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HomeMy WebLinkAbout12/05/1989, C-4 - REQUEST BY SONIC COMMUNICATIONS TO REASSIGN THE CABLE TELEVISION FRANCHISE AGREEMENT FROM SONIC CAB 'FETING AGENDA .!;7 ��INIIINII►Iip��ll��ll►111 iIlllll city of San LUIS OBISpo DATE ITEM # 4- COUNCIL AGENDA REPORT FROM: John Dunn, City Administrative Officer Prepared by: Debbi Hossli, Administrative Analyst SUBJECT: Request by Sonic Communications to reassign the cable television franchise agreement from Sonic Cable Television to Sonic Cable Leasing, both wholly owned subsidiaries of Sonic Communications. CAO RECOMMENDATION: Adopt the attached resolution authorizing the transfer of the cable franchise agreement to Sonic Cable Leasing. BACKGROUND Summary: In 1978, the City Council adopted an ordinance granting a fifteen year cable franchise to Sonic Cable Television. Sonic Communications, Sonic Cable Television's parent company, has recently requested to reassign the cable franchise to another of their subsidiary companies, Sonic Cable Leasing. The transfer has been requested to aid in Sonic Communication's corporate restructuring and merely involves a change in legal title to the franchise. The reassignment will not effect cable service to the residents of San Luis Obispo and local management of the cable system will remain the same. In order to satisfy the conditions prescribed in the cable ordinance which allow for the transfer, the proposed franchisee must demonstrate financial solvency and agree to operate the cable franchise under the terms of the existing agreement. Sonic Communications has submitted an Officers Certificate (Exhibit A) , a legal opinion prepared by the law firm representing sonic Communications (Exhibit B) , and corporate financial statements (Exhibit C) to comply with these requirements. Staff has reviewed the documents and determined that they adequately satisfy conditions of transfer. Therefore, staff is recommending that the City Council approve the attached resolution consenting to the reassignment of the franchise agreement to Sonic Cable Leasing. Concurrences: The City Attorney concurs with the recommendation to approve the transfer of the cable franchise agreement to Sonic Cable Leasing. ATTACHMENTS : Resolution Acceptance of Franchise Officer 's Certificate Letter to City Attorney from Sonic Counsel Sonic Consolidated Financial Statements n L/y- / A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN O LUIS OBISPO APPROVING AN INTER-COMPANY TRANSFER OF THE, CABLE TELEVISION FRANCHISE FROM SONIC CABLE TELEVISION TO SONIC CABLE LEASING, BOTH WHOLLY OWNED SUBSIDIARIES OF SONIC COMMUNICATIONS. Whereas, the City of San Luis Obispo approved an Ordinance No. 790 granting a fifteen year franchise agreement to Sonic Cable Television for community antenna television services, commencing April 1, 1978. Whereas, Sonic Communications, owner of Sonic Cable Television and Sonic Cable Leasing, has requested to reassign the franchise agreement from Sonic Cable Television to Sonic Cable Leasing to aid in restructuring corporate operations. Whereas, the reassignment only involves a change in legal title to the franchise agreement and will not effect cable service in the City of San Luis Obispo. Whereas, the current ordinance granting the franchise agreement to Sonic Cable allows for the reassignment of the franchise agreement subject to meeting conditions setforth in the ordinance and obtaining City Council consent. Whereas, Sonic Communications has demonstrated through an C Officer's Certificate (Exhibit A) , a legal opinion prepared by the law firm representing Sonic Communications (Exhibit B) , and a Financial. Statement (Exhibit C) , that the reassignment to Sonic Cable Leasing meets the conditions prescribed in the ordinance. Now, therefore., be it resolved by the Council of the City of San Luis Obispo as follows: Section 1. All benefits and obligations granted to Sonic Cable Television by the provisions of the franchise agreement, Ordinance No. 790 are hereby transferred to Sonic Cable Leasing, as of the date of this Resolution. Section 2. Sonic Cable Leasing, franchise, hereby accepts the terms of the aforesaid transfer of rights and duties and agrees to perform all obligations imposed upon the franchisee by the terms of said franchise agreement, Ordinance No. 790. r On motion of _ seconded O by and on the following role call vote: AYES: NOES: ABSENT: the foregoing Resolution was passed and adopted this 1989 day of Mayor Ron Dunin ATTEST: City Clerk. Pam Voges APPROVED: City A tinistrative Officer A to- e Finance Director ACCEPTANCE .OF FRANCHISE CITY OF SAN LUIS OBISPO SONIC CABLE LEASING CORPORATION, an Alaska Corporation, hereby agrees and undertakes during the life of the transferred franchise, to perform all .of the terms, conditions, provisions, and obligations thereof: SONIC CABLE LEASING CORPORATION further agrees to comply with the ^restrictions of said franchise and the laws and ordinances of the City of San Luis Obispo, and be subject to all rights, powers and privileges reserved and reservable to the City of San Luis Obispo and its officers as in said laws and ordinances contemplated and provided. Dated: November 21, 1989 SONIC CABLE LEASING CORPORATION an Alaska Corporation r. President/ - - Secretary - a OFFICER'S CERTIFICATE FOR SONIC COMMUNICATIONS Christopher Cohan certifies that: 1. He is the President of Sonic Communications, Sonic Leasing Corporation and Sonic Cable Television of San Luis Obispo. 2. He is the sole shareholder of Sonic Communications. Sonic Communications is the sole shareholder of Sonic Cable Television of San Luis Obispo and the sole shareholder of Sonic Leasing Corporation. 3. Because of the common ownership by Sonic Communications, Sonic Leasing Corporation has the same financial resources available to it as are available to Sonic Cable Television of San Luis Obispo. I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of my own knowledge. Dated: November ��, 1989 Chriop er 4oainlr�lPr-esid6rit 37:S1oCert.snc 111489 EXHIBIT "A" t i WARREN A. SINSHEIMER III " SINSHEIMER, SCHIEBELHUT b BACCETT ROBERT K. SCHIEBELHUT A PROFESSIONAL CORPORATION K. ROBIN BACCETT STREET ADDRESS: MARTIN I. TANCEMAN ATTORNEYS AT LAW IDIO PEACH STREET MARTIN P. MOROSKI DAVID A. IUHNKE POST OFFICE BOX 31 CM. SUZANNE FRYER SAN LU15 OBISPO. CALIFORNIA 93406-0031 TELECOPIER: , STEVEN 1. ADAMSKI _ 805-541-2802 DIANE W. MOROSKI 805-541-2800 CYNTHIA CALDEIRA IALYNNE GILES - MICHAEL R PETERSON SCOTT E. LEWIS ROBERT R. ORELLANA ALAN D. SHEWELL OF COUNSEL November 21, 1989 D. IAN DUFFY THOMAS M. DUGGAN City of San Luis Obispo HAND-DELIVERED 990 Palm Street San Luis Obispo, California 93401 Attention: City Attorney Re: Inter-Company Transfer of Cable Franchise Dear Sir: We are counsel to Sonic Communications, Sonic Cable Leasing Corporation and Sonic Cable Television of San Luis Obispo (collectively, the "Corporations") . We have been asked to render this opinion to you in connection the proposed transfer of a cable �- television franchise from Sonic Cable Television of San Luis Obispo to Sonic Cable Leasing Corporation. As counsel to the Corporations, we are familiar with the Articles of Incorporation, Bylaws, records of meetings of stockholders and directors and the stock ledgers of the. Corporations. In connection with this opinion, we have also reviewed and relied upon an Officer's Certificate of Christopher Cohan., President of each of the Corporations. In making our examination of the above-mentioned documents, we have assumed the conformity to the originals of all documents submitted to us as copies. We wish to advise you that Mr. K. Robin Baggett, a partner in our firm, is a director of Sonic Communications and Assistant Secretary to each of the Corporations. Based upon and subject to the foregoing, we hereby advise you that Christopher Cohan is the sole shareholder of Sonic Communications, and Sonic Communications is the sole shareholder of Sonic Cable Leasing Corporation and Sonic Cable Television of San Luis Qbispo. This opinion is solely for the information of the addressee hereof and is not to be quoted in whole or in part or otherwise EXHIBIT "B" v r� City of San Luis Obispo November 21, 1989 Page 2 referred to nor is it to be filed with any other governmental agency or other person without our prior written consent. Other than the addressee hereof and its counsel, no one is entitled to rely on this opinion. Very truly yours, SI S IT. SCHIEt-BELHUT SCHIEBELHUT & BAGGETT R RKS/bh e.:City.Ltr r i Communications SONIC COMMUNICATIONS AND SUBSIDIARIES Consolidated Financial Statements March 31, 1989 and 1988 A EXHIBIT "C" SONIC COMMUNICATIONS AND SUBSIDIARIES , TABLE OF CONTENTS P� President's Letter................................................................•-----.........1 Operations Discussion and Analysis.......................................................4 Report of Management........................................................................5 - Independent Auditors' Report_..............................................................6 Consolidated Financial Statements for the Yeats ended March 31, 1989 and 1988: Consolidated Balance Sheets.........:........................................................7 Consolidated Statements of Operations and Accumulated Deficit.........................8 Consolidated Statements of Cash Flows.....................................................9 Notes to Consolidated.Financial Statements............................................... 10 Supplemental Consolidating Schedules for the Year ended March 31, 1989: Balance Sheet Information.................................................................. 16 Operations Information..................:................................................... 17 OperatingStatistics........................................................................... 18 FYE FYE % Increase Performance Highlights 3131/89 3/3188 (Decrease) (in thousands) Consolidated operating revenue S 44,036 38,902 132 Consolidated operating expense 23,364 21,781 7.3 Consolidated operating income 20,672 17,121 20.7 Consolidated net loss (5,768) (8,870) (35.0) Net property,plant and equipment 67,226 69,565 (3.4) Number of basic subscribers 119 116 2.6 Number of pay TV subscribers 104 109 (4.6) Annual pay per view buys 315 174 81.0 Homes passed 234 240 (2.5) I I PRESIDL,VS LETTER To our employees and business associates: At the conclusion of our last fiscal year,I established a five point set of priorities for the company. These priorities were: BECOMING MORE COST COMPETITIVE As we conclude this fiscal year, the threat of re-regulation of the cable industry looms on the horizon. Much of the blame for this rests with the industry,as the subscriber has seen significant increases in the cost of cable over the past few years. Our primary approach has been to reduce costs whenever possible. To that end,we joined a programming co-op of various cable operators so that we could,collectively,bargain for programming rates comparable to the larger cable operators. We continue to be successful in aggressively pursuing methods to redtice and hold the line on the additional costs associated with the new copyright regulations and the deplorable"possessory interest"property tax, that only cable operators aro assessed. Considerable time was spent at the corporate and system level standardizing our customer reporting system (CableData)to allow more accurate and timely subscriber information and reports. In order to track staffing and spending more adequately,the customer service department was established as its own cost center in our financial reporting system. CPREPARING FOR FUTURE GROWTH The beginning of this fiscal year saw the completion of the company-wide standardization and reorganization of the previous year. It was now time to evaluate the long term direction the company should take. As we explored possible options and opportunities,it became apparent,that in every case,the restrictive nature of our existing debt structure made the actual undertaking of these opportunities unfeasible. Therefore,after much consideration, the decision was made to sell our Alaskan operation. This was a difficult decision to make because,due to the efforts of our Alaskan persomtel,.the Alaska system was having its most successful year since acquisition. Unfortunately,the oil industry recession of the past few years has had a serious detrimental impact on the Alaskan economy. This has made the original projections for the Alaska system unrealistic and the existing loan structure and covenants an onerous burden that we have been unable to extricate the company from by negotiation. As a result, in October of 1988, the company entered into an agreement to'selltihe Alaska system for 5143,000.000. This sales price is contingent on a number of factors,all of which we believe the company will achieve.. The proceeds of this sale will be used to retire the existing bank and insurance company debt,which will eliminate the operating constraints that exist under the loan agreements. We believe the sale will be completed during the summer of 1989, at which time we will begin to actively pursue other financial opportunities and the establishment of financing agreements under favorable management terms. r -1- BECOMING MORE CUSTOMER ORIENTED CThe cable industry has seen the need to become more sensitive toward the needs of the subscriber. In years past, our customer service representatives were simply"order takers," however,cable television is in a competitive marketplace and we can no longer afford to sit back and let other entertainment options take the place of cable television. To this end,we at Sonic have taken an aggressive approach to become more consumer oriented with the introduction of intensive customer service training. In this training we are focusing on"selling"the service that best fits the customers interests, i.e..Disney for the children,HBO for sports programming,etc. Additionally,we have eliminated the packaging concept of pay services and established a simple list of services for customers to seleu 8cein. We feel this allows for ease of purchase and gives the subscriber more choice. In an attempt to curtail video rentals and make movie viewing more convenient for the subscriber,we have lowered the price of our Pay-Per-View service. As a result of this price reduction,we have seen the buy rates steadily increase. It is our opinion that Pay-Per-View services will become more and more popular as subscribers become more Pay-Per-View,savvy. Not only has our customer service personnel become more service oriented, so has our technical and installation personnel. The field personnel have received euttomer.service training by rotating in the office and taking calls from subscribers. In turn,the customer service staff has gone in the field to observe how installations are performed. Cress training builds teamwork and promotes unity between the field and in- house personnel. We feel this comradery reflects in how we treat subscribers. The customization of our subscriber billing statement has made them easier to understand. We have itemized on the bili the amounts attributable to franchise fees,copyright fees,and city users taxes Sonic pays to the governmental agencies. This was done to make the subscriber aware of the portion of the bill attributable to taxes the company has little control over. CHUMAN RESOURCES The maximization and uciliza[ioa of our human resources is of the upmost importance to the company. We operate with a very lean staff which encourages personnel to be creative, responsible.-and innovative. During the past year,senior staff at the system level have become a more cohesive group, not only among themselves,but other systems as well. The sharing of ideas,such as new ways to gain subscribers,tips on how to collect bad debts,incentive programs,and employee motivational techniques have been anintegral part of the systems communication network. Our theory is,"why reinvent the wheel." The staffing levels have been reduced,even though the company realized a 3%growth in basic subscribers. Once again maximization to the fullest The Federal Communications Commission (F.C.C.), Equal Employment Opportunity Branch, has taken more steps toward enforcement of the Cable Act Because of this,the company has taken an aggressive, rather than passive, approach with regard•to F_EO compliance, and devoted considerable resources to achieving the goals established by the FCC: The fust stip was to negotiate a "Multiple Reporting Agreement" on our EEO program with the FCC The,purpose of the MRA is to outline the general administrative provisions and EEO reporting procedures agreed to by the company and the EEO Enforcement Brandt This presentation was made in Washington,D.C.earlier this year and it appears as if the program was-well received- The fulfillment of our EEO goals is much improved,and the company made the achievement of these goals a component of the management bonus program. C i SATISFYING OUR INTERNAL AND EXTERNAL CONSTITUTENCIES With the assimilation of the previously discussed issues,the newly implemented fmancial reporting system has become a critical management tool for measuring and monitoring the company's progress in these key areas. Due to the increased awareness and co-operation of management and operations we have realized the benefits of timely and accurate reporting,as the financial statements will illustrate. This has also allowed as to satisfy the reporting requirements of our lending institutions. LOOKING AHEAD With the numerous bills in Congress to re-regulate the industry,cable is going to be scrutinized even more; than ever. We feel this is a maior consumer issue and willreceivemuch attention. Therefore,our goal for the upcoming year is to stay focused on service,and provide the best cable can offer. The upcoming fiscal year should prove to be a pivotal one for both the cable industry and for Sonic. As we embark upon the new year,we feel confident that we will mea the challenges that lie ahead. Sincer l Christopher Cohan President l t 1 OPERATIONS DISCUSSION AND ANALYSIS cREVENUES: - For the fiscal year ending March 31, 1989,Consolidated Revenues of the Company were 544,036,000,an increase over the prior year of 13.296,or 55,134,000. This increase represents.the second year in a row that Sonic has increased total revenue over 13%annually. As with last year,this is attributable to increases in both subscribers and rates. Basic subscribers increased almost 3%, from 116,476 to 119,471. This, coupled with rata increases accoortted for a majority of the 53,502,000 increase in Basic Revenue. Pay TV Revenues for the year were up 7.2%,or$768,000. This increase is due entirely to pay-per-view revenues which increased 101%this year due to promotion and increased subscriber awareness. Revenues from the standard pay channels such as HBO and Showtime were essentially flat as the decrease in subscribers this year was due primarily to the increasing difficulty of marketing to a mature pay service market. This decrease in pay peoetrations was offset partially by pay rate increases. The subscriber has also become aware of the value of auxiliary services such as remote control, which increased 24.790,or 5387,000. Better cash management techniques enabled us to increase Interest Income 32296,or S385,000,for the year. EXPENSES The expense side of the ledger saw operating costs up 7.3%,or S 1;-583,000 from last year. In the CATV Operations area,while we were able to reduce labor and fringe costs,this was more than offset by increased subcontractor costs for non-capital projects (S282,000). Material costs also increased (5249,000)due to both increases in supplier prices(primarily in cable)and increased maintenance costs as our plant is aging in some system areas. To rectify this situation we have already budgeted at the operations level for increased installation staffing to reduce subcontractor costs to a minimum, and we have allocated a r significantportion of next year's capital budget to the rebuild of the older sections of our CAN plant - In the Programming area costs r.=up 13%,or S 1,006,000. Pay-pec-view licensing,costs were up 7390,or 5353,000, as a result of our increased revenues. Pay TV license fees were also up 7.696, or 5353,000, reflecting increasing programmer costs and declining Pay TV margins_ These figures support our current pay-per-view emphasis. The largest increased cost was that of the satellite services such as ESPN,CNN,USA Network,etc. Costs for these services roue 3690,or S605,000. This reflects the continuing trend of significant increases and programming expenses as suppliers continue to secure programming at any cost and pass these increases along to the cable operator. These increases were partially offset by lower copyright fees due to the implementation of Broadcast Basic Service,allowing a reduction of the copyright fee where feasible,and in January of this fiscal year we began the pass through of the copyright fees to the subscriber in most system areas. Marketing costs for the current year were up 12.8%.or S 195,000,paralleling our increased revenue base, and were attributable to increases in advertising and promotional expenses. Advertising sales and local origination costs were down 56%or 590,000. Due to the cost efficiency programs discussed in the President's Letter,Customer Service and General and Administrative costs were maintained at last year's level. r -4- . -/� OPERATMG INCOME The Operating Income or in cable parlance"Cash Flow"of the Company was%20,672,000,an increase of i 1 20.7%,or S3,551,000,for the fiscal year. OTHER EXPENSES Interest Expense was up 5b%,or$687,000,due primarily'to increasing interest rates during the year on the S30;=,000 Bank Debt Depreciation and Amortization was down from last year 2.2%,or 5289,000,as some of our older plant has become fully depreciated,mirroring the increased maintenance costs discussed under CATV Operations. R=rt of Management The management of Sonic Communications has prepared and is responsible for the financial statements and related financial information included.in this annual report The financial statements have been prepared in accordance with generally accepted accounting principles. Other financial information included elsewhere in this report is consistent with information in the financial statements. To meet its responsibilities with respect to financial information, management maintains a system of l internal accounting controls that is designed to provide reasonable assurance,on a cost effective basis,as to Elie integrity,objectivity,and reliability of the financial records and as to the protection of asset. This system includes communication through written policies and procedures,and an organizational structure that provides for appropriate division of responsibility and the training of personnel. The independent public accountants provide an objective assessment of the degree to which management as meits responsibility for faimess.of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and such other procedures as they deem necessary to trach and express an opinion on the fairness of the financial statements. ' Manag er'it believes that its policies and procedure provide reasonable assurance that its operations are twith a high standard of business conduct 1 Christopher Cohan President David E.Wagner Controller /^ r i 'J' KP414G PF-qt Marwick Certified Public Accountants Peat Marwick Main&Co. C 2121 No.California Blvd..Suite 840 l Walnut Creek.CA 945963572 ind=ndent Auditors'Renoir The Board of Directors Sonic Communications: We have audited the accompanying consolidated balance sheets of Sonic Communications and subsidiaries as of March 31, 1989.and the related consolidated statements of operations and accumulated deficit and cash flows for the year 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 audit The consolidated financial statements of Sonic Communications and subsidiaries as of March 31.1988 were audited by other auditors whose report dated Jane 17, 1988 expressed an unqualified opinion on those statements. 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 C free of material misstatement An audit includes examining, on a tut 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 1989 consolidated financial statements referred to above present fairly. in all material respects, the financial position of Sonic Communications and subsidiaries as of March 31, 1989, 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 2 to the consolidated financial statements. the Company changed its method of accounting for income taxes in 1989. Our audit was made for the purpose of forming an opinion on the consolidated frmncial statements taken as a whole. The consolidating information included in Schedules 1 and II is presented for purposes of additional analysis of the consolidated financial:statements rather than to present the financial position. results of operations and cash flows of the individual companies.The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and,in our opinion.is fairly presented in all material respects in relation to the consolidated financial statements taken as a whole. t24W/0/c 19/`( �!!. May 26. 1989 C � � I SONIC COMMUNICATwNS AND SUBSIDIARIES -� Consolidated Balanc, Sheets March 31, 1989 and 1988 Assets 12$4 14$$ - (in thousands) Cash and cash equivalents $ 2,017 5,512 Account receivable(net of allowance for doubtful accounts of$91,000 in 1989 and$201,000 in 1988) 829 771 Prepaids and other assets 985 774 Notes receivable — 1.153 Property,plant and equipment, net 67,226 69,565 Acquisition deposit — 2,328 Intangibles and deferred costs,net _21.770 25.104 $ 92,827 105,207 Liabilities and-Shareholder's Deficit Liabilities: Accounts payable 3,308 3,440 Accrued liabilities 3,430 3,577 Deposits and prepaid subscriptions 1,403 1,374 Notes payable 102,555 109,170 Capital lease obligations 1,282 1.029 Total liabilities 111,978 118.59 Shareholder's deficit: Common stock,no par value; authorized, 100,000 shares;.issued and outstanding, 7,950 shares 1,012 1,01.2 Additional paid-in capital 1,232 1,232 Accumulated deficit 21395) (15,627) Total shareholder's deficit (19,151) (13:383) $ 92,827 105,207 See accompanying notes to consolidated financial statements. -7- SONIC COMMUNICATIONS AND SUBSIDIARIES , CConsolidated Statements of Operations and Accumulated Deficit Years ended March 31, 1989 and 1988 1284 128$ (in thousands) Revenues: CAT' $ 28,173 24,671 Pay TV 11,390 10,622 Other 4,473 3.609 Total revenues 44.036 38.902 Operating expenses: CAN operations 4,424 3,882 Programming costs 8,708 7,702 Customer service 2,802 2,274 Marketing and sales 1,837 1,732 General and administrative 5.593 6.191 Total operating expenses 23.364 21.781 Operating income before other expenses 20.672 17.121 Other expenses: Depreciation and amortization 12,733 13,022 C Interest(net of amounts capitalized of$147,000 in 1989 and $258,000 in 1988) 12,948 12,261 — Other 759 760 Total other expenses 26.440 26.043 Loss before income taxes (5,768) (8,922) Income tax benefit — _52 Net loss (5,768) (8,870) Accumulated deficit,beginning of year (15,627 (6.757) Accumulated deficit,end of year $ 2( 1,395) 1( 5,627) See accompanying notes to consolidated financial statements. -8- �y'�7 JVly lt. l-V+v uvl CJ iviLA t 1V+vJ AND SUBS IDIARIF" Consolidated Statements of Cash Flows Years ended March 31, 1989 and 1988 14$4 14$$ (in thousands) Cash flows from operating activities: Net loss $ (5,768) (8,870) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and arnoatiiaaon 12,733 13,022 - Warrant amortization 150 334 Allowance for bad debts (116) 62 Effect of changes in Accounts receivable 58 172 Prepaids and other assets (211,) (62) Accounts payable (132) 1,547 Accrued liabilities (147) 1,220 Deposits and prepaid subscriptions 29 52 Net cash provided by operating activities 6.596 7.477- Cash flows from investing activities: •Issuance of notes receivable — (391) Collection of notes receivable 1,153 238 Capital expenditures (3,800) (5,847) Payment for purchase of subsidiary (638) — Net cash used in investing activities (3:285) (6.000) Cash flows from financing activities: Issuance of notes payable 1,985 — Payment of notes payable (8,750) (4) Payments on capital lease obligations 1 (411 . 06 Net cash used in financing activities (6.806) (20) Net increase(decrease)in cash and cash equivalents (3,495) 1,457 Cash and cash equivalents,beginning of year 5-512 4.055 Cash and cash equivalents,end of year $ 2,017 5512 Supplemental Disclosures of Cash Flow Information: Cash paid for interest.net of amourit capitalized $ 13,329 11,906 Assets acquired under capital leases $ 294 56 See accompanying notes to consolidated financial statements. -9- 1 SONIC COMMUNICATIONS AND SUBSIDIARIES Notes to Consolidated Financial Statements \` March 31. 1989 and 1988 (1) QManiradon Sonic Communications (the Company) operates television (CATV) systems in California and Alaska. The California cable operations ars located in San Luis Obispo County and the surrounding areas.Watsonville and surrounding areas,West Sacramento,Woodland,Auburn,the Portola/Feather River area and the Riverbank area of the San Joaquin Valley. The Alaskan operation is located in the city of Anchorage and surrounding communities with satellite operations in the Kenai Peninsula and Bethel. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Pro2=.Plant and Equipment CATV systems are stated at cost and are depreciated using the straight-line method over estimated useful lives of 5 to 18 %Tars for systems acquired after April 1, 1981. System additions prior to April 1, 1981 are depreciated using the declining balance method over estimated useful lives of 8 to 20 years. C Vehicles.machinery,office and data processing equipment and buildings are depreciated using the straight-line and declining balance methods over estimated useful lives of 3 to 25 years. Capital leases and leasehold improvements are amortized using the straight-line and declining balance methods over the shorter of the lease tam or the estimated useful life of the asset- Construction ssetConstruction in progress consists of expenditures incurred for expansion of existing CATV systems. Inter=incur,--4 during the period of construction is capitalized as pan of the cost of the CATV system. Repair 2nd maintenance costs are charged to operations as incurred. In tiles Intangibles ars stated zi cost The excess of amounts paid over the fair values of tangible and intangible assets acquired in purc4i=gansactions is recorded as goodwill and is amortized using the straight-line method over the life of the franchise,or 40 years if the franchise has an indefinite life. Franchise development costs arc generally deferred and amortized using the straight-line method over the life of the franchise. Financings'` Financing costs are deferred and amortized, using the interest method, over the life of the loans. which are 10 to 12 years (Continued) C O -10- �y-/ 9 C L) S=Mai "Significant Accounting Policies,Continued CATV and Pay TV Revenues CAN and Pay TV revenues include monthly subscriber billings. Installation fees and other charges to subscribers are included in other revenue. ncome Taxes In 1989,the Company adopted the liability method to account for income taxes in accordance with Statement of Financial Accounting Standards No. 96. Deferred income taxes are provided for temporary differences in reporting income and expenses for income tax and financial statement purposes. This adoption had no effect on income in the current year. nch Pgluivalen c For purposes of the statement of cash flows,the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Reclascificatonc Reclassifications have been made in the 1988 financial statements in order to conform to the presentation adopted for 1989. (3) prgrly,Plant and Equipment ' Property,plant and equipment consists of- M2 14$$ (in thousands) CATV system S 89515 84,457 ( Vehicles 1,517 1378 Machinery,office and data processing equipment 2,673 2,626 Buildings and leasehold improvements 2.711 - 2530 96.416 90,991 Accumulated depreciation and amortization (30.890 -(24,261 65.526 66,730 Construction in progress and inventory 1,618 2,760 Lard 92 _5 S 67,226 69,565 Property, plant and equipment includes capital leases for an office building, data processing equipment and vehicles totaling 51,353,000 and 51.043.000 in 1989 and 1988,respectively. (Continued) a (a) ln2ngbles and Deferred Costs intangibles and deferred costs consist oL (m thousands) Goodwill S 18.077 17,843 Non-compete agreements and subscriber lists 12.659 11.467 Franchise development costs 5.592 5.057 Futancing costs 1,659 1.659 Total intangibles and deferred costs 37.987 36.026 Accumulated amortization (16.2171 (10.9221 Intangibles and defentd costs,net S 21.770 25,104 (5) Notes Receivable Notes receivable at March 31, 1988 are unsecured and due from the sole shareholder with interest rates ranging from 6-9%. These notes were repaid in the current year. (6) Notes Payable Notes payable consist of. 12$2 im (in thousands) Nota payable to insurance companies: 1150%senior notes due 1996 S 17,500 20.000 11.75%senior notes due 1998 29.700 33.000 12.50%subordinated nota due 1996 8.521 9.682 _ 12.75%subordinated notes due 1998 14.849 16-488 70.570 79.170 Notes payable to banks 30,000 30.000 Notes payable to shareholder 1.985 — S 102656 109,170 Insurance Com Mies In connection with issuance of the subordinated notes. I0.000 detachable Class A warrants and 17,000 detachable Class B warrants were issued to the noteholders. The warrants have an imputed value of S1.232,000 (S45 per unit for Class A and S46 per unit for Class B),art exercisable after February 28, 1992 and before March 1. 1996 at S2.00 per share and have been recorded as additional paid-in capital. The number of shares of the Company's common stock for which each warrant is exercisable will be determined at the time of exercise and is based on a certain percentage of the Company's financial value at that time. The Company may.at the holder's option.purchase the warrants during the exercise period. During the period Marta 1, 1994 to March 1. 1996. the Company may.at its option,purchase all outstanding warrants The effective interest rates on the subordinated notes, discounted for the imputed value of the warrants,is 1355%for the 12.50%notes and 13.75%for the 12.75%notes. (Continued) -12- (6) Notes.. _. able.Continued ` The notes require payments of$4,375,000 in 1990.S8.750,000 per year from 1991 through 1995, and$5,000,000 per year in 1996 and 1997. Optional prepayments both with and without penalty ase permitted Hadercertain conditions Prepayment penalties for focal year 1990 range from 7.679io to 927%of outstanding principal. In 1989.principal payments include an optional prepayment as allowed under the loan agreement,without penalty paid to the insurance companies of 54,375.000. The notes, collateralized by substantially all of the Company's assets, require the Company to maintain certain financial ratios and include, among other things, restrictions as to additional borrowings and payment of dividends. Bits The bank loan agreement provides for a maximum revolving line of credit of 530,000.000. The principal outstanding was refinanced by a replacement tum note scheduled to be paid in 29 quarterly installments commencing on lune 30. 1989. Borrowings under the agreement aro at fluctuating interest rates(12%at March 31.1989). The agreement requires that the Company maintain certain financial ratios similar to the insurance company notes, Shareholder In 1989 the Company established a term loan agreement with its sole shareholder. This debt is subordinate to the insurance companies and bank debt The balance of this loan at March 31, 1989 was 51,985.000, which is due in one lump sum payment on March 31, 1998. The existing insurance company and bank loan agree=ments require that the interest rate on this loan be greater than or equal to the average rate of the existing insurance company and bank debt The average borrowing rate to the shareholder for the year ending March 31,.1989 was 12%. Nous payable mature as follows: (in thousands) l` 1990 S 7,675 1991 12.350 1992 12,350 1993 12,800 1994 13,400 Late=years 43.980 S 102,555 m t&= The Company leases an office building from its sole shareholder under capital lease which expires October 1,2004 and requires monthly payments of 513,000. The Company and its subsidiaries have various noncancelable operating leases for vehicles,office facilities and head-end site locations with terms in excess of one year. (Continued) -13- m Leases.Continued _ The present value of the minimum lease payments for all capital leases and the minimal annual .– lease payments for operating leases as of March 31, 1989 ate: \l Capital Operating 1Cd= LM= (in thousands) 1990 $ 303 S 511 1991 284 442 1992 270 419 1993 185 .385 4994 156 377 Lata Yeats 1.638 — 42 Total minimum lease payments 2,836 S 2,476 Less amount representing interest (1-554) Obligations under capital leases S 1,282 Interest expense on capital leases was S 155,000 and S 147,000 in 1989 and 1988,respectively. In addition, the Company and its subsidiaries lease other office space and land under month-to-month or other cancelable arrangements. Rental expense for 1989 and 1988 was as follows: (in thousands) Sole shareholder S 144 144 Others S 715 851 (8) Income Taxes The income tax benefit consists of: (m thousands) Dcfra! S — 52 Current S — 52 In 1988,the tax benefit of 552,000 arising from operating loss carryforwards was recognized in the financial statements as a reduction of deferred income tax credits which resulted from timing differences that will reverse during the carryforward period. At Manch 31, 1989,the Company has operating loss carryforwards (expiring through 2004) of approximately 562,709,000 for federal income tax purposes and 510,910,000 for financial reporting purposes. In addition,the Company has certain state operating loss carryforwards and investment tax credit carryforwards available to offset future income taxes. (Continued) -14- C' y-�3 (9) Profit Sharing Plan The Company has a profit sharing plan coveting all employees with more than one year of service. Contributions to the plan are at the discretion of the Board of Directors. subject to certain i limitations under the Internal Revenue Code. Contributions to the plan were 546.000 and 530.000 in 1989 and 1988,respectively. (10) Disposition of Alaska Subsidiary On October 7. 1988 the company signed an asset sale agreement with another CATV company to sell substantially all the assets of Sonic Cable TV of Alaska(a wholly-owned subsidiary). The sale price of the assets is estimated at 5143,000.000,but is contingent on a number of conditions. The most significant of these conditions are: the actual number of"paying" basic customers at a specified. measurement date and a calculation of adjusted asses and liabilities for various prepayments and accruals of revenue and expenses. The.sale is also contingent upon approval by the Alaska Public Utilities Commission. The sale,according to management estimates,is expected to be completed during the fust or second quarter of the1990 fiscal year. (11) Commitments-and Contingencies Terms of various franchise agreements generally require that the Company and its subsidiaries pay franchisors 2-5% of annual CATV.subscriber receipts,as described in the various agreements. CA'IV.franchises are normally granted for 15 to 20 years and have varying termination dates ranging through 2006. Management is of the opinion that all existing franchises will be renewed. Franchise fees expensed for 1989 and 1988 were$706.000 and 5747.000,respectively. The Company is a guarantor on a 52,500,000 personal line of credit for the sole shareholder_ C The Company is involved in various legal actions and other claims in the ordinary course of business relating to its CATV operations. Management believes that the resolution of these matters will not materially affect the Company's financial position or operations. P -15- �A/ C, .. eOo O Pf rf m N_N M1 H I mN NI r I O.nM1, N 000 P L h CJI Pb< O..t u N M1 NIIIIIII�IIIIII eq ..N ... NWWYpYpII CM ^� �. Io I I I o' I IG I I I IN . o o' ��I cn eft I v U �.�gryy �w'.yyy D. -P1m.ON I M1...CO Iy I M1 ^en 4m c N� v mN.Pe�c OI ^oM1o_N �, ON O t C> cr, M1. O— ICc, Ohf�ch Q� Ym r,�n„ a en r 0 m H �_ O 0 F r s N O. 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