COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON PUBLIC PROPERTY AND PUBLIC WORKS - - - - Room 400, City Hall Philadelphia, Pennsylvania Thursday, February 17, 2005 1:50 p.m. - - - - BILL 041071 - An Ordinance consenting to the transfer of control of the Area II cable television franchise from Urban Cable Works of Pennsylvania, LLC to Time Warner Cable... PRESENT: COUNCILMAN DARRELL CLARKE, Chair COUNCILMAN JAMES KENNEY COUNCILMAN JACK KELLY COUNCILMAN FRANK RIZZO COUNCILMAN MICHAEL NUTTER COUNCILMAN W. WILSON GOODE, JR. - - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 I N D E X BILL 041071 PAGE JOSEPH JAMES, Public Property....... SALVATORE DEBUNDA, ESQ., PhilaComm.. 27 WILLY JOHNSON, PhilaComm............ 30 STEVE PRESSMAN...................... 36 ERIC HOLDER, ESQ., Inner City....... 70 JOHN FOGARTY, ESQ., Time Warner..... 83 REGINA MARTIN, Urban Cable.......... 83 MURAD KALAM, ESQ., Inner City....... 93 JUDITH ROBINSON..................... 146 3 02/17/05 - PUBLIC PROPERTY - BILL 041071
Good afternoon. I'm sorry for the delay. This will be the hearing that was recessed on the Committee of Public Property and Public Works. Will the Clerk please read the title of the bill.
Bill No. 040700 is being held at the request of the sponsor, Councilman Mariano. Bill No. 041071, an ordinance 12 consenting of transfer of control of the Area II franchise from Urban Cable Works of Pennsylvania, LLC, to Time Warner Cable Inc. and the transfer and assignment of the Area II cable television franchise from Urban Cable Works of Philadelphia, L.P. to Time Warner Cable Inc., both under certain terms and conditions.
Thank you. For the record, a member of the Committee Councilman Frank Rizzo. Also present is Councilman Michael Nutter. The first witness, will you please read your name into the record? 4 02/17/05 - PUBLIC PROPERTY - BILL 041071
Good afternoon, Councilman. My name is Joseph James, I'm Deputy Commissioner for the Department of Public Property. I'm here on behalf of the Administration to speak to Bill No. 041701. I've provided written testimony and gave that testimony at the previous hearing. I have no 9 written testimony today, but I would like to offer an amendment to that bill. I'd like to speak to the provisions of the amendment which we have provided copies.
The amendments deal with two specific provisions which I will read into the record. And they deal with Time Warner Cable shall execute an agreement substantially in the form attached hereto as Exhibit C with additional provisions to the following effect and specific form and content satisfactory to the City Solicitor. Number 1, within 90 days following the execution of this assumption agreement, Time Warner Cable shall be in full material compliance with all terms and conditions of 5 02/17/05 - PUBLIC PROPERTY - BILL 041071 the franchise agreement, the 1999 assumption agreement and the 1999 supporting agreement or shall pay to the City liquidated damages as provided in the franchise agreement or in the case of the terms and conditions of the 1999 assumption agreement and supporting agreement liquidated damages of $250 per day for each day that such non-compliance continues and for each breach and shall be subject to all other applicable remedies provided by the franchise agreement. Any imposition of the liquidated damages with respect to the term and conditions of the 1999 assumption agreement and supporting agreement shall be in accordance with the procedural requirements of the franchise agreement with respect to liquidated damages. Number 2, Time Warner Cable shall submit to the City, not later than May 1, 2005, an updated revision of the 15-year projections attached as Exhibit B to the supporting agreement. The revised projection shall provide: One, actual figures for years 1999 through 2004 in each reporting category 6 02/17/05 - PUBLIC PROPERTY - BILL 041071 except as reasonable agreed otherwise by the parties. Two, projections for the year 2005 in all reporting categories except as reasonably agreed otherwise by parties, including but not limited Operating and Capital budgetary projections for year 2005. And three, further detail in the capital expenditures and investment reporting category by identifying in separate line items projections for investments and projections for capital expenditures for equipment, distribution plant, subscriber equipment and other expenditures. Time Warner Cable shall submit such revised projections each year providing actual figures in each reporting category except as reasonably agreed otherwise by the parties for the preceding five years an projections in each reporting category for the upcoming year including but not limited to Operating and Capital budgetary projections for the upcoming year. Such revised projections shall be subject to the confidentiality provisions of Article 2 Section 11 of the franchise agreement. 7 02/17/05 - PUBLIC PROPERTY - BILL 041071
Are there any questions of this witness by members of the Committee? (No response.)
Thank you, Mr. Chairman. Mr. James, I'd like to ask you some questions both about this document, which you just handed this up today; is that correct?
So I was reading it as you were reading it for the first time, but let me ask a couple questions. One, what was the circumstance or the nature of the need for this amendment in the first place?
The reason for the amendment was a number of reasons. In our review of the franchise agreement in the 8 02/17/05 - PUBLIC PROPERTY - BILL 041071 assumption agreement from 1999 and our review of the franchise as part of our review process, we wanted clear up an issue of liquidated damages as they apply to the assumption agreement and supporting agreement. It appeared in our review, there is specific language in the franchise agreement that speaks to liquidated damages in most categories with a specific dollar amount for compliance. When we reviewed the assumption agreement, it did not appear that the assumption agreement was fully incorporated into the franchise agreement.
This is the assumption agreement from the previous transfer in 1999?
That is correct. When we did the transaction before Council in 1999, it was done in a two-phase effort. First, it was a renewal of the Wade Cable franchise which already existed in Area II. It was renewed as Wade Cablevision in 1999. The next thing we did was a transfer from Wade Cablevision to Urban Cable Works of 9 02/17/05 - PUBLIC PROPERTY - BILL 041071 Philadelphia. So in review, the transfer, which the transfer incorporated the assumption agreement which were additional provisions that we were requesting at the time was done after the franchise had already been renewed, and it did not appear in the legal review there was language in that final document that incorporated all of those provisions into the franchise agreement.
And when you were last before the Committee, your testimony, of course, was necessarily brief. You were, I think, slightly under the weather and had to go to another meeting. What I'd like to get is a little better understanding of not the longer history for the moment of the transfer process, but I'm left with the impression from reading some of the documents that there may have been some earlier compliance issues with regard to the franchise agreement prior to your testimony and the conclusions that you had reached at that time. Could you explain to us what some of these compliance issues were? 10 02/17/05 - PUBLIC PROPERTY - BILL 041071
Yes. And I'm appreciative to Council at the time that I was under the weather and had to go to Harrisburg for a meeting on that day and I appreciate the fact that I was able to not have to get into detailed testimony then. In our review of the franchise, there were specific provisions that the Administration or the City felt that the franchisee was not in full compliance on all the provisions as far as meeting specific dates for generating specific reports that were part of the obligations in the franchise. We request, as part of the franchise, annual reports. We request as part of the assumption agreement penetration reports, revenue reports that give us specific details on the performance of the franchise. We had also questioned --
Did you receive any of those reports in the time period between 1999 and what I guess would be 2004?
I would say that we did receive reports. They were not delivered at 11 02/17/05 - PUBLIC PROPERTY - BILL 041071 the time or the date when they were due, but we did get all the reports that bring the franchise in compliance. If we had been applying the letter of the law that was in the franchise of the agreement, we could have argued over the fact that they were required to pay damages for not meeting those specific dates, but we did not do that as a matter of course. We worked with the franchisees to get the information. There was a bit of transition. They were a new franchisee in this area. We were trying to be supportive and helping the franchise to get in full compliance. We have since received all of the information that we have requested. But it was clear that when we looked at this, there were certain specific provisions in the assumption agreement such as the Community Advisory Committee that had not been instituted that was a requirement and it needed to be completed. It needed to be instituted. We have approved just recently amended bylaws that we have returned to the franchisee to establish the advisory 12 02/17/05 - PUBLIC PROPERTY - BILL 041071 committee. We've also instructed the franchisee to be in contact with those folks who may have submitted names in the past to be on the Advisory Committee to find out if they're still interested in being on the Advisory Committee so that they would have a list of candidates upon quick action they could be able to put this Committee in place and start that effort.
I believe in the original agreement it was required in -- I'll have to get the actual document. It was a short period after the time that we did the transaction.
Okay. Now, I need to really test your recollection, and there may be others who could be helpful. Would you layout for us some of the history of the Area II franchise by way of transactions, as well as ownership interest with a particular emphasis on either minority ownership or minority persons 13 02/17/05 - PUBLIC PROPERTY - BILL 041071 participation as relates to ownership interest in this particular franchise?
My recollection of the history of the franchise for Area II, back in 1983 and '84 when the franchises were first being put together as part of the City Council ordinance, there was a provision by Council to establish a minority franchise out of the four franchise areas that were designated in the City. Area II was awarded a franchise to, I believe, then Jim Wade as Wade Cablevision, the owner of the franchise for Area II which was a minority interest. That franchise over time has gone through a number of, I would say, partnerships and/or additional interests in support of the financial viability of the franchise which over time always included a component of Time Warner in some degree as an interest in support of the franchise but not the majority partner.
I'll have to get the specific dates to you. It was certainly after 14 02/17/05 - PUBLIC PROPERTY - BILL 041071 the 1984 award. Let me get the specific date. I don't want to make a mistake on the record. But the history of the franchise really culminated in the 1999 renewal --
Let's go to the '83-'84 time period for a moment. What was Council's action back at that time?
My recollection of the history is that City Council at that time, when they were making an award and they were looking for four franchise areas, that there was some consideration for a franchise to be in the ownership of or at least significantly have a component a minority interest component. That resulted in Wade Cablevision being awarded the Area II franchise and minority owner being Jim Wade or the owner of the franchise being Jim Wade and Wade Cablevision.
And did Mr. Wade at that time own the franchise solely, or were there partners?
I don't recall exactly in 1984 whether it was entirely owned by Mr. 15 02/17/05 - PUBLIC PROPERTY - BILL 041071 Wade or if he had partners. I can research the question for you.
I understand. What happened between 1983-'84 time period and 1999?
My recollection of the history of the franchise was that over time, if not initially, Mr. Wade added additional partnership in support of the franchise. I believe at some point in that history Time Warner either became a partner or had a partnership interest in the franchise. That reached its culmination in 1999 when we are doing the cable franchise renewal that we were advised that Wade Cablevision was going to be transferring its interests to a new entity of Urban Cable Works which was a formation of a new entity Urban Cable Works of Philadelphia along with Inner City Communications out of New York, and Time Warner was going to be at that point in time have a 40 percent interest in the ownership of the franchise and that Time Warner Entertainment, a subsidiary of Time Warner, would have an operating agreement 16 02/17/05 - PUBLIC PROPERTY - BILL 041071 to manage the operation of the franchise for the term of the franchise.
Is it accurate to say that from - let's take 1984 as a starting point. It is either by coincidence or just timing that these franchises are generally for years? 9
During the 11 period from '84 to '99, was there ever a time 12 when there was not either minority ownership 13 or participation in the franchise, from an 14 ownership standpoint? 15
In some fashion, I think that is true. There have always been some component of minority interest in the franchise ownership.
And then from the time period of June of 1999 through late 2004.
When we did the renewal and the formation of the new entity, there was going to be the new owner, there was a component of local participation which I 17 02/17/05 - PUBLIC PROPERTY - BILL 041071 believe was the minority component of the new Urban Cable Works franchise.
So now your testimony would be that for years, the 6 existence of the Area II franchise, there has 7 been either minority ownership or minority 8 participation from the start? 9
Now, are there 11 any outstanding compliance issues at the 12 moment? 13
As I mentioned earlier, 14 there is a compliance issue as it reads to the 15 assumption agreement of 1999 of forming the 16 Advisory Committee which, based upon all the 17 discussions with the franchisee, that matter 18 should be resolved shortly. Again, that is 19 why there is a provision in this assumption 20 agreement that within 90 days if there isn't any compliance, there will be full compliance on all aspects of the franchise on the 1999 assumption agreement.
And are there any outstanding issues with regard to the 18 02/17/05 - PUBLIC PROPERTY - BILL 041071 operation of the franchise or ensuring that the franchise is operated in accordance with the terms and conditions of the franchise agreement and what provisions exists to either ensure or guarantee that.
The franchisee is the new owners, Time Warner in our discussions did not provide a guarantee, a specific guarantee of the performance of the franchise because their corporate structure is somewhat different than the other franchisee here in Philadelphia, being Comcast. What we have discussed with them and what we believe is a mutual way of resolving this is the provision No. 2 which gives the City a stronger sense of the performance of the franchise --
Of the amendment. Which allows us to get a lot more specific details about their operating and capital investments from 1999 to 2004, as well as ongoing in the future we will have the kind of detailed information so that as we are reviewing their 19 02/17/05 - PUBLIC PROPERTY - BILL 041071 performance we have a sense of their past performance from a baseline and their success going forward and at least we know the amount of investments that are being put in the franchise to make the franchise successful.
What is it about the language in the proposed amendment No. 2 that ensures or, quote/unquote, guarantees the operation of the franchise?
In reading the amendment No. 2, there is no specific guarantee made in the franchise. I believe what you see in No. 14 2 is specific language that gives us the type of reporting mechanism that we who have to oversee the franchise have a stronger sense of their performance.
I hate to cut across you, but suppose similar to what your conditions were over the last five years that certain documents or reports were not being provided, what is the penalty in No. 2 for not providing same information that you're seeking to have access to in No. 2?
Well, the failure of the 20 02/17/05 - PUBLIC PROPERTY - BILL 041071 reporting under Item No. 2 would be the liquidated provisions in Item No. 1.
And we're certain here that No. 1 is connected to No. 2 in a non-disputable fashion?
It is our opinion that it certainly does. The 15-year projections which were submitted in the original 1999 assumption agreement is the basis for the reporting mechanism that we're now asking them to provide the kind details in. That's why in Item No. 1 we have specific that assesses liquidated damages to non-performance of the 1999 assumption agreement.
How did you decide on the $250 per day? That's like a couple months on my cable bill.
Well, the $250 per day for not meeting that obligation is consistent with the $250 liquidated damage provisions that's already in the franchise agreement today for not submitting reports. So what we did is we tracked consistent language that we already have in our franchise agreements that 21 02/17/05 - PUBLIC PROPERTY - BILL 041071 require for reports that we would request is a $250 liquidated damage per day. This is consistent with that.
But for the consistency issue, would there be another figure?
I believe in the review of the franchise agreement, there is a $500 penalty -- and I'll have to find what category it refers to. And there's a thousand dollar penalty for certain categories. What we used was, again, the reporting because this was a report issue that we used the same.
And do I take it from y our testimony now that, having this proposed amendment, other documents that you have received, the opinion from the City is that the franchise is in compliance, you received all the documents that you feel are required or appropriate and everything has been satisfied or put forward in a satisfactory manner?
Thank you, Mr. 22 02/17/05 - PUBLIC PROPERTY - BILL 041071 Chairman.
You're welcome, Councilman. Mr. James, real briefly, with respect to the ownership interest both over the period time and currently as it relates to minority participation, beyond the actual ownership interest, are there any provisions or any goals as it relates to actual employment? Sometimes we have certain ownership interests that may be a minority but as it relates to the workforce and any other aspect of that company there may not be levels that people feel comfortable with. Not just on the minority ownership interest, on all the cable franchises.
In the cable franchise agreements have specific provisions that deal with local participation as far as suppliers, and it also deals with minority goals as far as hiring employees.
We have a person who is assigned to receiving the reports that we get from the franchisees, and those reports are sent to MBEC for review.
Mr. James, I think you actually had to leave before a substantial part of the testimony. There was certain information requested by some of the participants in that hearing, particularly information requested from Time Warner and I believe also from Urban Cable. Is that information similar or all encompassing of the information that the City is required in order for us to proceed on this process, or is there additional information beyond that?
The level of details that are required under the FCC 394 filing 24 02/17/05 - PUBLIC PROPERTY - BILL 041071 allows the City to receive information about similar details to the information that the representative from PhilaComm was asking from the representatives from Time Warner, but it's not the kind of detail that we actually used entirely as a basis for making our determination. We are interested in the ownership interest. We are interested in the level of ownership interest and the participants who the interest. We're interesting in their ability to be able to financially meet the obligations of the franchise. I believe -- again I was not here for the entire hearing, but based upon the discussions that I've had, there was subsequent detailed information that the representative or the counsel from PhilaComm was asking from Time Warner which was not part of the submission that we were asking for. So there are certain things -- again, we wanted to stay within the guidelines of the federal guidelines as well as requirements under the franchise agreement for transfer issues.
Thank you. 25 02/17/05 - PUBLIC PROPERTY - BILL 041071 Councilman Nutter.
Mr. James, in response to Councilman Clarke, you had indicated that there are other provisions of the franchise agreement dealing with issues of whether it's employment. Does that also cover contracting opportunities, whether it's service, supply -- what we would refer to in the government as service, supply, and equipment and those kinds of issues?
In the category, it does list the local opportunities for suppliers and opportunity for services.
Well, can you expound a little bit, I, guess on that if all documents have been received? And I'm, quite honestly, quite intrigued by the prospect of the MBEC having some involvement in this. What is the review process? What are the requirements? Are there goals? Are there certain standards? And what are they and what are the numbers.
Well, there are specific 02/17/05 - PUBLIC PROPERTY - BILL 041071 goals in the franchise. There are specific percentage goals in those categories. I get that information before we conclude today, but there are specific goals. And in our franchising authority, we have a cable area manager and a cable area staff whose responsibility is to make sure we receive those reports, look at it for compliance with meeting its objectives, and that's why we share that information with MBEC so if they list an MBEC form there is a concurrence from MBEC that that firm that they listed is in fact an MBEC firm.
Do you know off the top of your head what the -- for instance, what the employment goals are, what the contracting goals or requirements?
Not off the top of my head. I have to look at that franchise agreement.
But in the course of this hearing, you could not only get that information, but also, say, for instance, the last year or so of reports that would show 27 02/17/05 - PUBLIC PROPERTY - BILL 041071 what the actuals are.
Thank you, Councilman. Any other questions of this witness? (No response.)
Thank you very much for your testimony. Thank you, Mr. James. I would like to have the representatives of PhilaComm Cable Group.
Good afternoon, Councilman. I have given to the Clerk a folder containing some of the things you may refer to here for ease of referral.
Good afternoon, Councilman Clarke and other Members of the 28 02/17/05 - PUBLIC PROPERTY - BILL 041071 City Council. My name is Sal DeBunda, I'm an attorney with Pelino & Lentz in Philadelphia. I'm here representing PhilaComm. Here with me is Willy Johnson who is a shareholder in PhilaComm, Bruce Crawley who is a shareholder in PhilaComm and Steve Pressman who is an accountant that we've hired to look at some of the books and records here. I've given you a folder of pertinent documents that we're going to refer to, not all of which, but I would ask that these documents be put into the record of the Committee. I've given copies to the Clerk.
I would like to start off, if I may, to indicate, as I said, I am representing the PhilaComm, but I thought it would be helpful for the Committee to know who PhilaComm is. So I'd like to just go quickly down the short list owners of PhilaComm, some 29 02/17/05 - PUBLIC PROPERTY - BILL 041071 of which are present sitting here and up at the table. There's Freeda Med who is vice president of marketing for West Insurance; Joanne Bell who is vice president and a member of the board of WES Management; there's Emmit Chapell who's president of Altroy International who's had other capacities here in the City. There's Valerie Clark who is president of the American Baptist Extension Corporation. There's Bruce Crawley who's the president of Crawley, Haskins and Sloan. There's Willy Johnson who is the Chairman and CEO of PRW Services, Inc. There's Witney Kernodle, Esquire, the daughter of Obra Kernodle who is with his office. There's Cheryl McKissock Felder who is president and CEO of McKissock & McKissock. There's Eugene Newton, M.D., who's president and chairman of Urban Health Systems. Carl Singley, Esquire, from Blank Rome. And Lawrence Jarrett who's vice president of public Government and Community Affairs for Urban Cable Works of Philadelphia.
Very impressive 30 02/17/05 - PUBLIC PROPERTY - BILL 041071 group.
I want to state that, for reasons I'm go to go explain later, we are here at this time, unfortunately, to still oppose the transfer. I'll get into that in more detail. I want to get some things out of the way, if I may, so I would like to start off by asking Mr. Johnson to give a brief statement. If you turn to Tab of the 12 materials -- I'm not sure if he's going to 13 read his statement. It's there for your 14 perusal and record. 15 Mr. Johnson, you may want to make 16 some comments. 17
Good afternoon, Mr. 18 Chairman and Members of the Committee. 19
Mr. Johnson, for the record, just please read your name into the record.
My name is Willy F. Johnson and I have served as the chairman and president of the PhilaComm group. Basically, the statement that we're 31 02/17/05 - PUBLIC PROPERTY - BILL 041071 introducing into the record gives some of the background of how PhilaComm Cable came together and its relationship between Time Warner and Inner City Broadcasting. Without laboring you with all of the information, it is here. I would like to relate to some comments that were made by, I think, the counsel for Inner City ascribing certain things to me as President of the group, with your indulgence. Counsel of Inner City have ascribed several comments to me in is correspondence to the Honorable Michael A. Nutter on February 4, 2005, and to the Honorable Darrell L. Clarke on February 10, 2005, which I would like to address. Counsel has commented that without the loan of its investment, PhilaComm would not have been able to participate in the franchise, and further, that no member of PhilaComm contributed money or put assets at risk. Counsel has further stated that Inner City was assured by me the loan would be paid off early but that PhilaComm could not pre-pay the loan because it was unable to secure 32 02/17/05 - PUBLIC PROPERTY - BILL 041071 financing on terms more favorable than Inner City's loan. My response to these comments is as follows: First, that Inner City's participation in the venture resulted only from PhilaComm's invitation. We invited Inner City to come and partner with us in an effort to have substantial minority participation in the Area II franchise. And the indication that we did not put up anything when we're the one who brought opportunity to the table, we believe is incorrect. Second, PhilaComm put its entire investment at risk, namely, the value of the interest we held in the franchise when we pledged our interest as collateral for our loan. Third, that although I have no 21 specific recollection of stating that the loan will be pre-paid, I do know that PhilaComm intended to refinance its purchase money loan with a bank loan on more favorable terms than the 15 percent rate charged to us by our 33 02/17/05 - PUBLIC PROPERTY - BILL 041071 partner and that based on Time Warner's own financial projections of the value of the franchise, we expected that cash flows would have allowed us to go through a favorable refinancing. When we approached First Union, which is now Wachovia seeking to refinance the loan, we were turned down because under Time Warner's management, the franchise had poorly performed and was in default of its financial covenants of the original bank financing which materially impacted on our investment and made it impossible for us to refinance the loan. Counsel further stated in his correspondence to the Councilmembers that PhilaComm is now victimizing Inner City because we seek something for nothing. 4 investment. We believe that Inner City also expected a reasonable return on their investment. PhilaComm's investment has been put at risk by Time Warner management and we 34 02/17/05 - PUBLIC PROPERTY - BILL 041071 seek now to understand how and why that happened and to clarify the various payments, loans and settlements which are proposed to be made by Time Warner to our partner Inner City in connection with the sale. We are particularly interested in clarifying the payments because our partners advise us that not only will PhilaComm receive a zero return on its investment, but that PhilaComm would be left, should Council approve a transfer, with a deficit where we'll be owing our partners. Finally, counsel for Inner City comments to Councilmen Clarke and Nutter that although PhilaComm previously rejected its suggestion that we continue as a partner with Time Warner in Area II franchise after the sale, we now seek to continue as a minority partner. We are not in favor of exiting the franchise, but we understand we will be required to exit the franchise because our investment was tied to Inner City's.
Our exit was tied to their exit. Moreover, PhilaComm understood then any continued investment will be based on the status quo performance and 35 02/17/05 - PUBLIC PROPERTY - BILL 041071 management of the franchise. In fact, PhilaComm has a continued interest in minority participation in an improved Area II franchise, assuming that Time Warner would agree to take the steps necessary to enhance the operations and management of the franchise and address the issues of subscribers' dissatisfaction and community relations. Thank you.
As I'm going to report, since last time, we've received a substantial amount of documentation from counsel of Inner City and from Time Warner. There's a short list of documents we have not yet received, which I'm talk about in a few minutes. Bit of the documents we received, we hired an accounting firm, Pressman Ciocca & Smith, whose resume is behind Binder Tab 2, and we've asked them to look at the documents and we have a short report on what he found in there which I think would be of interest to this Committee. I won't read you the whole 36 02/17/05 - PUBLIC PROPERTY - BILL 041071 resume, but I will tell you that he is the outside accountants for Lenfest Group which has been a significant cable operator in the United States since 1976. And it merged with Comcast about a few years ago. So he does has the background in cable television as well as accounting. If you look behind Tab 3 of the binder I've given you, you'll see the reports that we're referring to.
I'm name is Steve Pressman. I'm a managing general partner of Pressman, Ciocca, Smith. Some of the original documentation that we looked at was the closing binder for the original settlement. AND on January 11, 2000, on the formation of Urban Cable Works of Pennsylvania, we attempted to put together a sources and uses of funds upon that formation.
Mr. Chairman. I'm sorry. Mr. Pressman could you bring that microphone a little closer or point it down?
And do you have anything written? 37 02/17/05 - PUBLIC PROPERTY - BILL 041071
All the stuff he's going to talk about in behind Tab 3, but there's not a statement.
The sources of funds to form Urban Cable Works of Pennsylvania came about from two capital contributions. One was from City Cable Works which contributed $18,520,000 and PhilaComm which contributed $6,480, 000. In addition to the two capital contributions, there were loans from PNC and PNC-related entities of $10 million which amounted to a total of $35,050,000. The uses of the funds was the initial capital contribution into the newly formed entity of Urban Cable Works of Philadelphia which amounted to $32,400,000. There was a $200,000 financing fee. And we're at loss because of lack of documentation to account for an additional $2,450,000 upon the formation of Urban Cable Works. In addition to that, Urban Cable Works was split between the two partners in 80 percent and 20 percent capital contributions 38 02/17/05 - PUBLIC PROPERTY - BILL 041071 between City Cable Works and PhilaComm. And when you look at the mathematical contribution of each, it actually works out to be a capital contribution of 74 percent for City Cable Works and close to percent for PhilaComm. 7 And also in the documentation, there's not an 8 explanation as far as the difference in the 9 opening capital percentages. 10
If I may comment, what 11 Steve is saying is that we paid 26 percent of 12 the equity and got 20 percent of the 13 investment. 14
The next page is a 15 similar document, but this is the sources and 16 uses fund on the formation of Urban Cable 17 Works of Philadelphia and Urban Cable Works 18 was formed by 32,400,000 capital contribution 19 of Urban Cable Works. There was debt that the 20 new entity borrowed at the formation at 21 roughly $108 million. There was a cash 22 purchase for the system from Wade of 126 23 million in a addition to a note repayment and 24 financing cost of 14,800,000. The effective 25 price for 100 percent of the system was 39 02/17/05 - PUBLIC PROPERTY - BILL 041071 roughly $162 million.
Again, if I may comment here, the point that we want to make is they indicated in previous testimony that the purchase price for the Inner City portion was $87 million. They in effect, as we read this, paid $160,000 for the entire thing so that in effect 60 percent would be like $96 million and here we are sitting five years later and they're selling it for less than they paid for it according to the --
Substantially less than they paid for it, according to the information we have here.
The next sheet is just a document detailing the basic number subscribers for each of the years of operation from inception through 2004. The initial number of subscribers reported in the system, approximately 67,786. And then going through the years and ending up basically at the current time at 50,000 subscribers. There was a percent decrease in the five years of 40 02/17/05 - PUBLIC PROPERTY - BILL 041071 operation.
If I may interject again. I'm sorry. That's 30 percent penetration rate. We have a chart that you'll see later that shows penetration rates on the average throughout the country in the 40 to 45 percent range. This system is operating today at about a 31 percent penetration rate. That means that more than two-thirds of the homes past are not subscribing to cable in Area II.
The next sheet details our the related party transactions with Time Warner.
Average penetration usually is running in an urban area of about 45 to 50 percent.
The related party transactions with Time Warner we detailed out, again, through inception of this system through the year 2003 which was the last 41 02/17/05 - PUBLIC PROPERTY - BILL 041071 audited financial statement. Time Warner received various fees associated with the system. They were the manager of the system and received 4 1/2 percent of the total revenues of the system and that your cable management fees, that's the first line detailed out. The second line is programming and promotional services. Time warner sold to the system programing services that they received. And, again, not enough information is detailed whether Time Warner had any type of profit built into the re-selling of the programing or they sold it at their discounted cost. And then there's some small revenue that was generated between inner companies. All tolled over that four-year period, there was a little bit over $29 million that Time Warner charged the system for the related party transactions. Next sheet is just a summary, again, for that same four-year period where we had the audited financial statements of the operating cash flow. And operating cash flow is really the key line for a cable system. If 42 02/17/05 - PUBLIC PROPERTY - BILL 041071 you think about a typical operating company, you're looking at net income -- this is pretty much the equivalent, but you're adding back any interest depreciation or amortization. And cable companies when you're looking at operating efficiencies, you're looking at operating cash flow as the percentage of revenues. And in spite of the fact that the revenues increased from 2000 to 2003, the operating cash flow either before management fees or after management fees each year decreased. They started out at million, 15 and they decreased down to 14 million at the 16 end of 2003. And the operating cash flow 17 after management fees is a percentage of 18 revenue again decreased from 46 percent all the down to under 30 percent. And typically, in a well-run efficient cable system, you will see operating cash as a percentage of revenue at 40 to 45 percent. The next sheet details out just the actual operating cash flow versus the projected operating cash flow. Again, in the 43 02/17/05 - PUBLIC PROPERTY - BILL 041071 closing binder, Time Warner prepared a projected cash flow through the year 2003, and we simply took the actual numbers and then compared them to the projected numbers, and unfortunately for the owners for the system, the numbers were not even close. The actual numbers were not close to projections. The projections had increase in cash flow every year starting from and a half million 11 dollars all the way up to after management 12 fees of $28 million. Unfortunately, the 13 historical numbers went just the opposite 14 direction. They started at 18 million and 15 dropped down to a little bit under $14 16 million. And in the last year that we have 17 the full audited financial statements 2003, 18 the difference between historical numbers and 19 projected numbers was a deficit over $14 million.
If I may interject again. The significance here is that if you generate the cash flow you're supposed to, it makes the system more valuable. Two, it generates the extra cash flow to pay down your 44 02/17/05 - PUBLIC PROPERTY - BILL 041071 debt. The inability to meet the projections here lowered the value of the system and also continue to make it that even more expensive because you weren't able to pay it off. Just for an example, in the year 2003 -- this is their projection, not our number. They projected over $31 million of cash flow before management fees. They, in fact, did $16 million of cash flow. That's a difference of $15 million. As a percent owner of part 12 of that, that was a $3 million hit in that 13 year alone to our situation. This is the 14 situation where their own projections, they're 15 coming in at almost -- 50 percent of their 16 projections as the same company that made the 17 projections has been operating it during that 18 time. 19 And the next sheet is part of a 20 three-page summary in terms much what's been proposed, if you look at the second sheet in that section. In terms of the proposed sale at the current time, sales price is $87 million. There is an existing debt to PNC outstanding of $23 million, which leaves the 45 02/17/05 - PUBLIC PROPERTY - BILL 041071 net of 63 million. And PhilaComm as a percent owner would be entitled to 12,725,000. Unfortunately for PhilaComm, they have a note outstanding to Urban Cable Works of Philadelphia, Inc., and this is the percent 7 note compounded on a semi-annual basis that's 8 already been produced in the record and 9 there's an outstanding balance there of 13 10 million, so they're actually underwater where 11 PhilaComm members would have to come up out of 12 pocket for $630,000. If we were simply to 13 look at the projections that Time Warner 14 prepared at the inception of this system and 15 reflect a sale price from those projections -- and again, it's their own projections -- we would end us up with the sale price of 127 million less the note outstanding PNC, less the note outstanding Urban Works, and would a profit of almost 7 1/2 million dollars. So you have an $8 million swing in terms of historical numbers was actually there and what was projected to be three at this point in time.
I just want to point to a couple other things that are in that. Just a few pages beyond that, there's a report prepared that I've asked the Pressman firm to prepare which shows what the return on investment, what it was to both City Cable Works and PhilaComm. If you loot at proposed 80/20 split, which is the documented split, they would have gotten 22.41 return on their investment, and we would have gotten a 14.45 percent return on investment. Unfortunately, the note was at percent, so that accounts 14 for our negative situation here. But City 15 Cable Works would end up with 22 percent return on their investment during that same period. Just go to the last sheet, I want to read to you from the 10-Q which has been filed by Time Warner. Let me tell you what tab that is. The 10-Q indicated that -- I couldn't find it; it's not in the folder. Sorry. The 10-Q indicated that the consideration paid here was not the 53 million and the 34 million, but that it was the 47 02/17/05 - PUBLIC PROPERTY - BILL 041071 following: It was the $34 million settlement agreement that they signed. It was a $53 million price for the system itself. The forgiveness of $66 million that they owed to Time Warner. So they're basically saying, you owe us 66 million; we're going to make that go away as part of this deal. And also, you owe $55 million to other people; we're going to assume that debt. So in effect they paid them 34, plus 53, plus 66, plus 55; the last two being either forgiveness of indebtedness or assumption of debt. So in effect they paid them $208 million for this system, not $87 million. Councilman Clarke, I'm sure if you and I were doing a transaction and you owed me money and I forgave it, you would consider that as part of the consideration you received, not just the cash that I gave you. So in effect, the report here that the transaction involves an $87 million transaction is, in my opinion, not correct. It's actually a $280 million transaction, but a lot of it is forgiveness of a debt or 48 02/17/05 - PUBLIC PROPERTY - BILL 041071 assumption of debt. The other thing that's interesting here is in the same document where they are bind the interest, they agree to lend $8 million to them after the fact. Now, the reason I mention all this, both the 66 and the 55 and the 80 million, they're not proposing to give us any of that. They're saying the deal is $87 million and they calculated the interest to us based on the 87 million, not on the price that is being paid.
If I can just add, even with the 87 million, we've been asking for documentation about specific components of that, and we have not been provided that type of documentation.
As I mentioned earlier, there's a short list of things we haven't gotten, and that's one of the reasons we still are not able to decide on this issue. I'm going to quickly just go through them. It's not a long list. They keep referring to a settlement agreement that involved $34 million. This was paid by Time Warner to 49 02/17/05 - PUBLIC PROPERTY - BILL 041071 Urban Cable Works. We are percent partners in that company. We have asked for a copy of that settlement agreement. And Mr. Holder in his letter indicated to us he wasn't sure he could give it to us because it might be under a confidentiality agreement between Time Warner and Inner City. I've asked him whether or not he asked Time Warner for permission to give us that, and he has indicated -- I've not gotten a response that he did. He also indicated that he might need a confidentiality agreement from us to give it to us, and I told him we would give it to him. So at this point, there's a $34 million settlement which is, they are saying, part of our consideration which they will not give us a copy of. For whatever reason I cannot figure out. So we don't have that document. We don't know what's in there The second thing is there's a $23 million payoff to PNC off the $87 million. We did the math on what the interest rate was, and that comes out to $17 million. So there's a $5 million shortfall we don't know what 50 02/17/05 - PUBLIC PROPERTY - BILL 041071 accounts for it. We have asked them to give us that documentation. Mr. Holder's response to me was basically, "Well, if we had closed the deal, you would have it already." My answer is, I'd like to have it before I comment, not after the fact. Now, Willy Johnson was told that the reason they were paying off PNC that quickly was to avoid having to give them payment on a warrant they had for 11 percent of the system. So if it wasn't for the warrant and it wasn't for the interest, we don't know what it was for. And we've asked for information on that because that $5 million, again, percent of that has 16 an impact on us. That's another million 17 dollars that we don't have any information. 18 We have not, unfortunately, Councilman Clarke 19 been able to get that information. 20 The other thing -- and this may seem silly.
You have probably seen correspondence where we have asked to see the 51 02/17/05 - PUBLIC PROPERTY - BILL 041071 original of the note.
Of the promissory note that our client signed. I'm giving you the copy that we got from Mr. Holder. This is what they say is the best copy of the note. If you turn to the last page, you'll see a signature there. This piece of paper is not just a piece of paper. This is a $13 million piece of paper. It's based on this document that they say that we owe them $13 million. Can anybody tell me whose signature that is? We have asked to see the original of that document so we can figure that out. I don't believe that's silly. We have a guess they tried to suggest who it might be, but this is the best copy.
Yes. You see how clear the other pages are compared to this page? You noticed that too. 52 02/17/05 - PUBLIC PROPERTY - BILL 041071 So that's what we've asked for, and we have not gotten a response. But this is not just a piece of paper we want for our file, this is the basis on which they say we owe them $13 million. And we've asked to not get a copy of the original but to have the original to inspect it. And we have not been able to get that. So I guess to summarize, we've asked for the settlement agreement, we've asked for the payoff on PNC, we've asked to see a copy of this and we've also asked for financials for the holding company, the company that owns Philadelphia Cable Works. We have not gotten those. Everything else we have gotten. We've gotten thousands of pages. A lot of it is not relevant, some of it is relevant. We have not gotten those documents, but they impact our situation and make it difficult for us to reach a financial conclusion about this. So I just want to point out we still are asking for those if we can. I would like now to as Bruce Crawley to make some remarks. A copy of his statement 53 02/17/05 - PUBLIC PROPERTY - BILL 041071 is also in the materials we gave you behind -- I think it's Tab 19.
Mr. Chairman, Councilman Nutter, and Councilman Rizzo over in the corner, good afternoon. My name is Bruce Crawley. I'm here as a private business owner and a partner in the PhilaComm Cable Group, a company formed here in 1999. PhilaComm was established in direct response to City Council's interest in ensuring that there would be a continuing minority ownership presence in the City's Area II cable franchise. As you are aware, there are now four cable franchises in the City of Philadelphia, three of them are owned in their entirety by Comcast, and none of those have minority equity participation. When there was expressed interest in continuing the minority ownership presence in Area II, our partnership took steps to purchase a significant portion of what had grown to become a substantial local cable property. To assist us in generating the 54 02/17/05 - PUBLIC PROPERTY - BILL 041071 required capital and operating management talent, we reached out to the African-American-owned, New York City-based Inner City Broadcasting Corp. and invited them to participate with us as a minority partner. The resulting ownership structures are Time Warner as a 40 percent owner, Inner City as a 60 percent owner, with PhilaComm holding 10 percent of Inner City's 60. 9 percent by Comcast. 4 million investment. And Time Warner, in connection with Inner City, was responsible for the daily operating management. You should also note that there would be no need for discussion of franchise transfer, no need for any of these related discussions had Inner City not decided to withdraw from Philadelphia, to sell its ownership stake to Time Warner and simultaneously attempt to terminate our partnership under onerous conditions. 55 02/17/05 - PUBLIC PROPERTY - BILL 041071 My mission this afternoon is to provide you with a clear understanding of the depth of the continuing commitment by PhilaComm to remain as an equity participant in the Area II franchise. I will also encourage you to withhold your approval of the transfer until you can be assured that Inner CITY and Time Warner have done all they were required to do to be responsive to the City of Philadelphia and to the cable subscribers in Area II. We also want to ensure that Inner City and Time Warner will not be able to provide what is arguably then the nation's worst customer service and cable management inefficiency for four years and be handsomely rewarded for doing so. We, the members of PhilaComm, are business certainly business people and we saw the Area II franchise as a way of providing a high quality customer service at a reasonable profit. Neither of those outcomes were achieved. What actually transpired under the Inner City Time Warner management team was extraordinarily poor customer service, a 56 02/17/05 - PUBLIC PROPERTY - BILL 041071 decline in subscriber levels from nearly 68,000 to 50,000, as you've heard, over a four-year period; continuing demands for fee increases from Time Warner; parential misbudgets and subscriber penetration rates and operating inefficiencies that ranked the management of Urban Cable Works at the bottom of virtually every national listing of cable performance. I think you heard the number for penetration. And if you look at that penetration number, you saw that it fell well below the average penetration. But what was not pointed out that if you rank the 50 largest cable operations in the country, only two of them had a worse penetration rate than Urban Cable Works under Time Warner Inner City management. Perhaps the most distasteful aspect of the entire relationship has been the constant complaints by friends and neighbors here in Philadelphia who assumed that because we owned a small stake in Urban Cable Works that we somehow had the ability to improve 57 02/17/05 - PUBLIC PROPERTY - BILL 041071 what had grown to become a disastrous customer service record. Now, we all know that cable companies often suffer in the area of customer service reputation.
In fact, a recent University of Michigan American Consumer Satisfaction Survey found that the cable industry overall ranked near the very bottom, even lower than the IRS. But in an industry that has always suffered from a less than stellar customer service reputation, Urban Cable Works under the Inner City Time Warner management has clearly earned what is the worst cable service customer satisfaction record in Philadelphia. Many of us have heard horror stories of Urban Cable Works Subscribers in North and West Philadelphia who when required to move their residence out of Area II have bemoaned leaving their old neighborhood but have been absolutely delighted to have an opportunity to escape from Area II and from Urban Cable Works. You should know that we at PhilaComm have not taken the numerous anecdotal 58 02/17/05 - PUBLIC PROPERTY - BILL 041071 subscriber complaints lightly. We have sent formal complaints to Inner City board meetings. We've had numerous discussions with local operating managers. We pushed for the removal of service-related executives in local office who had not performed and invited their representatives to Philadelphia for evening meetings to explain our operating and customer service frustrations and to plead the case for the Urban Cable Works subscribers. It is clear to us and to our subscribers that our complaints fell on deaf ears and that Inner City regrettably had an entirely different agenda for its investment; one that did not involve being responsible to City of Philadelphia or to the City's routine requests for information and one that didn't include a commitment to customer service. In fact, Time Warner inner City ignored our repeated suggestions that Urban Cable Works establish a community advisory board to serve as a liaison between the community and the franchise for customer service, for corporate citizenship and for other issues. 59 02/17/05 - PUBLIC PROPERTY - BILL 041071 We've heard earlier in the presentation by Mr. James that they've now agreed that they will have a customer advisory board, but this is upon their proposed exit from the City of Philadelphia. You should know that the proposed names, list of people who can serve on the advisory board was submitted in the year 2000, and we constantly inquired about why they were dragging their feet in that regard. I would think that if we had a customer advisory board in place, we wouldn't have to have these various subscribers running around in frustration wondering why they're not getting the same kind of service that people in Areas I, III, and Iv are routine accustomed to receiving. As a result, the substantial minority subscriber base in Area II were left, as we have stated, with some of the nation's most unresponsive, non-customer-friendly, ineffectively managed cable service in the country. We have resented that behavior, and we certainly want to remain as a constant presence in Area II even after Inner City 60 02/17/05 - PUBLIC PROPERTY - BILL 041071 leaves to assist in repairing that dismal track record. Even despite our own fundamental disagreement with their proposed terms for exiting their agreement with PhilaComm, we don't believe Inner City's track record here and its callous disregard for the executive and legislative branches of this government to be rewarded by extraordinary accommodations that they have demanded. We trust you agree and that you will require them to be fully engaged in responsiveness to simple business courtesy and to fairness before you approve this transfer. The City's local minority investors and Area II's 50,000 subscribers deserve no less. Thank you very much.
If you look at Tabs 15, 16 and 17 of our booklet, you'll see that there were meetings involving Inner City and PhilaComm in which even the representatives of Inner City raised concerns about the way that Time Warner was operating the system. 61 02/17/05 - PUBLIC PROPERTY - BILL 041071 If you look behind Tab 15, you'll see a meeting of the Urban Cable Works of Pennsylvania. There's another meeting behind Tab which talks about their performance and 6 the way that they were handling things, 7 including bad debt. And behind Tab 17 is 8 additional correspondence that we had showing 9 our concern that we had at that time. 10 What I would like to do now in 11 closing -- I've taken a lot of your time -- is 12 kind of summarize what I think we have here 13 and why we're in the situation that we have. 14 We believe that the operation of the system 15 has had a negative impact on the City and Area 16 II subscribers. In looking through the paperwork, we did receive a pattern of failure by Time Warner and Inner City to comply with the reporting requirements under the original franchise agreement and again under the assumption agreement. The fact that they're now saying they're going to do that is at a time when they need something from you, but certainly the history has not been there that they have given you that information. 62 02/17/05 - PUBLIC PROPERTY - BILL 041071 We believe that there's been a failure by Time Warner Inner City to meet the City's requirements concerning liaison despite requests by our client to do that. There's been a shrinking penetration of percent. That means that 17,000 less 8 people are now subscribing than five years 9 ago. That's a hell of a way to run a 10 business, in my opinion. 11 This is producing less service to 12 the residents of this City and also important 13 less revenue to this City. You get a 14 percentage of the revenue. So less people are 15 subscribing, you get less revenue. 16 There's been problems with 17 connection completions, disconnections and 18 continued dissatisfaction of the Area II 19 subscribers there's been failure by Time 20 Warner to clarify the involvement of Comcast 21 in the franchise. They have stated that 22 Comcast is not involved in this, but if you 23 read their 10-Q, you'll see information that 24 they have continuing connection with Comcast. 25 Comcast owns 17-some percent of Time Warner's 63 02/17/05 - PUBLIC PROPERTY - BILL 041071 cable operations. They have shown a history of transferring recently 90,000 subscribers to lower Comcast percentage of ownership, so there is a history of them doing that. I have no proof that Comcast is involved here, but I'm not sure that they totally clarified even to our -- following the last meeting, I specifically asked Time Warner to discuss with us a continuing minority participation. Mr. Fogarty responded to me that they would consider a proposal from us about that but not until after this approval was granted, not before and not until after a joint proposal by them and Comcast to acquire the Adelphia system had than resolved. So they have basically said to us that they would not at this point talk to us about a continuing involvement until those conditions are met. And they have repeated that response even today when I spoke to them. I think there's also been a negative impact on the local partner in addition to the City and its subscribers. They have not provided us with still some information that 64 02/17/05 - PUBLIC PROPERTY - BILL 041071 we need. They have not shown that they're willing to respond to concerns that we have about their operations and their participation in the City. If they had only met their projections, we wouldn't be having this discussion, in my opinion. But they have failed to satisfy us as to why they didn't. And we also believe that they have not correct certain accounting irregularities which we found in their documents regarding bad debt, recognition of revenues and write down of assets.
The last thing is that we believe there should be a continuing minority participation. We would like to be that minority participation. We don't seem to be able to get anywhere with that at this point. There's also a serious question as to the total consideration received. Is it $87 million? Is it $208 million, or what it is? But based on all of that, in our feelings about the impact on the City, on the impact of the local investor and its subscribers, we unfortunately at this point have to still come 65 02/17/05 - PUBLIC PROPERTY - BILL 041071 out negative in terms of the request for the transfer of this franchise. I thank you for your time and will be willing to answer any questions that you have.
Mr. DeBunda and Mr. Johnson and Mr. Crawley and Mr. Pressman, I appreciate very deeply the information and, if not, the education you've provided to us on the record with an extensive document, the materials that you have received and your analysis of them. If I could ask -- and you'll decide amongst yourselves who will respond. But in a series of sentences or a paragraph, what is it that the local group, more formally known as PhilaComm, if you could lay out what's your goal at this point?
Our goal has always been to be an investor in this franchise, Councilman Nutter. How we would like to 66 02/17/05 - PUBLIC PROPERTY - BILL 041071 accomplish that at this point is to exit sufficiently for what our investment we think should be worth up to this point, because they're getting consideration, and then take some of that consideration and invest as a continuing investor in the Time Warner franchise here in Area II.
Can you make any comment with regard to attempts to convey that message or desire and, to the extent that you're comfortable, share any information with regard to where that kind of proposal stands at this point?
I have communicated to both Mr. Holder and Mr. Fogarty our desire to do what I just outlined. There has been discussion just recently about exiting from our current investment in Inner City. Those are still settlement discussions and I would, therefore, not like to go public with those; but there has been discussion there. With respect to Time Warner, I would indicate that we have not even that progress. There's been a statement to us that they would 67 02/17/05 - PUBLIC PROPERTY - BILL 041071 consider a proposal for us with no commitment or any percentages being talked only after this request has been approved and only after the joint proposal with Comcast to buy the Adelphia system is completed. We have made no 7 prognosis with Time Warner, in my opinion, at this point in having any concrete discussions about continuing as a minority participant.
Based on all the information that you have and based on the testimony that was received earlier from the City, if this transaction were to proceed as it is presently structured, from your perspective or any of the investors or local group members, would that put the City in a position where the division from the years 18 ago and the goals of minority ownership or 19 participation, given the demographics of the 20 franchise area, would we now be in a potential situation where the Area II franchise for the first time in apparently its history would have no minority ownership or participation?
That is absolutely the case, in our opinion, Councilman. That would 68 02/17/05 - PUBLIC PROPERTY - BILL 041071 leave Philadelphia, a City with 43 percent African-American population, about percent 4 Hispanic population, about percent Asian population with absolutely no minority cable ownership participation. And I think it's even more significant than it was year ago, 8 Councilman, because 20 years ago we were 9 talking about the cable business only a 10 conduit for providing some form of telecommunication services. Today, the cable companies are also providing Internet services and Internet access, and it is critically important for our communities, the communities that have been served in Area II and other minorities communities across the City that there be some policy input and some ownership input at the level of Internet access in the City. That wasn't a consideration earlier, but the evolution of this industry has caused them to be leaders in the provision of those services.
Okay. Thank you. Mr. Chairman, I'm finished at the 69 02/17/05 - PUBLIC PROPERTY - BILL 041071 moment.
Who would be the appropriate person to ask this question of? You talk about customers leaving a system. What impact has satellite television had on the cable business?
First of all, the penetration rates they were giving you for a national average and for local averages are already after the impact. If you look at -- I think it's Tab 5. Yes, Tab 5, you'll see that the national average for penetration of subscribers is whole country is 52.8 percent. The penetration rate for Urban Cable Works is 31 percent. All of those are affected by the same competitive situations. So we're basically operating at 60 percent of the national average of cable penetration in Area II. If you look up that list, it shows you which one is higher or lower. I think there's only two or three that are lower than this 70 02/17/05 - PUBLIC PROPERTY - BILL 041071 penetration rate here in Area II. I do not -- you can ask maybe the City to provide it. I don't know what Comcast penetration rates are in the other three areas. They probably have it; I don't. You may want to ask that question, but I would guess that it's significantly lower than their penetration rates in the same competitive environment, Councilman.
For the record, Councilman, I think it's interesting to note on that chart the two areas that are lower appear to be Chicago, what's called Area IV, I have no idea where that is, the cable operator is Comcast; and Los Angeles, South Central, and that operator is Comcast also. And those are at 25.7 and 24.2, respectively.
Thank you. The next panel will be Time Warner and Inner City.
Good afternoon, Councilman. My name is Eric Holder. I represent, along with my colleague Gerald Waldron, Inner City in this matter, Urban 71 02/17/05 - PUBLIC PROPERTY - BILL 041071 Cable Works. Councilman, we don't have prepared remarks. The testimony that we wanted to put on the record we made a part of the record, I guess, at the last hearing. I would only note that in comment that with regard to the concerns raised by the panel of the folks representing PhilaComm, and with all due respect, the comments are and the concerns are essentially beside the point. The purpose of this hearing is to look at the suitability of Time Warner to run the proposed franchise, and I'll ask Mr. Waldron to be allowed to detail more specifically what the concerns of the applicable statutes are. The thrust of what they spoke about is based on a private dispute between PhilaComm and Inner City. With regard to that dispute, that is something that is, as I said, private, something that I think will ultimately be worked out. But it is not appropriately the subject of the hearing for which we've all gathered day. With that, I would ask Mr. Waldron be allowed to simply go through very 72 02/17/05 - PUBLIC PROPERTY - BILL 041071 quickly --
Thank you, Mr. Chairman. Mr. Holder, could you say what you just said again, please, the last part of what you said? I apologize.
I was essentially saying that the purpose of this hearing is to look at the suitability of Time Warner as the operator of the proposed franchise in Area II. Much of what the representatives of PhilaComm spoke about during their panel's presentation dealt with a dispute, a private dispute, between PhilaComm and Inner City that we did not feel is appropriately a part of this hearing.
I heard that part. You said something about parties working something out, I thought I heard you say. 73 02/17/05 - PUBLIC PROPERTY - BILL 041071
That's really just an opinion on my part. As Mr. DeBunda indicated, without getting into any details, we have had some settlement conversations. I actually think that there will be worked out. That's just my opinion. I don't know if that opinion will be proved to be an accurate one or not.
Will, let me at least offer this in response. And I know you're probably not finished. But as views and opinions go, and you are a well-known, highly-regarded, significantly-talented attorney; and I, of course, am not, so I'm at an immediate disadvantage to you. But, I would only suggest that when you raise the issue that these hearings are for the purpose of determining suitability of the franchise operator or proposed operator to run a franchise here in Philadelphia, I would only submit to you that many of the issues that we've heard, whether at the first hearing or at today's hearing, go directly to the issue of suitability. The testimony that's been presented, the document that has been put 74 02/17/05 - PUBLIC PROPERTY - BILL 041071 forward, I believe, raises a significant amount of concern with regard to the suitability issue of franchise operation. I'd certainly like to hear more about penetration rates, operational performance and those kinds of issues. I think that they are all criteria that are a part of anyone's evaluation process on suitability, whether it is the representatives from the Public Property Department or the Law Department. And then, of course, I believe or I would take the position that a legislative body has an even wider range of view, opinion, fact, data, information that all go into anyone's decision-making process as it relates to suitability to operate a franchise. So I understand that we're all familiar with federal regulations and guidelines and statutes and the like, but in terms of what this body does, all of the information that's been put forward, I think, factors into the issues of suitability because there are any number of very serious and valid concerns about the operation of the franchise, 75 02/17/05 - PUBLIC PROPERTY - BILL 041071 at least based on the information. So I would at least suggest let us not so summarily dismiss the issues that have been raised and at least deal with them in this public hearing and in this public forum as you are now sitting in a City Council public hearing. They cannot brushed away as immaterial or they don't matter or they're not for you or you can't think about them or you can't take them into consideration as you represent people and interests here in the Philadelphia. I think we should at least agree to that.
Well, Councilman, I was very clear in the language that I used. I said much of what they talked about; I didn't say everything that they said was not appropriate. But what I'd like to do, if we could, as I indicated before is maybe have Mr. Waldron just go through very briefly from our perspective what we think is appropriate to be heard during the course of these hearings.
Members of the Committee, Councilman Nutter, I'm Gerald Waldron, along with Eric Holder, represent 76 02/17/05 - PUBLIC PROPERTY - BILL 041071 Inner City. Councilman Nutter, addressing your point, suitability is the question of the operator is the question that is before the franchising authority. The Federal Communications Act guides and limits the Council's action. As Councilman Nutter acknowledged here and acknowledged at the last hearing, that is the framework under which this franchising authority proceeds. The Federal Communications Commission has adopted Rules implementing that statutory provision, has adopted a form which gathers information which is then submitted to the City. And the focus of that information, the focus of the application and the focus of this Committee's question is on the qualifications of the transferee. And I'm just quoting from the FCC, "Local franchise authorities are permitted" --
I'll give it to yo when I'm done. "Are permitted to request 77 02/17/05 - PUBLIC PROPERTY - BILL 041071 additional information they deem reasonably necessary to determine the qualifications of the assignee or transferee." That's FCCR 5 4654, 1995. 6 And as Mr. Holder just said, the 7 extent to which there are questions about how 8 the operations have been run, how the 9 penetration levels, those are fair questions 10 for Time Warner. I do note that Mr. DeBunda said "I'm not sure that they're suitable" and then he said "I would like to be part of the future operations." So perhaps it was a mixed message that we heard from Mr. DeBunda and company. But the point is that the amount of money that investors received from it, that's what we heard from the last hearing. Those are questions which were asked today. In interest of cooperation and in the interest of comity, we have tried to respond. I do note that Mr. James earlier said that the staff was careful to stay within the guidelines, and he was referring to the FCC guidelines which speak to the requirements and the 78 02/17/05 - PUBLIC PROPERTY - BILL 041071 qualifications of the transferee. Lastly, I note it is always tempting for third parties to try to bring in collateral issues in a transfer process. This, frankly, is a familiar problem that the Federal Communications Commission deals with frequently. Here is what the FCC said -- and I will give you the cite at the end. Here is what the FCC said on this very question: "The Commission recognizes and discourages the temptation and tendency for parties to use the license transfer review proceeding as a forum to address or influence various disputes with one of the other applicants that have little, if any, relationship to the transaction or to polities and objectives of the Communications Act." The dispute with PhilaComm about whether they have access documents and the like, whether they have been paid according or not is simply not a legally justifiable reason for this Committee to not proceed in approving the transfer. The question as to how the system has been run and how Time Warner, that 79 02/17/05 - PUBLIC PROPERTY - BILL 041071 is absolute within the purview and, frankly, our colleagues from Time Warner can address that and we would not suggest that that is not an inappropriate question. It is the conversation between minority investors that are in the joint venture is where we think we have tried to be responsive to the situation, but Communications Act, the FCC rules and its decisions are clear on that point.
That actually was from a 2001 decision. It's application for consent to the transfer of control of licenses in Section 214 Authorizations and the cite is 16 FCCR Federal Communications Reporter 6547,6550, and that's a 2001 decision.
Why don't we do this. First, Mr. Waldron, I do appreciate your view and perspective on this and I respect you as well. If you would be so kind as to hand up something to one of our Sergeant-at-Arms with the various citations, 80 02/17/05 - PUBLIC PROPERTY - BILL 041071 that would be helpful.
If I might just respond, it is in the February 10th letter. The two quotes of the citations are in the February 10th letter from Mr. Holder to Chairman Clarke.
I would be glad to look through the pile of letters that I have, since I have one from virtually every day for the last month or so. I'd be glad to look through all of those letters. Secondly, let me suggest this to you or say it actually not such as a suggestion but very directly. I respect and appreciate the work of other branchs of government, and we'll talk a little bit about the FCC in a few minutes. I don't work for the FCC. I work for the citizens of the City of Philadelphia. There are 157,721 of them in my Councilmanic district. Four times I've taken an oath that says that I will discharge the duties of my office with fidelity. So that's what I'm going to do, notwithstanding whatever the FCC has to say about what we can consider and what 81 02/17/05 - PUBLIC PROPERTY - BILL 041071 we cannot consider. This is not only a matter involving a dispute between PhilaComm and Inner City Cable Corporation. This is a transfer of a franchise. We've been down this road on more than a couple of occasions under different circumstances. And speaking for myself, I will take into consideration all matters and information and data that I receive, notwithstanding whatever the FCC says that third parties can do or cannot do or what municipalities can or cannot look at, because one day the Chief Clerk is going to stand up at that podium there and will call my name and then I'll decide based on my own criteria how I exercise the duties of my office and discharge them. So that's what I'm going to do. I can't tell you what anybody else is going to do, but that's what I'm going to do. I've read through all the material. I've read all the letters. I have the stats. I'll be glad to look at the citations, but let's be clear. This is not and will not be reduced to just a matter between a group of investors, third-party entities and other 82 02/17/05 - PUBLIC PROPERTY - BILL 041071 people who may have an interest, because are you are now in our forum. You're not over at the MSB Building, you're not over at One Parkway, you're not on the sidewalk somewhere; you've come within the rails, and you have some experience with this, as I understand it. You have a little previous history of legislative process?
Prior to joining Covington and Burling, I spent 10 years on Capitol Hill as a Senior Counsel to the House Subcommittee on Telecommunications and was the staff that wrote the 1984 Cable Act and the 1992 Cable Act, which I will say the 1984 created the franchising authority and the 1992 Cable Act adopted ed the provisions that we're speaking about that governs us today.
As you have experience working with legislative bodies, you know that legislators take very seriously their duties and their responsibilities and 83 02/17/05 - PUBLIC PROPERTY - BILL 041071 what they take into consideration in making their decisions; you know that, right?
Good. Let's talk about the franchise and qualifications and suitability. Why don't we have some of that discussion?
My name is John Fogarty. I'm an attorney with Time Warner Cable.
We have both, I think, testified at the last session with respect to our view of Time Warner's record in managing this system. There's been a lot said this afternoon that I don't have the full record 84 02/17/05 - PUBLIC PROPERTY - BILL 041071 that was presented, but a lot of things we obviously disagree with. We believe that we have been in compliance with the franchise. I believe that's been the assessment of the City staff that's involved with that. I think we've provided extensive information with respect to our qualifications. There was only one factual matter that I did want to particularly take mention of. I think there was a mistake made by Mr. James in his testimony, and it's a matter of memory so I think it's understandable. But with respect to the ownership of the system, even though the name Wade was still used from the period of December 1995 until the transfer of the franchise into the present franchisee, Urban Cable Works of Philadelphia, the franchise was wholly owned by subsidiaries of Time Warner. And we're really proposing a situation --
The dates I have would either late '95 or early '96 until, it looks 85 02/17/05 - PUBLIC PROPERTY - BILL 041071 like, January of 2000.
Is that the ownership during that period was through subsidiaries wholly owned by Time Warner, so there were no 8 local investors at that time.
There were no 10 other investors, no other partners, no other entities?
And you're a good lawyer also. You seem particularly focused on the phrase "wholly owned subsidiaries." Does that mean that no other individuals are involved with those entities or they were sub-entities solely created by Time Warner for business purposes?
For business purposes or the acquisition of previously existing entities.
In which no 25 other individuals had any -- 86 02/17/05 - PUBLIC PROPERTY - BILL 041071
For the record, Mr. James earlier had called me aside and asked to be able to correct two parts of his testimony, and I indicated that he will be around for a while and can do that at a later date. So he does have some clarification on a couple things he said.
Well, let me ask this question. Is it correct or incorrect -- and I don't know if you've seen this document, but on the issue of subscribers, the materials received earlier would seem to indicate what probably amounts to about a percent drop in 16 subscribership from year end 2000 to year end 17 2004, going from 67,786 to 50,071. Are those 18 numbers correct? 19
And with regard to the issue of penetration rates, if the 50,000 is correct, then is it also true that the rate would be 31 percent based on 168,878 being passed?
Now, that I would say would be suspect only because within our franchise area as well as the entire City of Philadelphia, there has been a loss of population. So 161,000 passing number was from several years ago. So to say that that is an accurate number today, I would not say that. But at the same time, I don't have the accurate number to report today.