromise by the Indemnifying Party of such claim, whereupon such action shall be taken unless the Indemnified Party determines that the contest should be continued and so notifies the Indemnifying Party in writing within 15 days of such request from the Indemnifying Party. If the Indemnified Party determines that the contest should be continued, the Indemnifying Party shall be liable hereunder only to the extent of the lesser of (i) the amount which the other party(ies) to the contested claim had agreed to accept in payment or compromise as of the time the Indemnifying Party made its request therefor to the Indemnified Party or (ii) such amount for which the Indemnifying Party may be liable with respect to such claim by reason of the provisions hereof. 9.8 WORKING CAPITAL ADJUSTMENT. (a) Immediately prior to the Effective Time (and giving effect to the Distribution), Broadcasting shall prepare and deliver to Acquiror a schedule showing Broadcasting's best estimate of the Working Capital (the "Broadcasting Working Capital Calculation"). If the Broadcasting Working Capital Calculation is greater than zero, Acquiror shall pay the excess to NPJ in immediately available funds on the Effective Time; if the Broadcasting Working Capital Calculation is less than zero, NPJ shall pay the difference to Acquiror in immediately available funds on the Effective Time. I-60 (b) As promptly as practicable after the Effective Time, but in any event within 90 days thereafter, Acquiror shall prepare and deliver to NPJ a schedule showing Acquiror's determination of the Working Capital as of the Effective Time (and giving effect to the Distribution) (the "Acquiror Working Capital Calculation"). If NPJ disagrees with the Acquiror Working Capital Calculation, NPJ shall give notice thereof to Acquiror within 30 days after delivery of the Acquiror Working Capital Calculation to NPJ. (c) Acquiror and NPJ shall attempt to settle any such dispute; any such settlement shall be final and binding upon Acquiror and NPJ. If, however, Acquiror and NPJ are unable to settle such dispute within 30 days after receipt of such notice of dispute by Acquiror, the dispute shall be submitted to an independent certified public accounting firm mutually acceptable to Acquiror and NPJ for resolution, and the decision of such independent certified public accountants shall be final and binding upon Acquiror and NPJ. All costs incurred in connection with the resolution of said dispute by such independent public accountants, including expenses and fees for services rendered, shall be paid one half by Acquiror and one half by NPJ. Acquiror and NPJ shall use reasonable efforts to have the dispute resolved within 60 days after such dispute is submitted to said independent public accountants, but neither Acquiror or NPJ shall have any liability to any party hereto if such dispute is not resolved within such 60-day period. (d) Within 10 Business Days following a final determination of the Working Capital (whether as a result of NPJ failing to give notice of NPJ's disagreement with Acquiror's determination within the time period prescribed above, a resolution by Acquiror and NPJ of any such disagreement, or a determination by an accounting firm selected pursuant to clause (c) above to resolve any disagreement among the parties), Acquiror shall pay to NPJ, or NPJ will pay to Acquiror, as the case may be, in immediately available funds, any additional payment to which such party would have been entitled on the Effective Time under clause (a) of this Section based on the final determination of the Working Capital. ARTICLE 10. MISCELLANEOUS 10.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. 10.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: IF TO ACQUIROR: Continental Cablevision, Inc. The Pilot House, Lewis Wharf Boston, MA 02110 Telecopy: (617) 742-0530 Attention: Amos B. Hostetter, Jr. WITH A COPY TO: Sullivan & Worcester One Post Office Square Boston, MA 02109 Telecopy: (617) 338-2880 Attention: Patrick K. Miehe, Esq. I-61 IF TO THE COMPANY, HOLDING, BROADCASTING OR NPJ: The Providence Journal Company 75 Fountain Street Providence, RI 02902 Telecopy: (401) 277-7889 Attention: Stephen Hamblett and John L. Hammond, Esq. WITH A COPY TO: Edwards & Angell 2700 Hospital Trust Tower Providence, RI 08903 Telecopy: (401) 276-6611 Attention: Walter G.D. Reed, Esq. or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first Business Day at the place from which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth Business Day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. 10.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of the laws that might otherwise govern under principles of conflicts of laws applicable hereto. 10.4 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 10.5 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement except for Section 6.6 and Article 9 (which are intended to be for the benefit of the Persons provided for therein, and may be enforced by such Persons.) 10.6 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 10.7 EXPENSES. Prior to the Closing Date, the Company, Holding and Broadcasting shall pay, or make adequate provision for the payment of, all costs and expenses required to be paid by them under this Agreement in connection with the transactions contemplated by this Agreement. All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses; PROVIDED, HOWEVER, that the following fees, costs and expenses shall be borne one-half by the Company and one-half by Acquiror: (A) filing fees under the HSR Act; (B) closing fees (including, without limitation, facility fees, syndication fees and other arrangement fees, if any) to be paid to the financial institutions which will extend the New Company Debt (except that the expenses borne by the Company pursuant to this clause (B) shall not exceed 40 basis points of the aggregate principal amount of the New Company Debt); and (C) fees, costs and expenses to be paid to third parties that the Company and Acquiror mutually agree to make in connection with obtaining authorizations, consents, orders, waivers or approvals of any governmental authority (including, without limitation, the FCC) necessary for the transfer of control of any Franchise or License (except that the Company shall be solely responsible for all costs and expenses I-62 which result from the material violation of the terms of a Franchise by the Company or a Cable Subsidiary and Acquiror shall be solely responsible for all costs and expenses which result from material amendments to the terms of a Franchise made solely at the request of Acquiror). 10.8 PERSONAL LIABILITY. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. 10.9 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors. This Agreement may not be assigned by any party hereto. 10.10 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties. Any amendment to this Agreement by a party after the meeting of its stockholders referred to in Section 6.13 or 6.14, as the case may be, may be made without seeking the approval of such stockholders to the extent permissible under applicable Law. 10.11 EXTENSION; WAIVER. Any party hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of any other party contained herein or in any document, certificate or writing delivered pursuant hereto by any other party, or (iii) waive compliance with any of the agreements or conditions contained herein or any breach thereof. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 10.12 LEGAL FEES; COSTS. If any party hereto institutes any action or proceeding to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. 10.13 SPECIFIC PERFORMANCE. The parties acknowledge that money damages are not an adequate remedy for violations of this agreement and that any party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief. 10.14 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 10.15 FURTHER AGREEMENTS RELATING TO THE ORIGINAL AGREEMENT. In the event that (i) the private letter ruling contemplated by Section 6.17 hereof is not received from the IRS within 180 days of the Company's request therefor or (ii) prior to the date specified in clause (i), the IRS formally notifies the Company that it is not willing to issue such ruling, Acquiror, the Company and NPJ agree promptly to amend and restate I-63 this Agreement so that it is in the form of the Original Agreement and to abide by the provisions of that certain side letter among the Company, NPJ and Acquiror dated as of even date with this Agreement. ARTICLE 11. DEFINITIONS When used in this Agreement, the following terms shall have the meanings indicated. "Accumulated Funding Deficiency" means an accumulated funding deficiency, as defined in Section 302 of ERISA and Section 412 of the Code. "Acquiror" has the meaning set forth in the first paragraph of this Agreement. "Acquiror Balance Sheet" has the meaning set forth in Section 5.7. "Acquiror Benefit Arrangement", "Acquiror Employees", "Acquiror Employee Plan" and "Acquiror Plan" have the meanings set forth in Section 5.15. "Acquiror Class A Common Stock" means Acquiror's Class A Common Stock, $.01 par value per share. "Acquiror Class B Common Stock" means Acquiror's Class B Common Stock, $.01 par value per share. "Acquiror Common Stock" means, collectively, the Acquiror Class A Common Stock and the Acquiror Class B Common Stock. "Acquiror Merger Securities" means the Acquiror Class A Common Stock and the Acquiror Preferred Stock (if any) to be issued pursuant to the Merger. "Acquiror Preferred Stock" has the meaning set forth in Section 1.2(a). "Acquiror Restated By-Laws" means the By-Laws of Acquiror, as amended and restated and in effect as of the Closing Date. "Acquiror Restated Certificate" means the Certificate of Incorporation of Acquiror, as amended and restated and in effect on the Closing Date. "Acquiror's 1998-1999 Share Repurchase Program" means the Acquiror Common Stock repurchase program of Acquiror under the Stock Liquidation Agreement under which Acquiror will offer to purchase, and certain shareholders of Acquiror will sell to Acquiror on December 15, 1998 (or January 15, 1999, at the election of each such shareholder), at a price established pursuant to a specified formula, up to 667,366 shares of Acquiror Common Stock. "Acquiror Series A Preferred Stock" has the definition set forth in Section 5.6. "Acquiror Working Capital Calculation" has the meaning set forth in Section 9.8(b). "Affiliate" has the meaning set forth in Rule 12b-2 promulgated by the SEC under the Exchange Act. "Assumed Liabilities" has the meaning set forth in the Contribution Agreement. "Balance Sheet Date" means September 30, 1994. "Basic Service" means the level of cable television service provided by the Company, any Cable Subsidiary, Acquiror or any Subsidiary of Acquiror (as the case may be) in any Franchise Area which has I-64 the largest number of subscribers (other than the service level of the Company, any Cable Subsidiary, Acquiror or any Subsidiary of Acquiror (as the case may be) which consists primarily of transmissions of local and distant broadcasting stations). "Basic Subscriber" means a Person (i) who subscribes to Basic Service, (ii) who pays the full rate for such service charged by the Company, any Cable Subsidiary, Acquiror or any Subsidiary of Acquiror (as the case may be) for detached single family homes, and (iii) whose accounts receivable owed for such service are not more than 60 days past due from the date of invoice; provided, that a hotel, motel, or other multi-living unit customer which pays less per living unit than the rates charged for detached single family homes shall be considered to be that number of Basic Subscribers which is equal to revenues from Basic Service provided to such hotel, motel, or other customer for the month immediately preceding the month in which this Agreement is executed and delivered (without regard to nonrecurring revenues from ancillary services such as installation fees) divided by the full rate charged for detached single family homes for such service. "Benefit Arrangement" has the meaning set forth in Section 4.12(q). "Break-Up Fee Payment" has the meaning set forth in Section 8.3(b). "Broadcasting" has the meaning set forth in the preambles to this Agreement. "Broadcasting Class A Common Stock" means Broadcasting's Class A Common Stock, $1.00 par value per share. "Broadcasting Class B Common Stock" means Broadcasting's Class B Common Stock, $1.00 par value per share. "Broadcasting Common Stock" means, collectively, the Broadcasting Class A Common Stock and the Broadcasting Class B Common Stock. "Broadcasting Working Capital Calculation" has the meaning set forth in Section 9.8(a). "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are not open for the transaction of business. "Cable Balance Sheet" has the meaning set forth in Section 4.4. "Cable Dispute" has the meaning set forth in Section 6.10(a). "Cable Employees", "Cable Employee Plan", "Cable Plan" and "Cable Benefit Arrangement" have the meanings set forth in Section 4.12(q). "Cable Franchise Areas" has the meaning set forth in Section 7.4(f). "Cable Subsidiaries" means Subsidiaries of the Company that directly or indirectly own and operate cable television systems (including, without limitation, Copley/Colony, Inc. and its Subsidiaries and King Videocable Company and its Subsidiaries); PROVIDED, HOWEVER, that for purposes of Articles 3 and 4 of this Agreement, such term includes the Company with respect to its operation of the Palmer Systems. "Cable Tax Returns" has the meaning set forth in Section 6.10(h). "Certificates" has the meaning set forth in Section 1.6(b). "Certificate of Merger" has the meaning set forth in Section 1.5. "Closing" and "Closing Date" have the meanings set forth in Section 7.1. I-65 "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, as set forth in Section 4980B of the Code and Part 6 of Title I of ERISA. "Code" means the Internal Revenue Code of 1986, as amended. "Colony" has the meaning set forth in Section 2.6. "Common Stock Conversion Number" has the meaning set forth in Section 1.2(d). "Communications Act" means the Communications Act of 1934, the Cable Communications Policy Act of 1984 and the Cable Television Consumer Protection and Competition Act of 1992, all as amended to date, and the applicable rules and regulations thereunder. "Company" has the meaning set forth in the first paragraph of this Agreement. "Company Balance Sheet" has the meaning set forth in Section 3.8. "Company Benefit Arrangement" has the meaning set forth in Section 4.12(q). "Company Board of Directors" means the Board of Directors of the Company. "Company Class A Common Stock" means the Company's Class A Common Stock, $2.50 par value per share. "Company Class B Common Stock" means the Company's Class B Common Stock, $2.50 par value per share. "Company Common Stock" means, collectively, the Company Class A Common Stock and the Company Class B Common Stock. "Company Consolidated Income Taxes" and Company Consolidated Income Tax Returns" have the meanings set forth in Section 6.10(h). "Company Employee Plan" means any Employee Benefit Plan that is sponsored or contributed to by the Company, NPJ or any ERISA Affiliate of either of them covering the employees or former employees of the Company, NPJ, or any ERISA Affiliate of either of them. "Company Group" has the meaning set forth in Section 6.10(h). "Company/Kelso Agreement" means that certain Stock Purchase Agreement dated as of January 18, 1995 among the Company and the Kelso Partnerships pursuant to which the Company has agreed to purchase from the Kelso Partnerships all of the Kelso Interests. "Company Nominee" has the meaning set forth in Section 6.23. "Confidentiality Agreement" means the letter agreement between the Company and Acquiror dated as of February 16, 1994. "Contribution" and "Contribution Agreement" have the meanings set forth in Section 2.5. "Contributed Assets" has the meaning set forth in the Contribution Agreement. "Controlled Group Liability" means any and all liabilities under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code and (iv) the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code. I-66 "Directors Option Plan" means the 1994 Directors Stock Option Plan described on Schedule 3.6. "Dissenting Shares" and "Dissenting Stockholders" have the meaning set forth in Section 1.3. "Dissolution" has the meaning set forth in Section 2.4(b). "Distribution" has the meaning set forth in Section 2.5(c). "Effective Date" has the meaning set forth in Section 1.5. "Effective Time" has the meaning set forth in Section 1.5. "Employee Benefit Plan" has the meaning given such term in Section 3(3) of ERISA. "Enforceability Exceptions" has the meaning set forth in Section 3.1. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means a Person and/or such Person's Subsidiaries, or any trade or business (whether or not incorporated) which is under common control with such entity or such entity's Subsidiaries or which is treated as a single employer with such Person or any Subsidiary of such Person under Section 414(b), (c), (m), or (o) of the Code or Section 4001(b)(1) of ERISA (it being understood that Copley/Colony, Inc. and its Subsidiaries and Holding and its Subsidiaries are ERISA Affiliates of the Company). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Agent" has the meaning set forth in Section 1.6(a). "FCC" means the Federal Communications Commission. "FCC Approvals" has the meaning set forth in Section 3.3. "Franchises" means written "franchises" within the meaning of Section 602(8) of the Cable Communications Policy Act of 1984 (47 U.S.C. (S)522(9)). "GAAP" means United States generally accepted accounting principles. "Group Health Plan" means any group health plan, as defined in Section 5000(b)(1) of the Code. "Holding" has the meaning set forth in the preambles to this Agreement. "Holding Contribution" has the meaning set forth in the preambles to this Agreement. "Holding Dissolution" has the meaning set forth in the preambles to this Agreement. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "Indemnifying Party" and "Indemnified Party" have the meanings set forth in Sections 6.6 or 9.6, as the context requires. "Indemnitor" and "Indemnitee" have the meanings set forth in Section 6.10(f). "IRS" means the United States Internal Revenue Service. I-67 "Issuer" has the meaning set forth in Section 1.6(d). "Joint Proxy Statement/Prospectus" has the meaning set forth in Section 6.6(a). "Kelso Interests" and "Kelso Partnerships" have the meanings set forth in Section 2.2. "Law" means all federal, state, county and local laws, statutes, ordinances, rules and regulations. "Licenses" means approvals, consents, rights, certificates, orders, franchises, determinations, permissions, licenses, authorities or grants issued, declared, designated or adopted by any nation or government, any federal, state, municipal or other political subdivision thereof or any department, commission, board, bureau, agency or instrumentality exercising executive, legislative, judicial, regulatory or administrative functions pertaining to government; excluding, however, the Franchises. "Liens" means any lien, claim, charge, restriction, pledge, mortgage, security interest or other encumbrance. "Local Approvals" has the meaning set forth in Section 3.3. "Losses and Expenses" mean any and all damages, liabilities, obligations, losses, deficiencies, demands, claims, penalties, assessments, judgements, actions, proceedings and suits of whatever kind and nature and all costs and expenses relating thereto (including reasonable attorney's fees and disbursements). "Material Adverse Effect" means a material adverse effect on the business, condition (financial or otherwise) or assets of the named entity or the named entities taken as a whole. In all references in this Agreement to a "Material Adverse Effect on the Company and the Cable Subsidiaries taken as a whole", the Company shall be deemed to have no assets other than the stock of the Cable Subsidiaries and, to the extent appropriate given the context in which the statement is made, the Palmer Systems and the Related Assets. In all references in this Agreement to a "Material Adverse Effect on NPJ and its Subsidiaries taken as a whole", NPJ shall be deemed to own all of the assets and Subsidiaries of the Company other than the Retained Assets. "Material Cable Agreements" has the meaning set forth in Section 4.8(a). "Maximum Common Stock Amount" means $645,000,000 or such lesser amount as shall be calculated in accordance with Section 1.4(b) hereof. "Merger" has the meaning set forth in Section 1.1. "Merger Transactions" means, collectively, the transactions contemplated by (i) the Merger, (ii) this Agreement, (iii) the Plan of Reorganization, and (iv) the Contribution Agreement. "Multiemployer Plan" means a multiemployer plan, as defined in Sections 3(37) and 4001(a)(3) of ERISA. "New Company Debt" has the meaning set forth in Section 2.1. "NPJ" has the meaning set forth in the first paragraph of this Agreement. "NPJ Class A Common Stock" means NPJ's Class A Common Stock, $1.00 par value per share. "NPJ Class B Common Stock" means NPJ's Class B Common Stock, $1.00 par value per share. "NPJ Common Stock" means, collectively, the NPJ Class A Common Stock and the NPJ Class B Common Stock. I-68 "Non-Competition Agreement" means the Non-Competition Agreement among Broadcasting, NPJ and Acquiror in the form attached hereto as EXHIBIT D. "NPJ Debt" has the meaning set forth in Section 2.1. "NLRB" means the National Labor Relations Board. "Option Plan" means the Company 1994 Employee Stock Option Plan described in Schedule 3.6 hereto. "Original Agreement" has the meaning set forth in the preambles to this Agreement. "Other Filings" has the meaning set forth in Section 6.6(c). "Palmer Systems" means all cable television systems owned or operated by the Company directly. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" means any employer pension benefit plan, as defined in Section 3(2) of ERISA. "Person" means any individual, general partnership, limited partnership, corporation, limited-liability company, joint venture, trust, business trust, cooperative or association, and the heirs, executors, administrators, legal representatives, successors, and assigns of such Person where the context so requires. "Plan of Reorganization" means that certain Plan of Reorganization and Dissolution of the Company relating to the transactions contemplated by Section 2.3 and 2.4 hereof and in form and substance reasonably acceptable to Acquiror. "Preferred Stock Amount" has the meaning set forth in Section 1.2(f). "Preferred Stock Conversion Number" has the meaning set forth in Section 1.2(e). "Preferred Stock Election" has the meaning set forth in Section 1.2(g). "Proceeds" has the meaning set forth in Section 6.15(d). "Prohibited Transaction" means a transaction that is prohibited under 4975 of the Code or Section 406 and not exempt under Section 4975 of the Code or Section 408 of ERISA respectively. "Recapitalization Amendment" shall mean an amendment to the Acquiror Restated Certificate increasing the number of authorized shares of capital stock of Acquiror to no less than the amounts set forth in Section 5.6. "Registration Statements" has the meaning set forth in Section 6.6(a). "Related Assets" has the meaning set forth in Section 2.6. "Reportable Event" means a "reportable event" as defined in Section 4043 of ERISA to the extent that the reporting of such event to the PBGC has not been waived. "Retained Assets" has the meaning set forth in the Contribution Agreement. "Retained Liabilities" has the meaning set forth in the Contribution Agreement. "Rights" has the meaning set forth in the Rights Agreement. I-69 "Rights Agreement" means that certain Rights Agreement dated as of September 26, 1990 between the Company and The First National Bank of Boston, a national banking association, as Rights Agent. "Rights Distribution Date" has the meaning ascribed to the term "Distribution Date" in the Rights Agreement. "SEC" means the Securities and Exchange Commission. "SEC Filings" has the meaning set forth in Section 6.6(d). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Stock Acquisition Date" has the meaning set forth in the Rights Agreement. "Stock Plan" means the Company Restricted Stock Plan described in Schedule 3.6 hereto. "Subsidiary" shall mean as to any Person (i) any corporation of which such Person owns, either directly or through its Subsidiaries, 50% or more of the total combined voting power of all classes of voting securities of such corporation and (ii) any partnership, association, joint venture or other form of business organization, whether or not it constitutes a legal entity, in which such Person directly or indirectly through its Subsidiaries owns 50% or more of the total equity interests. "Superior Proposal" has the meaning set forth in Section 6.1. "Surviving Corporation" has the meaning set forth in Section 1.1. "Tax Return" means all returns, declarations, reports, estimates, information returns and statements required to be filed in respect of any Taxes. "Termination Date" has the meaning set forth in Section 8.1(b). "Threshold Amount" has the meaning set forth in Section 7.3 or 7.4, as the context requires. "Transaction Documents" shall have the meaning set forth in Section 3.1. "Transaction Securities" means, collectively, NPJ Common Stock and Acquiror Merger Securities. "Transferable Franchise Area" has the meaning set forth in Section 7.4(f). "Units Plan" means the Company Incentive Stock Units Plan described in Schedule 3.6 hereto. "Voting Agreement" has the meaning set forth in Section 6.22(c). "Welfare Plans" means any employee welfare benefit plan, as defined in Section 3(l) of ERISA. "Westerly" has the meaning set forth in Section 2.6. "Withdrawal Liability" has the meaning given such term in Section 4201 of ERISA. "Working Capital" means the consolidated current assets (other than the Proceeds of any disposition of a cable television system by the Company or a Cable Subsidiary contemplated by Section 6.15(d)) minus consolidated current liabilities (including, without limitation, any and all accrued unpaid taxes) determined in accordance with GAAP of Broadcasting and the Cable Subsidiaries as of the Effective Time. [remainder of this page intentionally left blank] I-70 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officer thereunto duly authorized on the day and year first above written. Providence Journal Company /s/ Trygve E. Myhren By: _________________________________ Name: Trygve E. Myhren Title: President and Chief Operating Officer The Providence Journal Company /s/ Stephen Hamblett By: _________________________________ Name: Stephen Hamblett Title: Chairman of the Board and Chief Executive Officer King Holding Corp. /s/ Trygve E. Myhren By: _________________________________ Name: Trygve E. Myhren Title: President and Chief Operating Officer King Broadcasting Company /s/ Trygve E. Myhren By: _________________________________ Name: Trygve E. Myhren Title: President and Chief Operating Officer Continental Cablevision, Inc. /s/ Amos B. Hostetter, Jr. By: _________________________________ Name: Amos B. Hostetter, Jr. Title: Chairman of the Board and Chief Executive Officer Schedules which are referenced and briefly described in the document have been omitted from this filing but will be made available upon request by the Commission. I-71 Exhibit A to the MERGER AGREEMENT CONTINENTAL CABLEVISION, INC. CERTIFICATE OF DESIGNATION OF SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SUCH SERIES OF PREFERRED STOCK Pursuant to Section 151 of the General Corporation Law of the State of Delaware, Continental Cablevision, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Corporation by Article FOURTH of the Restated Certificate of Incorporation of the Corporation (as in effect on the date hereof and as amended from time to time in accordance with its terms, the "Restated Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation on , 1995 adopted the following resolution creating a series of Preferred Stock designated as Series B Cumulative Preferred Stock: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Restated Certificate of Incorporation, a series of the class of authorized Preferred Stock, par value $.01 per share, of the Corporation is hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as follows: Section 1. DESIGNATION AND NUMBER. (a) The shares of such series shall be designated as "Series B Cumulative Redeemable Preferred Stock" (the "Series B Preferred Stock"). The number of shares initially constituting the Series B Preferred Stock shall be /1/, which number may be increased or decreased by the Board of Directors of the Corporation without a vote of stockholders; PROVIDED, HOWEVER, that such number may not be decreased below the number of then outstanding shares of Series B Preferred Stock. (b) The Series B Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution or winding up, rank (i) pari passu with the Series A Preferred Stock (this and other capitalized terms used herein and not otherwise defined have the meanings given such terms in Section 10 hereof) and (ii) prior to all classes of the Common Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of record of shares of Series B Preferred Stock, in preference to the holders of shares of Common Stock and of any shares of other capital stock of the Corporation ranking junior to the Series B Preferred Stock as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of assets of the Corporation legally available therefor, cash dividends at a rate per annum equal to % of the Stated Amount per share./2/ Such dividends (i) shall be payable semi-annually on the first day of June and December in each year commencing on the first such date to occur after the Issue Date (PROVIDED, THAT, if any such date is not a Business Day, such dividend shall be payable on the next succeeding Business Day), and (ii) shall be cumulative and will begin accruing on each share of Series B Preferred Stock from the date of issue thereof, whether or not declared by - -------- /1/ In the Certificate of Designation to be filed with the Secretary of State of Delaware, this number shall equal the shares of Series B Preferred Stock to be issued by the Corporation. I-72 the Corporation's Board of Directors. Dividends payable on the Series B Preferred Stock for any period less than a full six-month period shall be computed on the basis of the actual number of days elapsed and a 365-day year. (b) When dividends on shares of Series B Preferred Stock and on any other series of Preferred Stock ranking on a parity as to dividends with the Series B Preferred Stock at the time payable on such shares have not been paid in full, all dividends declared upon shares of Series B Preferred Stock and shares of such other Preferred Stock shall be allocated pro rata in proportion to the total amount of unpaid dividends then due and payable on the Series B Preferred Stock and such other series of Preferred Stock. The Board of Directors shall fix a record date for the determination of holders of shares of Series B Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall be no more than sixty days prior to the date fixed for the payment thereof. (c) The holders of shares of Series B Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. VOTING RIGHTS. In addition to any voting rights provided by law, the holders of shares of Series B Preferred Stock shall have the following voting rights: (a) So long as the Series B Preferred Stock is outstanding, each share of Series B Preferred Stock shall entitle the holder thereof to vote on all matters voted on by holders of the Class A Common Stock of the Corporation, voting together as a single class with the holders of the Class A Common Stock and with the holders of any other class of capital stock which votes as a single class with the Class A Common Stock, at all meetings of the stockholders of the Corporation; PROVIDED, HOWEVER, that the holders of Series B Preferred Stock shall not be entitled to vote on any increase or decrease in the number of any authorized shares of any class or classes of the capital stock of the Corporation. (b) Each share of Series B Preferred Stock shall initially entitle the holder thereof to cast one vote on all such matters. In the event the Corporation shall at any time or from time to time after the Issue Date declare or pay any dividend on the outstanding shares of Class A Common Stock in shares of Class A Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Class A Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Class A Common Stock) into a greater or lesser number of shares of Class A Common Stock without making an identical subdivision, combination or consolidation of the outstanding shares of Series B Preferred Stock, then in each such case the number of votes to which each share of Series B Preferred Stock will be entitled immediately after such event shall be adjusted by multiplying the number of votes to which each such share was entitled immediately prior to such event by a fraction, the numerator of which is the number of shares of Class A Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Class A Common Stock that were outstanding immediately prior to such event. An adjustment made pursuant to this paragraph (b) shall become effective at the close of business on the day upon which such corporate action becomes effective. In each case of such an adjustment, the Corporation at its expense will promptly compute the adjustment to be made in accordance with this paragraph (b) to the voting rights of the Series B Preferred Stock and will promptly mail to each holder of record of Series B Preferred Stock notice of such adjustment, which notice shall set forth (i) the computation described above, (ii) the number of vote(s) per share to which each share of Series B Preferred Stock was entitled before giving effect to such adjustment, and (iii) the number of vote(s) per share to which each share of Series B Preferred Stock will be entitled after giving effect to such adjustment. - -------- /2/ In the Certificate of Designation to be filed with the Secretary of State of Delaware, the annual rate shall equal 100 basis points over the average yield on the Corporation's 8 7/8% Senior Debentures due 2005 for the ten Trading Day period ending five Trading Days prior to the Effective Time (as defined in the Merger Agreement); PROVIDED, HOWEVER, that such rate shall equal 50 basis points over such average yield if, prior to the Effective Time, the Corporation issues in excess of $1,000,000,000 of capital stock. I-73 (c) The affirmative vote of the holders of at least a majority of the outstanding shares of Series B Preferred Stock, voting together as a class, in person or by proxy, at a special or annual meeting of stockholders called for the purpose, shall be necessary to authorize, adopt or approve an amendment to the Restated Certificate of Incorporation of the Corporation which would alter or change the powers, preferences or special rights of the shares of Series B Preferred Stock so as to affect such shares of Series B Preferred Stock adversely; PROVIDED, HOWEVER, if such amendment would also alter or change the powers, preferences or special rights of any other series of Preferred Stock in a similar fashion ("Affected Preferred Stock"), for purposes of this paragraph (c), such amendment shall require the affirmative vote of the holders of a majority of the voting power represented by the outstanding shares of Series B Preferred Stock and the Affected Preferred Stock, voting together as a single class. (d) If on any date dividends or distributions payable on all series of Preferred Stock shall have been in arrears and not paid in full for three consecutive semi-annual periods, then the number of directors constituting the Board of Directors of the Corporation shall, without further action, be increased by two (PROVIDED, HOWEVER, that if such directors would represent more than 25% of the total number of directors of the Corporation, then the number of directors constituting the Board of Directors of the Corporation shall, without further action, be increased by one) and the holders of shares of Series B Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a single class or as a class with the holders of shares of any Parity Stock, if such holders are then entitled to elect additional directors pursuant to any provision of the Certificate of Designation for such stock that is similar to this paragraph (d) ("Defaulted Preferred Stock"), to elect, by (i) the vote of the holders of a majority of the voting power represented by the Series B Preferred Stock present in person or represented by proxy and voting thereon, (ii) written consent of the holders of at least a majority of the voting power represented by the outstanding shares of Series B Preferred Stock, (iii) the vote of the holders of a majority of the voting power represented by the Series B Preferred Stock and Defaulted Preferred Stock present in person or represented by proxy and voting thereon, or (iv) written consent of the holders of at least a majority of the voting power represented by the outstanding shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be (and in the manner set forth in paragraph (e) of this Section 3), the director(s) of the Corporation to fill such newly created directorship(s), the remaining directors to be elected by the other classes of stock entitled to vote therefor (including the Series B Preferred Stock in accordance with paragraph (a) of this Section 3), at each meeting of stockholders held for the purpose of electing directors. Such additional director(s) shall continue as director(s) and such additional voting right shall continue until such time as all cumulative dividends payable on the Series B Preferred Stock and on all other series of Defaulted Preferred Stock shall have been paid in full or declared and set aside for payment, at which time such additional director(s) shall cease to be director(s) and such additional voting right of the holders of Series B Preferred Stock shall terminate subject to revesting in the event of each and every subsequent event of the character indicated above. (e) (i) The foregoing rights of holders of shares of Series B Preferred Stock to take any actions as provided in paragraphs (c) and (d) of this Section 3 may be exercised at any annual or special meeting of stockholders or at a special meeting of holders of Series B Preferred Stock held for such purpose as hereinafter provided or at any adjournment thereof, or by the written consent, delivered to the Secretary of the Corporation, of the holders of the minimum number of shares of Preferred Stock required to take such action. So long as such right to vote continues (and unless such right has been exercised by written consent of the minimum number of shares required to take such action), the Chairman of the Board of the Corporation may call, and upon the written request of holders of record of 20% of the voting power represented by the outstanding shares of Series B Preferred Stock, if the holders of Series B Preferred Stock are to vote separately as a single class, or the holders of record of 20% of the voting power represented by the outstanding shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, if the holders of shares of Series B Preferred Stock are to vote as a class with the holders of shares of any such other Preferred Stock, addressed to the Secretary of the Corporation at the principal office of the Corporation, shall call, a special meeting of the holders of shares entitled to vote as provided herein. Such meeting shall be I-74 held within 30 days after delivery of such request to the Secretary, at the place and upon the notice provided by law and in the by-laws of the Corporation for the holding of meetings of stockholders. (ii) At each meeting of stockholders at which the holders of shares of Series B Preferred Stock shall have the right, voting separately as a single class or as a class with the holders of shares of any such other Preferred Stock, to elect directors of the Corporation as provided in this Section 3 or to take any other action, the presence in person or by proxy of the holders of record of one-third of the voting power represented by the total number of shares of Series B Preferred Stock, if the holders of shares of Series B Preferred Stock are to vote separately as a single class, or the holders of record of one-third of the voting power represented by the total number of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, if the holders of shares of Series B Preferred Stock are to vote as a class with the holders of shares of any such other Preferred Stock, then outstanding and entitled to vote on the matter shall be necessary and sufficient to constitute a quorum. At any such meeting or at any adjournment thereof: (A) the absence of a quorum of the holders of shares of Series B Preferred Stock, if the holders of Series B Preferred Stock are to vote separately as a single class, or the holders of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, if the holders of shares of Series B Preferred Stock are to vote as a class with the holders of shares of any such other Preferred Stock, shall not prevent the election of directors other than those to be elected by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, and the absence of a quorum of the holders of shares of any other class or series of capital stock shall not prevent the election of directors to be elected by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, or the taking of any action as provided in this Section 3; and (B) in the absence of a quorum of the holders of shares of Series B Preferred Stock, if the holders of Series B Preferred Stock are to vote separately as a single class, or the holders of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, if the holders of Series B Preferred Stock are to vote as a class with the holders of shares of any such other Preferred Stock, the holders of a majority of the voting power represented by such shares present in person or by proxy shall have the power to adjourn the meeting as to the actions to be taken by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, from time to time and place to place without notice other than announcement at the meeting until a quorum shall be present. For the taking of any action as provided in paragraphs (c) and (d) of this Section 3 by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, (i) each holder of Series B Preferred Stock and each holder of shares of any other series of Affected Preferred Stock or Defaulted Preferred Stock which is not convertible into Common Stock shall have the right to cast one vote per share and (ii) each other holder of Affected Preferred Stock or Defaulted Preferred Stock shall have the right to cast such number of votes as may be cast by the holder of the number of shares of Common Stock into which such Affected Preferred Stock or Defaulted Preferred Stock, as the case may be, is then convertible as of any record date fixed for such purpose or, if no such date be fixed, at the close of business on the Business Day next preceding the day on which notice is given, or if notice is waived, at the close of business on the Business Day next preceding the day on which the meeting is held. Each director elected by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, as provided in paragraph (d) of this Section 3 shall, unless such director's term shall expire earlier or be terminated in accordance with paragraph (d) of this Section 3, hold office until the annual meeting of stockholders next succeeding such director's election or until such director's successor, if any, is elected and qualified. I-75 In case any vacancy shall occur among the directors elected by the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, as provided in paragraph (d) of this Section 3, such vacancy may be filled for the unexpired portion of the term by vote of the remaining director theretofore elected by such holders (if there is a remaining director), or such director's successor in office. If any such vacancy is not so filled within 20 days after the creation thereof, or (if applicable) if both directors so elected by the holders of Series B Preferred Stock or the holders of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, shall cease to serve as directors before their terms shall expire, the holders of the Series B Preferred Stock or the holders of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, then outstanding and entitled to vote for such directors may, by written consent as herein provided, or at a special meeting of such holders called as provided herein, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. Any director elected by the holders of shares of Series B Preferred Stock voting separately as a single class or the holders of shares of Series B Preferred Stock voting as a class with the holders of shares of Defaulted Preferred Stock may be removed from office with or without cause by the vote or written consent of the holders of at least a majority of the voting power represented by the outstanding shares of Series B Preferred Stock or a majority of the voting power represented by the outstanding shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be. A special meeting of the holders of shares of Series B Preferred Stock or the holders of shares of Series B Preferred Stock and Defaulted Preferred Stock, as the case may be, may be called in accordance with the procedures set forth in subparagraph (e)(i) of this Section 3. Section 4. CERTAIN RESTRICTIONS. (a) Whenever dividends or distributions payable on shares of Series B Preferred Stock as provided in Section 2 are not paid in full, thereafter and until all such unpaid dividends or distributions, whether or not declared, on the outstanding shares of Series B Preferred Stock shall have been paid in full or declared and set apart for payment, the Corporation shall not, without the consent of (i) the holders of not less than a majority of the shares of Series B Preferred Stock outstanding or (ii) (A) if dividends or distributions payable on shares of any other series of Preferred Stock are not then paid in full and (B) the consent of the holders of shares of such Preferred Stock is required for the Corporation to take the actions contemplated by this Section 4, the holders of shares representing a majority of the voting power represented by outstanding shares of Series B Preferred Stock and such other Preferred Stock: (I) declare or pay dividends, or make any other distributions, on any shares of Junior Stock or Parity Stock, other than dividends or distributions (x) payable in respect of Parity Stock in accordance with Section 2(b) hereof or (y) payable in Common Stock or in other capital stock of the Corporation ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series B Preferred Stock; or (II) redeem, purchase or otherwise acquire for consideration any shares of Junior Stock or Parity Stock pursuant to any mandatory redemption, put, sinking fund or other similar obligation, PROVIDED, THAT, the Corporation may at any time (x) redeem, purchase or otherwise acquire shares of Junior Stock or Parity Stock in exchange for any shares of Common Stock or for other capital stock of the Corporation ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series B Preferred Stock, and (y) accept shares of any Parity Stock or Junior Stock for conversion. (b) The Corporation shall not permit any Subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of capital stock of the Corporation unless the Corporation could, pursuant to paragraph (a) of this Section 4, purchase such shares at such time and in such manner. Section 5. REDEMPTION. (a) (i) At any time after the fifth anniversary of the Issue Date, by written notification delivered to the record holders of the Series B Preferred Stock in accordance with the procedures set forth in subparagraph (d) of this Section 5, the Corporation, at its sole option, may elect to redeem, in whole or from time to time in part, the shares of Series B Preferred Stock held by such holders at a price per share equal to the Redemption Price plus, if applicable, the Optional Redemption Premium. If at any time less than all of the shares of Series B Preferred Stock then outstanding are to be redeemed, the shares so to be I-76 redeemed may be selected (A) by lot, (B) on a PRO RATA basis among the holders of all such shares, or (C) in such other manner as the Board of Directors of the Corporation in its sole discretion may determine to be fair and equitable. (ii) Not more than 60 nor less than 30 Trading Days prior to (A) the tenth anniversary of the Issue Date and (B) each anniversary of the Issue Date thereafter so long as any shares of Series B Preferred Stock are outstanding, the Corporation shall give notice to each record holder of shares of Series B Preferred Stock, at such holder's address as it appears on the transfer books of the Corporation, that each holder has the right to require the Corporation to redeem any or all shares of Series B Preferred Stock held by such holder at a price per share equal to the Redemption Price. The notice shall also specify the redemption date (which date shall be not more than 60, nor less than 45, days from the date of such notice) and the procedures to be followed by such holder in exercising his right to cause such redemption and to receive payment of the Redemption Price (if such holder elects to cause such redemption). Failure by the Corporation to give the notice prescribed by the preceding sentences, or the formal insufficiency of any such notice, shall not prejudice the rights of any holder of shares of Series B Preferred Stock to cause the Corporation to redeem any such shares held by such holder. If a record holder of shares of Series B Preferred Stock shall elect to require the Corporation to redeem any or all such shares of Series B Preferred Stock in the manner provided in this subparagraph (ii), such holder shall deliver, within 30 days of the mailing to such holder of the Corporation's notice described in this subparagraph (a)(ii), or, if no notice is given, within 30 days following the last day the Corporation was required to give notice in accordance with this subparagraph (a)(ii) (in which case the date of redemption shall be the date which is 45 Business Days following the last day the Corporation was required to give notice in accordance with this subparagraph (a)(ii)), a written notice, in the form specified by the Corporation (if the Corporation did in fact give the notice required by this subparagraph (a)(ii)), to the Corporation stating such election and specifying the number of shares to be redeemed pursuant to this paragraph (a). The Corporation shall redeem the number of shares so specified on the date fixed for redemption in accordance with the provisions of this Certificate of Designation. (iii) The Corporation may satisfy its obligation under subparagraphs (a)(i) and (a)(ii) to pay the Redemption Price and, if applicable, the Optional Redemption Premium, by paying, at the option of the Corporation, cash and/or shares of Class A Common Stock as provided in paragraph (b) of this Section 5. (b) The Corporation, at its sole option, may elect to satisfy its obligation to pay all or any portion of the Redemption Price and, if applicable, the Optional Redemption Premium in respect of each share of Series B Preferred Stock to be redeemed pursuant to paragraph (a) of this Section 5 by making an election on or prior to the date set for redemption to issue shares of Class A Common Stock in respect of all or any portion of the Redemption Price and, if applicable, the Optional Redemption Premium. Such election shall be set forth in a certificate signed on behalf of the Corporation by the Chairman of the Board, the Vice Chairman of the Board, the President or any Vice President of the Corporation and delivered to the Secretary of the Corporation and shall be deemed to have been made on the date such certificate is delivered to the Secretary. Notice of such election and of the portion of the Redemption Price and, if applicable, the Optional Redemption Premium, as to which such election was made shall be given to the holders of the Series B Preferred Stock by the Corporation promptly upon making such election. The number of shares of Class A Common Stock to be issued pursuant to this paragraph (b) shall be determined by dividing the Redemption Price and, if applicable, the Optional Redemption Premium, per share of Series B Preferred Stock through the date of redemption (or portion thereof to be paid in shares of Class A Common Stock) by the Base Price of a share of Class A Common Stock. In connection with any such redemption, unless, in the reasonable determination of the Corporation, the exchange of shares of Class A Common Stock for Series B Preferred Stock is exempt from the registration requirements of the Securities Act, the Corporation shall register such exchange under such Act, and such exchange shall not be completed until such registration is effective. I-77 (c) (i) If shares of Class A Common Stock to be issued in exchange for any shares of Series B Preferred Stock pursuant to paragraph (b) of this Section 5 are to be issued in a name or names other than that of the holder of record of such shares of Series B Preferred Stock, no such issuance shall be made (A) until the holder requesting such issuance has paid to the Corporation all issue, stamp, transfer and documentation taxes payable upon the issuance of shares of Class A Common Stock in such name or names and (B) unless such issuance is registered under the Securities Act and all applicable state securities laws, the holder of the applicable shares of Series B Preferred Stock which are to be exchanged for Class A Common Stock hereunder shall have furnished to the Corporation evidence satisfactory to it that such issuance is exempt from registration under the Securities Act and all applicable state securities laws. Other than the taxes specified in clause (A) above, the Corporation will pay any and all issue, stamp, transfer, documentation and other taxes (other than taxes based on gross or net income) that may be payable in respect of any issue or delivery of shares of Class A Common Stock in exchange for shares of Series B Preferred Stock pursuant hereto. (ii) No fractions of shares of Class A Common Stock shall be issued upon any exchange of shares of Series B Preferred Stock pursuant to paragraph (b) of this Section 5. In lieu thereof, the Corporation shall pay a cash adjustment equal to such fractional interest multiplied by the Base Price. If more than one share of Series B Preferred Stock shall be surrendered for exchange by the same holder, the number of full shares of Common Stock issuable on exchange thereof shall be computed on the basis of the total number of shares of Series B Preferred Stock so surrendered. (iii) In case the Corporation shall at any time or from time to time after the Issue Date effect a capital reorganization, reclassification, subdivision, combination or consolidation of outstanding shares of Common Stock (other than by payment of a dividend in shares of Common Stock) so that, after giving effect to such capital reorganization, reclassification, subdivision, combination or consolidation, the Corporation shall no longer have authorized shares of Class A Common Stock, the Corporation shall be entitled, at its sole option and in lieu of shares of Class A Common Stock, to issue shares of voting Common Stock of the Corporation which, at such time, have the fewest votes per share as compared to other classes of the Corporation's voting Common Stock in payment of all or any portion of the Redemption Price and, if applicable, the Optional Redemption Premium. In any such event, the remaining provisions of this Section 5 which pertain to the Class A Common Stock (including, without limitation, those provisions relating to the registration of such shares under the Securities Act, the calculation of the Base Price and the giving of notices) shall continue to be applicable to such replacement class of Common Stock. (d) Notice of the redemption of shares of Series B Preferred Stock pursuant to subparagraph (a)(i) of this Section 5 shall be mailed at least 30, but not more than 60, Trading Days prior to the date fixed for redemption to each record holder of shares of Series B Preferred Stock to be redeemed, at such holder's address as it appears on the transfer books of the Corporation. (e) On the date of any redemption being made pursuant to this Section 5, the Corporation shall, and at any time before the date of redemption, may: (i) deposit for the benefit of the holders of shares of Series B Preferred Stock to be redeemed the funds and/or shares of Class A Common Stock, as applicable, necessary for such redemption with a bank or trust company in the Borough of Manhattan, The City of New York, or in the City of Boston, in either case having a capital and surplus of at least $50,000,000; or (ii) if the Corporation so elects, segregate and hold in trust for the benefit of the holders of shares of Series B Preferred Stock to be redeemed the funds and/or shares of Class A Common Stock, as applicable, necessary for such redemption. Any moneys and/or shares so deposited or segregated and held in trust by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall be released from any such deposit or trust and revert to the general funds of the Corporation. After such reversion, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof and any holder of shares of Series B Preferred Stock to be redeemed shall look only to the Corporation for the payment of the Redemption Price (and, if applicable, the Optional Redemption Premium). Any interest and/or shares I-78 accrued on funds and/or shares deposited pursuant to this paragraph (e) shall be paid from time to time to the Corporation for its own account. (f) Upon the deposit or segregation in trust of funds and/or shares pursuant to paragraph (e) in respect of shares of Series B Preferred Stock to be redeemed pursuant to this Section 5, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, from and after the date of redemption designated in the notice of redemption (or, if no such notice is given pursuant to subparagraph (a)(ii) of this Section 5, the date of redemption determined pursuant to the provisions of such subparagraph) (i) the shares represented thereby shall no longer be deemed outstanding, (ii) the rights to receive dividends thereon shall cease to accrue and (iii) all rights of the holders of shares of Series B Preferred Stock to be redeemed shall cease and terminate, excepting only the right to receive the Redemption Price (and, if applicable, the Optional Redemption Premium) therefor. Section 6. REACQUIRED SHARES. Any shares of Series B Preferred Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares of Series B Preferred Stock shall upon their cancellation, and upon the filing of an appropriate certificate with the Secretary of State of the State of Delaware, become authorized but unissued shares of Preferred Stock and may be reissued as part of another series of Preferred Stock subject to the conditions or restrictions on issuance set forth herein. Section 7. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of Junior Stock upon liquidation, dissolution or winding up unless, prior thereto, the holders of shares of Series B Preferred Stock shall have received the Liquidation Preference with respect to each share, or (ii) to the holders of shares of Parity Stock, except distributions made ratably on all such Parity Stock and the Series B Preferred Stock in proportion to the total amounts to which the holders of all shares of such Parity Stock and the Series B Preferred Stock are entitled upon such liquidation, dissolution or winding up. Upon any such liquidation, dissolution or winding up of the Corporation, after the holders of the Series B Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the remaining net assets of the Corporation shall be distributed to the holders of Junior Stock, and the holders of Series B Preferred Stock shall not be entitled to participate in such distribution. (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other Person or Persons nor the sale of all or substantially all the assets of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 7. Section 8. CERTAIN COVENANTS. Any registered holder of Series B Preferred Stock may proceed to protect and enforce its rights and the rights of such holders by any available remedy by proceeding at law or in equity to protect and enforce any such rights, whether for the specific enforcement of any provision in this Certificate of Designation or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 9. MERGER OR SALE OF THE CORPORATION. If at any time there shall be (a) a merger or consolidation of the Corporation with or into another Person, such that the Corporation is not the surviving corporation upon consummation thereof, or (b) a sale of all or substantially all of the Corporation's assets to any other Person (either, an "Extraordinary Transaction"), then, as part of such Extraordinary Transaction, provision shall be made so that, at the election of the Corporation, either: (i) the successor Person resulting from such Extraordinary Transaction shall, contemporaneously with the consummation of, and as part of the consideration for, such Extraordinary Transaction, either (A) issue to each holder of Series B Preferred Stock in exchange for such holder's certificates representing the Series B Preferred Stock, certificates representing shares of preferred stock of the successor Person of a class or series having substantially similar terms to those set forth herein; or (B) issue or deliver to such holders such shares of stock, securities or other assets of the successor Person to which such holders I-79 would have been entitled pursuant to the Extraordinary Transaction if, immediately prior thereto, each such holder's shares of Series B Preferred Stock had been redeemed in the manner provided in subparagraph (a)(i) of Section 5 hereof and shares of Class A Common Stock had been issued in consideration therefor in the manner set forth in paragraph (b) of Section 5 hereof; or (ii) immediately prior to the consummation of such Extraordinary Transaction, the Corporation shall redeem all, but not less than all, of the shares of Series B Preferred Stock then outstanding in the manner provided in subparagraph (a)(i) of Section 5 hereof. Section 10. DEFINITIONS. For the purposes of this Certificate of Designation of Series B Preferred Stock, the following terms shall have the meanings indicated: "Affected Preferred Stock" shall have the meaning given such term in paragraph (b) of Section 3 hereof. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Base Price", when used with reference to shares of Class A Common Stock, shall mean the Current Market Price valued, if the Class A Common Stock is not publicly traded, on the date of redemption or, if the Class A Common Stock is publicly traded, for the period of 15 Trading Days ending two Trading Days prior to the date of redemption. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in The Commonwealth of Massachusetts are authorized or obligated by law or executive order to close. "Class A Common Stock" and "Common Stock" each shall have the meaning assigned to such term in the Corporation's Restated Certificate of Incorporation. "Current Market Price", when used with reference to shares of Class A Common Stock or other securities on any date, shall mean the closing price per share of Class A Common Stock or such other securities on such date and, when used with reference to shares of Class A Common Stock or other securities for any period shall mean the average of the daily closing prices per share of Class A Common Stock or such other securities for such period. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Class A Common Stock or such other securities are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Class A Common Stock or such other securities are listed or admitted to trading or, if the Class A Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Class A Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by the primary professional market maker making a market in the Class A Common Stock or such other securities selected by the Board of Directors of the Corporation. If the Class A Common Stock is not publicly held or so listed or publicly traded, "Current Market Price", shall mean the amount as determined by investment bankers mutually agreeable to the Corporation and the holders of a majority of the voting power represented by the outstanding shares of Series B Preferred Stock (the fees and expenses of which shall be paid by the Corporation) equal to the net proceeds that would be expected to be received by a stockholder of the Corporation from the sale of such shares of Class A Common Stock in an underwritten public offering after being reduced by pro forma expenses and underwriting discounts. If I-80 securities other than Class A Common Stock are not publicly held or so listed or publicly traded, "Current Market Price" shall mean the Fair Market Value per share of such other securities as determined by an independent investment banking firm mutually agreeable to the Corporation and the holders of a majority of the voting power represented by the outstanding shares of Series B Preferred Stock (the fees and expenses of which shall be paid by the Corporation). "Defaulted Preferred Stock" shall have the meaning given such term in paragraph (c) of Section 3 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction. "Issue Date" shall mean the date on which shares of Series B Preferred Stock are issued in accordance with the terms and conditions of the Merger Agreement. "Junior Stock" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock, including, without limitation, the Common Stock. "Liquidation Preference" with respect to a share of Series B Preferred Stock shall mean the Stated Amount, plus an amount per share equal to all unpaid dividends thereon, whether or not declared, to the date of such liquidation, dissolution or winding up. "Merger Agreement" shall mean that certain Amended and Restated Agreement and Plan of Merger by and among Providence Journal Company, The Providence Journal Company, King Holding Corp., King Broadcasting Company and the Corporation dated as of November 18, 1994, as the same may from time to time be amended, modified or supplemented. "Optional Redemption Premium" shall mean a premium, expressed as a percentage of the Stated Amount, equal to (i) 2% if any shares of Series B Preferred Stock are redeemed prior to the sixth anniversary of the Issue Date; (ii) 1% if redeemed on or after the sixth anniversary of the Issue Date and prior to the seventh anniversary date of the Issue Date; and (iii) 0% on or after the seventh anniversary of the Issue Date. "Parity Stock" shall mean any capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, including, without limitation, the Series A Preferred Stock. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" shall have the meaning assigned to such term in the Corporation's Restated Certificate of Incorporation and shall include, without limitation, the Series A Preferred Stock and the Series B Preferred Stock. "Redemption Price" in respect of a share of Series B Preferred Stock shall mean the Stated Amount per share as of the date of redemption, plus an amount per share equal to all unpaid dividends thereon, whether or not declared, to the date of redemption. "Securities Act" shall mean the Securities Act of 1933. "Series A Preferred Stock" shall have the meaning assigned to such term in the Corporation's Certificate of Designation relating thereto and filed with the Secretary of State of the State of Delaware on April 27, 1992. I-81 "Stated Amount" with respect to a share of Series B Preferred Stock shall mean $ ./3/ "Subsidiary" of any Person means any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Trading Day" means a day on which the principal national securities exchange on which the Class A Common Stock is listed or admitted to trading is open for the transaction of business or, if the Class A Common Stock is not listed or admitted to trading on any national securities exchange, a Business Day. IN WITNESS WHEREOF, Continental Cablevision, Inc. has caused this Certificate to be duly executed in its corporate name as of this day of , 1995. Continental Cablevision, Inc. By: _________________________________ Attest: _____________________________________ - -------- /3/ In the Certificate of Designation to be filed with the Secretary of State of Delaware, the Stated Amount shall be the quotient obtained by dividing (a) $96,750,000 by (b) the shares of Series B Preferred Stock to be issued. I-82 Exhibit B to the MERGER AGREEMENT CONTRIBUTION AND ASSUMPTION AGREEMENT This Contribution and Assumption Agreement (this "Agreement"), dated as of , 1995, is made by and between King Broadcasting Company, a Washington corporation ("KBC"), and The Providence Journal Company, a Delaware corporation and a wholly owned subsidiary of KBC ("NPJ"). RECITALS WHEREAS, KBC, NPJ and Continental Cablevision, Inc., a Delaware corporation ("Acquiror") (together with Providence Journal Company, a Rhode Island corporation (the "Company"), and King Holding Corp., a Delaware corporation), are parties to that certain Amended and Restated Agreement and Plan of Merger dated as of November 18, 1994 (the "Merger Agreement") pursuant to which, among other things, KBC has agreed to contribute to NPJ all of the assets of KBC (except as otherwise set forth herein or in the Merger Agreement) as one step in a series of transactions as a result of which (i) Acquiror will acquire the cable television businesses of the KBC and its Cable Subsidiaries (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement) by merging KBC with and into Acquiror, and (ii) NPJ will conduct the business conducted by KBC and its Subsidiaries prior to giving effect to the Contribution (as defined in Section 1.1 hereof) other than their cable television operations; and WHEREAS, in accordance with Section 2.4 of the Merger Agreement, the Company has heretofore contributed to KBC all of the Company's businesses and assets in exchange for shares of common stock of KBC and the assumption by KBC of all of the obligations and liabilities of the Company. NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 11. CONTRIBUTION AND ASSUMPTION A. CONTRIBUTION OF ASSETS. (1) Subject to Section 1.1(b), KBC hereby contributes, grants, conveys, assigns, transfers and delivers to NPJ without recourse (the "Contribution") all of KBC's right, title and interest in and to any and all assets of KBC, whether tangible or intangible and whether fixed, contingent or otherwise, including, without limitation, the capital stock of all Subsidiaries of KBC, the real property more particularly described on Schedule 1.1(a) hereto and any and all furniture, fixtures, equipment, tools, vehicles, supplies, buildings, improvements, accounts receivable, notes, prepaid expenses, securities, trademarks, trade names, leases and contract rights, wherever located (collectively, the "Contributed Assets"). (2) Notwithstanding Section 1.1(a), KBC hereby retains and does not contribute, grant, convey, assign, transfer or deliver to NPJ (i) the issued and outstanding capital stock of each Cable Subsidiary, (ii) KBC's rights created pursuant to this Agreement, (iii) cash in the amount of $ , and (iv) the Palmer Systems, the Related Assets and the assets of Westerly or Colony, as the case may be, to the extent the transactions contemplated by the last sentence of Section 2.6 of the Merger Agreement shall have been consummated (collectively, the "Retained Assets"). I-83 (3) Notwithstanding anything contained in this Agreement or in the Merger Agreement to the contrary, NPJ acknowledges and agrees that KBC makes and has made no warranty, either express or implied, including without limitation warranties of merchantability or fitness for a particular purpose, with respect to any Contributed Assets. B. ASSUMPTION OF LIABILITIES. (1) Subject to Sections 1.2(b) and 1.5 hereof, NPJ, in partial consideration for the Contribution, hereby unconditionally assumes and agrees to pay, satisfy and discharge, any and all liabilities of KBC, whether contingent or otherwise, including, without limitation (if applicable), the NPJ Debt (the "Assumed Liabilities"). (2) Notwithstanding Section 1.2(a), KBC hereby retains, and NPJ does not assume and will have no liability with respect to, (i) the New Company Debt, (ii) the debts, liabilities and obligations associated with the business operations of the Cable Subsidiaries and the cable operations of KBC, (iii) KBC's obligations created pursuant to this Agreement, and (iv) the liabilities set forth on Schedule 2.5(b) to the Merger Agreement (collectively, the "Retained Liabilities"). (c) It is expressly agreed by the parties hereto that all of the obligations of NPJ under the Merger Agreement shall be treated as Assumed Liabilities and not as Retained Liabilities under this Agreement. C. EMPLOYEE BENEFITS. All plans and arrangements for the benefit of KBC's employees (including stock option plans) in place as of the Effective Time are subject to the terms of Sections 6.12 and 6.26 of the Merger Agreement. Obligations of NPJ under such Sections shall be treated as Assumed Liabilities and not as Retained Liabilities under this Agreement. D. FURTHER ASSURANCES. Each of the parties hereto promptly shall execute such documents and other instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and to consummate the transactions contemplated hereby. E. TAX MATTERS. Notwithstanding anything to the contrary in this Agreement, liabilities of the parties for Taxes that are associated with the business operations of the Cable Subsidiaries are subject to the terms of Section 6.10 of the Merger Agreement, and all obligations of NPJ under Section 6.10 of the Merger Agreement shall be treated as Assumed Liabilities and not as Retained Liabilities under this Agreement. The transactions contemplated by the Merger Agreement are intended to qualify as tax-free reorganizations, liquidations and dissolutions under the applicable sections of the Code. F. REMEDIES. Except as otherwise expressly set forth herein, all remedies of the parties hereunder shall be governed exclusively by Article 9 of the Merger Agreement. G. COOPERATION. The parties agree to cooperate with each other in all reasonable respects to ensure the smooth transfer of the Contributed Assets, the Assumed Liabilities and the business related thereto, including, without limitation, entering into any service or other sharing agreements that may be necessary. I-84 ARTICLE 12. MISCELLANEOUS A. ENTIRE AGREEMENT. This Agreement, together with the Merger Agreement, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. B. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of conflict of law principles. C. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. D. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: if to KBC: c/o Continental Cablevision, Inc. The Pilot House, Lewis Wharf Boston, MA 02110 Telecopy: (617) 742-0530 Attention: Amos B. Hostetter, Jr. with a copy to: Sullivan & Worcester One Post Office Square Boston, MA 02109 Telecopy: (617) 338-2880 Attention: Patrick K. Miehe, Esq. if to NPJ: The Providence Journal Company 75 Fountain Street Providence, RI 02902 Telecopy: (401) 277-7889 Attention: Stephen Hamblett and John L. Hammond, Esq. with a copy to: Edwards & Angell 2700 Hospital Trust Tower Providence, RI 08903 Telecopy: (401) 276-6611 Attention: Walter G.D. Reed, Esq. or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on I-85 which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. E. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement except as provided in Sections 2.7 and 2.8 (which are intended to be for the benefit of the Persons provided for therein, and may be enforced by such Persons). F. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. G. PERSONAL LIABILITY. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. H. BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, including Acquiror as the surviving corporation in the Merger. This Agreement may not be assigned by any party hereto. I. CERTAIN TRANSFERS OF ASSETS BY NPJ. For a period of four years from the date hereof, NPJ agrees that 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 (other than a dividend or distribution payable in capital stock) in respect of its capital stock, or redeem or otherwise acquire any of its capital stock, if, as a result of and after giving effect to any such transaction and the application of any proceeds received therefrom, NPJ would have a fair market value (determined as a sale on a private market going concern basis, free and clear of all liabilities) of less than: (x) for the period from the date hereof to the first anniversary of the Effective Date, $200,000,000, (y) for the period from such first anniversary to the second anniversary of the Effective Date, $150,000,000 and (z) for the period from such second anniversary to the fourth anniversary of the Effective Date, $50,000,000, PROVIDED, HOWEVER, Acquiror agrees that NPJ may proceed with and consummate any transaction which would otherwise be prohibited by this Section 2.9 if NPJ provides security in form and amount reasonably acceptable to Acquiror. J. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties. K. LEGAL FEES; COSTS. If any party hereto institutes any action or proceeding to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. L. JURISDICTION. The parties accept, generally and unconditionally, the exclusive jurisdiction of the State of Rhode Island or the Commonwealth of Massachusetts in any action, suit or proceeding of any kind which arises out of or by reason of this Agreement or any agreements contemplated hereby. M. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. I-86 N. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. King Broadcasting Company By: _________________________________ Name: Title: The Providence Journal Company By: _________________________________ Name: Title: I-87 Exhibit C to the MERGER AGREEMENT VOTING AGREEMENT This Voting Agreement, dated as of November 18, 1994 (this "Agreement"), is by and among Continental Cablevision, Inc., a Delaware corporation ("Acquiror"), Providence Journal Company, a Rhode Island corporation (the "Company"), each person or entity listed as an "Acquiror Stockholder" on the signature pages hereof (each, an "Acquiror Stockholder") and each person or entity listed as a "Providence Journal Company Stockholder" on the signature pages hereof (each, a "PJC Stockholder"). WHEREAS, each Acquiror Stockholder owns the number of shares of (i) Class A Common Stock, par value $.01 per share, of Acquiror ("Acquiror Class A Common Stock"), (ii) Class B Common Stock, par value $.01 per share, of Acquiror ("Acquiror Class B Common Stock") and (iii) Series A Convertible Preferred Stock, par value $.01 per share, of Acquiror ("Acquiror Preferred Stock") set forth opposite such Acquiror Stockholder's name on EXHIBIT A hereto (all shares of Acquiror Class A Common Stock, Acquiror Class B Common Stock and Acquiror Preferred Stock now owned and which may hereafter be acquired by the Acquiror Stockholders prior to the termination of this Agreement shall be referred to herein as the "Acquiror Shares"); WHEREAS, each PJC Stockholder owns the number of shares of (i) Class A Common Stock, par value $2.50 per share, of the Company ("Providence Journal Class A Common Stock") and (ii) Class B Common Stock, par value $2.50 per share, of the Company ("Providence Journal Class B Common Stock") set forth opposite such PJC Stockholder's name on EXHIBIT B hereto (all shares of Providence Journal Class A Common Stock and Providence Journal Class B Common Stock now owned and which may hereafter be acquired by the PJC Stockholders prior to the termination of this Agreement, shall be referred to herein as the "Providence Journal Shares"); WHEREAS, the Company and Acquiror propose to enter into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides, among other things, that the Company will merge with Acquiror pursuant to the Merger (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement) contemplated by the Merger Agreement; WHEREAS, it is a condition to the willingness of Acquiror to enter into the Merger Agreement that each PJC Stockholder agree, and in order to induce Acquiror to enter into the Merger Agreement, each PJC Stockholder has agreed, to enter into this Agreement; and WHEREAS, it is a condition to the willingness of the Company to enter into the Merger Agreement that each Acquiror Stockholder agree, and in order to induce the Company to enter into the Merger Agreement, each Acquiror Stockholder has agreed, to enter into this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE 1 VOTING OF PROVIDENCE JOURNAL SHARES AND ACQUIROR SHARES SECTION 1.1. VOTING AGREEMENT. (a) Each PJC Stockholder hereby agrees that during the time this Agreement is in effect, at any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, such PJC Stockholder shall vote his, her or its Providence Journal Shares: (i) in favor of the Merger, the Merger Agreement (as amended from time to time) and the other transactions contemplated by the Merger Agreement, the Preemptive Rights Waiver Amendment and, I-88 if applicable, the Alternate Merger Agreement (as amended from time to time), and the transactions contemplated by the Alternate Merger Agreement, (ii) against any proposal for any recapitalization, merger, sale of assets or other business combination between the Company or any of its Cable Subsidiaries and any person or entity other than Acquiror, or any other action or agreement, that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or the Alternate Merger Agreement, as the case may be, or that would result in any of the conditions to the obligations of the Company under the Merger Agreement or the Alternate Merger Agreement, as the case may be, not being fulfilled, and (iii) in favor of any other matter relating to the consummation of the transactions contemplated by the Merger Agreement or the Alternate Merger Agreement, as the case may be. Each PJC Stockholder acknowledges receipt and review of a copy of the Merger Agreement (which contains a copy of the Alternate Merger Agreement). (b) Each Acquiror Stockholder hereby agrees that during the time this Agreement is in effect, at any meeting of the stockholders of Acquiror, however called, and in any action by consent of the stockholders of Acquiror, such Acquiror Stockholder shall vote his, her or its Acquiror Shares: (i) in favor of the Merger, the Recapitalization Amendment, the Merger Agreement (as amended from time to time) and the transactions contemplated by the Merger Agreement, and, if applicable, the Alternate Merger Agreement and the other transactions contemplated by the Alternate Merger Agreement, (ii) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Acquiror under the Merger Agreement or the Alternate Merger Agreement, as the case may be, or that would result in any of the conditions to the obligations of Acquiror under the Merger Agreement or the Alternate Merger Agreement, as the case may be, not being fulfilled and (iii) in favor of any other matter relating to the consummation of the transactions contemplated by the Merger Agreement and the Alternate Merger Agreement, as the case may be. Each Acquiror Stockholder acknowledges receipt and review of a copy of the Merger Agreement (which contains a copy of the Alternate Merger Agreement). (c) Anything herein to the contrary notwithstanding, the parties hereto acknowledge and agree that nothing contained in this Agreement shall be deemed to require an Acquiror Stockholder who is a director of Acquiror or a PJC Stockholder who is a director of the Company to take any action or refrain from taking any action in his or her capacity as such. ARTICLE 2 REPRESENTATION AND WARRANTIES OF THE PJC STOCKHOLDERS Each PJC Stockholder hereby represents and warrants to Acquiror as follows: SECTION 2.1. AUTHORITY RELATIVE TO THIS AGREEMENT. Such PJC Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform his, her or its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by such PJC Stockholder and the consummation by such PJC Stockholder of the transactions contemplated hereby have been duly and validly authorized by such PJC Stockholder, and no other proceedings on the part of such PJC Stockholder are necessary to authorize the execution and delivery of this Agreement or to consummate such transactions. This Agreement has been duly and validly executed and delivered by such PJC Stockholder and, assuming the due authorization, execution and delivery hereof by each other party hereto, constitutes a legal, valid and binding obligation of such PJC Stockholder, enforceable against such PJC Stockholder in accordance with its terms. SECTION 2.2. NO CONFLICT. (a) The execution and delivery of this Agreement by such PJC Stockholder do not, and the performance of this Agreement by such PJC Stockholder shall not, (i) conflict with or violate any trust agreement, charter, by-laws or other instrument or organizational document of such PJC Stockholder (if any), (ii) conflict with I-89 or violate any law, rule, regulation, order, judgment or decree applicable to such PJC Stockholder or by which such PJC Stockholder's Providence Journal Shares are bound or affected or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of such PJC Stockholder's Providence Journal Shares pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such PJC Stockholder is a party or by which such PJC Stockholder or such PJC Stockholder's Providence Journal Shares are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent or delay the performance by such Stockholder of such PJC Stockholder's obligations under this Agreement. (b) The execution and delivery of this Agreement by such PJC Stockholder do not, and the performance of this Agreement by such PJC Stockholder shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state, local or foreign regulatory body, except where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by such PJC Stockholder of such PJC Stockholder's obligations under this Agreement. SECTION 2.3. TITLE TO THE PROVIDENCE JOURNAL SHARES. Such PJC Stockholder is the owner of the Providence Journal Shares set forth opposite his, her or its name on EXHIBIT B free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances of any nature whatsoever. Such PJC Stockholder has not appointed or granted any proxy, which appointment or grant is still effective, with respect to such Providence Journal Shares. Such PJC Stockholder has sole voting power with respect to such Providence Journal Shares, and the person(s) executing this Agreement have the power to direct the voting of such Providence Journal Shares. ARTICLE 3 REPRESENTATION AND WARRANTIES OF THE ACQUIROR STOCKHOLDERS Each Acquiror Stockholder hereby represents and warrants to the Company as follows: SECTION 3.1. AUTHORITY RELATIVE TO THIS AGREEMENT. Such Acquiror Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform his, her or its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by such Acquiror Stockholder and the consummation by such Acquiror Stockholder of the transactions contemplated hereby have been duly and validly authorized by such Acquiror Stockholder, and no other proceedings on the part of such Acquiror Stockholder are necessary to authorize the execution and delivery of this Agreement or to consummate such transactions. This Agreement has been duly and validly executed and delivered by such Acquiror Stockholder and, assuming the due authorization, execution and delivery hereof by each other party hereto, constitutes a legal, valid and binding obligation of such Acquiror Stockholder enforceable against such Acquiror Stockholder in accordance with its terms. SECTION 3.2. NO CONFLICT. (a) The execution and delivery of this Agreement by such Acquiror Stockholder do not, and the performance of this Agreement by such Acquiror Stockholder shall not, (i) conflict with or violate any trust agreement, charter, by-laws or other instrument or organizational document of such Acquiror Stockholder (if any), (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to such Acquiror Stockholder or by which such Acquiror Stockholder's Acquiror Shares are bound or affected or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of such Acquiror Stockholder's Acquiror Shares I-90 pursuant to, any note, bond, mortgage, indenture contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such Acquiror Stockholder is a party or by which such Acquiror Stockholder or by which such Acquiror Stockholder's Acquiror Shares are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent or delay the performance by such Acquiror Stockholder of such Acquiror Stockholder's obligations under this Agreement. (b) The execution and delivery of this Agreement by such Acquiror Stockholder do not, and the performance of this Agreement by such Acquiror Stockholder shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state, local or foreign regulatory body, except where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by such Acquiror Stockholder of such Acquiror Stockholder's obligations under this Agreement. SECTION 3.3. TITLE TO THE ACQUIROR SHARES. Such Acquiror Stockholder is the owner of the Acquiror Shares set forth opposite his, her or its name on EXHIBIT A. Such Acquiror Stockholder has sole voting power with respect to such Acquiror Shares or has the power to direct the voting of such Acquiror Shares. ARTICLE 4 COVENANTS OF THE PJC STOCKHOLDERS SECTION 4.1. NO INCONSISTENT AGREEMENT. Each PJC Stockholder hereby covenants and agrees that, except as contemplated by this Agreement, such PJC Stockholder shall not enter into any voting agreement or grant a proxy or power of attorney with respect to such PJC Stockholder's Providence Journal Shares which is inconsistent with this Agreement. SECTION 4.2. TRANSFER OF TITLE. Each PJC Stockholder hereby covenants and agrees that such PJC Stockholder shall not transfer ownership of any of its Providence Journal Shares unless the transferee agrees in writing to be bound by the terms and conditions of this Agreement. ARTICLE 5 COVENANTS OF THE ACQUIROR STOCKHOLDERS SECTION 5.1. NO INCONSISTENT AGREEMENT. Each Acquiror Stockholder hereby covenants and agrees that, except as contemplated by this Agreement, such Acquiror Stockholder shall not enter into any voting agreement or grant a proxy or power of attorney with respect to such Acquiror Stockholder's Acquiror Shares which is inconsistent with this Agreement. SECTION 5.2. TRANSFER OF TITLE. Each Acquiror Stockholder hereby covenants and agrees that such Acquiror Stockholder shall not transfer ownership of more than 10% of such Acquiror Stockholder's Acquiror Shares unless the transferee agrees in writing to be bound by the terms and conditions of this Agreement; PROVIDED, HOWEVER, from and after the date on which the holders of at least 50.1% (the "Required Percentage") of the combined voting power of the Acquiror Common Stock and the Acquiror Series A Preferred Stock have become parties to this Agreement, no Acquiror Stockholder shall transfer ownership of any of such Acquiror Stockholder's Acquiror Shares if, after giving effect to such transfer, the Required Percentage of Acquiror Stockholders would no longer be bound by the terms of this Agreement. I-91 ARTICLE 6 MISCELLANEOUS SECTION 6.1. TERMINATION. This Agreement shall terminate on the earlier to occur of (i) the consummation of the Merger Transactions, (ii) December 31, 1995 and (iii) the termination of the Merger Agreement (or, if applicable, the Alternate Merger Agreement). SECTION 6.2. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. SECTION 6.3. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. SECTION 6.4. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by all of the parties hereto. SECTION 6.5. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable or being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. SECTION 6.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of the laws that might otherwise govern under principles of conflicts of law applicable hereto. SECTION 6.7. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 6.8. JURISDICTION. The parties accept, generally and unconditionally, the exclusive jurisdiction of the State of Rhode Island or the Commonwealth of Massachusetts in any action, suit or proceeding of any kind which arises out of or by reason of this Agreement or any agreements contemplated hereby. SECTION 6.9. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. SECTION 6.10 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: (a) if to any PJC Stockholder or Acquiror Stockholder, to him, her or it at the location listed below such PJC Stockholder's or Acquiror Stockholder's name on the signature pages hereof, (ii) if to Acquiror, to it at The Pilot House, Lewis Wharf, Boston, MA 02110, telecopy (617) 742-0530, attention: Amos B. Hostetter, Jr., and (iii) if to the Company, to it at 75 Fountain Street, Providence, RI 02902, telecopy (401) 277-7889, attention: Stephen Hamblett and John L. Hammond, Esq., or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or I-92 communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. SECTION 6.11 ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise. SECTION 6.12 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. Continental Cablevision, Inc. By: _________________________________ Name: Title: Providence Journal Company By: _________________________________ Name: Title: Acquiror Stockholders: _____________________________________ Amos B. Hostetter, Jr., not in his individual capacity but solely in his capacity as Trustee of the Amos B. Hostetter, Jr. 1989 Trust Address for notices: The Pilot House, Lewis Wharf Boston, MA 02110 Attn: Amos B. Hostetter, Jr. _____________________________________ Timothy P. Neher, not in his individual capacity but solely in his capacity as Trustee of the Amos B. Hostetter, Jr. 1989 Trust I-93 Address for notices: The Pilot House, Lewis Wharf Boston, MA 02110 Attn: Amos B. Hostetter, Jr. Providence Journal Company Stockholders: _____________________________________ John A. Bowers Address for notices: 2 Maryland Drive West Warwick, RI 02893 _____________________________________ Harry Dyson Address for notices: 24 Metcalf Drive Cumberland, RI 02864 _____________________________________ Stephen Hamblett Address for notices: 35 Benefit Street Providence, RI 02906 _____________________________________ Trygve E. Myrhen Address for notices: 30 Apple Tree Lane Barrington, RI 02806 _____________________________________ James F. Stack Address for notices: 5 Highridge Drive Lincoln, RI 02865 I-94 _____________________________________ Joel N. Stark Address for notices: 137 Briarcliff Avenue Warwick, RI 02889 _____________________________________ James V. Wyman Address for notices: 6 Barway Lane Cumberland, RI 02864 I-95 EXHIBIT A TO VOTING AGREEMENT
ACQUIROR ACQUIROR ACQUIROR CLASS A CLASS B PREFERRED COMMON STOCK COMMON STOCK STOCK ------------ ------------ --------- Amos B. Hostetter, Jr., not in his individual capacity but solely in his capacity as Trustee of the Amos B. Hostetter, Jr. 1989 Trust................ 1,713,742
I-96 EXHIBIT B TO VOTING AGREEMENT
PROVIDENCE PROVIDENCE JOURNAL JOURNAL CLASS A CLASS B COMMON STOCK COMMON STOCK ------------ ------------ John A. Bowers........................................ 1 Harry Dyson........................................... 4 Stephen Hamblett...................................... 156 148 Trygve Myhren......................................... 3 James Stack........................................... 2 Joel Stark............................................ 3 James Wyman........................................... 6
I-97 Exhibit D to the MERGER AGREEMENT NONCOMPETITION AGREEMENT This Noncompetition Agreement (this "Agreement"), dated as of , 1995, is made by and among King Broadcasting Company, a Washington corporation ("KBC"), The Providence Journal Company, a Delaware corporation ("NPJ"), and Continental Cablevision, Inc., a Delaware corporation ("Acquiror"). RECITALS WHEREAS, KBC, NPJ and Acquiror (together with Providence Journal Company, a Rhode Island corporation ("PJC"), and King Holding Corp., a Delaware corporation) are parties to that certain Amended and Restated Agreement and Plan of Merger dated as of November 18, 1994 (the "Merger Agreement") pursuant to which, among other things, PJC has agreed to contribute all of its assets to KBC in exchange for shares of common stock of KBC and the assumption by KBC of all of the liabilities of PJC, and KBC, in turn, has agreed to contribute to NPJ all of the assets of KBC (except as otherwise set forth in the Merger Agreement) pursuant to the terms of the Contribution Agreement (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement); and WHEREAS, the Contribution is one step in a series of transactions as a result of which (i) Acquiror will acquire the cable businesses of KBC and its Cable Subsidiaries (a portion of which was transferred to KBC as a result of the Dissolution) by merging KBC with and into Acquiror, and (ii) NPJ will acquire and conduct the business previously conducted by KBC and its Subsidiaries (other than their cable television operations). NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 7 NONCOMPETITION COVENANTS 7.1 NONCOMPETITION COVENANTS. NPJ acknowledges that (i) it, on its own and through its Subsidiaries and their respective officers, employees and other representatives, has specialized knowledge and experience in the operation of cable television systems (as defined in the Cable Communications Policy Act of 1984, as amended) providing the services provided by KBC or PJC, as the case may be, and the Cable Subsidiaries on the date prior to the date the Contribution is effected (the "Restricted Business"; provided that the term "Restricted Business" shall not be construed to include the business of developing or creating programming), (ii) its reputation and contacts within the Restricted Business and those of its Subsidiaries are considered of great value to KBC and Acquiror and (iii) if such knowledge, experience, reputation or contacts were used to compete with Acquiror, serious harm to Acquiror could result. Thus, NPJ agrees that, for a period of three (3) years after the Closing Date, neither it nor any of its Subsidiaries shall, directly or indirectly, on its own behalf or in the service or on behalf of others: 7.1.1 actively solicit for employment (including as an independent contractor), interfere with or endeavor to entice away (or attempt to do any of the foregoing) (x) any of the directors, officers, employees or agents of Acquiror or any of its Subsidiaries, whether holding such position prior to or after the Closing Date, or (y) any person who at any time on or after January 1, 1994, was an officer or employee of PJC, KBC or any of their Subsidiaries engaged on behalf of either of them in the Restricted Business and whom Acquiror employs effective upon the Closing; 7.1.2 own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as a stockholder, partner, principal, agent, representative, I-98 consultant or otherwise with any business or enterprise engaged in the Restricted Business in the franchise areas served by KBC or Acquiror, or any of their respective Subsidiaries, at the date hereof (the "Restricted Area"); or 7.1.3 use or permit PJC's, KBC's or NPJ's name to be used in connection with any business or enterprise engaged in the Restricted Business in the Restricted Area; PROVIDED, HOWEVER, that the provisions of this Section 1.1 shall not be construed to prohibit the ownership by NPJ or any Subsidiary of NPJ, as a passive investor, of not more than 5% of any class of securities registered pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of any corporation which is engaged in the Restricted Business, or passive investments in partnerships or joint ventures representing not more than 5% of any class of any equity interests therein. 7.2 REASONABLENESS OF COVENANTS, ETC. In the event that the provisions of Section 1.1 should ever be adjudicated to exceed the time, geographic or service limitations permitted by applicable Law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic or service limitations permitted by applicable Law. NPJ agrees that its covenants set forth in Section 1.1 (the "Noncompetition Covenants") are appropriate and reasonable when considered in light of the nature and extent of the Restricted Business and the transactions contemplated by the Merger Agreement, including, without limitation, the assets being contributed to NPJ by KBC pursuant to the Contribution Agreement. Without limiting the generality of the foregoing, NPJ specifically agrees that prohibitions on the active solicitation, interference or enticement of officers, directors, employees or agents of Acquiror or any of its Subsidiaries, as set forth in Section 1.1, are appropriate and reasonable in all respects. NPJ agrees that the Noncompetition Covenants are of the essence of this Agreement and the Merger Agreement; that each such Noncompetition Covenant is reasonable and necessary to protect and preserve the interests and properties of Acquiror and its Subsidiaries and the Restricted Business of Acquiror and its Subsidiaries; that irreparable loss and damage will be suffered by Acquiror should NPJ or any of its Subsidiaries breach any such Noncompetition Covenant; that each of such covenants is separate, distinct and severable not only from the other of such covenants but also from the other and remaining provisions of this Agreement and the Merger Agreement; that the unenforceability of all or any of the Noncompetition Covenants shall not affect the validity or enforceability of any other such covenants; that, in addition to other remedies available to it, Acquiror shall be entitled to both temporary and permanent injunctions to prevent a breach or contemplated breach by NPJ of any of the Noncompetition Covenants; and that NPJ hereby waives any requirements for the posting of a bond or any other security by Acquiror in connection therewith. 7.3 SPECIFIC PERFORMANCE; OTHER REMEDIES. NPJ recognizes that the Noncompetition Covenants are unique and, accordingly, Acquiror shall, in addition to such other remedies as may be available to it at law or in equity, have the right to enforce its rights under Section 1.1 by actions for injunctive relief and specific performance to the extent permitted by law. ARTICLE 8 MISCELLANEOUS 8.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties with respect to the specific subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the specific subject matter hereof. 8.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of conflict of law principles. 8.3 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. I-99 8.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: if to NPJ: The Providence Journal Company 75 Fountain Street Providence, RI 02902 Telecopy: (401) 277-7889 Attention: Stephen B. Hamblett and John L. Hammond, Esq. with a copy to: Edwards & Angell 2700 Hospital Trust Tower Providence, RI 02903 Telecopy: (401) 276-6611 Attention: Walter G.D. Reed, Esq. if to KBC or Acquiror: Continental Cablevision, Inc. The Pilot House Lewis Wharf Boston, MA 02109 Telecopy: (617) 742-0530 Attention: Amos B. Hostetter, Jr. with a copy to: Sullivan & Worcester One Post Office Square Boston, MA 02109 Telecopy: (617) 338-2880 Attention: Patrick K. Miehe, Esq. or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. 8.5 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement except for Sections 2.7 and 2.8 (which are intended to be for the benefit of the Persons provided for therein, and may be enforced by such Persons). 8.6 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. I-100 8.7 PERSONAL LIABILITY. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. 8.8 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, including Acquiror as the surviving corporation in the Merger. This Agreement may not be assigned by any party hereto. 8.9 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties. 8.10 LEGAL FEES; COSTS. If any party hereto institutes any action or proceeding to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. 8.11 JURISDICTION. The parties accept, generally and unconditionally, the exclusive jurisdiction of the State of Rhode Island or the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind which arises out of or by reason of this Agreement or any agreements contemplated hereby. 8.12 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. King Broadcasting Company By: _________________________________ Name: Title: The Providence Journal Company By: _________________________________ Name: Title: Continental Cablevision, Inc. By: _________________________________ Name: Title: I-101 ANNEX II PROVIDENCE JOURNAL COMPANY Plan of Reorganization This Plan of Reorganization of Providence Journal Company, a Rhode Island Corporation (the "Company"), has been approved and adopted by the Company's Board of Directors. RECITALS A. The Company is engaged in three principal lines of business: cable television, newspaper publishing and television broadcasting and related electronic media enterprises. After due deliberation and consultation, the Board of Directors has determined that the overall business and operating goals of the Company, and the Company's future business prospects, would be best served if the cable television business were to be combined with a significantly larger cable television operator. B. After extensive negotiations, Continental Cablevision, Inc., a Delaware corporation ("Continental"), pursuant to the terms of an Amended and Restated Agreement and Plan of Merger dated as of November 18, 1994 (the "Merger Agreement"), has agreed to acquire the Company's cable television business in a tax-free merger transaction (the "Continental Merger"), in exchange for capital stock of Continental, on condition, inter alia, that (i) Continental acquire in that transaction only cable television businesses and properties; (ii) that prior to the Continental Merger, the Company or its wholly-owned subsidiary become the 100% owner of King Holding Corp., which is now 50%-owned; and (iii) the shares to be issued by Continental as a result of the Continental Merger be delivered to and held by the Company's shareholders and not the Company. C. In order to carry out the conditions imposed by Continental in respect of the Continental Merger, and to best achieve the Company's business objectives as aforesaid, the Board of Directors has decided to structure this Plan of Reorganization herein set forth (the "Plan of Reorganization") which will conclude with (i) a spin-off distribution transaction qualifying as a reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of l986 (as amended), structured as hereafter provided, followed by (ii) the Continental Merger. PLAN OF REORGANIZATION I. PARTIES; DATES. 1. AFFILIATED PARTIES. The affiliated entities which are involved in and shall be parties to the Plan of Reorganization are: The Company; The Providence Journal Company, a Delaware corporation and a wholly-owned subsidiary of the Company ("New Providence Journal"); Colony Communications, Inc., a Rhode Island corporation and a wholly- owned subsidiary of the Company ("Colony"); Westerly Cable Television, Inc., a Rhode Island corporation and a wholly- owned subsidiary of Colony ("Westerly Cable"); King Holding Corp., a Delaware corporation which is 50%-owned by the Company ("King Holding"); King Broadcasting Company, a Washington corporation and a wholly-owned subsidiary of King Holding ("King Broadcasting"); and II-1 King Videocable Company, a Washington corporation and a wholly-owned subsidiary of King Broadcasting ("King Videocable"). 2. INDEPENDENT PARTIES. The following independent entities are involved in, but are not parties to, this Plan of Reorganization: Continental; and Kelso Investment Associates IV, L.P., Kelso Partners IV, L.P. and Kelso Equity Partners II, L.P., each a Delaware limited partnership (collectively, the "Kelso Partnerships"). 3. TIMES OF EVENTS. The following terms have the meaning noted: The "Time of Reorganization" is the time at which the "King Holding Dissolution", the "Company Dissolution", the "Contribution" and the "Spin-Off Distribution" (all as hereafter defined) shall take place, in that order. The "Merger Time" is the time at which the Continental Merger shall be effective. II. REORGANIZATION TRANSACTIONS. The Plan of Reorganization shall be carried out through the following steps and transactions. 1. DISSOLUTION OF KING HOLDING. At the Time of Reorganization, King Holding will be liquidated and dissolved (the "King Holding Dissolution") in the following manner and in accordance with the provisions of Section 275, et seq. of the Delaware General Corporation Law ("DGCL"): (a) King Holding will transfer all of its assets (consisting solely of all of the outstanding stock of King Broadcasting), subject to all of its liabilities, to King Broadcasting in exchange for the issuance to King Holding of 100 shares of King Broadcasting Class A Common Stock; (b) King Holding will distribute those 100 shares of King Broadcasting Class A Common Stock to the Company in exchange for the shares of King Holding Common Stock owned and held by the Company, which shall be surrendered to King Holding for redemption and cancellation; and (c) King Holding will thereafter be dissolved pursuant to the provisions of the DGCL. As a result of the King Holding Dissolution, King Broadcasting will become a wholly-owned subsidiary of the Company. The Company will cause King Holding to adopt a separate plan of liquidation conforming in all material respects to the terms of this paragraph 1 to the extent required by the DGCL. 2. LIQUIDATION AND DISSOLUTION OF THE COMPANY. (a) Following the King Holding Dissolution and prior to the Contribution, in order to effect the liquidation and dissolution of the Company in accordance with the Rhode Island Business Corporations Act ("RIBCA"), the Company shall contribute and transfer to King Broadcasting all of the Company's right, title and interest in and to any and all assets then held by the Company, whether tangible or intangible and whether fixed, contingent or otherwise, including the stock of all subsidiaries of the Company (including, without limitation, all of the outstanding capital stock of King Broadcasting), in exchange for a number of shares of King Broadcasting Class A Common Stock and King Broadcasting Class B Common Stock equal to the number of shares of such King Broadcasting Common Stock the Company will distribute to its stockholders in accordance with paragraph (b) below. In partial consideration for such contribution and transfer, and concurrently therewith, King Broadcasting shall assume any and all liabilities of the Company, whether fixed, contingent or otherwise. (b) Immediately following such contribution and transfer and prior to the Contribution, the Company shall cease to do business and shall be thereafter dissolved in accordance with Section 7-1.1-77 of the RIBCA II-2 (the "Company Dissolution"). As a result of the Company Dissolution, the sole remaining asset of the Company, consisting of shares of the King Broadcasting Common Stock of the same class and consisting of the same number of shares of each such class as that outstanding for the Company immediately prior to the Company Dissolution, shall be distributed to the shareholders of the Company so that one fully paid and nonassessable share of King Broadcasting Class A Common Stock will be distributed to the holder of each share of Company Class A Common Stock outstanding immediately prior to the Company Dissolution and one fully paid and nonassessable share of King Broadcasting Class B Common Stock will be distributed to the holder of each share of Company Class B Common Stock outstanding immediately prior to the Company Dissolution. The distribution of shares of King Broadcasting Common Stock pursuant hereto shall be in exchange solely for, and in complete redemption and cancellation of, and in payment for, all outstanding shares of capital stock of the Company. As a result of the Company Dissolution, each holder of the Company's Common Stock immediately prior to the Company Dissolution will own the same number and class of shares of King Broadcasting Common Stock as such holder owned in the Company. The foregoing is subject to the exercise of dissenter's rights under the RIBCA as described in the Merger Agreement. (c) In order to facilitate the exchange of certificates and to avoid requiring that certificates representing shares of Company Common Stock be exchanged for shares of King Broadcasting Common Stock prior to the Spin-Off Distribution and the Continental Merger, the Merger Agreement provides that the certificates representing shares of Company Class A Common Stock and Company Class B Common Stock immediately prior to the Company Dissolution (other than any such certificate which represents Dissenting Shares as defined therein or shares owned directly or indirectly by the Company or any of its Subsidiaries) shall be deemed to represent the equivalent number of shares of King Broadcasting Class A Common Stock and King Broadcasting Class B Common Stock issued in connection with the Company Dissolution. (d) This Section II, (2) of the Plan of Reorganization shall constitute the Plan of Liquidation and Dissolution of the Company; the resolution of the Board of Directors of the Company approving and adopting this Plan of Reorganization shall constitute the approval by the Board of said Plan of Liquidation and Dissolution of the Company; and that resolution shall constitute the recommending action to the Company's shareholders that the Company be dissolved and the direction that the question of the Company's dissolution be presented to the shareholders as contemplated by Section 7-1.1-77 of the RIBCA. The approval of the Plan of Reorganization by the requisite vote of the Company's shareholders as provided in Section IV(2) of this Plan of Reorganization, shall constitute the required shareholder approval for the dissolution of the Company in accordance with Section 7-1.1-77 of the RIBCA, including approval of the manner in which shares of King Broadcasting are to be distributed to shareholders in exchange for their shares of the Company's Class A and Class B Common Stock. 3. CONTRIBUTION TO NEW PROVIDENCE JOURNAL. (a) After the Company Dissolution and prior to the Spin-Off Distribution and the Merger Time and pursuant to the terms of the Contribution and Assumption Agreement to be entered into by King Broadcasting and New Providence Journal in the form attached to the Merger Agreement (the "Contribution Agreement"), King Broadcasting shall contribute and transfer (the "Contribution") to New Providence Journal all of King Broadcasting's right, title and interest in and to any and all assets then held by King Broadcasting, whether tangible or intangible and whether fixed, contingent or otherwise, including the stock of all subsidiaries of King Broadcasting, provided, however, that King Broadcasting shall not contribute to New Providence Journal (i) the issued and outstanding capital stock of Colony or any other Cable Subsidiary (as defined in the Merger Agreement); (ii) King Broadcasting's rights created pursuant to the Contribution Agreement; (iii) cash sufficient to pay all expenses relating to the transactions described in the Merger Agreement that are the responsibility of the Company, King Holding or King Broadcasting thereunder; and (iv) the Palmer Systems (as defined in the Merger Agreement), the Related Assets (as defined in the Merger Agreement) and the assets of Westerly or Colony, as the case may be, to the extent the transactions contemplated by the last sentence of Section 2.6 of the Merger Agreement shall have been consummated. II-3 (b) In partial consideration for the Contribution, concurrently therewith and pursuant to the Contribution Agreement, New Providence Journal shall assume any and all liabilities of King Broadcasting, whether fixed, contingent or otherwise; provided, however, that New Providence Journal will not assume, and will have no liability with respect to, (i) the "New Company Debt" (as defined in the Merger Agreement), (ii) any liabilities associated with the business operations of Colony or the cable operations of King Broadcasting except as provided in the Contribution Agreement, (iii) King Broadcasting's obligations created pursuant to the Contribution Agreement, and (iv) as otherwise provided in the Merger Agreement. (c) In partial consideration for the Contribution, New Providence Journal will issue to King Broadcasting, in its name, a number of its shares of Class A Common Stock and Class B Common Stock will be exactly equal to the number of shares of King Broadcasting Class A Common Stock and Class B Common Stock shares outstanding. When issued, these shares will be fully paid and non- assessable. (d) As a result of the Contribution and after the issuance of shares under the preceding paragraph (c), New Providence Journal will directly own the following assets: (a) All of the assets, subject to all of the liabilities, of THE PROVIDENCE JOURNAL-BULLETIN newspaper publishing business and the assets constituting the Company's electronic transmission facilities. (b) The assets used in the Company's present "corporate function". (c) The five television stations heretofore owned and operated by King Broadcasting. (d) All of the outstanding capital stock of the following corporations (in each case representing l00% of the issued and outstanding capital stock of such corporations, which corporations in some cases own and hold shares of other corporations and/or partnership interests in other entities): (i) Providence Journal Broadcasting Corp.; (ii) Fountain Street Corporation; (iii) M/I Acquisition Corp.; (iv) Mathewson Street Parking Corp.; (v) Washington Street Garage Corporation; (vi) PJ Programming, Inc.; (vii) Colony/Linkatel Networks, Inc.; (viii) Colony/PCS, Inc.; (ix) Colony Cable Networks, Inc.; and (x) any subsidiary corporation formed or acquired between the date of this Plan of Reorganization and the Time of Reorganization for the purpose of holding assets, or conducting operations, unrelated to the cable television business. 4. DISTRIBUTION OF NEW PROVIDENCE JOURNAL SHARES. Immediately after the Contribution and before the Merger Time, King Broadcasting will distribute to its shareholders, as a dividend in respect of its issued and outstanding shares, shares of New Providence Journal held by it on the following basis: One fully paid and non-assessable share of New Providence Journal Class A Common Stock for each share of King Broadcasting Class A Common Stock held; and One fully paid and non-assessable share of New Providence Journal Class B Common Stock for each share of King Broadcasting Class B Common Stock held. This transaction is herein referred to as the "Spin-Off Distribution". The Spin-Off Distribution will be effected by delivery of share certificates registered in the names of the respective shareholders as shown on the records of the Company immediately prior to the Spin-Off Distribution. II-4 III. CONTINENTAL MERGER. Upon completion of the Distribution, King Broadcasting shall be merged with and into Continental pursuant to the provisions of the Merger Agreement. IV. SHAREHOLDER APPROVAL; OTHER ACTIONS; APPRAISAL RIGHTS. 1. SPECIAL MEETING OF SHAREHOLDERS. The steps and transactions set forth in Section II of this Plan of Reorganization (the "Section II Steps") SHALL BE SUBMITTED to the shareholders of the Company for approval at a Special Meeting to be called and held as soon as possible, recognizing the necessity of compliance with applicable securities laws and other regulatory requirements. The Merger Agreement with Continental will be submitted for approval by the Company's shareholders at the same Special Meeting in a separate vote. 2. REQUIRED VOTE. To be adopted by the Company's shareholders, the Section II Steps must be approved by the affirmative vote of a majority of the holders of both the Company's Class A Common Stock and the Company's Class B Common Stock, with the holders of each class voting separately as a class. 3. NEW PROVIDENCE JOURNAL AS AGENT. In the event (i) the Section II Steps and the Merger Agreement are duly adopted by the shareholders of the Company and (ii) the Section II Steps, the Continental Merger and the other transactions contemplated by the Merger Agreement are consummated, each shareholder of the Company entitled to receive shares of Continental Class A Common Stock as a result of the Section II Steps and the Continental Merger shall be conclusively deemed (A) to have duly constituted and appointed New Providence Journal, acting by or through any authorized officer or officers, with full power of substitution, as his or her lawful agent and attorney-in-fact with authority to execute and deliver for him or her and in his or her behalf (I) the Registration Rights Agreement (as defined in the Merger Agreement), substantially in the form heretofore negotiated with Continental and approved by the Company, with such additions, deletions and changes as the officer or officers of New Providence Journal executing the same may in his, her or their sole discretion determine to be advisable, each such determination and the approval thereof by each shareholder of the Company to be conclusively evidenced by the execution and delivery of the Registration Rights Agreement by such officer or officers, and (II) such other documents, instruments and certificates considered necessary or appropriate by the officer or officers of New Providence Journal executing the Registration Rights Agreement to carry out the provisions of the same, and (B) to approve and consent to New Providence Journal acting as the Representative (as defined in the Registration Rights Agreement) on and pursuant to the terms and conditions of the Registration Rights Agreement. This agency relationship shall be deemed coupled with an interest and irrevocable so long as the Registration Rights Agreement shall remain in force and effect. The Company shall mail to each of its shareholders a summary of the Registration Rights Agreement concurrently with any notice of the Special Meeting of the Company's shareholders referred to in Section IV.1 of this Plan of Reorganization, and shall furnish a true and complete copy of the Registration Rights Agreement to each of its shareholders who requests the same. 4. OTHER BOARD AND SHAREHOLDER ACTION. If under applicable state law the actions contemplated by this Plan of Reorganization reasonably require additional actions by shareholders and/or directors of subsidiary companies, the adoption of additional plans of liquidation or dissolution or otherwise or any other agreements, instruments or actions, then the Company shall cause those actions to be taken, those approvals to be obtained and any such agreements or instruments to be put in place and carried out. 5. DISSENTING SHAREHOLDERS. Shareholders of the Company shall have dissenting shareholders rights under the RIBCA as described in the Merger Agreement. V. CONDITIONS TO COMPLETION. The completion of the transactions contemplated by this Plan of Reorganization shall be required only if, at or prior to the Time of Reorganization: II-5 (a) CONDITIONS TO MERGER AGREEMENT. The conditions to consummation of the Continental Merger, as set forth in the Merger Agreement, (including without limitation (i) obtaining the "NPJ Debt", and (ii) closing the acqusition contemplated by the "Company/Kelso Agreement" (as such terms are defined in the Merger Agreement) shall have been satisfied or waived, and the parties thereto shall be unconditionally prepared to proceed to consummate the Continental Merger. (b) RESTRUCTURING OF KING BROADCASTING. Prior to the Time of Reorganization, the Articles of Incorporation of King Broadcasting will be amended by proper filing with the Secretary of State of Washington in this manner: (a) The authorized capital shall be 50,000 shares of Class A Common Stock and 40,000 shares of Class B Common Stock; (b) Distributions to shareholders of King Broadcasting may be made in such a manner as to accommodate the Spin-Off Distribution as contemplated by Section II(4) above; (c) The capital stock sections of the Articles of Incorporation shall be identical to the comparable sections of the Charter of the Company, except as provided in the preceding paragraphs (a) and (b). (c) NEW PROVIDENCE JOURNAL. New Providence Journal shall have been organized under the laws of the State of Delaware and the Certificate of Incorporation of New Providence Journal in the form attached hereto as Exhibit I shall have been duly filed with the Delaware Secretary of State. (d) OTHER ACTIONS. The Company and the other parties to this Plan of Reorganization shall have complied with the provisions of Section 2.6 of the Merger Agreement with respect to certain additional transfers of operating assets and mergers of operating companies. VI. AMENDMENT OF PLAN. This Plan of Reorganization may be amended by resolution of the Company's Board of Directors at any time prior to the Time of Reorganization. As adopted by the Board of Directors of Providence Journal Company. A true copy, ATTEST - ---------------------- Harry Dyson, Secretary Date: ---------------- II-6 EXHIBIT I CERTIFICATE OF INCORPORATION OF THE PROVIDENCE JOURNAL COMPANY SECTION 1 NAME The name of the corporation (hereinafter called the "Company") is: The Providence Journal Company. SECTION 2 DELAWARE OFFICE AND REGISTERED AGENT The registered office of the Company in the State of Delaware is located at 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent 19904. The name of the registered agent of the Company at said address is The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-100, Dover, Delaware 19904. SECTION 3 PURPOSES The nature of the business of the Company and the objects and purposes to be transacted, promoted or carried on by it are as follows: (1) To publish an independent newspaper which is devoted to the dissemination of local, state, national and international news to residents of Rhode Island and adjoining communities and which is dedicated to the welfare of the community, in keeping with the principles of free press; (2) To own and operate other media, communications and broadcasting businesses; and (3) To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. SECTION 4 CAPITAL STRUCTURE 4.1 AUTHORIZED SHARES. The total number of shares of capital stock which the Company shall have authority to issue is Nine Hundred Thousand (900,000) shares, consisting of two classes of capital stock: (a) Six Hundred Thousand (600,000) shares of Class A Common Stock, par value $1.00 per share (the "Class A Stock"); PROVIDED, HOWEVER, that Four Hundred Fifty Thousand (450,000) of such shares of Class A Stock authorized hereby but not outstanding as of the date of original issuance may be issued by the Company only upon the exercise of rights issued pursuant to the Rights Agreement to be effective as of December 1, 1994, between the Company and the Rights Agent named therein (the "Rights Agreement") or pursuant to another agreement which the Board of Directors of the Company determines to be substantially similar to the Rights Agreement; and II-7 (b) Three Hundred Thousand (300,000) shares of Class B Common Stock, par value $1.00 per share (the "Class B Stock"); PROVIDED, HOWEVER, that Two Hundred Twenty-Five Thousand (225,000) shares of Class B Stock authorized hereby but not outstanding as of the original issuance thereof may be issued by the Company only upon the exercise of rights issued pursuant to the Rights Agreement or pursuant to another agreement which the Board of Directors of the Company determines to be substantially similar to the Rights Agreement. The Class A Stock and the Class B Stock are hereinafter collectively called the "Common Stock". The designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of Common Stock of the Company are as set forth in the following subsections of this Section 4. 4.2 VOTING RIGHTS. At every meeting of stockholders of the Company, every holder of Class A Stock shall be entitled to one (1) vote in person or by proxy for each share of Class A Stock outstanding in his name on the transfer records of the Company, and every holder of Class B Stock shall be entitled to four (4) votes in person or by proxy for each share of Class B Stock outstanding in his name on the transfer records of the Company. Except as may otherwise be required by law, the holders of Class A Stock and Class B Stock shall vote together as a single class. Every reference in this Certificate of Incorporation to a majority or other proportion of shares of stock shall be deemed to refer to such majority or other proportion of the votes entitled to be cast by such shares of stock. The holders of Class A Stock and Class B Stock are not entitled to cumulative votes in the election of any directors. 4.3 DIVIDENDS. When and as dividends are declared, whether payable in cash, in property or in shares of stock of the Company (except as hereinafter provided in this subsection 4.3), the holders of Class B Stock and the holders of Class A Stock shall be entitled to share equally, share for share, in such dividends. A dividend payable in shares of Class B Stock to the holders of Class B Stock and in shares of Class A Stock to the holder of Class A Stock shall be deemed to be shared equally among both classes. No dividends shall be declared or paid in shares of Class B Stock except to holders of Class B Stock, but dividends may be declared and paid, as determined by the Board of Directors, in shares of Class A Stock to all holders of Common Stock. 4.4 LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Class A Stock and the holders of Class B Stock shall have the right to share, ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Company available for distribution to its stockholders. 4.5 CONVERSION RIGHTS. (a) At any time each share of Class B Stock may be converted into one fully paid and nonassessable share of Class A Stock. Such right shall be exercised by the surrender to the Company of the certificate representing such share of Class B Stock to be converted at any time during normal business hours at the principal executive offices of the Company, or if an agent for the registration of transfer of shares of Common Stock is then duly appointed and acting (said agent being hereinafter referred to as the "Transfer Agent"), then at the office of the Transfer Agent, accompanied by a written notice of the election by the holder thereof to convert and (as so required by the Company or the Transfer Agent) by instruments of transfer, in form satisfactory to the Company and the Transfer Agent, duly executed by such holder or his duly authorized attorney, and by transfer tax stamps or funds therefor, if required pursuant to paragraph (d) below. (b) As promptly as practicable after the surrender for conversion of a certificate representing shares of Class B Stock in the manner provided for in paragraph (a) above and the payment of any amount required by the provisions of paragraphs (a) and (d), the Company will deliver, or cause to be II-8 delivered, a certificate or certificates representing the number of full shares of Class A Stock issuable upon such conversion, issued in such name or names as such holder may direct. Such conversion shall be deemed to have been made at the close of business on the date of the surrender of the certificate representing shares of Class B Stock, and all rights of the holder of such shares as such holder shall cease at such time and the person or persons whose name or names the certificate or certificates representing the shares of Class A Stock are to be issued shall be treated for all purposes as having become the record holder or holders of such shares of Class A Stock at such time. (c) The Company covenants that it will at all times reserve and keep available, solely for the purpose of issuance upon conversion of the outstanding shares of Class B Stock, such number of shares of Class A Stock as shall be issuable upon the conversion of all such outstanding shares, provided that nothing contained herein shall be construed to preclude the Company from satisfying its obligation in respect of the conversion of the outstanding shares of Class B Stock by delivery of purchased shares of Class A Stock which are held in the treasury of the Company. (d) The issuance of certificates for shares of Class A Stock upon conversion of shares of Class B Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Stock converted, the person or persons requesting the issuance thereof shall pay to the Company the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Company that such tax has been paid. 4.6 TRANSFER OF CLASS B STOCK. No person holding shares of Class B Stock (a "Class B Holder") may transfer, and the Company shall not register the transfer of, such shares of Class B Stock, whether by sale, assignment, gift, devise, bequest, appointment or otherwise, except to a "Permitted Transferee" of such Class B Holder; PROVIDED, HOWEVER, that a Class B Holder may sell, and the Company may purchase from such person, shares of Class B Stock to be held in the treasury of the Company. The term "Permitted Transferee" shall have the following meaning: (a) In the case of a Class B Holder who is a natural person holding record and beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means: (i) the spouse of such Class B Holder, (ii) a parent of such Class B Holder, (iii) a lineal descendant of a parent of such Class B Holder (said lineal descendants, together with the Class B Holder and his or her parents and spouse, are hereinafter referred to as such Class B Holder's "Family Members"), (iv) the trustee of a trust solely for the benefit of one or more of such Class B Holder's Family Members, and (v) a corporation, all the outstanding capital stock of which is owned by, a limited liability company, all of the members of which are, or a partnership, all of the partners of which are, one or more of such Class B Holder's Family Members, provided that if any share of capital stock of such corporation (or any survivor of a merger or a consolidation of such a corporation), or any membership or partnership interest in such a limited liability company or partnership, is acquired by any person who is not a Class B Holder's Family Member, all shares of Class B Stock then held by such corporation, limited liability company or partnership, as the case may be, shall be deemed without further act on anyone's part to be converted into shares of Class A Stock and shall thereupon and thereafter be deemed to represent a like number of shares of Class A Stock. (b) In the case of a Class B Holder holding the shares of Class B Stock in question as trustee pursuant to a trust other than a trust described in paragraph (c) below, "Permitted Transferee" means (i) the person who established such trust; and (ii) a Permitted Transferee of the person who established such trust determined pursuant to paragraph (a) above. (c) In the case of a Class B Holder holding shares of Class B Stock in question as trustee pursuant to a trust which was irrevocable on the record date for determining the persons to whom Class B Stock is first distributed by the Company (the "Record Date"), "Permitted Transferee" means any person to whom or for whose benefit principal may be distributed either during or at the end of the term of such trust whether by power of appointment or otherwise. II-9 (d) In the case of a Class B Holder holding record (but not beneficial) ownership of the shares of Class B Stock in question as nominee for the person who was the beneficial owner thereof on the Record Date, "Permitted Transferee" means such beneficial owner and a Permitted Transferee of such beneficial owner determined pursuant hereto. (e) In the case of a Class B Holder which is a partnership or a limited liability company holding record and beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means any partner of such a partnership or any member of such a limited liability company. (f) In the case of a Class B Holder which is a corporation holding record and beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means any stockholder of such corporation receiving shares of Class B Stock through a dividend or through a distribution made upon liquidation of such corporation and a survivor of a merger or consolidation of such corporation. (g) In the case of a Class B Holder which is the estate (or representative thereof) of a deceased Class B Holder or which is the estate of a bankrupt or insolvent Class B Holder and provided such deceased, bankrupt or insolvent Class B Holder, as the case may be, held record or beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means a Permitted Transferee of such deceased, bankrupt or insolvent Class B Holder as determined pursuant to paragraphs (a), (b) and (c) above, as the case may be. 4.7 PLEDGE OF CLASS B STOCK. Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section 4. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of Class A Stock, as the pledgee may elect. 4.8 EFFECT OF PURPORTED TRANSFER. Any purported transfer of shares of Class B Stock, other than to a Permitted Transferee, shall be null and void and of no effect and the purported transfer by a holder of Class B Stock, other than to a Permitted Transferee, will result in the immediate and automatic conversion of the shares of Class B Stock of such holder into shares of Class A Stock. The purported transferee shall have no rights as a stockholder of the Company and other rights against, or with respect to, the Company except the right to receive shares of Class A Stock. 4.9 "STREET" OR "NOMINEE" REGISTRATION. Shares of Class B Stock shall be registered in the name(s) of the beneficial owner(s) thereof (as hereafter defined) and not in "street" or "nominee" names; PROVIDED, HOWEVER, that certificates representing shares of Class B Stock may be registered in "street" or "nominee" name if such shares are being held in such manner only for the benefit of a Class B Holder(s) who is the beneficial owner(s) of such shares. For the purposes of this subsection 4.9, the term "beneficial owner(s)" of any shares of Class B Stock shall mean the person or persons who possess the power to dispose of, or to direct the disposition of, such shares. Any shares of Class B Stock registered in "street" or "nominee" name may be transferred to the beneficial owner of such shares upon proof satisfactory to the Company that such person is, in fact, the beneficial owner of such shares. Any shares of Class B Stock to be registered in "street" or "nominee" name may be so registered only upon proof satisfactory to the Company that such shares are to be held only for the benefit of a Class B Holder(s) who is the beneficial owner(s) of such shares. 4.10 LEGENDS; CONDITIONS OF TRANSFER. The Company shall note on the certificates representing the shares of Class B Stock the restrictions on transfer and registration of transfer imposed by this Section 4. The Company may, as a condition to the transfer of or the registration of transfer of shares of Class B Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. II-10 4.11 INTERPRETIVE PROVISIONS. For purposes of subsections 4.6, 4.7, 4.8, 4.9 and 4.10 of this Section 4: (i) Each joint owner of shares of Class B Stock shall be considered a Class B Holder of such shares. (ii) A minor for whom shares of Class B Stock are held pursuant to a Uniform Gifts to Minors Act or similar laws shall be considered a Class B Holder of such shares. (iii) The relationship of any person that is derived by or through legal adoption shall be considered a natural one. (iv) Unless otherwise specified, the term "person" includes natural person, corporation, partnership, unincorporated association, limited liability company, firm, joint venture, trust or other entity. 4.12 RESTRICTIONS APPLICABLE TO OTHER SECURITIES. Any securities of the Company which are convertible into shares of Class B Stock or carry a right to subscribe to or acquire shares of Class B Stock shall be subject to the restrictions on transfer applicable to Class B Stock as set forth in this Section 4. 4.13 ISSUANCE OF STOCK; PREEMPTIVE RIGHTS. (a) Except as provided herein, without the affirmative vote or written consent of the holders of a majority of the outstanding shares of Class B Stock, the Company shall not issue or sell any shares of Class B Stock or any obligation or security that shall be convertible into, or exchangeable for, or entitle the holder thereof to subscribe for or purchase, any shares of Class B Stock; PROVIDED, HOWEVER, nothing contained herein shall preclude the Company from reissuing purchased shares of Class B Common Stock which are held in the treasury of the Company. (b) Holders of Class A Stock shall have preemptive rights to acquire authorized but unissued shares or treasury shares or securities convertible into shares or carrying a right to subscribe to or acquire shares of Class A Stock, and holders of Class B Stock shall have preemptive rights to acquire authorized but unissued shares, or treasury shares or securities convertible into shares, of both Class A Stock and Class B Stock; PROVIDED, HOWEVER, in no event shall holders of Common Stock have any preemptive right to acquire (i) Class A Stock issued upon conversion of Class B Stock under this Section 4, (ii) shares which are issued pursuant to any employee stock purchase plan, employee stock option plan or comparable plan pursuant to which employees of the Company or its subsidiaries may acquire shares as part of their incentive compensation benefits, as long as such stock option plan, stock purchase plan or other comparable plan is approved by the stockholders of the Company, (iii) shares sold other than for money, or (iv) shares which are contrary to the provisions of the Rights Agreement or another agreement which the Board of Directors of the Company determines to be substantially similar to the Rights Agreement. 4.14 RIGHTS OR OPTIONS. Subject to subsection 4.13 of this Section 4, the Company shall have the power to create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the Company, rights or options entitling the holders thereof to purchase from the Company any shares of its capital stock of any class or classes at the time authorized, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the Board of Directors. The terms upon which, the time or times, which may be limited or unlimited in duration, at or within which, and the price or prices at which any such rights or options may be issued and any such shares may be purchased from the Company upon the exercise of any such right or option shall be such as shall be fixed and stated in a resolution or resolutions adopted by the Board of Directors providing for the creation and issuance of such rights or options, and, in every case, set forth or incorporated by reference in the instrument or instruments evidencing such rights or options. In the absence of actual fraud in the transaction, the judgment of the Board of Directors as to the consideration for the issuance of such rights or options and the sufficiency thereof shall be conclusive. 4.15 RIGHT OF FIRST REFUSAL. (a) The Company shall have the right, in case of a proposed sale of shares of Common Stock of the Company by any holder thereof, to purchase said shares at the lowest price at which said holder is willing to II-11 sell before the same shall be sold by such holder to any other party; provided, however, that the Company shall exercise its right to purchase within fifteen (15) days after receipt of written notice of said holder's desire to sell said shares and the price at which the holder is willing to sell and other pertinent terms of the sale. If the Company shall decide to purchase said shares on such terms and conditions, said holder shall, upon tender of the purchase price thereof, transfer to the Company the shares so sold. If the Company shall not accept said offer within said period of fifteen (15) days, said holder may at any time within thirty (30) days after the expiration of said fifteen (15) day period, sell said shares (and no more) at a price not lower than that at which it was offered to the Company and on terms no more favorable than as offered to the Company without re-offering it to the Company. For the purposes of this subsection 4.15 all references to shares of Common Stock shall be deemed to refer not only to such shares but also to all securities of the Company which are convertible into, or carry a right to subscribe to or acquire, shares of Common Stock of the Company. (b) Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Company), 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 called for the purpose of amending, altering, changing, repealing or adopting any provisions inconsistent with this subsection 4.15 shall be required to amend, alter, change, repeal, or adopt any provisions inconsistent with this subsection 4.15; PROVIDED, HOWEVER, that this paragraph (b) shall not apply to, and such vote shall not be required for, any amendment, alteration, change, repeal or adoption of any inconsistent provision that is recommended to the stockholders by the vote of not less than two-thirds of the whole Board of Directors, and any such amendment, alteration, change, repeal or adoption of any inconsistent provision recommended shall require only the vote, if any, required under the applicable provisions of Delaware law. 4.16. UNCLAIMED DIVIDENDS. Any and all right, title, interest and claim in or to any dividends declared, or other distributions made, by the Company, whether in cash, stock or otherwise, which are unclaimed by the stockholder entitled thereto for a period of three years after the close of business on the payment date, shall be and be deemed to be extinguished and abandoned; and such unclaimed dividends or other distributions in the possession of the Company, its transfer agents or other agents or depositaries shall at such time become the absolute property of the Company, free and clear of any and all claims of any persons or other entities whatsoever. SECTION 5 INCORPORATOR The name and mailing address of the incorporator is as follows: Benjamin P. Harris, III c/o Edwards & Angell 2700 Hospital Trust Tower Providence, Rhode Island 02903 II-12 SECTION 6 DURATION OF EXISTENCE The Company is to have perpetual existence. SECTION 7 BOARD OF DIRECTORS 7.1. NUMBER OF DIRECTORS. The business and affairs of the Company shall be managed by or under the direction the Board of Directors. Except as provided in subsection 7.3 with regard to the period prior to March, 1995, the number of directors of the Company which shall constitute the Board of Directors shall be twelve (12) unless otherwise determined from time to time by resolution adopted by the affirmative vote of a majority of the whole Board of Directors. As used in this Certificate of Incorporation, the term "whole Board of Directors" means the total number of Directors which the Company would have if there were no vacancies. 7.2. POWERS OF THE BOARD. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors, subject to the provisions of this Certificate of Incorporation, is expressly authorized and empowered: (a) To make, alter, amend or repeal the By-Laws of the Company in any manner not inconsistent with the laws of the State of Delaware or this Certificate of Incorporation, subject to the power of the stockholders to amend, alter or repeal the by-laws made by the Board of Directors or to limit or restrict the power of the Board of Directors so to make, alter, amend or repeal the by-laws. (b) Subject to the applicable provisions of the By-Laws, to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the Company, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Company, except as conferred by the laws of the State of Delaware, unless and until authorized so to do by resolution adopted by the Board of Directors or the stockholders of the Company entitled to vote in respect thereof. (c) Without the assent or vote of the stockholders, to authorize and issue obligations of the Company, secured or unsecured, to include therein such provisions as to redeemability, convertibility or otherwise, as the Board of Directors in its sole discretion may determine, and to authorize the mortgaging or pledging, as security therefor, of any property of the Company, real or personal, including after-acquired property. (d) To fix and determine, and to vary the amount of, the working capital of the Company; to determine whether any, and if any, what part of any, accumulated profits shall be declared in dividends and paid to the stockholders; to determine the time or times for the declaration and payment of dividends; to direct and to determine the use and disposition of any surplus or net profits over and above the capital stock paid in; and in its discretion the Board of Directors may use or apply any such surplus or accumulated profits in the purchase or acquiring of bonds or other pecuniary obligations of the Company to such extent, in such manner and upon such terms as the Board of Directors may deem expedient. (e) To sell, lease or otherwise dispose of, from time to time, any part or parts of the properties of the Company and to cease to conduct the business connected therewith or again to resume the same, as it may deem best. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised or done II-13 by the Company, subject, nevertheless, to the provisions of the laws of the State of Delaware, of this Certificate of Incorporation and of the By-Laws of the Company. 7.3. BOARD TERMS. Prior to March 1, 1995, the Board of Directors shall consist of three (3) members. Thereafter, the Board of Directors shall consist of twelve (12) members (until such time as the Board of Directors acting pursuant to subsection 7.1 above shall amend such number) and shall be divided into three (3) classes, each class to be equal in number. The term of office of directors of the first class shall expire at the annual meeting of stockholders to be held in 1996; the term of office of directors of the second class shall expire at the annual meeting of stockholders to be held in 1997; and the term of office of directors of the third class shall expire at the annual meeting of stockholders to be held 1998. At each annual meeting of stockholders following the annual meeting for 1995, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of stockholders. 7.4. CHANGE IN SIZE OF BOARD; VACANCIES. In the event of any change in the authorized number of directors, the Board of Directors shall apportion any newly created directorships to, or reduce the number of directorships in, such class or classes as shall, so far as possible, equalize the number of directors in each class. At all times all classes of directors shall be as nearly equal in number as possible. If, consistent with the concept that the three classes shall be as nearly equal in number as possible, any newly created directorship may be allocated to more than one class, the Board of Directors shall allocate it to the available class whose term of office is due to expire at the earliest date following such allocation. Vacancies in the Board of Directors, however caused, and newly created directorships shall be filled solely by a majority vote of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. No decrease in the number of directors shall shorten the term of an incumbent director. 7.5. REMOVAL. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Company), any director or the entire Board of Directors of the Company may be removed at any time, without cause AND only 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 stockholders called for the purpose of such removal; PROVIDED, HOWEVER, that 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. 7.6. AMENDMENT OF THIS SECTION. Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Company), 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 this Section 7, shall be required to amend, alter, change, repeal, or adopt any provisions inconsistent with, this Section 7; PROVIDED, HOWEVER, that this subsection 7.6 shall not apply to, and such 80% vote shall not be required for, any amendment, alteration, change, repeal or adoption of any inconsistent provision that is recommended to the stockholders by the vote of not less than two-thirds of the whole Board of Directors, and any such amendment, alteration, change, repeal or adoption of any inconsistent provision so recommended shall require only the vote, if any, required by the applicable provisions of Delaware Law. 7.7. APPLICATION OF BY-LAWS. In all other regards, the powers, terms, qualifications, election, manner of acting, compensation and conduct of meetings of, and other matters relating to, directors shall be governed by By- Laws not inconsistent with this Certificate of Incorporation. II-14 SECTION 8 BUSINESS COMBINATIONS 8.1. DEFINITIONS. For purposes of this Section 8 the following terms shall have these meanings: (a) "Business Combination" means: (i) The sale, exchange, lease, transfer or other disposition by the Company or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all of the consolidated assets or business of the Company; (ii) Any merger or consolidation of the Company or any subsidiary thereof into or with a corporation, irrespective of which corporation is the surviving entity in such merger or consolidation; (iii) Any reclassification of securities, recapitalization or other transaction which has the effect, directly or indirectly, of any partial or complete liquidation, spin-off, split-off or split-up of the Company. As used in this definition, a "series of related transactions" shall be deemed to include not only a series of transactions with the same Participant but also a series of separate transactions with a Participant or any affiliate or associate of such Participant. Anything in this definition to the contrary notwithstanding, this definition shall not be deemed to include any transaction of the type set forth in subsection (i) through (iii) above between or among (A) any two or more Subsidiaries of the Company, (B) or the Company and one or more Subsidiaries of the Company where (1) the Company is the surviving or continuing entity, (2) the Company's Certificate of Incorporation and By-Laws will remain the Certificate of Incorporation and By-Laws of such surviving or continuing entity, and (3) the stockholders of the Company prior to such transaction retain the same percentage ownership in such surviving or continuing entity after such transaction. (b) "Participant" shall mean any individual, partnership, corporation, group or other entity (other than the Company, any Subsidiary of the Company or a trustee holding stock for the benefit of employees of the Company or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements) participating in the Business Combination. When two or more Participants act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnership, syndicate, association or group shall be deemed a "Participant." (c) "Subsidiary" shall mean any company, corporation or entity of which the Company owns not less than 50% of any class of equity securities, directly or indirectly. 8.2. DETERMINATIONS BY THE BOARD. The directors shall have the exclusive power and authority to determine, for the purposes of this Section 8, on the basis of information known to them: (a) whether two or more transactions constitute a "series of related transactions" as hereinabove defined, and (b) such other matters with respect to which a determination is required under this Section 8. Any such determination shall be final and binding for all purposes hereunder. 8.3. APPROVAL OF BUSINESS COMBINATIONS. Whether or not a vote of the stockholders is otherwise required in connection with the transaction, neither the Company nor any of its Subsidiaries shall become a party to any Business Combination without prior compliance with the provisions of this subsection 8.3. (a) Such Business Combination shall be approved by the Board of Directors of the Company by the affirmative vote of not less than two-thirds of the whole Board of Directors of the Company; OR (b) If there is not full compliance with the provisions of paragraph (a) of this subsection 8.3, such Business Combination shall 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 II-15 the election of directors; if there is full compliance with the provisions of said paragraph (a), such vote shall be as required by law. In addition, any proxy statement used in connection with the solicitation of such vote shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the directors, or any of them, may have furnished in writing and, if deemed advisable by majority of the directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of capital stock (such investment banking firm to be selected by majority of the directors), which investment banking firm will have been furnished with all information it reasonably requests, and will be paid a reasonable fee by the Company for its services upon receipt of the Company of such opinion; AND (c) (i) The aggregate amount of the cash and the fair market value of other consideration to be received per share of capital stock in such Business Combination by holders of capital stock, other than any Participant, shall be not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by any Participant in the last 24 months in acquiring any of its holdings of capital stock, and not less than the book value of a share of the capital stock, as reflected in the balance sheet of the Company as of the last day of the last fiscal quarter of the Company preceding such Business Combination; and (ii) The consideration (if any) to be received in such Business Combination by holders of capital stock other than any Participant shall, except to the extent that a stockholder agrees otherwise as to all or part of the shares which such stockholder owns, be in the same form and of the same kind as the consideration paid by any Participant in acquiring capital stock already owned by it during the last 12 months. For purposes of paragraphs (i) and (ii) of this subsection 8.3(c), in the event of a Business Combination upon the consummation of which the Company would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Company will be effected), the term "other consideration to be received" shall include, without limitation, capital stock retained by stockholders of the Company other than any Participant. 8.4. FACTORS TO BE CONSIDERED BY THE BOARD. Prior to voting with regard to any Business Combination, the directors shall, consistent with their overall responsibilities to the stockholders of the Company, consider the impact of the proposed Business Combination on the following: (a) The working conditions, job security or compensation of the employees of the Company and its Subsidiaries; (b) The management of the Company; (c) The short-term and long-term financial stability of the Company; (d) The ability of the Company to publish an independent, high-quality, comprehensive newspaper and to freely conduct its other operations and those of its Subsidiaries to the advantage of the customers and markets served; (e) The economic strength, business reputation, managerial ability and recognized integrity of any Participant (or the principals thereof) proposing a Business Combination with the Company; and (f) The effect on the communities served by the Company's newspapers and by its other operations and Subsidiaries in light of any change which might occur as a result of the factors outlined in paragraph (a) through (e) above, considered together or singly. 8.5. AMENDMENT OF THIS SECTION. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Company), the affirmative vote of the holders of at least 80% of the combined voting power of the then outstanding shares of stock of II-16 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 this Section 8, shall be required to amend, alter, change, repeal or adopt any provisions inconsistent with, this Section 8; PROVIDED, HOWEVER, that this subsection 8.5 shall not apply to any amendment, alteration, change, repeal or adoption of any inconsistent provision that is recommended to the stockholders by the vote of not less than two-thirds of the whole Board of Directors, and any such amendment, alteration, change, repeal or adoption of any inconsistent provision so recommended shall require only the vote, if any, required under the applicable provisions of Delaware law. 8.6. BUSINESS COMBINATION ACT. The Company shall be subject to the provisions of Title 8, Section 203 of the General Corporation Law of the State of Delaware as in effect or as hereafter amended. SECTION 9 CONFLICT OF INTEREST No contract or transaction between the Company and one or more of its directors or officers, or between the Company and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for such reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes such contract or transaction, or solely because such director is counted in determining the presence of a quorum at such meeting and votes upon the authorization of such contract or transaction, if (a) the material facts as to such director's or officer's relationship or interest as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or the committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested members thereof, even though such disinterested members be less than a quorum, or (b) the material facts as to such director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of such stockholders, or (c) the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 10 LIMITATION OF LIABILITY; INDEMNIFICATION 10.1. LIMITATION OF DIRECTORS' LIABILITY. To the fullest extent that the General Corporation Law of the State of Delaware, as it exists on the date hereof or as it may hereafter be amended, permits the limitation or elimination of the liability of directors, no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. No amendment to or repeal of this Section 10 shall apply to or have any effect on the liability or alleged liability of any director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 10.2. RIGHT TO INDEMNIFICATION. The Company shall, to the fullest extent permitted by applicable law as then in effect, indemnify any person (the "Indemnitee") who was or is involved in any manner (including, without limitation, as a party or witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceeding by or in the right of the Company to procure a judgment in its favor) (a "Proceeding") by reason of the fact that he is or was a director, officer, II-17 employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) against all expenses (including attorneys' fee), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such Proceeding. Such indemnification shall be a contract right and shall include the right to receive payment in advance of any expenses incurred by the Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect. 10.3. INSURANCE, CONTRACTS AND FUNDING. The Company may purchase and maintain insurance to protect itself and any Indemnitee against any expenses, judgments, fines and amounts paid in settlement as specified in subsection 10.1 of this Section or incurred by any Indemnitee in connection with any Proceeding referred to in subsection 10.2 of this Section, to the fullest extent permitted by applicable law as then in effect. The Company may enter into contracts with any director, officer, employee or agent of the Company in furtherance of the provisions of this Section and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Section. 10.4. INDEMNIFICATION NOT EXCLUSIVE RIGHT. The right of indemnification provided in this Section shall not be exclusive of any other rights to which those seeking indemnification may otherwise be entitled, and the provisions of this Section shall inure to the benefit of the heirs and legal representatives of any person entitled to indemnity under the Section and shall be applicable to proceedings commenced or continuing after the adoption of this Section, whether arising from acts or omissions occurring before or after or after such adoption. 10.5. ADVANCEMENT OF EXPENSES; PROCEDURES; PRESUMPTIONS AND EFFECTS OF CERTAIN PROCEEDINGS; REMEDIES. In furtherance but not in limitation of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification under this Section: (a) ADVANCEMENT OF EXPENSES. All reasonable expenses incurred by or on behalf of an Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Company within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified against such expenses pursuant to this Section. (b) PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (i) To obtain indemnification under this Section, an Indemnitee shall submit to the Secretary of the Company a written request, including such documentation as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made not later than 60 days after receipt by the Company of the written request for indemnification together with the Supporting Documentation. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification. (ii) The Indemnitee's entitlement to indemnification under this Section shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined), if they constitute a quorum of the Board of Directors; (B) by a written opinion of Independent Counsel (as hereinafter defined) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, a majority of such Disinterested Directors so directs; (C) by the stockholders of the Company entitled to vote (but only if a majority of the Disinterested Directors, if II-18 they constitute a quorum of the Board of Directors, presents the issue of entitlement to indemnification to such stockholders for their determination); or (D) as provided in subsection 10.5(c) of this Section. (iii) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to subsection 11.5(b)(ii) of this Section, a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object. (c) PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. Except as otherwise expressly provided in this Section, the Indemnitee shall be presumed to be entitled to indemnification under this Section upon submission of a request for indemnification together with the Supporting Documentation in accordance with subsection 10.5(b)(i), and thereafter the Company shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under subsection 10.5(b) of this Section to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after the receipt by the Company of the request therefor together with the Supporting Documentation, the Indemnitee shall be entitled to indemnification unless (i) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (ii) such indemnification is prohibited by law. The termination of any Proceeding described in subsection 10.2, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his conduct was lawful. (d) REMEDIES OF INDEMNITEE. (i) In the event that a determination is made pursuant to subsection 10.5(b) of this Section that the Indemnitee is not entitled to indemnification under this Section, (A) the Indemnitee shall be entitled to seek an adjudication of his entitlement to such indemnification in an appropriate court of the State of Delaware; (B) any such judicial proceeding shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) in any such judicial proceeding the Company shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Section. (ii) If a determination shall have been made or deemed to have been made, pursuant to subsection 10.5(b) or (c), that the Indemnitee is entitled to indemnification, the Company shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification in prohibited by law. In the event that (C) advancement of expenses is not timely made pursuant to subsection 10.5 (a) or (D) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed have been made pursuant to subsection 10.5(b) or (c), the Indemnitee shall be entitled to seek judicial enforcement of the Company's obligation to pay to the indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Company may bring an action, in an appropriate court of the State of Delaware or the State of Rhode Island contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in subparagraph (A) or (B) of this paragraph (ii) (a "Disqualifying Event"); PROVIDED, HOWEVER, that in any such action the Company shall have the burden or proving the occurrence of such Disqualifying Event. (iii) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this subsection 10.5(d) that the procedures and presumptions of this Section are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Section. II-19 (iv) In the event that the Indemnitee, pursuant to this subsection 10.5(d), seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Section, the Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any expenses actually and reasonably incurred by him if the Indemnitee prevails in such judicial adjudication. If it shall be determined in such judicial adjudication that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitor in connection with such judicial adjudication shall be prorated accordingly. (e) Definitions. For purposes of this subsection 10.5: (i) "Disinterested Director" means a director of the Company who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (ii) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent (A) the Company or the Indemnitee in any matter material to either such party or (B) any other party to the Proceeding giving rise to a claim for indemnification under this Section. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights under this Section. 10.6. SEVERABILITY. If any provision or provisions of this Section shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Section (including, without limitation, all portions of any paragraph of this Section containing any such provision held to be invalid, illegal or unenforceable that are not themselves invalid, illegal or unenforceable) shall not in any way be affected in impaired thereby; and (b) to the fullest extent possible, the provisions of this Section 10 (including, without limitation, all portions of any subsection or paragraph of this Section containing any such provision held to be invalid, illegal or unenforceable that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 10.7 AMENDMENT OF THIS SECTION. Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Company), any amendment, alteration or repeal of this Section 10 shall require 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. SECTION 11 BY-LAWS To the extent deemed necessary or appropriate by the Board of Directors to enable the Company to engage in any business or activity directly or indirectly conducted by it in compliance with the laws of the United States of America as now in effect or as they may hereafter from time to time be amended, the Company may adopt such by-laws as may be necessary or advisable to comply with the provisions and avoid the prohibitions of any such law. Without limiting the generality of the foregoing, such by-laws may restrict or prohibit the transfer of shares of capital stock of the Company to, and the voting of such stock by, aliens or their representatives, or corporations organized under the laws of any foreign country or their representatives, or corporations directly or indirectly controlled by aliens or by any such corporation or representative. II-20 SECTION 12 MEETINGS Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Company may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Company. SECTION 13 PARTICIPATION OF NON-CITIZENS; REGULATORY COMPLIANCE 13.1. PARTICIPATION OF NON-CITIZENS. The following provisions are included for the purpose of ensuring that control and management of the Company remains with loyal citizens of the United States and/or corporations formed under the laws of the United States or any of the states of the United States, as required by the Communications Act of 1934, as the same may be amended from time to time. (a) The Company shall not issue to "Aliens" (which term shall include (i) a person who is a citizen of a country other than the United States; (ii) any entity organized under the laws of a government other than the government of the United States or any state, territory, or possession of the United States; (iii) a government other than the government of the United States or of any state, territory, or possession of the United States; and (iv) a representative of, or an individual or entity controlled by, any of the foregoing, either individually or in the aggregate, in excess of twenty-five percent (25%) of the total number of shares of capital stock of the Company outstanding at any time and shall seek not to permit the transfer on the books of the Company of any capital stock to any Alien that would result in the total number of shares of such capital stock held by Aliens exceeding such twenty-five percent (25%) limit. (b) No Alien or Aliens shall be entitled to vote or direct or control the vote of more than twenty-five percent (25%) of (i) the total number of shares of capital stock of the Company outstanding and entitled to vote at any time and from time to time, or (ii) the total voting power of all shares of capital stock of the Company outstanding and entitled to vote at any time and from time to time. (c) No Alien shall be qualified to act as an officer of the Company, and no more than one-fourth of the total number of directors of the Company at any time and from time to time may be Aliens. (d) The Board of Directors of the Company shall have all powers necessary to implement the provisions of this Section 13. 13.2. REGULATORY COMPLIANCE. The Company shall not do, nor shall it cause any act to be done, that would cause it to be in violation of the Communications Act of 1934 or of the rules and regulations promulgated thereunder, as the same may be amended from time to time. SECTION 14 AMENDMENT OF CERTIFICATE OF INCORPORATION The Company reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate or Incorporation in the manner now or hereafter prescribed by law or the specific provisions of this Certificate of Incorporation, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form, or as hereinafter amended, are granted subject to the right reserved in this Section 14. II-21 IN WITNESS WHEREOF, I, the undersigned, being the incorporator hereinabove named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make and file this certificate, hereby declaring and certifying that the facts herein stated are true, and accordingly have hereunto set my hand this 11th day of November, 1994. ------------------------------------- ++ Benjamin P. Harris, III + State of Rhode Island + ss.: County of Providence + ++ BE IT REMEMBERED that on the 11th day of November, 1994 personally appeared before me, Lauren E. Marandola, a notary public for the State of Rhode Island, Benjamin P. Harris, III, the party to the foregoing Certificate of Incorporation, known to me personally to be such, and acknowledged the said Certificate to be his act and deed and that the facts therein stated are true. GIVEN under my hand and seal of office the day and year aforesaid. ------------------------------------- Notary Public II-22 CERTIFICATE OF CORRECTION OF CERTIFICATE OF INCORPORATION OF THE PROVIDENCE JOURNAL COMPANY It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is The Providence Journal Company. 2. The Certificate of Incorporation of the corporation, which was filed by the Secretary of State of Delaware on November 15, 1994, is hereby corrected. 3. The inaccuracies to be corrected in said instrument and the corrected form are as follows: a. On Page 4, paragraph (b) in the thirteenth line, the language should be changed from "ii" to "in" to read as follows: "(b) As promptly as practicable after the surrender for conversion of a certificate representing shares of Class B Stock in the manner provided for in paragraph (a) above and the payment of any amount required by the provisions of paragraphs (a) and (d), the Company will deliver, or cause to be delivered, a certificate or certificates representing the number of full shares of Class A Stock issuable upon such conversion, issued in such name or names as such holder may direct. Such conversion shall be deemed to have been made at the close of business on the date of the surrender of the certificate representing shares of Class B Stock, and all rights of the holder of such shares as such holder shall cease at such time and the person or persons in whose name or names the certificate or certificates representing the shares of Class A Stock are to be issued shall be treated for all purposes as having become the record holder or holders of such shares of Class A Stock at such time." b. On page 12, Section 7.3 in the 13th line, the word "in" was omitted before the "1998"; Section 7.3 should now read as follows: "7.3. BOARD TERMS. Prior to March 1, 1995, the Board of Directors shall consist of three (3) members. Thereafter, the Board of Directors shall consist of twelve (12) members (until such time as the Board of Directors acting pursuant to subsection 7.1 above shall amend such number) and shall be divided into three (3) classes, each class to be equal in number. The term of office of directors of the first class shall expire at the annual meeting of stockholders to be held in 1996; the term of office of directors of the second class shall expire at the annual meeting of stockholders to be held in 1997; and the term of office of directors of the third class shall expire at the annual meeting of stockholders to be held in 1998. At each annual meeting of stockholders following the annual meeting for 1995, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of stockholders." IN WITNESS WHEREOF, I, the undersigned, being the incorporator for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make and file this certificate of correction, hereby declaring and certifying that the facts herein stated are true, and accordingly have hereunto set my hand this 12th day of January, 1995. /s/ Benjamin P. Harris III _____________________________________ Benjamin P. Harris, III II-23 ++ + State of Rhode Island + ss.: County of Providence + ++ BE IT REMEMBERED that on the 12th day of January, 1995 personally appeared before me, Lauren E. Marandola, a notary public for the State of Rhode Island, Benjamin P. Harris, III, the party to the foregoing Certificate of Incorporation, known to me personally to be such, and acknowledged the said Certificate to be his act and deed and that the facts therein stated are true. GIVEN under my hand and seal of office the day and year aforesaid. /s/ ------------------------------------- Notary Public II-24 ANNEX III [ FORM OF BEAR STEARNS' OPINION ] , 1995 Board of Directors Providence Journal Company 75 Fountain Street Providence, Rhode Island 02902 Ladies and Gentlemen: We understand that Providence Journal Company ("Providence Journal") has entered into (i) a Restated Agreement and Plan of Merger (the "Merger Agreement") with Continental Cablevision, Inc. ("Continental"); (ii) a Contribution and Assumption Agreement, a Registration Rights Agreement and a Noncompetition Agreement with Continental; (iii) a Stock Purchase Agreement ("Kelso Stock Purchase Agreement") with Kelso & Company, Inc. ("Kelso"); and (iv) separate Stock Purchase Agreements (the "Minority Interest Purchase Agreements") with each of Copley Press Electronics Company, Brown University and Telesat Cablevision of South Florida, Inc. and Telesat Cablevision, Inc. (collectively, the "Minority Interests"). The Merger Agreement, the Contribution and Assumption Agreement, the Registration Rights Agreement, the Noncompetition Agreement, the Kelso Stock Purchase Agreement and the Minority Interest Purchase Agreements are collectively referred to herein as the "Agreements." We further understand that, pursuant to the Agreements: (i) Providence Journal will acquire Kelso's interest in King Holding Corp. ("KHC") and the Minority Interests; (ii) Providence Journal will contribute, to a newly-formed wholly-owned subsidiary, The Providence Journal Company ("New Providence Journal"), substantially all of the assets of Providence Journal other than the capital stock of the Cable Subsidiaries (as such term is defined in the Merger Agreement and the Contribution and Assumption Agreement) and certain other cable television assets (collectively, "PJC Cable Business") and Providence Journal will then distribute all of New Providence Journals common stock to Providence Journals shareholders on a pro rata basis; (iii) Continental will assume or incur $755 million of New Indebtedness (as such term is defined in the Merger Agreement); and (iv) Providence Journal will then merge with and into Continental as a result of which each share of Providence Journal Common Stock held by shareholders will be converted into shares of newly issued Continental Merger Stock, comprised of 28,260,300 shares of Continental Class A Common Stock and 4,987,100 shares of Continental Series B Preferred Stock (or 33,247,400 shares of Continental Class A Common Stock if no shares of Continental Series B Preferred Stock are issued) representing approximately 16.4% of Continental's fully diluted equity securities outstanding after the merger (or 18.9% of Continental's fully diluted equity securities outstanding if no shares of Continental Series B Preferred Stock are issued). The aforementioned transactions and related transactions described in the Agreements are collectively referred to herein as the Providence Journal Transactions." You have provided us with the joint proxy statement-prospectus in substantially the form to be sent to the shareholders of Providence Journal (the "Joint Proxy Statement-Prospectus"). You have asked us to render our opinion as to whether the Providence Journal Transactions in the aggregate are fair, from a financial point of view, to the shareholders of Providence Journal. In the course of our analyses for rendering this opinion, we have, among other things: 1. reviewed the Joint Proxy Statement-Prospectus; III-1 2. reviewed the Merger Agreement (including the terms of the Continental Merger Stock), the Contribution and Assumption Agreement, the Registration Rights Agreement, the Noncompetition Agreement, the Kelso Stock Purchase Agreement, the Minority Interest Purchase Agreements and the related schedules of such agreements; 3. reviewed (i) the audited consolidated financial statements of Providence Journal, Colony Communications, Inc. and Copley/Colony, Inc. for the years ended December 31, 1990 through December 31, 1993 and their unaudited financial statements for the month period ended , 1994; (ii) KHC's audited consolidated financial statements for the years ended December 31, 1992 and December 31, 1993 and unaudited consolidated financial statements for the month period ended , 1994; (iii) the Colony Cablevision divisions internally prepared unaudited income statements for the years ended December 31, 1991 through December 31, 1993 and the month period ended , 1994; (iv) internally prepared consolidating pro forma financial statements for the year ended December 31, 1993 for the PJC Cable Business; and (v) internally prepared consolidated pro forma balance sheets as of June 30, 1994 for New Providence Journal and consolidated pro forma statement of operations for the year ended December 31, 1993 for New Providence Journal; 4. reviewed certain operating and financial information of Providence Journal, the PJC Cable Business, and KHC, including projections for the PJC Cable Business and King Broadcasting Company ("KBC"), provided to us by the managements of Providence Journal, the PJC Cable Business and KBC; 5. reviewed Continentals audited financial statements for the years ended December 31, 1991 through 1993 and its unaudited financial statements for the months ended , 1994; 6. reviewed certain operating and financial information of Continental, including projections, provided to us by Continentals management; 7. met with certain members of the senior managements of Providence Journal, the PJC Cable Business, KBC and Continental to discuss each companys respective operations, historical financial statements and prospects, recent actions taken by the Federal Communications Commission and the impact thereof on the PJC Cable Business and Continental, and the amount and timing of potential synergies and/or costs savings to Continental realizable as a result of the Merger; 8. reviewed the historical prices and volume of Continentals privately- held common stock issued or traded in negotiated transactions as furnished to us by Continental; 9. reviewed publicly available financial data and stock market performance of publicly traded companies engaged in businesses that we deemed generally comparable to the PJC Cable Business, Continental and KBC, respectively; 10. reviewed the financial terms of recent acquisitions of companies we deemed generally comparable to PJC Cable Business and KBC; and 11. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. In the course of our review, we have relied upon and assumed the accuracy and completeness of the financial and other information provided to us by Providence Journal, the PJC Cable Business and Continental, among others, and the reasonableness of the assumptions made with respect to their respective projected financial results. We have not assumed any responsibility for such information and we have further 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 us incomplete or misleading. With respect to the projected financial results of the PJC Cable Business, KBC and Continental which were furnished to us, we have assumed that such financial projections have 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. We 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 III-2 Federal Communications Commission and the amount and timing of potential synergies and/or cost savings to Continental realizable as a result of the Merger. We have, with your approval, assumed that the PJC Spin-Off and the Merger will qualify as tax-free reorganizations as contemplated by the Merger Agreement. In arriving at our opinion, we have not performed any independent appraisal of the assets of Providence Journal, the PJC Cable Business or Continental. We express no 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. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date of the opinion. We have acted as financial advisor to Providence Journal in connection with the Providence Journal Transactions and will receive a fee for such services, payment of a significant portion of which is contingent upon the consummation of the Providence Journal Transactions. As part of our engagement, we 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 we have assessed and reviewed with the senior management and the Board of Directors of Providence Journal. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Providence Journal Transactions in the aggregate are fair, from a financial point of view, to the shareholders of Providence Journal. Very truly yours, Bear, Stearns & Co. Inc. By: _________________________________ Managing Director III-3 ANNEX IV DELAWARE GENERAL CORPORATION LAW 262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to (S)228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership interest of a member of a nonstock corporation. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to (S)251, 252, 254, 257, 258, 263 or 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 stockholders; and further provided that no appraisal rights shall be available for any share of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of (S)251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation; b. Shares of stock of any other corporation which at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 stockholders; c. Cash in lieu of fractional shares of the corporations described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock and cash in lieu of fractional shares described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under (S)253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. IV-1 (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to (S)228 or 253 or this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders IV-2 shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall IV-3 be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. (Last amended by Ch. 61, L. '93, eff. 7-1-93.) IV-4 ANNEX V RHODE ISLAND BUSINESS CORPORATIONS ACT Sections 7-1.1-73 and 7-1.1-74 7-1.1-73. RIGHT OF SHAREHOLDERS TO DISSENT.--(a) Any shareholder of a corporation shall have the right to dissent from any of the following actions: (1) Any plan of merger or consolidation to which the corporation is a party, unless the corporation is the surviving corporation in a merger and the approval of its stockholders was not required by virtue of the provisions of either (S)7-1.1-67 or 7-1.1-68.1; or (2) Any acquisition which requires the approval of the shareholders under (S)7-1.1-70.1; or (3) Any sale or exchange of all or substantially all of the property and assets of a corporation which requires the approval of the shareholders under (S)7-1.1-72. (b) A shareholder may not dissent as to less than all of the shares registered in his or her name which are owned beneficially by him or her. A nominee or fiduciary may not dissent on behalf of any beneficial owner as to less than all of the shares of the owner registered in the name of the nominee or fiduciary. (c) Notwithstanding the foregoing, unless otherwise provided in the articles of incorporation of the issuing corporation, there shall be no right to dissent for the holders of the shares of any class or series of stock which, as of the date fixed to determine the stockholders entitled to receive notice of the proposed transaction (or a copy of the agreement of merger under (S)7-1.1- 68.1), were: (1) Registered on a national securities exchange or included as national market securities in the national association of securities dealers automated quotations system or any successor national market system; or (2) Held of record by not less than two thousand (2,000) stockholders. 7-1.1-74. RIGHTS OF DISSENTING SHAREHOLDERS.--(a) Any shareholder electing to exercise the right of dissent shall file with the corporation, prior to or at the meeting of shareholders at which the proposed corporate action is submitted to a vote, a written objection to the proposed corporate action. If the proposed corporate action be approved by the required vote and the shareholder shall not have voted in favor thereof, the shareholder may, within ten (10) days after the date on which the vote was taken, or if a corporation is to be merged without a vote of its shareholders into another corporation, any of its shareholders may, within fifteen (15) days after the plan of the merger shall have been mailed to the shareholders, make written demand on the corporation, or, in the case of a merger of consolidation, on the surviving or new corporation, domestic or foreign, for payment of the fair value of the shareholder's shares, and, if the proposed corporate action is effected, the corporation shall pay to the shareholder, upon surrender of the certificate or certificates representing the shares, the fair value thereof as of the day prior to the date on which the vote was taken approving the proposed corporate action, excluding any appreciation or depreciation in anticipation of the corporate action. Any shareholder failing to make demand within such ten (10) day period or such fifteen (15) day period, as the case may be, shall be bound by the terms of the proposed corporate action. Any shareholder making the demand shall thereafter be entitled only to payment as in this section provided and shall not be entitled to vote or to exercise any other rights of a shareholder. (b) No demand may be withdrawn unless the corporation shall consent thereto. If, however, the demand shall be withdrawn upon consent, or if the proposed corporate action shall be abandoned or rescinded or the shareholders shall revoke the authority to effect the action, or if, in the case of a merger, on the date of the filing of the articles of merger the surviving corporation is the owner of all the outstanding shares of the other corporations, domestic and foreign, that are parties to the merger, or if no demand or petition for the determination of fair value by a court shall have been made or filed within the time provided in this section, V-1 or if a court of competent jurisdiction shall determine that the shareholder is not entitled to the relief provided by this section, then the right of the shareholder to be paid the fair value of his or her shares shall cease and his or her status as a shareholder shall be restored, without prejudice to any corporate proceedings which may have been taken during the interim. (c) Within ten (10) days after the corporate action is effected, the corporation, or, in the case of a merger or consolidation, the surviving or new corporation, domestic or foreign, shall give written notice thereof to each dissenting shareholder who has made demand as herein provided, and shall make a written offer to each shareholder to pay for the shares at a specified price deemed by the corporation to be the fair value thereof. The notice and offer shall be accompanied by a balance sheet of the corporation the shares of which the dissenting shareholder holds, as of the latest available date and not more than twelve (12) months prior to the making of the offer, and a profit and loss statement of the corporation for the twelve (12) months' period ended on the date of the balance sheet. (d) If within thirty (30) days after the date on which the corporate action was effected the fair value of the shares is agreed upon between any dissenting shareholder and the corporation, payment therefor shall be made within ninety (90) days after the date on which the corporate action was effected, upon surrender of the certificate or certificates representing the shares. Upon payment of the agreed value, the dissenting shareholder shall cease to have any interest in the shares. (e) If within the period of thirty (30) days a dissenting shareholder and the corporation do not so agree, then the corporation, within thirty (30) days after receipt of written request for the filing from any dissenting shareholder given within sixty (60) days after the date on which the corporate action was effected, shall, or at its election at any time within the period of sixty (60) days may, file a petition in any court of competent jurisdiction in the county in this state where the registered office of the corporation is located praying that the fair value of the shares be found and determined. If, in the case of a merger or consolidation, the surviving or new corporation is a foreign corporation without a registered office in this state, the petition shall be filed in the county where the registered office of the domestic corporation was last located. If the corporation shall fail to institute the proceeding as herein provided, any dissenting shareholder may do so in the name of the corporation. All dissenting shareholders, wherever residing, shall be made parties to the proceeding as an action against their shares quasi in rem. A copy of the petition shall be served on each dissenting shareholder who is a resident of this state and shall be served by registered or certified mail on each dissenting shareholder who is a nonresident. Service on nonresidents shall also be made by publication as provided by law. The jurisdiction of the court shall be plenary and exclusive. All shareholders who are parties to the proceeding shall be entitled to judgment against the corporation for the amount of the fair value of their shares. The court may, if it so elects, appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have such power and authority as shall be specified in the order of their appointment or an amendment thereof. The judgment shall be payable only upon and concurrently with the surrender to the corporation of the certificate or certificates representing the shares. Upon payment of the judgment, the dissenting shareholder shall cease to have any interest in the shares. (f) The judgment shall include an allowance for interest at such rate as the court may find to be fair and equitable in all circumstances, from the date on which the vote was taken on the proposed corporate action to the date of payment. (g) The costs and expenses of any proceeding shall be determined by the court and shall be assessed against the corporation, but all or any part of the costs and expenses may be apportioned and assessed as the court may deem equitable against any or all of the dissenting shareholders who are parties to the proceeding to whom the corporation shall have made an offer to pay for the shares if the court shall find that the action of the shareholders in failing to accept the offer was arbitrary or vexatious or not in good faith. The expenses shall include reasonable compensation for and reasonable expenses of the appraisers, but shall exclude the fees and expenses of counsel for and experts employed by any party; but if the fair value of the shares as V-2 determined materially exceeds the amount which the corporation offered to pay therefor, or if no offer was made, the court in its discretion may award to any shareholder who is a party to the proceeding such sum as the court may determine to be reasonable compensation to any expert or experts employed by the shareholder in the proceeding. (h) Within twenty (20) days after demanding payment for his or her shares, each shareholder demanding payment shall submit the certificate or certificates representing his or her shares to the corporation for notation thereon that the demand has been made. His or her failure to do so shall, at the option of the corporation, terminate his or her rights under this section unless a court of competent jurisdiction, for good and sufficient cause shown, shall otherwise direct. If shares represented by a certificate on which notation has been so made shall be transferred, each new certificate issues therefor shall bear similar notation, together with the name of the original dissenting holder of the shares, and a transferee of the shares shall acquired by the transfer no rights in the corporation other than those for which the original dissenting shareholder had after making demand for payment of the fair value thereof. (i) Shares acquired by a corporation pursuant to payment of the agreed value therefor or to payment of the judgment entered therefor, as in this section provided, may be held and disposed of by the corporation as in the case of other treasury shares, except that, in the case of a merger or consolidation, they may be held and disposed of as the plan of merger or consolidation may otherwise provide. V-3 ANNEX VI PROVIDENCE JOURNAL COMPANY CABLE DIVISION SALE BONUS PLAN 1. PURPOSE. The purpose of the Providence Journal Company Cable Division Sale Bonus Plan (the "Plan") is to maximize the cash flow of, and thereby to enhance the value of, the Cable Division (the "Cable Division") of the Providence Journal Company (the "Company") by providing an opportunity for its key officers to participate in significant incentives that will contribute to the enhancement of the Company's shareholder value. 2. ADMINISTRATION. The Plan will be administered by the Vice President of Human Resources of the Company (the "Administrator"), who shall not be a Participant in the Plan. The Administrator shall have authority to interpret the provisions of the 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 the Company (the "Executive Committee"), and to communicate to Plan Participants concerning the administration of the Plan. The Administrator, with the concurrence of the Chief Executive Officer, shall make recommendations for awards under the Plan to the Executive Committee. 3. REVIEW AND AUTHORIZATION. All recommendations for awards to be made by the Administrator pursuant to the provisions of this Plan are subject to the review and approval by the Executive Committee. 4. ELIGIBILITY TO RECEIVE AWARDS. Persons eligible to receive awards under the Plan shall be limited to those officers and other key executive employees of the Cable Division who are in positions in which their decisions, actions and counsel significantly affect the operation of the Cable Division. Employees eligible to receive awards under the Plan are referred to herein as "Participants". Participants will share in the Bonus Pool based upon a weighing of salary and years of service. A list of Participants, including the percentage of the bonus pool for which each such Participant is eligible, is attached hereto as Exhibit A. 5. BONUS POOL. A bonus pool of $2,100,000 will be established based upon the fourteen (14) Participants who are listed in Exhibit A as of , 1994. The bonus opportunity awards have been calculated based upon achieving the 1994 cash flow objective for the Cable Division of $123,600,000 (the "1994 Objective"). The size of the Bonus Pool shall be increased by 50% of the amount of the 1994 Objective that is achieved. 6. CONDITIONS. Any bonus award earned out of the Bonus Pool will be distributed to the Participants only upon all of the following conditions having been satisfied: (a) The closing of the sale, merger or other distribution of the Cable Division (the "Closing"). (b) The Participant remaining in the employment of the Cable Division or the Company through the date of the Closing. (c) Comparable results with respect to the 1995 cash flow objective of the Cable Division (the "1995 Objective"). 7. GENERAL RESTRICTIONS. (a) This Plan supersedes any other award that the Participant may be eligible for pursuant to any other long-term incentive plan of the Company or the Cable Division. (b) Unforeseen changes, such as new statutes or regulations that positively or negatively affect the cash flow of the Cable Division, will be excluded from the calculation of the 1994 Objective or the 1995 Objective. VI-1 (c) Nothing in the Plan nor in any agreement entered into pursuant to the Plan shall confer upon any person the right to continue in the employment of the Company or the Cable Division or shall affect any right which the Company or the Cable Division may have to terminate the employment of such person. 8. AMENDMENT. The Board may terminate or amend the Plan at any time. The termination or any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect the Participant's rights under an award previously granted. VI-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL provides, in effect, that any person made a party to any action by reason of the fact that he is or was a Director, officer, employee or agent of New Providence Journal may and, in certain cases, must be indemnified by New Providence Journal against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorney's fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorney's fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of New Providence Journal. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the Director, officer, employee or agent is liable to New Providence Journal, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expenses, and, in a non-derivative action, to any criminal proceeding in which such person had reasonable cause to believe his conduct was unlawful. Article VIII of the New Providence Journal By-Laws in effect provides that New Providence Journal shall indemnify each person who is or was an officer or director of New Providence Journal to the fullest extent permitted by Section 145 of the DGCL. Section 10 of the New Providence Journal Certificate of Incorporation provides that no Director of New Providence Journal shall be personally liable to New Providence Journal or its stockholders for monetary damages for breach of fiduciary duty as a Director, except (i) for any breach of the duty of loyalty to New Providence Journal or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or knowing violations of law, (iii) for any transaction from which the director derived an improper personal benefit and (iv) for liability under Section 174 of the DGCL relating to certain unlawful dividends and stock repurchases. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Listed below are the exhibits which are filed as part of this registration statement (according to the numbers assigned to them in Item 601 of Regulation S-K). Each exhibit marked by a pound sign (#) is a management contract or compensatory plan. 2.1 Amended and Restated Merger Agreement dated as of November 18, 1994 by and among Continental Cablevision, Inc., Providence Journal Company, The Providence Journal Company, King Holding Corp. and King Broadcasting Company. Included as Annex I to the Joint Proxy Statement-Prospectus. 2.2 Contribution and Assumption Agreement (included as Exhibit B to Annex I). 2.3 Plan of Reorganization (included as Annex II). 3.1 Certificate of Incorporation of The Providence Journal Company (included as Exhibit I to Annex II). 3.2 Bylaws of The Providence Journal Company. . . To be filed by amendment. 4.1 [Credit Agreement dated as of , 1995, among The Providence Journal Company and certain of its Subsidiaries as Guarantors and for itself and certain financial institutions named therein.] . . . To be filed by amendment. 4.2 Rights Agreement dated as of February 1, 1995 between The Providence Journal Company and The First National Bank of Boston, as Rights Agent. . . To be filed by amendment. 5 Opinion of Edwards & Angell. . . To be filed by amendment. 8 Opinion of Edwards & Angell regarding certain tax matters. . . To be filed by amendment.
II-1 10.1 Incentive Stock Units Plan as amended and restated on December 31, 1993. Filed herewith as Exhibit 10.1.# 10.2 Form of Restricted Stock Unit Grant Agreement. Filed herewith as Exhibit 10.2.# 10.3 1994 Stock Option Plan (Employee). Filed herewith as Exhibit 10.3.# 10.4 1994 Stock Option Plan (Director). Filed herewith as Exhibit 10.4.# 10.5 Form of Non-Qualified Stock Option Agreement. Filed herewith as Exhibit 10.5.# 10.6 Form of Change of Control Agreement. Filed herewith as Exhibit 10.6.# 10.7 Cable Division Sale Bonus Plan (included as Annex VI). 10.8 Stock Purchase Agreement dated as of January , 1995 between Providence Journal Company and Kelso Investment Associates IV, L.P., Kelso Partners IV, L.P. and Kelso Equity Partners II, L.P., Filed herewith as Exhibit 10.8. 10.9 Stock Purchase Agreement dated as of , 1995 between Colony Communications, Inc. and Copley Press Electronics Company. . . To be filed by amendment. 10.10 Voting Agreement (included as Exhibit C to Annex I). 10.11 Registration Rights Amendment. . . To be filed by amendment. 21 Subsidiaries of Providence Journal Company. Filed herewith as Exhibit 21. 23.1 Consent of Edwards & Angell. . . To be contained in the opinion of Edwards & Angell to be filed by amendment. 23.2 Independent Auditors' Consent and Report on Schedule of KPMG Peat Marwick LLP. Filed herewith as Exhibit 23.2. 23.3 Independent Auditors' Consent of Deloitte & Touche LLP. Filed herewith as Exhibit 23.3. 23.4 Independent Auditors' Consent of Coopers & Lybrand LLP. Filed herewith as Exhibit 23.4. 23.5 Consent of Bear Stearns & Co. . . To be filed by amendment. 24 Power of Attorney. . . Filed herewith as Page II-4. 27 Financial Data Schedule. Filed herewith as Exhibit 27. 99.1 Financial Statement Schedule Report on Schedule by Coopers & Lybrand LLP 99.2 Schedule II Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Directors, officers and controlling persons of New Providence Journal pursuant to the foregoing provisions, or otherwise, New Providence Journal has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by New Providence Journal of expenses incurred or paid by a Director, officer or controlling person of New Providence Journal in the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person in connection with the securities being registered, New Providence Journal will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. II-2 (c) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is in effective, and that, for purposes of determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement, relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering therein. (d) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment, all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PROVIDENCE, RHODE ISLAND, ON THE 27TH DAY OF JANUARY, 1995. The Providence Journal Company By: /s/ Stephen Hamblett --------------------------------- Stephen Hamblett Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE UNDERSIGNED OFFICERS AND DIRECTORS OF THE PROVIDENCE JOURNAL COMPANY, HEREBY SEVERALLY CONSTITUTE AND APPOINT STEPHEN HAMBLETT, TRYGVE E. MYHREN, JAMES F. STACK AND JOHN L. HAMMOND, AND EACH OF THEM, TO SIGN FOR HIM OR HER, AND IN HIS OR HER NAME IN THE CAPACITY INDICATED BELOW, ALL AMENDMENTS TO SUCH REGISTRATION STATEMENT ON FORM S-4 RELATING TO CLASS A COMMON STOCK AND CLASS B COMMON STOCK OF THE PROVIDENCE JOURNAL COMPANY FOR THE PURPOSE OF REGISTERING SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO THE PLAN OF REORGANIZATION AND THE MERGER AND RELATED TRANSACTIONS DESCRIBED HEREIN, HEREBY RATIFYING AND CONFIRMING OUR SIGNATURES AS THEY MAY BE SIGNED BY OUR ATTORNEYS TO SUCH REGISTRATION STATEMENTS AND ANY AND ALL AMENDMENTS THERETO. SIGNATURE TITLE DATE --------- ----- ---- /s/ Stephen Hamblett Director; Chairman January 27, - ------------------------------------- of the Board and 1995 STEPHEN HAMBLETT Chief Executive Officer (principal executive officer) /s/ James F. Stack Director and Chief January 27, - ------------------------------------- Financial Officer 1995 JAMES F. STACK (principal financial officer) /s/ Harry Dyson Director and January 27, - ------------------------------------- Treasurer 1995 HARRY DYSON (principal accounting officer) II-4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- EXHIBITS TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- PROVIDENCE JOURNAL (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX
PAGE ---- 2.1 Amended and Restated Merger Agreement dated as of November 18, 1994 by and among Continental Cablevision, Inc., Providence Journal Company, The Providence Journal Company, King Holding Corp. and King Broadcasting Company. Included as Annex I to the Joint Proxy Statement-Prospectus. 2.2 Contribution and Assumption Agreement (included as Exhibit B to Annex I). 2.3 Plan of Reorganization (included as Annex II). 3.1 Certificate of Incorporation of The Providence Journal Company (included as Exhibit I to Annex II). 3.2 Bylaws of The Providence Journal Company. . . To be filed by amendment. 4.1 [Credit Agreement dated as of , 1995, among The Providence Journal Company and certain of its Subsidiaries as Guarantors and for itself and certain financial institutions named therein.] . . . To be filed by amendment. 4.2 Rights Agreement dated as of February 1, 1995 between The Providence Journal Company and The First National Bank of Boston, as Rights Agent. . . To be filed by amendment. 5 Opinion of Edwards & Angell. . . To be filed by amendment. 8 Opinion of Edwards & Angell regarding certain tax matters. . . To be filed by amendment. 10.1 Incentive Stock Units Plan as amended and restated on December 31, 1993. Filed herewith as Exhibit 10.1.# 10.2 Form of Restricted Stock Unit Grant Agreement. Filed herewith as Exhibit 10.2.# 10.3 1994 Stock Option Plan (Employee). Filed herewith as Exhibit 10.3.# 10.4 1994 Stock Option Plan (Director). Filed herewith as Exhibit 10.4.# 10.5 Form of Non-Qualified Stock Option Agreement. Filed herewith as Exhibit 10.5.# 10.6 Form of Change of Control Agreement. Filed herewith as Exhibit 10.6.# 10.7 Cable Division Sale Bonus Plan (included as Annex VI). 10.8 Stock Purchase Agreement dated as of January , 1995 between Providence Journal Company and Kelso Investment Associates IV, L.P., Kelso Partners IV, L.P. and Kelso Equity Partners II, L.P., Filed herewith as Exhibit 10.8. 10.9 Stock Purchase Agreement dated as of , 1995 between Colony Communications, Inc. and Copley Press Electronics Company. . . To be filed by amendment. 10.10 Voting Agreement (included as Exhibit C to Annex I). 10.11 Registration Rights Amendment. . . To be filed by amendment. 21 Subsidiaries of Providence Journal Company. Filed herewith as Exhibit 21. 23.1 Consent of Edwards & Angell. . . To be contained in the opinion of Edwards & Angell to be filed by amendment. 23.2 Independent Auditors' Consent and Report on Schedule of KPMG Peat Marwick LLP. Filed herewith as Exhibit 23.2. 23.3 Independent Auditors' Consent of Deloitte & Touche LLP. Filed herewith as Exhibit 23.3. 23.4 Independent Auditors' Consent of Coopers & Lybrand LLP. Filed herewith as Exhibit 23.4. 23.5 Consent of Bear Stearns & Co. . . To be filed by amendment. 24 Power of Attorney. . . Filed herewith as Page II-4.
PAGE ---- 27 Financial Data Schedule. Filed herewith as Exhibit 27. 99.1 Financial Statement Schedule Report on Schedule by Coopers & Lybrand LLP 99.2 Schedule II Valuation and Qualifying Accounts
EX-10.1 2 INCENTIVE STOCK UNITS EXHIBIT 10.1 PROVIDENCE JOURNAL COMPANY INCENTIVE STOCK UNITS PLAN (Amended Restatement - December 31, 1993) ------------------ 1. PURPOSE ------- The purpose of this Plan is to enable the Providence Journal Company (Company) to attract and retain persons of outstanding competence and to promote the stockholder point of view among key employees of the Company and members of its Board of Directors. 2. ADMINISTRATION OF THE PLAN -------------------------- The Plan shall be administered by the Compensation Committee (Committee) as appointed by the-Board of Directors of the Company. 3. ELIGIBILITY OF EMPLOYEES AND DIRECTORS -------------------------------------- The Committee shall (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 Company's stock for the purpose of this Plan; (f) determine an appropriate interest rate for installment payments; and (g) approve purchase of Stock Units through the voluntary deferral of compensation. 4. STOCK UNIT ACCOUNTS ------------------- The Committee shall record in a stock units account with respect to each grantee the number of Stock Units awarded or purchased and their fair market value on the date of the award or purchase, such fair market value to be determined in accordance with Paragraph 6 herein. Whenever the Company shall declare and pay a dividend, whether in cash or stock, upon its outstanding Common Stock, there shall be credited to the account of each grantee the equivalent of such dividend with respect to all the Stock Units credited to his account. At the end of each calendar year, the total amount of dividend equivalents credited to each account shall be converted into additional Stock Units at the fair market (the fair market formula outlined in - ------------------------------------- deleted) value determined in accordance with Paragraph 6. ------- 5. DATE AND AMOUNT OF PAYMENT -------------------------- The amount to be paid to the grantee by the Company upon termina- 1 tion of grantee's participation in the Plan shall be the vested portion of the sum of (a) the excess, if any, of the total fair market value of the Stock Units awarded him on the date of payment over the fair market value of such Units as recorded in the Stock Units Account at date of grant(s); (b) the fair market value of the Stock Units on the date of payment resulting from conversion of dividends; and (c) any unconverted interim dividends credited to grantee. The date and method of payment and valuation shall be determined by this Committee The valuation shall coincide with the grantee's termination of employment, termination of service as a director, death, total disability or retirement, whichever occurs sooner. The amount payable may be installments not to exceed an overall period of ten years, or in one sum as determined by the Committee. Installment payouts shall earn interest on the unpaid balance as determined by the Committee. Special grantee requests for liquidation of vested stock units and payment, ----- for reasons other than indicated above, shall be reviewed by the Committee and subject to the sole discretion of the Executive Committee of the Board of Directors. A grantee initiating such a request must abstain from participating in any consideration or decision on the request. However, in no event will any request be entertained unless the grantee has achieved the age of 55, and in no event will the Committee permit liquidation, by special request, of more than twenty percent (20%) of the grantee's vested amount upon valuation in any calendar year. Valuation for purposes of determining the amount of the payment to be made pursuant to the preceding paragraph shall occur six months from the date the ---------- ------------- request was approved. Such payment shall be made immediately subsequent to ------------------------- such valuation. 6. FAIR MARKET VALUE ----------------- For purposes of the Plan, the fair market value of the Stock Units at the ------------------------------------------------------------------------- date of valuation for Payment and conversion purposes will be 100% of the ------------------------------------------------------------------------- fair market value of the shares of Common Stock of the Company determined by ---------------------------------------------------------------------------- reference to the most recent price offered by the Company to purchase shares ---------------------------------------------------------------------------- under the Quarterly Stock Repurchase Program of the Company, or if no such -------------------------------------------------------------------------- Program is in effect by reference to an appropriate measure of current ---------------------------------------------------------------------- market value as determined by the Committee. ------------------------------------------- 7. VESTING ------- The amount payable with respect to each Stock Units grant, including those which are credited as dividend equivalents, shall become vested at the rate of 20% for each calendar year of employment (not exceeding five) after the calendar year in which the Stock 2 Units grant was made or credited as dividend equivalents. Vesting shall be considered completed (100%) when Stock Units are purchased with deferred compensation and when payment results from grantee's death, total disability, retirement, or involuntary termination of employment subsequent --------------------------------------------------- to a change of control (as defined in employment related agreements with ------------------------------------------------------------------------ executive officers and in effect on January 1 1994). --------------------------------------------------- The increase in Stock Unit values resulting from the change in fair market value determination effective January 1, 1987 shall vest at a rate of 20% per calendar year and shall be considered completed (100%) when payments results from grantee's death or total disability. Vesting provisions shall not be applicable to non-employee grantees who are members of the Board of Directors. 8. CONVERSION ---------- Any grantee may elect, by written instructions to the Treasurer of the Company, to convert their vested Stock Unit Shares to fixed dollar deferred compensation beginning at age fifty-five (55) of up to 10% per year or such other rate as the Committee may approve. Such converted shares will earn interest at a rate determined by the Committee and will be payable as specified in paragraph 5. 9. BENEFICIARIES ------------- In the event of a grantee's death, the amount due under the terms of this Plan will be payable to beneficiary(s) designated under the Company's group life insurance; and if none, then to grantee's estate. Grantee may designate a different beneficiary in writing filed with the Treasurer of the Company. 10. AMENDMENT OR DISCONTINUANCE --------------------------- The Board of Directors reserves the right to amend or discontinue the Plan but not to the detriment of grants made prior to such amendment or discontinuance. 11. EFFECTIVE DATE -------------- This Plan as set forth herein shall be effective 12/31/93. -------- NOTE: The base value of unit awards will be changed so that the change, ----------------------------------------------------------------- effective December 31. 1993, in the method of determining fair market value --------------------------------------------------------------------------- contained in Paragraph 6, is neutral. ------------------------------------- 3 EX-10.2 3 RESTRICTED STOCK GRANT AGREEMENT EXHIBIT 10.2 PROVIDENCE JOURNAL COMPANY RESTRICTED STOCK UNIT GRANT AGREEMENT ------------------------------------- October 11, 1993 Grantee: - ------- Providence Journal Company (the "Company"), pursuant to its Restricted Stock Unit Plan (the "Plan"), hereby grants to you, ___________________ an award of ____ Restricted Stock Units ("RSUs") under the Plan, on the following terms and conditions: 1. Value. Each RSU will be deemed to be equivalent for valuation purposes ----- to (and shall be convertible into, subject to netting, as hereinafter provided) one (1) share of Class A Common Stock of the Company (or in the discretion of the Company's Executive Committee, one (1) voting trust certificate representing ownership of one (1) share of Class A Common Stock). Such shares or voting trust certificates are herein referred to as the "Shares". 2. Vesting. The grant herein provided is subject to forfeiture prior to ------- vesting as provided herein. You shall become fully vested with regard to your grant of RSUs: - (a) On the third anniversary of the date hereof so long as you have continuously been an employee of the Company, a subsidiary or a successor thereto to that anniversary date; or (b) Prior to that third anniversary date if you shall die or become totally disabled, or if your employment shall be involuntarily terminated by the Company, a subsidiary or a successor employer other than for cause ("total disability" and "cause" shall have the meanings given to them in the employment policies and other benefit plans of the Company). Also, if you shall retire prior to that third anniversary date in accordance with the retirement policies of your then employer, your grant of RSUs will vest on the date of retirement on a proportionate basis determined by dividing the number of days of employment after the date hereof by 1,095. 3. Forfeiture. Your grant of RSUs hereunder shall be forfeited if your ---------- employment by the company, a subsidiary or a successor employer ceases for other than the reasons specified in Section 2(b), above. RSUs which do not vest at retirement under the proportionate vesting provisions of Section 2, shall be 1 forfeited. 4. Dividend Accruals. Prior to vesting, the value of your RSU grant shall ----------------- be increased by an amount equal to the number of Shares you will be entitled to receive upon full vesting times the dollar amount of per share dividends declared and paid on the Class A Common Stock of the Company from the date hereof to the date of vesting. 5. Transfer Prohibited. Except to the extent you may sell Shares after ------------------- vesting, neither your RSUs nor any of your rights, privileges and benefits under the Plan or this Agreement may be transferred, sold, assigned, pledged or hypothecated by you, except at your death by will or the laws of descent and distribution. 6. Conversion/Payment at Vesting. Upon vesting, or as soon thereafter as ----------------------------- is practical, your RSU account, including dividend equivalency accruals, will be valued, based on the then market value of Shares. You will then receive, in actual Shares, the value of that account, after deducting all applicable withholding and other taxes. Fractional Share entitlements will be paid in cash. 7. Deferral. Notwithstanding the foregoing provisions, you will have the -------- opportunity to voluntarily defer payout at vesting and the resulting receipt of Shares (and fractional cash entitlements) by filing a written election with the Company prior to the commencement of the year in which vesting is expected to occur. The written election must state the date to which deferral is to be made. The provisions of Section 4 shall continue to apply during the deferral period after the originally scheduled vesting date. 8. Recapitalizations, Etc. If any change is made in the Shares into which ---------------------- RSUs are to be converted (through mergers, consolidation, reorganization, recapitalization, stock split or stock dividend, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), appropriate adjustments shall be made by the Executive Committee of the Board of Directors of the Company as to the number of RSUs in your account (and thus the number of Shares to which you shall be entitled upon vesting). Adjustments shall be made on the basis of the value of the Shares immediately prior to the time of such a change. 9. Successors to Assume. If as a result of a reorganization, business -------------------- combination or like transaction, a corporation or other entity other than the Company or a subsidiary is to employ you, the Company will require such successor employer to assume the Company's obligations hereunder and to provide shares of its common stock for issuance to you upon vesting pursuant hereto, appropriate adjustments in the number of shares to be made as provided in Section 8. 10. Restrictions on Shares. The company contemplates that ---------------------- 2 the issuance of the Shares to which you will be entitled pursuant to this Agreement will not be registered under the Securities Act of 1933 (and applicable state securities laws), but instead will be issued in a private placement transaction. Accordingly, you hereby agree, and will be asked to reconfirm at the time of vesting: (a) that you will acquire the Shares to be issued to you for investment and not with a view to resale or distribution; and (b) that you will sell, assign, transfer or pledge the Shares only either (i) upon receipt by you and the Company of an opinion of counsel for the Company (or its successor) or of other counsel satisfactory to the Company (or such successor) that your proposed disposition or pledge of the Shares may be effected without registration under said Securities Act of 1933 and said applicable state securities laws or (ii) a registration statement covering your disposition transaction has become effective and it then in effect. 11. Legend and Share Certificates. Each certificate representing Shares ----------------------------- of the Company issued in accordance with the terms of this Agreement shall be stamped with a legend in substantially the following form: "These Shares were issued in a private placement without registration under the Securities Act of 1933, and the transfer of the shares of stock represented by the within certificate is prohibited, except under certain conditions, as described in a Restricted Stock Unit Grant Agreement between the Company and the holder hereof, a copy of which is on file in the office of the Company." 12. Plan Administration and Terms. This Agreement is subject to the terms ----------------------------- and conditions of the Plan itself, a copy of which has been provided to you. Plan administration will be under the direction of the Executive Committee of the Company's Board of Directors. If the Company (or any successor employer does not have an Executive Committee, administrative direction (and the power to act under Section 13, below) shall be the responsibility of the Board of Directors of the Company or such successor (which responsibility may be delegated in turn to a Compensation or like committee). 13. Disputes. Any dispute or disagreement which shall arise under, or as -------- a result of, or pursuant to, this Agreement shall be determined by the Executive Committee of the Board of Directors of the Company in its absolute and uncontrolled discretion, and any such determination or any other determination by the Board of Directors under or pursuant to this Agreement and any interpretation by the Executive Committee of the terms of this Agreement, shall be final, binding and conclusive on all persons affected thereby. 14. Specific Performance. It is agreed that the parties -------------------- 3 hereto may have specific performance as a remedy for the enforcement hereof. 15. Amendment; Governing Law. This Agreement may be altered, amended or ------------------------ terminated only by written instrument signed by each of the parties hereto, or their successors, executors, administrators or assigns, and this Agreement shall be governed by the laws of the State of Rhode Island. 16. Conflict. In the event of any conflict between the provisions of this -------- Agreement and the Charter or By-laws of the Company, the provisions of this Agreement shall be deemed to govern. 17. Direction to Personal Representatives. You agree that in any last ------------------------------------- will and testament prepared after the date hereof you will direct your executor or personal representative to carry out all of the provisions of this Agreement, but failure so to direct shall in no way affect the validity of this Agreement. 18. Successors. This Agreement shall be binding upon shall inure to the ---------- benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns, and the parties hereto and said heirs, executors, administrators, personal representatives, successors and assigns agree to execute any instrument which may be necessary or proper to carry out the purposes and intent hereof. 19. Notices. Any notice which either party hereto may be required or ------- permitted to give to the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed as follows: if to the Company, to its Chairman, 75 Fountain Street, Providence, Rhode Island 02902, or at such other address as the Company by notice to you may designate in writing from time to time; or if to you, at your address as shown on the records of the Company, or at such other address as you, by notice to the Chairman of the Company, may designate in writing from time to time. Very truly yours, PROVIDENCE JOURNAL COMPANY By:______________________________ The undersigned accepts the foregoing grant and agrees to all the terms and conditions thereof. Dated:__________________, 1993 ___________________________________ Grantee 4 EX-10.3 4 EMPLOYEE OPTION PLAN EXHIBIT 10.3 PROVIDENCE JOURNAL COMPANY -------------------------- 1994 STOCK OPTION PLAN ---------------------- 1. Purpose ------- The purpose of the 1994 Stock Option Plan (the "Plan") of Providence Journal Company (the "Company") is to attract and retain high quality key employees and to promote both the long-term success of and shareholder interests in the Company. The Plan is intended to provide long-term incentive compensation and share ownership opportunities to selected key employees. The Company believes the dynamics of a plan focused on increasing shareholder value provide participants with a significant incentive to contribute to the success of the Company. 2. Term ---- The Plan shall be effective as of October 1, 1994 and shall remain in effect until the earlier of five (5) years from the effective date or termination of the plan by the Board of Directors of the Company (the "Board"). The Plan shall be subject to approval by the shareholders of the Company. If that approval has not been obtained by June 30, 1995, the Plan shall be terminated, and any option grants therefore made shall be void. After termination of the Plan, no future grants may be made, but, subject to the preceding sentence, previously made grants shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the Plan. 3. Administration -------------- a. The Committee ------------- The Plan shall be administered by a committee (the "Committee") which shall be the Executive Committee of the Board or any other committee appointed by the Board consisting of two or more non-employee Directors, each of whom is both (1) qualified to administer this Plan as contemplated by Rule 16b-3 under the 1 Securities Exchange Act of 1934, as amended (the "Act"), and (2) considered to be an "outside director" as contemplated by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). b. Authority of the Committee -------------------------- The Committee shall have full and exclusive power, except as not permitted by law and subject to the provisions of this Plan, to select the participants in the Plan, determine the sizes of grants of options, establish the terms and conditions of such option grants, amend the terms and conditions of any outstanding option pursuant to Section 6 of the Plan, and otherwise make such determinations and/or interpretations and to establish such procedures which may be necessary or advisable for the administration of the Plan. 4. Eligibility ----------- Key employees of the Company shall be eligible to receive grants under the Plan. Recipients of grants are deemed to be "Participants" in the Plan. "Company" includes any wholly-owned or majority-owned direct or indirect subsidiary of the Company and any other entity that is directly or indirectly controlled by the Company or in which the Company has a significant equity interest (as determined by the Committee). 5. Shares Subject to the Plan -------------------------- Subject to the provisions of Section 6, the stock subject to the Plan shall be shares of Class A Common Stock (the "Shares"). The total amount of Shares which may be issued under the Plan shall not exceed four thousand (4,000). Of these, no more than seven hundred fifty (750) Shares may be issued to any one individual. Shares may be authorized and unissued shares or treasury shares, as determined by the Committee, and fractional Shares shall be settled in cash. If any option granted under the Plan is canceled, terminates, expires or lapses for any 2 reason, any Shares subject to such option shall be returned to the Plan and shall be available for issuance under the Plan. In addition, any Shares which have been exchanged by a Participant as full or partial payment to the Company in connection with any grant under the Plan, shall be available for issuance under the Plan. In instances where a grant is settled in cash or any form other than Shares, then the Shares covered by these settlements shall not be deemed issued and shall remain available for issuance under the Plan. Any Shares that are issued by the Company as a result of the assumption or substitution of grants made by an acquired company shall not be counted against the number of Shares available for issuance under the Plan. 6. Adjustments and Reorganizations ------------------------------- The Committee may make such adjustments as it deems appropriate to meet the intent of the Plan in the event of changes that impact the Company's Share price or Share status, provided that any such actions are consistently and equitably applicable to all affected Participants and are otherwise consistent with the provisions of the Plan. 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 the Company's assets to its shareholders, or other change in the structure of the Company affecting its Shares, such appropriate adjustments shall be made (i) in the aggregate number and class of Shares which may be issued under the Plan pursuant to Section 5, and (ii) the number and class of and/or price of Shares subject to outstanding options granted under the Plan, as deemed appropriate by the Committee in its discretion, to prevent the dilution or enlargement of rights to any Participant. 7. Stock Options ------------- a. Grants of Stock Options ----------------------- Stock options granted pursuant to the Plan represent a right to purchase a specified number of Shares during a specified period and at a specified price as 3 determined by the Committee at the time of grant, subject to the terms and provisions of the Plan and provided that the purchase price be not less than 100% of Fair Market Value on the date of grant. Subject to the provisions of Section 5, the Committee shall have discretion in determining the number of options and Shares subject to such options, as well as the time of grant, provided, however, that no such grants be made after the fifth anniversary of the effective date of this Plan. b. Vesting of Options ------------------ Options shall vest at such times and under such terms and conditions as determined by the Committee. The Committee shall have the authority to accelerate the vesting of any stock options as it deems appropriate for the Plan or the Company. c. Exercise of Options ------------------- Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. d. Payment ------- The option exercise price shall be paid in full at the time of exercise of the option in cash or by check or, as may be provided by the Committee at any time, by delivery of Shares owned by the Participant in partial or full payment. e. Call Provision -------------- At the time of grant, the Committee may, in its discretion, subject the Shares underlying the options to a mandatory call feature and a limitation upon the amount paid in settlement of such stock options in the event of the exercise of such call feature. 4 8. Fair Market Value ----------------- Fair Market Value for all purposes under the Plan shall mean the average of the high and low prices of the Company's Shares as traded on an applicable stock exchange or in an established over-the-counter trading market for the date in question, provided that if the Shares were not traded on that day, the average of the high and low prices on the previous day are used to mean Fair Market Value. In the event that the Shares of the Company are not publicly traded, in the discretion of the Committee Fair Market Value shall be determined (i) by reference to the most recent prices paid for Shares by buyers at arms-length transactions, (ii) by reference to the most recent appraisal of the value of the Shares of the Company provided by an independent valuation firm or (iii) by such other appropriate means as the Committee shall deem appropriate. 9. Transferability --------------- No option granted pursuant to the Plan shall be assignable, alienable, saleable or otherwise transferable other than by will or by the laws of descent and distribution, pursuant to a qualified domestic relation order (as defined by the Code), or unless otherwise determined by the Committee. If a participant shall die, the executor or administrator of the participant's estate or a transferee of the option pursuant to a will or the laws of descent and distribution shall have the right to exercise the option in lieu of the participant. 10. Termination of Employment ------------------------- The Committee shall, in its discretion, determine, in the event of a termination of employment that is voluntary or involuntary, for cause or not for cause, or due to death, disability or retirement, the terms and conditions of the treatment of any outstanding stock options granted under the Plan. Such terms and conditions will be set forth at the time of grant and may provide that the Committee retains the right to amend such provisions. 5 11. Change of Control ----------------- a. Definition ---------- "Change of Control" shall mean a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) promulgated under the Act whether or not the Company is then subject to such reporting requirements. Further, without limiting the generality of the foregoing, such a Change of Control shall be deemed to have occurred if any of the following events takes place. (i) The Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; (ii) During any period of twenty-four consecutive months, individuals who at the beginning of such period constitute the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or (iii) At any time when the outstanding voting securities of the Company are required to be registered under Section 12 of the Act, any "person" (as such term is used in Section 13(d) and 14(d) of the Act) is or becomes the "beneficial owner," as defined in Rule 13d-3 under the Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, this clause (iii) shall not apply -------- ------- to the acquisition by a person of securities of the Company representing 20% or more, but not 6 in excess of 50% of the combined voting power of the Company's then outstanding securities if such acquisition of securities has been approved by a vote of at least two thirds of the directors in office just prior to the issuance or sale of securities to such person. For purposes of this paragraph (iii), the term "person" shall exclude any person or group who on the date hereof is the beneficial owner, directly or indirectly, of securities representing 10% or more of the combined voting power of the Company's presently outstanding securities. Notwithstanding the foregoing, in no event shall the consummation of the spin-off reorganization approved by the Board of Directors of the Company on August 24, 1993, constitute a Change of Control for purposes of this Agreement (the "Spinoff Reorganization"). b. Exercise and Vesting Options ---------------------------- Unless deemed otherwise by the Committee, all options outstanding under this Plan at the time of a Change of Control shall immediately become vested and exercisable, notwithstanding the provisions of Section 7 to the contrary, and will be exercisable until the end of their term as set at time of grant. 12. Agreements ---------- Grants under this Plan shall be evidenced by agreements that set forth the terms, conditions and limitations for each grant which may include the term of grant, the provisions applicable in the event the Participant's employment terminates and the Company's authority to unilaterally or bilaterally amend or modify any grant. 13. Plan Amendment -------------- The Committee may, at any time as it deems necessary, terminate, amend or modify the Plan. However, no such amendment, modification, or termination of the Plan may be made without the approval of the shareowners of the Company, if such approval is required by the Code or by the Act or by any other regulatory body with appropriate 7 jurisdiction. 14. Tax Withholding --------------- The Company shall have the authority to deduct or withhold from any settlement of a grant made under the Plan an amount sufficient to satisfy federal, state, and local taxes required by law to be withheld. At the discretion of the Committee, a Participant may be permitted to pay to the Company the withholding amount in the form of cash or check, or previously owned Shares under such conditions as may be prescribed by the Committee, and such Shares shall be valued at the Fair Market Value as of the settlement date of the applicable grant. Further, a Participant may elect, subject to the approval of the Committee, to satisfy the withholding requirements, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is determined equal to an amount to satisfy federal, state and local tax withholding requirements. 15. Future Rights ------------- Nothing in the plan shall interfere with or limit in any way the right of the Company to terminate any Participants' employment at any time, nor confer upon any Participant any right to continue in the employment of the Company or to participate in any other benefit, severance or compensation plan provided by the Company. In addition, no person shall have the right to be selected to receive an option under the Plan, or having been selected, to be selected to receive a future option. 16. Governing Law ------------- The validity, construction and effect of the Plan and any actions taken or relating to the Plan and any and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Rhode Island and applicable federal law. 17. Rights as a Shareholder ----------------------- Except as otherwise provided in the grant agreement contemplated by Section 12 above, 8 a Participant shall have no rights as a shareholder of the Company, including rights to receive dividends on or to vote Shares subject to an option, until the Participant becomes the holder of record of the Shares underlying the option. 9 EX-10.4 5 DIRECTOR OPTION PLAN EXHIBIT 10.4 PROVIDENCE JOURNAL COMPANY -------------------------- 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN -------------------------------------------- 1. Purpose ------- The purpose of the 1994 Non-Employee Director Stock Option Plan (the "Plan") of Providence Journal Company (the "Company") is to attract and retain non- employees of high quality to serve as members of the Board of Directors of the Company (the "Board") and to promote both the long-term success of and shareholder interests in the Company. The Company believes the dynamics of a plan focused on increasing shareholder value will provide non-employee directors with a greater identity of interest between themselves and the shareholders of the Company. 2. Term ---- The Plan shall be effective as of October 1, 1994 and shall remain in effect until the earlier of five (5) years from the effective date or termination of the Plan by the Board. The Plan shall be subject to the approval by the shareholders of the Company. If that approval has not been obtained by June 30, 1995, the Plan shall be terminated, and any option grants theretofore made shall be void. After termination of the Plan, no future grants may be made, but, subject to the preceding sentence, previously made grants shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the Plan. 3. Plan Operation -------------- The Plan is intended to meet the requirements of Rule 16b-3(c)(2)(ii) adopted under the Securities Exchange Act of 1934 ("1934 Act") and accordingly is intended to be self-governing. To this end the Plan is intended to require no discretionary action by any administrative body with regard to any transaction under the Plan except as specified in Section 5(b) of the Plan. To the extent, if any, that any questions of interpretation arise, these shall be resolved by the Board. 1 4. Participation ------------- Participation under the Plan shall be limited to non-employee members of the Board. Participation shall be automatic and (1) any non-employee member of the Board as of October 1, 1994 shall receive an initial grant, and (2) any non-employee member of the Board as of October 1, 1995 and as of each subsequent October 1 (the "Grant Date") while the Plan is in effect, shall be a Participant (a "Participant") under the Plan and shall automatically receive a stock option grant as contemplated herein. If October 1 shall not be a business day, the Grant Date shall be the first business day following. 5. Shares Subject to the Plan -------------------------- a. Number of Shares ---------------- Subject to the provisions of Section 5(b) below, the stock subject to the Plan shall be shares of Class A Common Stock (the "Shares"). The total amount of Shares which may be issued under the Plan shall not exceed two hundred fifty (250). Shares may be authorized and unissued shares or treasury shares, as determined by the Board. If any option granted under the Plan is cancelled, terminates, expires or lapses for any reason, any Shares subject to such option shall again be returned to the Plan and shall be available for issuance under the Plan. In addition, any Shares which have been exchanged by a Participant as full or partial payment to the Company in connection with any grant under the Plan, shall be available for issuance under the Plan. b. Adjustments ----------- The Board, as it deems appropriate to meet the intent of the Plan, may make such adjustments to the number and kind of Shares available under the Plan and to any outstanding stock options, provided such adjustments are consistent with the effect on other shareholders arising from any corporate restructuring or similar action. Such actions may include, but are not limited to, any stock dividend, stock split, 2 combination or exchange of Shares, merger, consolidation, recapitalization, spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other change affecting Shares. The Board may also, when similarly appropriate, make such adjustment in the exercise price of outstanding stock options as it deems necessary to preserve the rights of Participants under the Plan. 7. Stock Options ------------- a. Granting of Stock Options ------------------------- Each Participant shall be granted a stock option to purchase five (5) Shares as of October 1, 1994 and on each subsequent Grant Date that the Plan is in effect. b. Exercise Price -------------- The purchase price for each Share covered by the initial stock option grant shall be $7,700; the purchase price for each Share covered by a subsequent stock option grant shall be 100% of Fair Market Value on the Grant Date. c. Payment ------- The option exercise price shall be paid in full at the time of exercise of the option in cash or by check or, by delivery of Shares owned by the Participant in partial or full payment. d. Duration and Exercisability --------------------------- Each stock option shall have a term of ten years and shall become initially exercisable, (except earlier as provided in Section 10) on the first anniversary of grant. Notwithstanding the foregoing, in the event of a Participant's death or ceasing to be a member of the Board as a result of disability, the stock option shall immediately become fully exercisable. 3 e. Termination ----------- When a Participant ceases to be a member of the Board, for whatever reason, each vested stock option, or portion thereof, held by such Participant shall continue to be exercisable for a period of three years or until the end of the original term, if sooner. Any non- vested stock option, or portion thereof, held by such Participant shall be cancelled as of the Participant's date of termination of Board service. f. Call Provision -------------- At the time of grant, the Board may, in its discretion, subject the Shares underlying the stock options to a mandatory call feature and a limitation upon the amount paid in settlement of such stock options in the event of the exercise of such call feature. g. Documentation of Grants ----------------------- Stock options shall be evidenced by written agreements or such other appropriate documentation as the Board shall prescribe. 8. Fair Market Value ----------------- Fair Market Value for all purposes under the Plan shall mean the average of the high and low prices of the Company's Shares as traded on an applicable stock exchange or in an established over-the-counter trading market for the date in question, provided that if the Shares were not traded on that day, the average of the high and low prices on the previous day are used to mean Fair Market Value. In the event that the Shares of the Company are not publicly traded, in the discretion of the Board Fair Market Value shall be determined (i) by reference to the most recent prices paid for Shares by buyers at arms-length transactions, (ii) by reference to the most recent appraisal of the value of the Shares of the Company provided by an independent valuation firm or (iii) by such other appropriate means as the Committee shall deem appropriate. 4 9. Transferability --------------- No option granted pursuant to the Plan shall be assignable, alienable, saleable or otherwise transferable other than by will or by the laws of descent and distribution, pursuant to a qualified domestic relation order (as defined by the Code), or unless otherwise determined by the Committee. If a Participant shall die, the executor or administrator of the Participant's estate or a transferee of the option pursuant to a will or the laws of descent and distribution shall have the right to exercise the option in lieu of the Participant. 10. Change of Control ----------------- a. Definition ---------- "Change of Control" shall mean a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) promulgated under the Act whether or not the Company is then subject to such reporting requirements. Further, without limiting the generality of the foregoing, such a Change of Control shall be deemed to have occurred if any of the following events takes place: (i) The Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; (ii) During any period of twenty-four consecutive months, individuals who at the beginning of such period constitute the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or 5 (iii) At any time when the outstanding voting securities of the Company are required to be registered under Section 12 of the Act, any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner," as defined in Rule 13d- 3 under the Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, -------- ------- this clause (iii) shall not apply to the acquisition by a person of securities of the Company representing 20% or more, but not in excess of 50% of the combined voting power of the Company's then outstanding securities if such acquisition of securities has been approved by a vote of at least two thirds of the directors in office just prior to the issuance or sale of securities to such person. For purposes of this paragraph (iii), the term "person" shall exclude any person or group who on the date hereof is the beneficial owner, directly or indirectly, of securities representing 10% or more of the combined voting power of the Company's presently outstanding securities. Notwithstanding the foregoing, in no event shall the consummation of the spin-off reorganization approved by the Board of Directors of the Company on August 24, 1993, constitute a Change of Control for purposes of this Agreement (the "Spinoff Reorganization" ) . b. Exercise and Vesting of Options ------------------------------- All options outstanding under this Plan at the time of a Change of Control shall immediately become vested and exercisable, notwithstanding the provisions of Section 7 to the contrary, and will be exercisable until the end of their term as set at time of grant. 11. Plan Amendment -------------- The Board may suspend the Plan or amend the Plan if deemed to be in the best interests of the Company and its stockholders; provided, however, that (i) no such amendment 6 may impair any Participant's right regarding any outstanding stock option without his or her consent, and (ii) the Plan may not be amended more than once every six months, and only to the extent such amendment is permitted by Rule 16b(c)(2)(ii)(B), or its successor, under the 1934 Act. 12. Future Rights ------------- Neither the Plan, nor the granting of stock options nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a Participant for any period of time, or at any particular rate of compensation as a member of the Board. Nothing in this Plan shall in any way limit or effect the right of the Board or the shareholders of the Company to remove any Participant from the Board or otherwise terminate his or her service as a member of the Board. 13. Governing Law ------------- The validity, construction and effect of the Plan and any actions taken or relating to the Plan and any and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Rhode Island and applicable federal law. 14. Rights as a Shareholder ----------------------- A participant shall have no rights as a shareholder of the Company, including rights to receive dividends on or to vote Shares subject to an option, until the Participant becomes the holder of record of the Shares underlying the option. 7 EX-10.5 6 NON-QUALIFIED OPTION AGREEMENT EXHIBIT 10.5 PROVIDENCE JOURNAL COMPANY NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ Number of Purchase Price Expiration Shares Per Share Date ------ --------- ---- 9/30/04 This Agreement (the "Agreement") made this ____ day of _______, 1994 is made between PROVIDENCE JOURNAL COMPANY, a Rhode Island Corporation (the "Company") and _______________________________ (the "Optionee"). This Agreement confirms an award of a nonqualified stock option (the "Option") covering ___ shares of Class A Common Stock (or such other voting or non-voting shares as the Company may unilaterally substitute therefor) which has been granted to the Optionee under the Company's 1994 Stock Option Plan (the "Plan), a copy of which has been delivered to the Optionee. This award entitles the Optionee to purchase the shares covered by this Option at a price of $____________ per share. This Option has been granted for the purpose of encouraging the Optionee to acquire ownership in the Company as an incentive to advance the Company's interests and to continue in the Company's employ. This Option is subject to the terms and conditions of the Plan and to the Optionee's agreement to the terms and conditions set forth below. All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Plan. 1. OPTION PERIOD. This Option shall remain in effect until 9/30/2004, subject to either earlier expiration in the event that the Optionee's employment with the Company terminates prior to such date as provided for in Paragraph 3 of this Agreement or possible later expiration as a result of the Optionee's death as provided for in Paragraph 3(f) of this Agreement. 1 2. EXERCISE RIGHTS. Subject to Paragraph 1 and except as otherwise provided in Paragraph 3(e) and (f) of this Agreement, this Option cannot be exercised until 10/01/95 and then only to the extent permitted by the following schedule and the other terms and conditions governing this Option: Cumulative Maximum Number of Option Date Shares Purchasable ---- ------------------ 10/1/95 10/1/96 10/1/97 10/1/98 Except in the event of Optionee's death, purchase of any or all the shares covered by this Option must occur no later than the expiration date provided for in Paragraph 1 of this Agreement. 3. CONTINUED EMPLOYMENT. Except as may otherwise be provided by the Plan, this Option shall not be exercisable after: a. The Optionee's termination of employment for cause by the Company. The term "cause" for this purpose shall mean, as determined by the Committee, the intentional commission by Optionee of theft, embezzlement or other serious and substantial crimes against the Company, intentional wrongful engagement in "competitive activity" as determined by the Committee or intentional wrongful disclosure of confidential information of the Company which materially affects the Company. For purposes of this definition, no act or omission shall be considered to have been "intentional" unless it was not in good faith and Optionee had knowledge at the time that the act or omission was not in the best interest of the Company. Optionee shall not be deemed to have been terminated for "cause" hereunder unless and until there shall have been delivered to Optionee a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors of the Company then in office, at a meeting of the Board called and held for such purpose finding that, in the good faith opinion of the Board, Optionee committed an intentional act set forth above and specifying the particulars thereof in detail. Nothing herein shall limit the right of 2 Optionee or his beneficiaries to contest the validity or propriety of any such determination. b. The Optionee's voluntary termination of employment with the Company other than as provided for in sub-paragraph (c) which follows. c. The earlier of three years after the Optionee's normal retirement from the Company (or early retirement with Company consent), or the expiration date set forth in Paragraph 1, provided that this Option shall only be exercisable to the extent of the number of shares purchasable as of the date of the Optionee's retirement as provided under Paragraph 2 of this Agreement. d. The earlier of thirty days after the Company terminates the Optionee's employment for a reason other than for cause or the expiration date set forth in Paragraph 1, provided that this Option shall only be exercisable to the extent of the number of shares purchasable as of the date of the Optionee's termination of employment as provided under Paragraph 2 of this Agreement. e. The earlier of three years following the Optionee's termination of employment from the Company as a result of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), or the expiration date set forth in Paragraph 1 of this Agreement, and this Option shall be fully exercisable for the full number of shares covered hereby. f. One year following the Optionee's death while this Option is outstanding and irrespective of whether this option would have otherwise expired pursuant to this Agreement, and this Option shall be fully exercisable for the full number of shares covered hereby. Nothing contained in this Agreement shall confer on the Optionee any right to continue in the 3 employ of the Company or shall limit the Company's rights to terminate the Optionee at any time, provided, however, that nothing in this Agreement shall affect any other contractual rights existing between the Optionee and the Company. 4. PURCHASE OF SHARES. From time to time, but only to the extent this Option is then exercisable, the Optionee may purchase shares of Common Stock covered by this Option by delivering to the Company a signed notice of the Optionee's election to purchase a designated number of shares. The aggregate purchase price of the shares shall be paid in full at the time of exercise by delivery to the Company of cash and/or check. In lieu of part or all of the cash and/or check payment, the Optionee may pay the purchase price in full shares of the Company's Common Stock owned by the Optionee pursuant to procedures specified by the Company from time to time. If payment is made in whole or in part in Common Stock, the Fair Market Value on the date of exercise shall be credited against the purchase price. At the discretion of the Committee, option exercises may be settled in cash, without issuing or selling shares to the Optionee. 5. LEAVE OF ABSENCE. If the Optionee is officially granted a leave of absence for illness, military or governmental service or other reasons by the Company, for purposes of this Option, such leave of absence shall not be treated as termination of employment. 6. TRANSFERABILITY. This option shall not be transferable or assignable by the Optionee other than by will, the laws of descent and distribution, or pursuant to a domestic relations order as defined in the Code; provided, however, that the Committee may permit, subsequent to the grant of this Option, limited transferability so long as the Option continues to be subject to all the terms and conditions of this Agreement. 7. RIGHT OF REPURCHASE. The Company reserves the right to require the Optionee to sell to it the number of shares acquired through exercise of this Option if, either one year before or after such exercise, the Optionee has: 4 a. Disclosed, without prior written authorization from the Company, other than in an official capacity as part of the Optionee' s responsibilities for the Company, any confidential information or materials relating to the Company business; b. Violated any agreement with the Company regarding rights, title and interest in any idea, patentable or not, made or conceived by the Optionee or by the Optionee and others, in conjunction with your employment with the Company which relates to the actual or anticipated business research, or development work of the Company; or c. Acted in any other manner which is otherwise inimical to the Company, as determined by the Committee. The price per share to be paid by the Company for any such repurchase shall be the lower of the purchase price stipulated above or the Fair Market Value on the date preceding such purchase. 8. ACCELERATION OF EXERCISABILITY. Notwithstanding any other provision of this Agreement establishing the earliest date upon which the Employee may exercise his rights under this Option: a. This Option shall become immediately exercisable in full in the event of a "Change of Control", as defined herein. A "Change of Control" shall mean a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item or any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "1934 Act") whether or not the Company is then subject to such reporting requirements. Further, without limiting the generality of the foregoing, such a Change of Control shall be deemed to have occurred if any of the following events takes place: 5 (i) The Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; (ii) During any period of twenty-four consecutive months, individuals who at the beginning of such period constitute the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or (iii) At any time when the outstanding voting securities of the Company are required to be registered under Section 12 of the 1934 Act, any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial- owner," as defined in Rule 13d-3 under the 1934 Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, however, this clause (iii) shall not apply -------- ------- to the acquisition by a person of securities of the Company representing 20% or more, but not in excess of 50% of the combined voting power of the Company's then outstanding securities if such acquisition of securities has been approved by a vote of at least two thirds of the directors in office just prior to the issuance or sale of securities to such person. For purposes of this paragraph (iii), the term "person" shall exclude any person or group who on the date hereof is the beneficial owner, directly or indirectly, of securities representing 10% or more of the combined voting power of the Company's presently outstanding securities. Notwithstanding the foregoing, in no event shall the consummation of the spin-off reorganization approved by the Board of Directors of the Company on August 24, 1993, constitute a Change of Control for purposes of this 6 Agreement. (b) In the event of a dissolution or liquidation of the Company, or in the event of any corporate separation or division, including but not limited to, split-up, split-off, or spin-off, the Committee may, in its absolute discretion, take such action as it determines appropriate under the facts and;circumstances as then exist, including, without limitation, providing that one of the following alternatives shall apply to this Option: (i) The Employee shall have the right to exercise this Option at the Option price for the kind and amount of stock and other securities, property, cash, or any combination thereof receivable upon such dissolution, liquidation, or corporate separation or division by a holder of the number of shares for which this Option might have been exercised immediately prior to such dissolution, liquidation, or corporate separation or division; or (ii) In the alternative, this Option shall terminate as of a date to be fixed by the Committee; provided that not less than thirty (30) days written notice of the date so fixed shall be given to the Employee, who shall have the right, during the period of thirty (30) days preceding such termination to exercise this Option as to all the shares covered by it. 9. SECURITIES LAW COMPLIANCE. As a condition to the exercise in whole or in part of the Option hereby granted, each written note of election shall include a representation and warrant in writing to the Company that the shares purchased are not being acquired with a view to the distribution or resale thereof, except in compliance with the Securities Act of 1933 (the " 1933 Act"). No shares purchased upon exercise of the Option shall be sold unless and until the seller and the Company shall have received an opinion of the Company's counsel to the effect that the proposed sale has been registered under the 1933 Act (and applicable state registration laws) or may be effected without such registration pursuant to an exemption under the 1933 Act (and applicable state laws). No shares shall be purchased upon the exercise of this 7 Option unless and until any then applicable requirement of the Securities and Exchange Commission and any state having jurisdiction and of any exchanges upon which shares of the Common Stock may be listed or regulatory bodies governing trading of the Common Stock shall be complied with in full. 10. TAX WITHHOLDING. As condition to delivery by the Company of certificates for shares purchased upon exercise of all or any part of this Option, adequate provision, as determined by the Company, shall be made for the payment required by law to satisfy any federal, state or local tax withholding obligations. The Committee may permit shares purchased under this Option to be used to satisfy such tax withholding obligations, with such shares valued using the Fair Market Value on the date of exercise; provided, however, that such share withholding shall be mandated if the Optionee is a person subject to Section 16 of the 1934 Act at the time of exercise. 11. RIGHTS AS SHAREHOLDER. Optionee shall not be deemed for any purpose to be, or have rights as, a shareholder of the Company with respect to the shares covered by this Option until this Option is exercised. No adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date on which shares are actually issued to Optionee, which shall be as soon as practicable after exercise of this Option. Notwithstanding the foregoing, the Company reserves the right to unilaterally subject such shares issued upon exercise of this Option to voting trust or other arrangements which limit Optionee's voting rights with respect to such shares. 12. MISCELLANEOUS. The Agreement (a) shall be binding upon and inure to the benefit of any successor of the Company; (b) shall be governed by the laws of the State of Rhode Island, and any applicable laws of The United States of America; (c) may not be amended except in writing; and (d) shall in no way affect the Optionee's participation or benefits under any other plan or benefit program maintained or provided by the Company. In the event of a conflict between this Agreement and the Plan, the Plan shall govern. 8 This Agreement has been executed by the undersigned: Providence Journal Company By_________________________ Title______________________ _________________________ Optionee 9 EX-10.6 7 CONTROL AGREEMENT EXHIBIT 10.6 AGREEMENT --------- AGREEMENT, made this 11th day of October, 1993, by and between ___________________ ("Executive") and PROVIDENCE JOURNAL COMPANY, a Rhode Island corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company wishes to assure itself of continuity of management in the event of any actual or threatened change in the control of the Company; and WHEREAS, the Company and the Executive desire to embody in a written agreement the terms and conditions under which the Executive shall be employed by the Company in the event of any actual or threatened change of control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: Section 1. Definitions. - ----------------------- 1.1. Change of Control. "Change of Control" shall mean a change of ----------------- control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the Company is then subject to such reporting requirements. Further, without limiting the generality of the foregoing, such a Change of Control shall be deemed to have occurred if any of the following events takes place: (a) The Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; 1 (b) During any period of twenty-four consecutive months, individuals who at the beginning of such period constitute the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or (c) At any time when the outstanding voting securities of the Company are required to be registered under Section 12 of the Act, any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner", as defined in Rule 13d-3 under the Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; provided, -------- however, this clause (c) shall not apply to the acquisition by a person of - ------- securities of the Company representing 20% or more, but less than 50% of the combined voting power of the Company's then outstanding securities if such acquisition of securities has been approved by a vote of at least two thirds of the directors in office just prior to the issuance or sale of securities to such person. For purposes of this paragraph (c), (i) the share holdings of the Voting Trustees under the Voting Trust Agreement dated September 20, 1956, as amended and extended, the voting trust certificates issued thereby and the existence of Voting Trust itself shall be ignored, and (ii) the term "person" shall exclude any person or group who on the date hereof is the beneficial owner, directly or indirectly, of securities representing 10% or more of the combined voting power of the Company's presently outstanding securities. Notwithstanding the foregoing, in no event shall the consummation of the spin- off reorganization approved by the Board of Directors of the Company on August 24, 1993 constitute a Change of Control for purposes of this Agreement (the "Spinoff Reorganization"). 2 1.2. Effective Date. "Effective Date" shall mean the date on which a -------------- Change of Control occurs. 1.3. Term of Employment. "Term of Employment" shall mean the period ------------------ commencing on the Effective Date and ending on the earliest of: (a) Executive's death or Total Disability (as hereinafter defined); (b) termination of the Term of Employment pursuant to Section 4 below; (c) two (2) years from the Effective Date. Neither the expiration of the Term of Employment nor the termination of the Agreement will relieve the Company of the obligation to provide Executive, in accordance with the terms hereof, the payments, benefits and coverage to which he has become entitled under the Agreement. 1.4. Total Disability. "Total Disability" shall mean a mental or physical ---------------- condition which in the reasonable opinion of the company renders the Executive unable or incompetent to carry out the job responsibilities attendant to his office, which condition shall have existed for a period of 365 or more consecutive days. If any controversy should arise as to whether a disability exists, the Executive or the Company may require that the Executive be examined by a physician and in such case the choice of such a physician shall be made by mutual agreement between the Executive and the Company. If they are unable to agree, the examining physician shall be a physician in the Providence metropolitan area who has been designated by the Dean of the Division of Biological and Medical Sciences of Brown University, Providence, Rhode Island. Section 2. Employment. - ---------------------- 2.1. Capacity and Situs of Employment. The Company agrees to employ -------------------------------- Executive throughout the Term of Employment, during which (a) Executive's position, authority, duties and responsibilities shall be reasonably commensurate in all material 3 respects with those held, exercised and assigned at any time during the six month period immediately preceding the Change of Control, and (b) Executive's situs of employment will be at the Company's executive headquarters in Providence, Rhode Island or such other location within a sixty (60) mile radius of the Providence City Hall (hereinafter referred to as the "Area") to which the Company's executive headquarters may be moved. 2.2. Services of the Executive. Executive agrees, subject to Sections 4.3 ------------------------- and 4.4 below, to remain in the Company's employ during the Term of Employment, on the terms described in Section 2.1. Excluding periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote substantially all of his attention, energy and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge responsibilities assigned to Executive hereunder, to use his best efforts to perform such responsibilities faithfully and efficiently. Executive may (a) serve on corporate, civic and charitable boards or committees, (b) deliver lectures and fulfill speaking engagements and (c) manage personal investments, so long as such activities do not interfere with the performance of Executive's responsibilities. To the extent that any such activities have been conducted by Executive prior to the Change of Control, such prior conduct, and any subsequent conduct similar in nature and scope, shall not be deemed to interfere with the performance of Executive's responsibilities. Section 3. Compensation & Benefits During the Term of Employment. - ------------------------------------------------------ ---------- 3.1. Compensation. The Company will pay as compensation to Executive for ------------ his services as an employee during the Term of Employment - (a) base annual salary at a rate equal to or greater than the rate of base salary in effect for Executive immediately 4 prior to the Change of Control; plus (b) provide an annual bonus opportunity (as a percentage of base salary) equal to or greater than the annual bonus plan in effect prior to a Change of Control. 3.2. Benefits. In addition, for his services as an employee during the -------- Term of Employment, Executive will receive all life, disability, accident and group health insurance benefits, retirement and deferred compensation, and all other fringe benefits and payments under additional benefit plans, all in an amount or with a value reasonably comparable to those benefits being provided by the Company to the Executive immediately prior to the Change in Control, including but not limited to the following - (a) Executive will participate fully in the Company's Retirement Plan and the Providence Journal Qualified Compensation Deferral Plan (the "401(k) Plan") (and/or any successor plan or plans), (the Company's Retirement Plan and 401(k) Plan and any successor plan or plans are hereinafter referred to as the "Plans") with benefit accruals under the Retirement Plan and Company contributions for the benefit of Executive under the 401(k) Plan at least at the same level as immediately prior to the Change of Control, or Executive will receive annual cash payments from the Company each at least equal to the total value of such benefit accruals and Company contributions for him under the Plans for the last fiscal year of the Company ending prior to the Change of Control. (b) Executive will participate fully, together with his dependents and beneficiaries, in all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the Change of Control, or receive substantially equivalent coverage (or the full value thereof in cash annually in advance from the Company); (c) Executive will participate fully in additional benefit plans offered by the Company to executives immediately prior to or after the Change of Control; and 5 (d) Executive will receive fringe benefits (which shall not include any benefit referred elsewhere in this Section 3), including paid holidays, paid vacation, executive physical examinations, office, office furnishings and equipment and support staff, at least comparable to those provided to Executive immediately prior to the Change of Control, as well as reimbursement, upon proper accounting, of reasonable expenses and disbursements incurred by Executive in the course of his duties. 3.3. Acceleration of Payment of Deferred Compensation. Contemporaneous ------------------------------------------------- with the Change of Control, all amounts accrued by the Company for the Executive under the terms of the Providence Journal Company & Subsidiaries Deferred Compensation Plan, the Management Incentive Compensation Plan, the Long Term Incentive Plan, or any similar compensation or benefit plans, shall be vested and paid to Executive in a single payment within thirty (30) days of the Executive's termination of employment. 3.4. Acceleration of Payment in Connection with the Stock Plans. ---------------------------------------------------- ----- Contemporaneous with a termination of employment subsequent to a Change of Control, the Company shall vest and pay to the Executive upon termination of employment, in a single payment an amount equal to the value of all benefits accrued by Executive pursuant to the terms of any restricted stock, stock units plan, or stock option plan, if and only if such payment is not considered a "parachute payment", under Section 280G of the Code. If such payment described above would be considered a "parachute payment" then the value of Executive's benefits pursuant to any stock plans shall be deposited in a trust account for the benefit of Executive pursuant to the terms of Section 10 hereof. Section 4. Termination of Employment. - ------------------------------------- 4.1. Termination other than for Cause. In the event Executive's -------------------------------- employment is terminated by the Company during the Term of Employment for any reason other than "Cause" (as defined in Section 4.5 below), the Company will pay Executive, as liquidated damages a lump sum cash payment, payable within ten (10) 6 days of his termination, equal to 150% of (i) Executive's highest annual base salary in effect at any time during the three-year period immediately preceding his termination (including in base salary for this purpose any amount contributed by the Company on his behalf to the Company's 401(k) Plan) plus (ii) the amount of the target bonus opportunity immediately preceding his termination. 4.2. Participation in Benefit Plans. In the event of a termination ------------------------------ described in Section 4.1 above, Executive, together with his dependents and beneficiaries, will continue following his termination to participate fully, in accordance with Section 3.2(b) above, in all life insurance plans, accident and health plans and other welfare plans, maintained or sponsored by the Company immediately prior to the termination, or receive substantially equivalent coverage (or the full value thereof in cash) from the Company, until the earlier of (a) the first anniversary of his termination or (b) the Executive's eligibility for comparable benefit plans with another employer. 4.3. Resignation By Executive - Constructive Termination. --------------------------------------------------- (a) If Executive resigns during the Term of Employment in accordance with Section 4.3(b) below, his employment will be deemed to have been terminated by the Company for reasons other than Cause (and he will be deemed to have offered to continue to provide services to the Company), and he will be entitled to all the payments and rights and benefits described in Sections 4.1 and 4.2. (b) Executive may resign in accordance with this Section 4.3 upon the occurrence of any of the following events: (i) any reduction of, or failure to pay, Executive's base annual salary or annual bonus in breach of Section 3.1 above; (ii) a determination by Executive made in good faith that, as a result of the Change of Control and a change in circumstances thereafter significantly affecting his position, including, without limita- 7 tion, a major change in scope of the business or other activities for which he was responsible immediately prior to the Change of Control, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, any of the authority, duties or responsibilities contemplated by Section 2.1 above; (iii) the failure of the Company after a Change of Control to comply with and satisfy Section 6.1 or 6.2 below; (iv) relocation by the Company of its principal executive offices or any event that causes Executive to have his principal location of work changed to any location outside the Area as defined in Section 2.1(b). (v) without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto or transferee or substantially all of the assets thereof. 4.4. Resignation by Executive. If Executive resigns during the Term of ------------------------ Employment for any reason not contemplated by Section 4.3 above, he shall receive base salary, annual bonus, and other incentive compensation earned during the calendar year of his resignation. In addition, all vested deferred and incentive compensation shall become payable. 4.5. Termination for Cause. If Executive is dismissed by the Company for --------------------- Cause, he will not be entitled to payments or benefits provided under Section 4.1 or 4.2. "Cause" means the intentional commission by Executive of theft, embezzlement or other serious and substantial crimes against the Company, intentional wrongful engagement in "competitive activity" in violation of Section 8 below or intentional wrongful disclosure of confidential information of the Company which materially 8 affects the Company. For purposes of this definition, no act or omission shall be considered to have been "intentional" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to Executive a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors of the Company then in office, at a meeting of the Board called and held for such purpose finding that, in the good faith opinion of the Board, Executive committed an intentional act set forth above and specifying the particulars thereof in detail. Nothing herein shall limit the right of Executive or his beneficiaries to contest the validity or propriety of any such determination. 4.6. Dispute Resolution. If Executive's employment is alleged to be ------------------ terminated for Cause or if Executive's right to resign under Section 4.3 or 4.4 is disputed, Executive may initiate binding arbitration in Rhode Island before the American Arbitration Association (AAA) and under its rules by serving a notice to arbitrate upon the Company and AAA or, at Executive's election, institute judicial proceedings, in either case within 90 days of the effective date of his termination or, if later, his receipt of notice of termination or such longer period as may be reasonably necessary for Executive to take such action if illness or incapacity should impair his taking such action, within the 90-day period. Provided the Executive initiates such action in good faith the Company agrees (i) to pay the costs and expenses (including fees of counsel to the Executive) of any such arbitration or judicial proceeding, and (ii) to pay interest to Executive on any amounts found to be due to Executive hereunder during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate most recently announced by Rhode Island Hospital Trust National Bank (or its successor) prior to the commencement 9 of the arbitration or litigation. The Company and Executive agree that any arbitration award shall be binding and may be enforced by any court of competent jurisdiction. 4.7. Death or Total Disability of the Executive. ------------------------------------------ (a) If Executive dies or suffers a Total Disability during the Term of Employment, then this Agreement shall terminate and the Company, its successors and assigns shall be relieved and discharged of any and all obligations whatsoever to make further payment to Executive pursuant to the terms of this Agreement after the date of death or Total Disability of Executive, except as to base salary earned for services actually rendered and vacation pay accrued prior to the date of death or Total Disability of Executive. In the case of Total Disability of Executive, the Executive will continue to receive full compensation hereunder during the 365 day period prior to a determination of Total Disability. (b) If Executive dies following a termination of employment which entitled him to payments and benefits under this Section 4 but prior to receipt of all such payments and benefits, his beneficiary (as designated to the Company in writing) or, if none, his estate, will be entitled to receive all unpaid amounts and benefits due under this Agreement. 4.8. Enforcement of Rights. Termination of Executive's employment, --------------------- whether or not giving rise to payments or benefits under this Section 4, will not in any way prevent Executive from enforcing rights to payments or benefits under Section 3 relating to periods during which he was employed. 4.9. Termination of Employment not to Affect Rights and Obligations set ------------------------------------------------------------------ forth in Section 9. Termination of Executive's employment for any reason will - ------------------ not in any way affect the rights and obligations of the parties as set forth in Section 9 hereof. Section 5. Payment of Fees, Costs and Expenses. - ---------------------------------------------- It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of 10 his rights under this Agreement by litigation or other legal action or arbitration proceeding because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if Executive determines in good faith that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or arbitration proceeding designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive under Section 5 hereof, the Company will promptly, upon request of the Executive in the event of the likelihood of a Change of Control or upon a Change of Control, use its best efforts to secure an irrevocable standby letter of credit (the "Letter of Credit"), issued by Rhode Island Hospital Trust National Bank or another bank of comparable or greater size (the "Bank") for the benefit of the Executive providing that the fees and expenses of counsel selected from time to time by the Executive pursuant to this Section 5 or in proceedings contemplated by Section 4.6 shall be paid, or reimbursed to the Executive if paid by the Executive, on a regular, periodic basis upon presentation by the Executive to the Bank of a statement or statements prepared by such counsel in accordance with its customary practices. The Company shall pay all amounts and take all action necessary to maintain the Letter of Credit during the Term of Employment and for one (1) year thereafter and if, notwithstanding the Company's complete discharge of such obligations, such Letter of Credit shall be terminated or not renewed, the Company shall obtain a replacement irrevocable clean letter of credit drawn upon a commercial bank selected by the Company and reasonably acceptable to the Executive, upon substantially the same terms and conditions as contained in the Letter of Credit, or any similar arrangement which, in any case, assures the Executive the benefits of this Agreement without incurring any cost or expense for enforcement against the Company or the defense thereof. 11 Section 6. Merger or Acquisition. - --------------------------------- 6.1. Assumption of Obligations. If the Company is at any time before or ------------------------- after a Change of Control merged, consolidated or reorganized into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets of the Company are transferred to another corporation or other entity, the entity arising from such merger, consolidation or reorganization, or the acquirer of such assets, shall (by agreement in form and substance satisfactory to Executive) expressly assume the obligations of the Company under this Agreement. Specifically, if the Spin-off Reorganization is carried out, the corporation or entity which will employ Executive upon the consummation thereof shall expressly assume the obligations of the Company under this agreement. 6.2. Executive's Rights to Benefits. In the event of any merger, ------------------------------ consolidation, reorganization or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock plans or any bonus, profit sharing, savings, pension, group insurance, hospitalization or other incentive or benefit plan or arrangement which may be or become applicable to executive of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. 6.3. References. In the event of any merger, consolidation, ---------- reorganization or transfer of assets described above, references to the Company in this Agreement shall, unless the context suggests otherwise, be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. Section 7. Competitive Activity/Confidentiality. - ------------------------------------------------ 7.1. Non Compete. ----------- During a period ending one year following Executive's termination of employment, if Executive shall have received or shall 12 be receiving payments under Section 4.1 hereof, Executive shall not, without the prior written consent of the Company, engage in any competitive activity. For purposes of this Agreement, the term "competitive activity" shall mean Executive's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company (as constituted on the date of Executive's termination) and such enterprise's sales or any product or service competitive with any product or service of the Company amounted to 25% of such enterprise's net sales for its most recently completed fiscal year and if the Company's net sales of said product or service amounted to 25% of the Company's net sales for its most recently completed fiscal year. "Competitive activity" shall not include the ownership of securities in any such enterprise and exercise of rights appurtenant thereto or participation in management of any such enterprise other than in connection with the competitive operations of such enterprise. 7.2. Confidentiality. The Executive agrees that from this date hereof he --------------- will not disclose or release to any other person or entity, the Company's trade secrets, confidential business practices, client lists, the details of this Agreement, or other proprietary information without written authorization from the Company. Nothing shall be deemed a Company trade secret, confidential business practice or other proprietary information that is public knowledge. Section 8. Change of Control following Certain Circumstances. - ------------------------------------------------------------- Notwithstanding any provision herein to the contrary, should a Change of Control occur subsequent to Executive's death, Total Disability or retirement from the Company, the remainder of any benefits owed under the terms of the Providence Journal Company & Subsidiaries Deferred Compensation Plan, Management Incentive Compensation Plan, Long Term Incentive Plan, any stock plans or other non-qualified deferred compensation plan, including 13 interest, shall be paid in full on the date of the Change of Control. This Section 8 shall not apply to any benefits payable pursuant to the terms of any stock plan if such payment would be considered a "parachute payment", then the value of Executive's benefits pursuant to the stock plan shall be deposited in a trust account for the benefit of Executive pursuant to the term of Section 9 thereof. Section 9. Stock Plans - ----------------------- 9.1. Establishment of a Trust. Contemporaneous with the Change of Control ------------------------ an amount equal to the value of vested and non-vested benefits accrued by Executive under the terms of any stock plans and unpaid as of said date which, if paid on such date, would be considered a "parachute payment" shall be deposited by the Company in a trust created by the Company which shall include the following terms (the "Trust"): (a) The trustee shall be independent corporate fiduciary. (b) A separate account shall be maintained for the Executive. (c) Trust assets are to be invested in the discretion of the trustee in a manner which protects principal from risk of substantial loss. (d) Payments from the Trust to Executive are to be made in accordance with any stock plans and the terms of this Agreement. (e) In the event of bankruptcy or insolvency of the Company, a court can direct that payments be made from the Trust funds to a creditor of the Company directs. (f) If assets remain in Executive's Trust account after all benefits have been paid from it, the surplus will be returned to the Company or allocated to other accounts in the Trust as the Company directs. (g) The Trust may be amended by the Company and the trustee provided that the Trust must remain irrevocable and Trust 14 assets may be used solely to pay benefits under any company stock plans, subject to claims of creditors. (h) If at any time during the term of the Trust, the company has less than an investment grade rating, all vested assets in Executive's Trust account shall be payable to him immediately in a single payment. 9.2. Interest. The interest on amounts payable to the Executive in -------- installments pursuant to the stock plans shall be compounded annually as of December 31. The rate of interest on such installments shall be the greater of (i) the rate of interest computed in accordance with the terms of any stock plans then in effect or (ii) the average annual rate of interest paid by Rhode Island Hospital Trust National Bank during the prior twelve months on $10,000 three year certificates of deposit. 9.3. Installment Payments. Notwithstanding any contrary provision in any -------------------- stock plans, amounts payable to Executive in installments pursuant to the terms of the stock plans shall be payable in substantially equal installments. Notwithstanding any provision herein to the contrary, the obligations of the Company as set forth in Sections 9.1, 9.2, and 9.3 hereof shall be in effect as to all unpaid amounts payable to Executive under any stock plans, regardless --- of whether Executive is employed by the Company at the time of the Change of Control or a Change of Control occurs after Executive's death, Total Disability or retirement from the Company. In addition, on the annual anniversary of the establishment of the Trust the Company shall be obligated to deposit additional amounts in the Trust equal to the excess of the value of his account in the stock plans over the value of his Trust account. Section 10. Termination of this Agreement. - ------------------------------------------ Either the Company or Executive may, by giving 60 days written notice to the other party, terminate this Agreement as of the second or any subsequent annual anniversary of the occurrence of a Change of Control. 15 Section 11. Withholding of Taxes. - --------------------------------- All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries or estate will be subject to the withholding or such amounts relating to tax and/or other payroll deductions as may be required by law. Section 12. Amendment. - ---------------------- No amendment, change or modification of this Agreement may be made except in writing, signed by or on behalf of both parties. Section 13. Miscellaneous. - -------------------------- 13.1. Binding Effect. The provisions of this Agreement shall be binding -------------- upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors and assigns. 13.2. Governing Law. The validity, interpretation and effect of this ------------- Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. 13.3. Severability. The invalidity or enforceability of any provision of ------------ this Agreement shall not effect the validity of any other provision. 13.4. No Set-Off. There shall be no right of set-off or counterclaim, in ---------- respect of any claim, debt or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement, and nothing in this Agreement shall relieve the Company of its obligations to Executive under any other agreement, plan, contract or arrangement. No right, benefit or interest hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process or assignment by operation of law. Any attempt, voluntary or involuntary to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be 16 null, void and of no effect. 13.5. Assignability. No right or interest to or in any payments shall be ------------- assignable by the Executive; provided, however, that this provision shall not -------- ------- preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. 13.6. Counterparts; Headings. This Change of Control Agreement may be ---------------------- executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. 13.7. Entire Agreement. This instrument contains the entire agreement of ---------------- the parties pertaining to the subject matter contained herein and supersedes and is in lieu of any and all other employment arrangements having affect as of the effective date. 13.8. Notices. All notices given hereunder shall be in writing and shall ------- be delivered personally or sent by prepaid registered or certified mail, return receipt requested, addressed as follows: If to the Company: Providence Journal Company 75 Fountain Street Providence, RI 02902 Attention: Vice President Human Resources 17 If to the Executive: __________________________ __________________________ __________________________ All notices shall be deemed to be given on the date received at the address of the addressee, or if delivered personally, on the date delivered. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ATTEST: PROVIDENCE JOURNAL COMPANY By:__________________________ Title:_______________________ WITNESS: _____________________________ _____________________________ Executive 18 EX-10.7 8 CABLE DIVISION SALE BONUS PLAN EXHIBIT 10.7 PROVIDENCE JOURNAL COMPANY CABLE DIVISION SALE BONUS PLAN 1. Purpose. The purpose of the Providence Journal Company Cable Division ------- Sale Bonus Plan (the "Plan") is to maximize the cash flow of, and thereby to enhance the value of, the Cable Division (the "Cable Division") of the Providence Journal Company (the "Company") by providing an opportunity for its key officers to participate in significant incentives that will contribute to the enhancement of the Company's shareholder value. 2. Administration. The Plan will be administered by the Vice President of -------------- Human Resources of the Company (the "Administrator"), who shall not be a Participant in the Plan. The Administrator shall have authority to interpret the provisions of the 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 the Company (the "Executive Committee"), and to communicate to Plan Participants concerning the administration of the Plan. The Administrator, with the concurrence of the Chief Executive Officer, shall make recommendations for awards under the Plan to the Executive Committee. 3. Review and Authorization. All recommendations for awards to be made by ------------------------ the Administrator pursuant to the provisions of this Plan are subject to the review and approval by the Executive Committee. 4. Eligibility to Receive Awards. Persons eligible to receive awards ----------------------------- under the Plan shall be limited to those officers and other key executive employees of the Cable Division who are in positions in which their decisions, actions and counsel significantly affect the operation of the Cable Division. Employees eligible to receive awards under the Plan are referred to herein as "Participants". Participants will share in the Bonus Pool based upon a weighing of salary and years of service. A list of Participants, including the percentage of the bonus pool for which each such Participant is eligible, is attached hereto as Exhibit A. 5. Bonus Pool. A bonus pool of $2,100,000 will be established based upon ---------- the fourteen (14) Participants who are listed in Exhibit A as of____________, 1994. The bonus opportunity awards have been calculated based upon achieving the 1994 cash flow objective for the Cable Division of $123,600,000 (the "1994 Objective"). The size of the Bonus Pool shall be increased by 50% of the amount of the 1994 Objective that is achieved. 1 6. Conditions. Any bonus award earned out of the Bonus Pool will be ---------- distributed to the Participants only upon all of the following conditions having been satisfied: (a) The closing of the sale, merger or other distribution of the Cable Division (the "Closing"). (b) The Participant remaining in the employment of the Cable Division or the Company through the date of the Closing. (c) Comparable results with respect to the 1995 cash low objective of the Cable Division (the "1995 Objective"). 7. General Restrictions. -------------------- (a) This Plan supersedes any other award that the Participant may be eligible for pursuant to any other long-term incentive plan of the Company or the Cable Division. (b) Unforeseen changes, such as new statutes or regulations that positively or negatively affect the cash flow of the Cable Division, will be excluded from the calculation of the 1994 Objective or the 1995 Objective. (c) Nothing in the Plan nor in any agreement entered into pursuant to the Plan shall confer upon any person the right to continue in the employment of the Company or the Cable Division or shall affect any right which the Company or the Cable Division may have to terminate the employment of such person. 8. Amendment. The board may terminate or amend the Plan at any time. The --------- termination of any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect the Participant's rights under an award previously granted. 2 EX-10.8 9 STOCK PURCHASE AGREEMENT EXHIBIT 10.8 STOCK PURCHASE AGREEMENT ------------------------ STOCK PURCHASE AGREEMENT, dated as of January 18, 1995, among KELSO INVESTMENT ASSOCIATES IV, L.P., a Delaware limited partnership ("KIA IV"), KELSO PARTNERS IV L.P., a Delaware limited partnership ("KP"), and KELSO EQUITY PARTNERS II, L.P., a Delaware limited partnership ("KEP II", together with KIA IV and KP sometimes herein referred to individually as a "Seller" and collectively as "Sellers"), and PROVIDENCE JOURNAL COMPANY, a Rhode Island corporation ("Purchaser"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Purchaser desires to purchase from each Seller, and each Seller desires to sell to Purchaser, all shares of Class A Common Stock and shares of Class B Common Stock, par value $.10 per share (collectively the "Shares"), of King Holding Corp., a Delaware corporation (the "Company"), and any warrants for the purchase of shares (such warrants, together with the shares, the "Securities") held by such Seller at the Closing (as hereinafter defined), which will represent all of the Securities of the Company held by the Sellers, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I Section 1. Purchase and Sale of Securities. --------- ------------------------------- On the terms and subject to the conditions of this Agreement, each Seller severally agrees to sell, transfer, assign and deliver to Purchaser, and Purchaser hereby agrees to purchase from each Seller, all Securities held by such Seller at the Closing for an aggregate purchase price of Two Hundred Sixty Million Dollars ($260,000,000) (the "Purchase Price"), payable as specified in Section 2. ARTICLE II Section 2. Payment. --------- ------- (a) At the Closing, the Purchaser shall deliver to or for the account of each Seller that portion of the Purchase Price in cash by wire transfer of funds equal to the amount set forth opposite such Seller's name on Schedule A attached ---------- hereto. (b) In addition, at the Closing, the Purchaser will pay Kelso & Company, L.P. ("Kelso") a Five Million Dollar ($5,000,000) investment banking fee in cash by wire transfer of funds. ARTICLE III Section 3. Closing. --------- ------- (a) The closing of the transactions contemplated hereby (the "Closing") shall take place as soon as practicable (but, in any event, at least one business day) after the satisfaction or waiver of the conditions to closing set forth herein at the offices of Edwards & Angell, 2700 Hospital Trust Tower, Providence, Rhode Island at 10:00 a.m., or at such other time and place as the parties hereto shall agree in writing (the "Closing Date"). (b) Effective as of the Closing, the Joint Venture Agreement dated as of April 29, 1991 (as amended, the "Joint Venture Agreement"), among the Purchaser, KIA IV and KP, and all other agreements related to the Joint Venture Agreement, including the Management Agreement and the Financial Advisory Agreement referred to therein, shall terminate and be of no further force or effect. ARTICLE IV Section 4. Representations and Warranties of Sellers. --------- ----------------------------------------- The Sellers hereby jointly and severally represent and warrant to Purchaser as follows: Section 4.1. Partnership Existence. ----------- --------------------- Each Seller is a limited partnership duly formed and validly existing and in good standing under the laws of Delaware, with full power and authority to enter into this Agreement and consummate the transaction contemplated hereby. Section 4.2. Title to Securities. ----------- ------------------- The total number of Shares and warrants to purchase Shares -2- held by each Seller, (hereinafter referred to as "such Seller's Total Securities" and in the aggregate as the "Total Securities") is set forth opposite such Seller's name on Schedule A. The Total Securities represent all of ---------- the issued and outstanding capital stock and warrants to purchase capital stock of the Company owned by the Sellers. Each Seller is the record and beneficial owner of such Seller's Total Securities and has good and valid title to such Seller's Total Securities at the date hereof, free and clear of any claims, liens, encumbrances, security interests (including any interests under Article 8 of the Uniform Commercial Code), options, charges or other rights or claims with respect thereto (collectively, "Liens"), except those rights created under the Joint Venture Agreement. At the Closing, good and valid title to such Seller's Total Securities will transfer to Purchaser, free and clear of any Liens other than those created by the Purchaser. Such Total Securities are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition or such Total Securities other than the Joint Venture Agreement. Section 4.3. Authorization; Compliance with Laws, Etc. ----------- ---------------------------------------- All partnership and other actions required to be taken by each of the Sellers to authorize each of them to execute and deliver and to carry out this Agreement and the transactions contemplated hereby have been, or as of the Closing Date shall have been, duly and properly taken, and this Agreement constitutes a valid and binding obligation of each of the Sellers enforceable against each of the Sellers in accordance with its terms. Neither the execution and delivery by any of the Sellers of this Agreement nor the sale of the Total Securities, violate or will violate any provision of law (subject to obtaining all necessary governmental consents) applicable to, or any material provision of the partnership agreement of, any of the Sellers, or conflict with or will result in any material breach of any term, condition or provision of, or constitute or will constitute (with due notice or lapse of time or both) a material default under, or will result in the creation or imposition of any lien, charge or encumbrance upon any property of any of the Sellers pursuant to the terms of, any mortgage, deed of trust or other agreement or instrument to which any of the Sellers is a party, except for such violations, conflicts, defaults, liens, charges or encumbrances (i) for which the Sellers have obtained a waiver or release thereof or (ii) that do not have a material adverse effect on the ability of the Sellers to carry out this Agreement and the transactions contemplated hereby. -3- Section 4.4. Litigation; Compliance with Law. ----------- ------------------------------- There are no actions, suits, claims, proceedings or investigations pending or, to the knowledge of the Sellers, threatened against any of the Sellers at law or in equity, or before or by any federal, state, municipal or other governmental court, department, commission, board, bureau, agency or instrumentality, domestic or foreign, which does or would materially and adversely affect the ability of any of the Sellers to execute and deliver this Agreement and to consummate the transactions contemplated hereby. ARTICLE V Section 5. Representations and Warranties by Purchaser. --------- ------------------------------------------- Purchaser hereby makes the following representations and warranties to the Sellers as follows: Section 5.1. Corporate Existence. ----------- ------------------- Purchaser is a corporation duly organized and existing and in good standing under the laws of the State of Rhode Island with full power and authority to enter into this Agreement and consummate the transactions contemplated hereby. Section 5.2. Authorization; Compliance with Laws, Etc. ----------- ---------------------------------------- (a) All corporate and other actions required to be taken by Purchaser to authorize it to execute and deliver and to carry out this Agreement and the transactions contemplated hereby, have been, or as of the Closing Date shall have been, duly and properly taken, and this Agreement constitutes a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms. Neither the execution and delivery by the Purchaser of this Agreement nor the purchase of the Total Securities, violate or will violate any provision of law (subject to obtaining all necessary governmental consents) applicable to, or any material provision of the corporate charter or by-laws of, the Purchaser, or conflict with or will result in any material breach of any term, condition or provision of, or constitute or will constitute (with due notice or lapse of time or both) a material default under, or will result in the creation or imposition of any lien, charge or encumbrance upon any property of the Purchaser pursuant to the terms of, any mortgage, deed of trust or other agreement or instrument to which the Purchaser is a party, except for such violations, conflicts, defaults, liens, charges or encumbrances (i) for which the Sellers have obtained a waiver or release thereof or (ii) that do not have a material adverse effect on the ability of the Sellers to carry out this Agreement and the transactions contemplated hereby. -4- (b) Except as set forth on Schedule 5.2(b) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by the Purchaser do not require any action by or in respect of, or filing with, any government body, agency, official or authority. Section 5.3. Litigation. ----------- ---------- There are no actions, suits, claims, proceedings or investigations pending or, to the knowledge of the Purchaser, threatened against the Purchaser at law or in equity, or before or by any federal, state, municipal or other governmental court, department commission, board, bureau, agency or instrumentality, domestic or foreign, which does or would materially and adversely affect the ability of the Purchaser to execute and deliver this Agreement and to consummate the transactions contemplated hereby. ARTICLE VI Section 6. Conditions to Obligations of Purchaser. --------- -------------------------------------- The obligations of the Purchaser under this Agreement are subject to the condition that, at the Closing: Section 6.1. Compliance by Sellers; Correctness of Representations and ----------- --------------------------------------------------------- Warranties of Sellers. - --------------------- The Sellers shall have complied with and performed all the terms, covenants and conditions of this Agreement to be complied with and performed by them, and all of the representations and warranties made by each of the Sellers under this Agreement shall be true and correct as of the Closing. Each of the Sellers shall have delivered to the Purchaser a certificate of its General Partner (or other appropriate officers) certifying, in such form as the Purchaser may reasonably request, as to the fulfillment of the conditions set forth in this Section 6.1. Section 6.2. Delivery of Total Shares. ----------- ------------------------ Stock certificates representing the Total Shares shall be delivered by Sellers to the Purchaser and be accompanied by stock powers duly executed in blank. Certificates representing the warrants shall also be delivered by Sellers to the Purchaser and be accompanied by assignments in form and substance reasonably satisfactory to the Purchaser. Section 6.3. Certificates of Sellers. ----------- ----------------------- Sellers shall have delivered to Purchaser a certificate signed by a General Partner of each of the Sellers, setting forth the votes or consents constituting the authorization and approval of the general partners of Sellers and the Sellers of this -5- Agreement and the transactions contemplated hereby. Section 6.4. Opinion of Counsel for Sellers. ----------- ------------------------------ The Purchaser shall have received an opinion or opinions dated the Closing Date of counsel (who may be the general counsel) to Sellers reasonably satisfactory to Purchaser, in form and substance reasonably satisfactory to Purchaser and its counsel. Section 6.5. Consents of Third Parties. ----------- ------------------------- All necessary consents waivers or approvals of third parties (other than governmental authorities), required for the lawful consummation of the transactions contemplated by this Agreement (all of which are set forth on Schedule 6.5), the absence of which would materially affect Purchaser's rights hereunder, shall have been obtained (and shown by evidence satisfactory to the Purchaser). Section 6.6. Consents, etc. of Governmental Authorities. ----------- ------------------------------------------ (a) No court or governmental authority shall have issued any order, writ, injunction or decree prohibiting the Purchaser from consummating the transactions contemplated hereby or shall have commenced or threatened any proceeding concerning such transactions or indicated its opposition to such transactions. All material consents of governmental authorities (other than cable franchise consents) all of which are set forth on Schedule 5.2(b), including necessary consents from the Federal Communications Commission ("FCC") shall have been obtained and be in full force and effect. (b) All applicable waiting periods under the Hart-Scott- Rodino Antitrust Improvements Act ("Hart-Scott Act") shall have expired or been terminated and no objection shall have been made by the Federal Trade Commission ("FTC") or Department of Justice. Section 6.7. Consummation of Continental Transaction. ----------- --------------------------------------- The consummation of the acquisition by Continental Cablevision, Inc. or a related entity ("CCI") of all of the cable television businesses of the Purchaser, including, without limitation, the cable television businesses of King Videocable Company ("KVC") in an acquisition (the "CCI Acquisition") which may be structured as a merger or otherwise, shall have occurred or shall simultaneously take place. Section 6.8. Mutual Release. ----------- -------------- The Purchaser and the Sellers shall have executed and delivered a Mutual Release (the "Release"), the form of which is -6- attached hereto as Exhibit A. --------- Section 6.9. Resignation of Officers and Directors. ----------- ------------------------------------- All of the officers and directors of the Company and any of its subsidiaries nominated by the Sellers or representing the Sellers shall have submitted their resignations from all such positions. ARTICLE VII Section 7. Conditions to Obligations of the Sellers. --------- ---------------------------------------- The obligations of the Sellers under this Agreement are subject to the condition that, at the Closing: Section 7.1. Compliance by Purchaser; Correctness of Representations and ----------- ----------------------------------------------------------- Warranties. - ---------- Purchaser shall have complied with and performed all the terms, covenants and conditions of this Agreement to be complied with and performed by Purchaser, and all of the representations and warranties made by Purchaser under this Agreement shall be true and correct as at the Closing. The Purchaser shall have delivered to the Sellers a certificate of an appropriate officer certifying, in such form as the Sellers may reasonably request, as to the fulfillment of the conditions set forth in this Section 7.1. Section 7.2. Certificates of Purchaser. ----------- ------------------------- Purchaser shall have delivered to Sellers a certificate signed by its Secretary or Assistant Secretary under its corporate seal, setting forth the votes or consents constituting the authorization and approval of the directors of Purchaser of this Agreement and the transactions contemplated hereby. Section 7.3. Consents of Third Parties. ----------- ------------------------- All necessary consents, waivers or approvals of third parties required for the lawful consummation of the transaction contemplated by this Agreement, the absence of which would materially affect Purchaser's rights hereunder shall have been obtained (and shown by evidence satisfactory to the Sellers). Section 7.4. Consents, etc. of Governmental Authorities. ----------- ------------------------------------------ (a) No court or governmental authority shall have issued any order, writ, injunction or decree prohibiting Sellers from consummating the transactions contemplated hereby, or shall have commenced or threatened any proceeding concerning such transactions or indicated its opposition to such transactions. All -7- regulatory consents, including necessary consents from the FCC and any applicable cable franchise authority, shall have been obtained by final order. (b) All applicable waiting periods under the Hart-Scott Act shall have expired or been terminated and no objection shall have been made by the FTC. Section 7.5. Mutual Release. ----------- -------------- The Release shall have been executed and delivered by the Purchaser and the Sellers. Section 7.6. Opinion of Counsel for Purchaser. ----------- -------------------------------- The Sellers shall have received an opinion from Edwards & Angell, counsel to the Purchaser, dated the Closing Date in form and substance reasonably satisfactory to the Sellers and their counsel. ARTICLE VIII Section 8. Covenants. --------- ---------- Section 8.1. Expenses of the Parties. ----------- ----------------------- Purchaser and Sellers will pay their respective expenses, including the expenses of their legal and accounting representatives and management consultants, in connection with the origin, negotiation, execution and performance of this Agreement, provided, that (i) if the Closing does not occur by the Closing Date (other than due to a breach of this Agreement by the Sellers or any one of them), the Purchaser shall pay all of the reasonable out-of-pocket expenses of the Seller incurred by the Seller directly in connection with this Agreement, including, without limitation, reasonable legal fees up to an aggregate amount of $75,000, and (ii) Purchaser shall pay or, at the request of the Sellers, reimburse the Sellers for, any and all reasonable expenses, including, without limitation, reasonable legal fees, associated with obtaining any consents and approvals from any governmental or regulatory authority or any third party in connection with the consummation of the transactions contemplated hereby. The parties hereto hereby agree that none of such expenses shall be paid or payable by the Company or charged to the Company. The Purchaser shall pay or, at the request of the Sellers, reimburse the Sellers for any and all transfer taxes and documentary and stamp taxes with respect to the transactions contemplated hereby. Section 8.2. Notice of CCI Acquisition. ----------- ------------------------- The Purchaser shall deliver notice to the Sellers if and -8- when it reasonably believes that the CCI Acquisition will not occur prior to December 31, 1995. Section 8.3. Governmental and Third Party Consents. ----------- ------------------------------------- The Purchaser shall, as promptly as possible, (i) make all filings and submissions required under any applicable law (including but not limited to those with the FCC, the FTC, the applicable cable franchise authorities, the Department of Justice or under the Hart-Scott Act), and (ii) use its best efforts to obtain all other consents and approvals from and make all other filings and notifications to any governmental or regulatory authority or any third party which are necessary in order to consummate the transactions contemplated hereby. Subject to Section 8.1, the Sellers shall coordinate and cooperate with the Purchaser in exchanging such information and supplying such assistance as may be reasonably requested by the Purchaser in connection therewith. Section 8.4. CCI Acquisition ----------- --------------- The Purchaser agrees to proceed in good faith and to take all actions reasonably necessary to cause the consummation of the CCI Acquisition as soon as possible. The Purchaser also agrees to keep the Sellers informed of the status of the CCI Acquisition and to provide the Sellers with copies of all material agreements relating to the CCI Acquisition. ARTICLE IX Section 9. Termination and Effect. --------- ---------------------- Section 9.1. Termination of Agreement. ----------- ------------------------ This Agreement may be terminated: (a) At the election of Purchaser or Sellers, if the Closing shall not have taken place on or before December 31, 1995 (or such later date as may be agreed to in writing by the Purchaser and Sellers), provided that the party exercising such right of termination shall not then be in default under its obligations hereunder; or (b) At any time by mutual written consent of Purchaser and Sellers. (c) At the election of the Sellers, at any time after receipt of the notice referred to in Section 8.2. Section 9.2. Effect of Termination. ----------- --------------------- If this Agreement is terminated and the transactions -9- contemplated hereby are not consummated as described above, this Agreement shall become null and void and of no further effect, except for the provisions of Sections 8, 10 and 12.5, without any liability on the part of any party or any of its employees, representatives, agents, directors, officers or stockholders. Nothing in this Section 9.2 shall relieve any party to this Agreement of liability for breach of this Agreement. ARTICLE X Section 10. Brokers' Commissions. ---------- -------------------- The parties hereto hereby agree and warrant to each other that, except as otherwise disclosed, there are no claims for brokerage commissions, or placement or finders' fees in connection with the transactions contemplated by this Agreement. Purchaser hereby indemnifies and holds Sellers harmless from any commissions, fees or claims of any person, firm or corporation employed or retained or claiming to be employed or retained, by Purchaser to bring about, or to represent it, in the transactions contemplated hereby. Each Seller hereby indemnifies and holds Purchaser harmless from any commissions, fees or claims of any person, firm or corporation employed or retained or claiming to be employed or retained, by such Seller to bring about, or to represent it, in the transactions contemplated hereby. ARTICLE XI Section 11.1. Survival of Representations. ------------ --------------------------- All representations, warranties and covenants contained herein shall survive the Closing. ARTICLE XII Section 12. Miscellaneous. ---------- ------------- Section 12.1. Amendment to Agreement. ------------ ---------------------- (a) Each party to this Agreement may, by written notice to the other: (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations or warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement, and (iii) waive compliance with any of the covenants of the other party contained in this Agreement and waive performance of any of the obligations of the other party to this Agreement. (b) Except as provided in subsection (a), neither this Agreement nor any provision hereof may be amended or modified -10- except by an instrument in writing signed by Purchaser and Sellers. Section 12.2. Binding Effect. ------------ -------------- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that none of Purchaser or any of the Sellers may assign this Agreement in whole or in part without the prior written consent of the Purchaser or the Sellers, as applicable, which consent will not be unreasonably withheld or delayed. Section 12.3. Entire Agreement. ------------ ---------------- This instrument and the schedule referred to herein contain the entire agreement of the parties hereto with respect to the transactions contemplated herein, and any reference herein to this Agreement shall be deemed to include the schedule hereto. Section 12.4. Headings. ------------ -------- The descriptive headings in the Agreement are inserted for convenience only and do not constitute a part of this Agreement. Section 12.5. Confidential Information; Publicity. ------------ ----------------------------------- Each of the Purchaser and each of the Sellers hereby agree that they shall abstain from disclosing to others any aspect of this Agreement and the transactions contemplated hereby and shall take such reasonable precautions as are necessary to prevent the disclosure thereof by or to others, except as required by law or to the extent such information is or becomes generally available to the public other than through a breach of this Agreement. The Purchaser and Sellers may each disclose this Agreement and the transactions contemplated hereby to its institutional lenders, financial advisors, partners, attorneys and accountants. CCI and the Purchaser may make public disclosure of this Agreement and the transactions contemplated hereby in connection with obtaining the consents described above in Section 8.3. Section 12.6. Specific Performance. ------------ -------------------- The parties hereto hereby acknowledge that money damages are not an adequate remedy for violations of this Agreement and that any party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief. This Section 12.6 shall in no way limit any parties' other remedies at law. -11- Section 12.7. Notices. ------------ ------- Any notice, request, information or other document to be given hereunder to either of the parties by the other shall be in writing and delivered personally or sent by telecopy or certified or registered mail, postage prepaid, as follows: If to the Purchaser addressed to Purchaser: Providence Journal Company 75 Fountain Street Providence, RI 02903 Attention: Trygve E. Myhren President with copies to: Walter G. D. Reed, Esq. Edwards & Angell 2700 Hospital Trust Tower Providence, RI 02903 and John L. Hammond, Esq. Vice President - Legal Providence Journal Company 75 Fountain Street Providence, RI 02902 If to Sellers: c/o Kelso & Company, L.P. 350 Park Avenue 21st Floor New York, NY 10022 Attn: James J. Connors, II, Esq., General Counsel. Any party may change the address to which notices are to be sent to it by giving written notice of such change of address to the other parties in the manner herein provided for giving notice. Section 12.8. Counterparts. ------------ ------------ This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. -12- Section 12.9. No Benefit to Others. ------------ -------------------- The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto and their successors and permitted assigns, and they shall not be construed as conferring any rights on any other persons. Section 12.10. Governing Law. ------------- ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 12.11. Management Fees, etc. ------------- --------------------- Each of the Purchaser and Kelso will be entitled to receive its management fees on a pro rata basis and customary out-of-pocket expenses under the Management Agreement and its governance fees on a pro rata basis and customary out-of-pocket expenses under the Financial Advisory Agreement, as applicable, up to until the Closing Date. Section 12.12. Mutual Cooperation. ------------- ------------------ Subject to the terms of this Agreement, the Purchaser and the Sellers hereby agree (i) to take all commercially reasonable actions required to permit the transactions contemplated hereby to be consummated as promptly as possible and (ii) to cooperate in good faith to amend, or otherwise modify, as necessary to effect the agreements contained herein, the Joint Venture Agreement and all agreements entered into in connection therewith in order to permit the transactions contemplated hereby to be consummated as promptly as possible. -13- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. PROVIDENCE JOURNAL COMPANY By:___________________________ Name: _____________________ Title:_____________________ KELSO INVESTMENT ASSOCIATES IV, L.P. By: Kelso Partners IV, L.P., General Partner By:___________________________ KELSO PARTNERS IV, L.P. By:___________________________ General Partner KELSO EQUITY PARTNERS II, L.P. By:___________________________ General Partner AGREED: KELSO & COMPANY L.P. By: Kelso & Companies, Inc., General Partner By:___________________________ Title:________________________ -14- SCHEDULE A ----------
SELLER Number of Shares Purchase Price - ------ ---------------- --------------- Kelso Investment 104,069 Shares of $257,696,110.00 Associates IV, L.P. Class B Common Stock Kelso Partners IV, L.P. 100 Shares of Class $ 1,000.00 A Common Stock (or warrants exercisable into such shares) Kelso Equity Partners 930 Shares of Class $ 2,302,890.00 II, L.P. B Common Stock
Exhibit A --------- MUTUAL RELEASE -------------- For the mutual exchange of good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned parties (a "Releasing Entity") to this Mutual Release (the "Release") does hereby covenant and agree that all of the other parties to this Release and their respective affiliates and their partners, officers, directors, employees, representatives, successors and assigns (collectively referred to herein as the "Released Entities"), are hereby forever discharged and released from any and all manner of actions, causes of action, suits, debts, accounts, contracts, demands, claims, liabilities, costs, expenses, losses and responsibilities of any nature whatsoever whether or not now known, suspected or claimed, which the Releasing Entity had, now has or hereafter may have, or claim to have against all or any of the Released Entities by reason of any act, transaction, practice, conduct or omission of any of the Released Entities arising out of or in any way relating to (i) that certain Joint Venture Agreement dated as of April 29, 1991, among Providence Journal Company, Kelso Investment Associates IV, L.P., and Kelso Partners IV, L.P., as amended to date (the "JV Agreement"), the Management Agreement or the Financial Advisory Agreement (each as defined in the JV Agreement) or any agreement entered into in connection therewith (collectively the "King Agreements"); (ii) the operation, activities or management of King Holding Company ("KHC"), King Broadcasting Company ("KBC") or any direct or indirect subsidiary of KBC or KHC (the "King Entities"), or the conduct of any other aspect of the King Entities' business (the matters in this clause (ii) are collectively referred to herein as the "JV's Business"); or (iii) all other acts, transactions, practices, conduct or omissions by any Released Entity, or anyone acting for or on behalf of any Released Entity, relating to or arising from the King Entities, the King Agreements or the JV's Business (the "Other Acts"), whether in furtherance of the JV's Business or not. Anything herein to the contrary notwithstanding, this Release shall not apply to any manner of actions, causes of action, suits, debts, accounts, contracts, demands, claims, liabilities, costs, expenses, losses or responsibilities of any nature whatsoever arising out of or in any way relating to that certain Stock Purchase Agreement and related Letter Agreement dated January __, 1995 among certain of the Released Entities. Each of the undersigned covenants and agrees (a) never, unless required by law or at the insistence of any governmental body, to commence or prosecute, assist in the commencement or prosecution of, or assert against any of the Released Entities in any action or proceeding any demands, causes of action, debts, accounts, claims, costs, expenses, losses, obligations, damages or liabilities of any nature whatsoever, whether or not now known, suspected or claimed, which the undersigned ever had, now has or hereafter may have, or claimed to have against any of the Released Entities, by reason of any act, transaction, practice, conduct or omission of any of the Released Entities in connection with the King Agreements, the King Entities, the JV's Business or Other Acts and (b) not to sell, assign, transfer, convey or otherwise dispose of any claim, demand or cause of action or right relating to any matter intended to be released by this Mutual Release. Each of the undersigned represents and warrants that it has not sold, assigned, transferred, conveyed or otherwise disposed of any claim, demand or cause of action or right relating to any matter covered by this Release. Each of the undersigned agrees to indemnify and hold each of the Released Entities harmless from and against any and all actions, claims, causes of action, suits, demands, obligations, damages, costs, expenses and liabilities, of any nature whatsoever, including court costs and attorneys' fees, arising from or in connection with, any action or proceeding, brought by, or prosecuted by, the undersigned, or by any of its successors or assigns, contrary to the provisions of this Release. It is further agreed that this indemnity shall be deemed breached and a cause of action accrued thereon immediately upon the commencement of any action contrary to this Release and then in any such action this Release may be pleaded by the Released Entities as a defense or any of the Released Entities may assert this Release by way of counterclaim or crossclaim in any such action. It is expressly understood and agreed that this Release may not be altered, amended, or modified or otherwise changed in any respect whatsoever, except by a writing duly executed by authorized representatives of all of the undersigned. Nothing set forth herein is intended, or shall be construed, to limit or restrict any party to this Release from proceeding at law or in equity to enforce any of the provisions of this Release and to recover reasonable attorneys' fees and costs if successful. This Release may be executed in counterparts each of which shall be deemed an original. -2- IN WITNESS WHEREOF, each of the undersigned has caused its duly authorized officer to execute this Release effective as of the ____ day of ________, 1995. PROVIDENCE JOURNAL COMPANY By:___________________________ Title:________________________ Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal KELSO INVESTMENT ASSOCIATES IV, L.P. By: Kelso Partners IV, L.P., General Partner By:___________________________ Title:________________________ Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal -3- KELSO PARTNERS IV, L.P. By:___________________________ General Partner Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal KELSO EQUITY PARTNERS II, L.P. By:___________________________ General Partner Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal KELSO & COMPANY, INC. By:___________________________ Title:________________________ Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal -4- KELSO & COMPANY, L.P. By: Kelso & Company, Inc., General Partner By:___________________________ Title:________________________ Subscribed and sworn before me as of the day of ________, 1995. ------------------------------ Notary Public ------------------------------ (Print Name) Seal -5- EX-21 10 SUBSIDIARIES OF PROVIDENCE JOURNAL EXHIBIT 21 PROVIDENCE JOURNAL COMPANY AND ITS SUBSIDIARIES ----------------------------------------------- Providence Journal Company ("PJ") 1. Providence Journal Broadcasting Corp. ("PJBC") a. Journal Broadcasting of Charlotte, Inc. b. Journal Broadcasting of Kentucky, Inc. c. Journal Broadcasting of New Mexico, Inc. d. Mountain States Broadcasting, Inc. 2. Colony Communications, Inc. ("Colony") 3. Colony Cable Networks, Inc. ("CCN") 4. Colony/Linkatel Networks, Inc. 5. Colony/PCS, Inc. 6. Fountain Street Corporation ("FtnSt") 7. Mathewson Street Parking Corporation ("MSPC") 8. M/I Acquisition Corp. ("M/I Ac.") 9. PJ Programming, Inc. ("PJ Prog") 10. The Providence Journal Company 11. Washington Street Garage Corporation 1 COLONY COMMUNICATIONS, INC. AND ITS SUBSIDIARIES ------------------------------------------------ Colony Communications, Inc. ("Colony") 1. CCF Management Services,Inc. 2. CCI Management Services,Inc. 3. Colony Cablevision of Lakewood, Inc. 4. Colony Cablevision of Southeastern Massachusetts, Inc. 5. Colony Interconnects, Inc. 6. Dynamic Cablevision of Florida, Inc. ("Dyn") 7. Lowell Cable Television, Inc. 8. U.S. Cablevision Corp. 9. Vision-Cable Company of Rhode Island, Inc. 10. Westerly Cable Television, Inc. 2 JOINT VENTURES (50% INTEREST) ----------------------------- A. King Holding Corp. ("King") 1. King Broadcasting Company ("KBC") a. King Videocable Company ("KVC") i. King Videocable Company-Minnesota ii. King Videocable Company-Newhall iii. King Videocable Company-TwinFalls("KV-TF") (a) King Videocable Company - Idaho b. King Videocable Company - Valencia c. King News Corporation B. Copley/Colony, Inc. ("Cop/Col") 1. Copley/Colony Cablevision of Costa Mesa, Inc. 2. Copley/Colony Cablevision of Cypress, Inc. 3. Copley/Colony Cablevision of Lomita, Inc. 4. Copley/Colony Cablevision of Los Angeles County, Inc. 5. Copley/Colony Cablevision of Orange County, Inc. 6. Copley/Colony Harbor Cablevision, Inc. 3 EX-23.2 11 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE The Board of Directors and Shareholders of Providence Journal Company: The audits of the consolidated financial statements of Providence Journal Company and Subsidiaries referred to in our report dated February 11, 1994, except as to note 2 which is as of November 18, 1994, and note 11(b) which is as of October 26, 1994, included the related financial statement schedule as of December 31, 1993, and for each of the years in the two year period ended December 31, 1993, included in the Joint Proxy Statement-Prospectus. Our report refers to a change in method of accounting for income taxes and a change in method of accounting for postretirement benefits in 1992. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports on the consolidated financial statements of Providence Journal Company and Subsidiaries, and the combined financial statements of Providence Journal Cable, included herein and to the reference to our firm under the heading "Experts" in the Joint Proxy Statement-Prospectus. KPMG Peat Marwick LLP Providence, Rhode Island January 25, 1994 EX-23.3 12 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of The Providence Journal Company on Form S-4 of our report on King Holding Corp. and subsidiaries dated February 11, 1994 (except for the fifth paragraph of Note 1 as to which the date is February 22, 1994, and Note 2 as to which the date is November 18, 1994) appearing in the Joint Proxy Statement-Prospectus, which is part of this Registration Statement. We consent to the use in this Registration Statement of The Providence Journal Company on Form S-4 of our report dated November 30, 1994 (relating to the financial statements of King Videocable Company not presented separately herein) appearing in the Joint Proxy Statement-Prospectus, which is part of this Registration Statement. We also consent to the references to us under the heading "Experts" in such Joint Proxy Statement-Prospectus. Deloitte & Touche LLP Boston, Massachusetts January 27, 1995 EX-23.4 13 CONSENT OF COOPERS & LYBRAND LLP EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion in this joint registration statement on Form S-4 of Providence Journal Company and Continental Cablevision, Inc. of our reports dated February 12, 1992 , on our audits of the consolidated financial statements and financial statement schedule of Providence Journal Company (prior to restatement for discontinued operations of the Company's cable television businesses), Colony Communications, Inc. and Copley/Colony, Inc. We also consent to the reference to our firm under the caption "Experts." Coopers & Lybrand L.L.P. Boston, Massachusetts January 26, 1995 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS YEAR DEC-31-1994 DEC-31-1993 JAN-01-1994 JAN-01-1993 SEP-30-1994 DEC-31-1993 1,400 1,017 0 0 21,265 24,432 2,610 2,134 864 1,022 40,790 39,006 256,722 252,402 123,132 110,082 748,749 775,685 35,060 42,195 271,055 276,601 214 214 0 0 0 0 343,043 359,361 748,749 775,685 0 0 138,531 179,499 0 0 140,634 196,332 0 0 0 0 2,038 2,578 (5,000) (20,955) (1,427) (5,765) (3,573) (15,190) (3,486) (7,494) 0 1,551 0 0 (7,059) (21,133) 83.11 (247.75) 0.00 0.00
EX-99.1 15 SCHEDULE BY COOPERS & LYBRAND EXHIBIT 99.1 REPORT OF INDEPENDENT ACCOUNTANTS In connection with our audits of the consolidated financial statements of Providence Journal Company and Subsidiaries for the year ended December 29, 1991, (prior to restatement for discontinued operations of the Company's cable television businesses) which financial statements are not included in the Prospectus, we have also audited the financial statement schedule of Providence Journal Company for the year ended December 29, 1991, (prior to restatement for discontinued operations of the Company's cable television businesses) listed in Item 21(b) herein. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein (prior to restatement for discontinued operations of the Company's cable television businesses). Coopers & Lybrand Boston, Massachusetts February 12, 1992 EX-99.2 16 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS EXHIBIT 99.2 PROVIDENCE JOURNAL COMPANY SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD - ----------- ---------- ---------- ----------- ----------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS For the year ended December 31, 1993...... $2,501,627 $1,226,396 $(366,735) $(1,227,294) $2,133,994 For the year ended December 31, 1992...... $1,970,891 $1,179,795 $ 322,377 $ (971,436) $2,501,627 For the year ended December 29, 1991...... $1,799,384 $1,664,628 $ 2,825 $(1,495,946) $1,970,891
- -------- (1) Represents net provision (payment) on contract advertising rebates. -----END PRIVACY-ENHANCED MESSAGE-----