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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of March 27, 1997: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction J(1)(a) and (b) to the Form 10-K and is therefore
filing with the reduced disclosure format.
Documents Incorporated by Reference: None.
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TABLE OF CONTENTS
PART I
Item 1. BUSINESS.
General................................................. 4
Acquisition Strategy.................................... 5
Business Strategy....................................... 5
Development of the Systems.............................. 7
System Descriptions..................................... 8
The Cable Television Industry........................... 11
Programming, Service and Rates.......................... 11
Marketing, Customer Service and Community Relations..... 12
Technological Developments.............................. 13
Franchises.............................................. 14
Competition............................................. 15
Employees............................................... 17
Legislation and Regulation.............................. 17
Item 2. PROPERTIES. ............................................ 26
Item 3. LEGAL PROCEDINGS. ..................................... 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 27
Item 6. SELECTED FINANCIAL DATA. ............................... 27
Item 7. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction............................................ 29
Results of Operations................................... 30
Liquidity and Capital Resources......................... 33
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 35
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. ................... 35
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers of FrontierVision Inc. . 36
Advisory Committee ...................................... 38
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Item 11. EXECUTIVE COMPENSATION.
Deferred Compensation Plan............................... 38
Compensation Committee Interlocks and Insider Participation 39
Employment Agreement..................................... 39
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. ............................................. 40
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 41
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
Financial Statements..................................... 42
Reports on Form 8-K...................................... 44
Exhibits................................................. 44
Financial Statement Schedules............................ 44
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANT'S
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE EXCHANGE ACT ................................................... 45
GLOSSARY ............................................................ 46
FINANCIAL STATEMENTS ................................................ F-1
FINANCIAL STATEMENT SCHEDULES ....................................... S-1
EXHIBITS
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PART I
Unless the context otherwise requires, the term "Company" or "FVOP" means
FrontierVision Operating Partners, L.P., a Delaware limited partnership. The
terms "fiscal" and "fiscal year" refer to FVOP's fiscal year ending December 31.
See "Glossary" for the definition of certain terms used in this Form 10-K.
FrontierVision Capital Corporation ("Capital") is a wholly-owned subsidiary of
the Company. Capital has nominal assets and no operations.
Item 1. BUSINESS
GENERAL
The Company, headquartered in Denver, Colorado, owns, operates and develops
cable television systems in small and medium-sized suburban and exurban
communities, primarily concentrated in three operating regions - Ohio (the "Ohio
Systems"), Kentucky (the "Kentucky Systems") and New England ("the New England
Systems") - with a fourth, smaller group of cable television systems in the
Southeast (the "Southeast Systems"). Including its initial acquisition in
November 1995, FVOP has acquired systems serving, in the aggregate,
approximately 365,600 subscribers and has sold two of its Southeast Systems,
serving in the aggregate, approximately 10,400 subscribers, making the Company
one of the 25 largest multiple system cable operators ("MSOs") in the U.S. As of
December 31, 1996, FVOP's cable television systems (the "Existing Systems")
passed approximately 498,900 homes in eleven states and served approximately
356,400 customers, representing penetration of 71.4%. For the years ended
December 31, 1996 and 1995, the Company had revenue of approximately $76.5
million and $4.4 million, respectively, and EBITDA (as defined herein) of
approximately $34.4 million and $1.0 million, respectively.
In order to execute the Company's business strategy, James C. Vaughn and John S.
Koo, the Company's co-founders, have assembled a senior management group of
eight individuals with over 105 years of collective experience in the cable
television industry. Equity investors in the Company include affiliates of J.P.
Morgan & Co. Incorporated, Brown Brothers Harriman & Co., Olympus Partners and
First Union Capital Partners, Inc. Including the $76.0 million of capital
commitments received in September 1996, FVP has obtained aggregate capital
commitments of approximately $199.4 million, of which approximately $156.5
million had been invested in the Company at December 31, 1996.
The acquisition of the Existing Systems represents the substantial completion of
the first phase of the Company's business plan. Through its core acquisitions in
Ohio, Kentucky and New England, the Company has established significant
subscriber mass and has positioned itself as a dominant cable operator in each
of its primary operating regions. The Company is currently the second largest
MSO in the state of Maine, the second largest MSO in Kentucky and a top five MSO
in southern Ohio. In the Southeast, the Company has accumulated attractive
systems which it expects to consolidate with subsequent system acquisitions,
trade for systems within the Company's primary operating regions or sell.
The next phase of the Company's business plan will focus on the acquisition of
contiguous cable systems, the integration of business operations, significant
investment in technical plant and the development of additional cable and
telecommunications services. The Company expects its geographically focused
acquisition program to facilitate the acquisition of neighboring cable systems
that are locally-owned, operated by smaller MSOs or comprise non-strategic
assets of larger MSOs. Many of these systems could be readily integrated into
the Company's regional operating infrastructure, eliminating customer service,
technical support and office administration functions previously required by the
potential seller. By eliminating headends and centralizing distribution through
larger systems and increasing channel capacities through selective upgrade and
rebuild activity, the Company believes that it can efficiently introduce new
video and broadband telecommunications services, increase service rates and
develop significant ancillary revenue streams, thus maximizing its growth
opportunities.
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ACQUISITION STRATEGY
The Company focuses on cable television systems in selected small and
medium-sized suburban and exurban markets. The Company seeks to exploit unique
acquisition opportunities in the cable television marketplace created by the
confluence of several economic, regulatory, competitive and technical forces.
The cable television industry has experienced rapid and continuing consolidation
over the last several years for various reasons; operators have been faced with
the need for increased levels of capital expenditures to expand channel
capacity, cable operators have recently begun to face the threat of competition
from new market entrants, including telephone company video programming services
and DBS services, and many smaller MSOs, particularly those that were
acquisitive during the late 1980's and purchased systems at prices significantly
higher than those paid by FVOP, are either seeking liquidity for their investors
or are constrained from accessing additional capital to upgrade or rebuild aging
plant to remain competitive with other video programming providers.
Additionally, the Company believes that many of these smaller companies are
often unable to respond to the technological changes facing the cable and
telecommunications industries and are thus generally poorly positioned to
develop new broadband service revenue in the future.
At the same time that "financial players" and smaller cable operators, many of
whom were acquisitive during the late 1980's and purchased systems at prices
significantly higher than those paid by FVOP, are seeking to exit the cable
television business, larger MSOs are directing their finite human and financial
resources to the major urban and suburban markets. Large MSOs are divesting less
strategic systems or are trading them for more strategic assets in what the
Company believes is an effort to conserve capital, to rationalize their own
geographic clusters and to increase subscriber density in their larger urban and
suburban systems.
The convergence of these market forces has resulted in both a large inventory of
cable systems for sale in small to medium-sized markets, and a relatively small
pool of capable buyers. As a result of this supply and demand anomaly, the
Company has been able to selectively acquire cable properties at historically
attractive prices. The aggregate purchase price paid (net of aggregate
disposition proceeds of approximately $15.0 million) by the Company for the
Existing Systems was approximately $551.0 million, representing an average of
8.7 times the pro forma acquisition cash flow (as defined) of the Existing
Systems.
The Company believes that other acquisition opportunities exist and the Company
is continuously exploring opportunities with other cable television system
owners and operators. Although the Company does not currently have definitive
agreements to acquire systems other than those described herein, the Company
intends to continue to pursue, on an opportunistic basis, additional strategic
acquisitions of significant size as well as smaller "fill-in" acquisitions
within its existing operating regions to further enhance their operational and
financial performance.
BUSINESS STRATEGY
The Company's objective is to acquire at least 500,000 subscribers in
geographically concentrated clusters of 100,000 subscribers or more. FVOP seeks
to maximize enterprise value by acquiring cable television systems at attractive
prices in geographically rational clusters to realize economies of scale and by
improving system management to enhance operating profit. The Company believes
that it can generate significant financial returns over a four- to six-year
investment horizon through the liquidation of its properties in either the
private or public market. To achieve its objective, the Company pursues the
following business strategies:
TARGET CLUSTERS IN SMALL AND MEDIUM-SIZED MARKETS. The Company has acquired
clusters of cable television systems serving small and medium-sized suburban and
exurban markets which are generally within 50 to 100 miles of larger urban and
suburban communities. The Company believes that such markets have many of the
beneficial attributes of larger urban and suburban markets--moderate to high
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household growth, economic stability, attractive subscriber demographics and
favorable potential for additional clustering--and that in such markets (i) it
will face less direct competition, (ii) it will maintain higher subscriber
penetration levels and lower customer turnover, and (iii) its overhead and
certain operating costs will generally be lower than those in larger markets.
GROW THROUGH STRATEGIC AND OPPORTUNISTIC ACQUISITIONS. The Company has
systematically implemented a focused acquisition and consolidation strategy
within its three primary operating regions of Ohio, Kentucky and New England and
its systems group in the Southeast. The Company will continue to seek to acquire
systems, both "fill-in" acquisitions of smaller systems as well as "strategic"
acquisitions of larger size, that can be readily integrated into its existing
system clusters. The Company may also pursue acquisitions outside of its primary
operating regions that can either be resold at higher prices or exchanged for
systems that are contiguous to its primary clusters.
IMPLEMENT OPERATING EFFICIENCIES. The Company seeks to implement extensive
management, operational and technical changes in its acquired systems which are
designed to improve operating efficiencies, enhance operating cash flow and
operating margins and reduce overhead through economies of scale. By
centralizing and upgrading customer service functions, streamlining engineering
and technical support and installing state-of-the-art telephone, management
information systems ("MIS") and billing systems, the Company seeks to reduce
administrative costs while providing a higher level of customer service. Through
December 31, 1996, the Company has consolidated certain customer service and
sales offices operated by its predecessors and expects ultimately to consolidate
its existing thirty-five offices into four regional service centers and
approximately fifteen local payment offices. In addition, the Company plans to
interconnect 42 of the existing 199 headends that serve the Existing Systems. By
serving more subscribers from centralized distribution points, the Company
expects to reduce technical maintenance costs, improve reliability and more
cost-effectively introduce new services.
FOCUS ON THE CUSTOMER. By centralizing customer service at the regional level,
functions that directly impact subscribers--customer service, administration of
customer accounts and technical support--are implemented more quickly and
effectively. As a result of its consolidation efforts, the Company has been able
to enhance customer service by increasing hours of operations for its customer
service functions, better coordinating technical service and installation calls,
improving employee training and oversight and standardizing maintenance
procedures.
PROMOTE AND EXPAND SERVICE OFFERINGS. The Company aggressively promotes and
expands services to add and retain customers and increase revenue per
subscriber. Through a coordinated array of marketing techniques, including
door-to-door sales, telemarketing, direct mail, print and broadcast advertising,
flyers and billing inserts and cross-channel promotion, the Company seeks to
increase basic and premium service penetration by expanding the programming and
pricing options available to its customers, creating new basic and premium
packages and launching lower priced premium channels such as Disney, Starz! and
Encore. For example, in the fourth quarter of 1996, the Company launched the
"Ultimate TV" package, a multi-service programming package consisting of several
lower priced premium services, to approximately 65,000 of its customers.
Supported by direct mail and telemarketing, the "Ultimate TV" promotion added
approximately 9,400 pay units. In 1997, the Company will open a centralized
tele-marketing center to further enhance marketing, account collection and
customer satisfaction.
As systems are consolidated and technically enhanced, FVOP also expects to
expand addressability, which is available currently in systems only serving
approximately 33.3% of the Company's subscribers, to increase revenue derived
from pay-per-view movies and events and new pay services such as interactive
video games. In addition, the Company has increased advertising sales staffing
and upgraded advertising insertion equipment to increase advertising spot
revenue in existing properties and newly acquired systems. As systems are
integrated into larger, contiguous system clusters that expand advertising
market delivery, FVOP plans to intensify local spot advertising sales efforts,
which generated only $.82 per subscriber per month during the last quarter of
1996.
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STRATEGICALLY UPGRADE SYSTEMS. The Company intends to selectively upgrade its
cable systems to increase channel capacities, enhance signal quality and improve
technical reliability. The Company believes such technical upgrades will not
only enhance the potential for increasing revenue, but also will improve
customer and community relations and further solidify the Company's incumbent
position as the preeminent provider of video services in its operating regions.
In addition, by implementing a hybrid fiber optic-backbone/coaxial cable design
across the majority of its cable plant, the Company will effectively position
itself for its planned introduction of new broadband and interactive services in
certain markets. In 1997 the Company expects to invest $16.8 million in plant
rebuild and upgrades, fiber interconnection and channel additions and an
additional $4.0 million for digital and analog converters. Also in 1997, the
Company has planned trials of digital programming and Internet access in
selected systems with the objective of a broader roll-out in 1998.
Additional potential for increased revenue will result as the Company develops
broadband service capability for the transmission of video, voice and data
services. Creating full service broadband terrestrial and satellite networks and
interconnecting contiguous cable systems will enable the Company's regional
systems to offer a wide range of new services. These service offerings will
include multi-channel pay-per-view, interactive video games, advertising
insertion and the delivery of videotext or other information services. Over the
longer term, potential applications for fiber interconnected networks include
competitive telephone access, distance learning, long distance telephone
backhaul, PCS and ESMR interconnection and energy management and monitoring.
DEVELOPMENT OF THE SYSTEMS
The Existing Systems. The Company commenced operations in November 1995 with the
acquisition of certain cable television systems from United Video Cablevision,
Inc. (the "UVC Systems") in Maine and Ohio for an aggregate purchase price of
approximately $121.8 million, and certain other cable systems from Longfellow
Cable Company, Inc. (the "Longfellow Systems") in central Maine for an aggregate
purchase price of approximately $6.1 million. During 1996, the Company has
continued to grow through acquisitions. FVOP acquired certain cable television
systems from (i) C4 Media Cable Southeast, Limited Partnership (the "C4
Systems") on February 1, 1996 for an aggregate purchase price of approximately
$47.6 million (subject to adjustment), (ii) Americable International Maine, Inc.
(the "Americable Systems") on March 29, 1996 for an aggregate purchase price of
approximately $4.8 million, (iii) Cox Communications (the "Cox Systems") on
April 9, 1996 for an aggregate purchase price of approximately $135.9 million,
(iv) Phoenix Grassroots Cable Systems, LLC (the "Grassroots Systems") on August
29, 1996 for an aggregate purchase price of approximately $9.7 million, (v)
Triax Southeast Associates, L.P. (the "Triax Systems") on October 7, 1996 for an
aggregate purchase price of approximately $85.9 million (subject to adjustment),
(vi) American Cable Entertainment of Kentucky-Indiana, Inc. (the "ACE Systems")
on October 9, 1996 for an aggregate purchase price of approximately $147.4
million, (vii) SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio Systems")
on October 31, 1996 for an aggregate purchase price of approximately $3.8
million, and (viii) SRW, Inc.'s Deep Creek Cable TV, L.P. (the "Deep Creek
System") on December 23, 1996 for an aggregate purchase price of approximately
$3.0 million (subject to adjustment). Through December 31, 1996, the Company has
paid consideration of approximately $566.0 million, before disposition proceeds,
for such systems, which at the date of acquisition served approximately 365,600
basic subscribers. The aggregate consideration paid to acquire these systems
represents an average of approximately 8.7 times the pro forma acquisition cash
flow of the systems. In addition, the Company sold systems serving, in the
aggregate, approximately 10,400 basic subscribers located in Chatsworth, Georgia
and Woodstock and New Market, Virginia during the third quarter of 1996 for
aggregate disposition proceeds of approximately $15.0 million. The UVC Systems,
the Longfellow Systems, the Americable Systems and the Grassroots Systems
contributed 66,500 subscribers to the New England Systems. The UVC Systems, the
Triax Systems, the Cox Systems and the Penn/Ohio Systems contributed 111,600
subscribers to the Ohio Systems. The Cox Systems, the ACE Systems and the Triax
Systems contributed 118,200 subscribers to the Kentucky Systems and the C4
Systems, the Triax Systems, and the Penn/Ohio Systems contributed 69,300
subscribers to the Southeast Systems.
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PENDING ACQUISITIONS. The Company is currently focusing on the acquisition of
geographically contiguous cable systems or cable systems in close proximity to
its Existing Systems. In early 1997, the Company anticipates spending
approximately $64.7 million to close up to eight additional "fill-in"
acquisitions, each of which are under contract or letter of intent, of systems
which served, in the aggregate, approximately 44,100 basic subscribers at
December 31, 1996. The aggregate consideration expected to be paid to acquire
these systems represents an average of approximately 7.6 times the pro forma
acquisition cash flow of the systems. Of the total subscribers to be acquired,
approximately 27,000 would be added to the Ohio Systems, 11,000 to the Kentucky
Systems and 6,100 to the Southeast Systems. On March 20, 1997, the Company
closed the acquisition of cable television system assets serving approximately
7,000 basic subscribers in Kentucky from Bluegrass Cable Partners, Limited
Partnership for a cash purchase price of $9.9 million.
While there can be no assurance that any or all of these acquisitions will be
consummated and while there can be no assurances that the Company can
successfully integrate any acquired business with its existing operations or
realize any efficiencies therefrom, the Company intends to aggressively pursue
these opportunities. In addition, the Company intends to continue to pursue, on
an opportunistic basis, additional strategic acquisitions of significant size
and smaller "fill-in" acquisitions within its existing operating regions to
further enhance the operational and financial performance of its geographic
clusters and to obtain subscriber densities sufficient to support telephony and
new broadband services.
SYSTEM DESCRIPTIONS
The Company's cable television systems consist of three primary clusters--Ohio,
Kentucky and New England--with a fourth, smaller group of systems in the
Southeast. The following chart provides certain operating and technical profile
statistics as of and for the year ended December 31, 1996:
COMBINED EXISTING SYSTEMS
<TABLE>
<CAPTION>
Ohio Kentucky New England Southeast Existing
Systems Systems Systems Systems Systems
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Homes passed 157,600 151,400 95,200 94,700 498,900
Basic subscribers 113,500 117,700 67,100 58,100 356,400
Basic penetration 72.0% 77.7% 70.5% 61.4% 71.4%
Premium units 51,600 43,100 27,800 29,600 152,100
Premium penetration 45.5% 36.6% 41.4% 50.9% 42.7%
Avg. monthly revenue per basic subscriber (1) $ 29.53 $ 31.78 $ 28.58 $ 26.82 $ 29.73
Number of headends 53 36 70 40 199
Percentage of subscribers with at least 54 channel capacity 52.7% 57.0% 48.3% 27.3% 49.1%
(1) Average monthly revenue per subscriber equals revenue for the month ended December 31, 1996 divided by the number of
subscribers generating revenue during such period.
</TABLE>
OHIO SYSTEMS. As of December 31, 1996, the Ohio Systems passed approximately
157,600 homes and served approximately 113,500 basic subscribers and 51,600
premium units. The majority of the Ohio Systems are located within a 60 minute
driving distance of either Columbus or Toledo. In addition to those subscribers
located in exurban Columbus and Toledo, Ohio, certain of the Company's
subscribers residing along the Ohio River in Ohio, Kentucky and West Virginia
are served from a single regional office located in Chillicothe, Ohio. The 1996
median household income in the Ohio cluster exceeds U.S. averages for counties
with less than 100,000 households ("Comparable Counties"), according to Equifax
National Decision Systems, 1996. Approximately 87% of the counties in which the
Company has systems have fewer than 100,000 households. However, household
growth rates in the areas served by the Ohio Systems are projected to lag that
of Comparable Counties over the next five years.
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Approximately 52.7% of the current plant design for the Ohio Systems is at least
54 channels, including a fiber-to-the-feeder 550 MHz design in Ashland,
Kentucky. Upon completion of its current rebuild of the Chillicothe, Washington
Court House and Greenfield, Ohio Systems, the Company will serve approximately
37.5% of its subscribers in the Ohio Systems with plant having at least a 78
channel capacity and 79.5% with at least a 54 channel capacity. The Company
plans to utilize excess channel capacity to introduce new basic and premium
services. Although the Ohio Systems' basic penetration rate at December 31, 1996
was above the Ohio state average of 65.6%, their pay penetration rate was
approximately 27.7% below the Ohio state average pay penetration rate of 63.0%
according to Warren Publishing, Inc.'s TELEVISION AND CABLE FACTBOOK, 1997.
Also as part of its technical improvement program, the Company plans to increase
the deployment of addressable converters, which were available to only 24.0% of
the Ohio Systems subscribers as of December 31, 1996, and more aggressively
market pay-per-view and other interactive services such as video games. In
addition, the Company plans to leverage the existing centralized advertising
facilities and advertising sales personnel acquired from Cox to increase
advertising revenue in all of the Ohio Systems where such efforts had not
existed prior to acquisition.
KENTUCKY SYSTEMS. As of December 31, 1996, the Kentucky Systems passed
approximately 151,400 homes and served approximately 117,700 basic subscribers
and 43,100 premium units. The majority of the Company's Kentucky Systems
subscribers, serviced from a regional customer service center in Richmond,
Kentucky, reside in outlying communities of Lexington, Kentucky and Cincinnati,
Ohio. The 1996 median household income and the projected growth rates (from 1996
to 2001) in the areas served by the Kentucky Systems exceed U.S. averages for
Comparable Counties, according to Equifax National Decision Systems, 1996.
Approximately 57.0% of the current plant design for the Kentucky Systems is at
least 54 channels, including fiber-to-the-feeder 550 MHz design systems in
Nicholasville and Cynthiana, Kentucky and 750 MHz design in Madison, Indiana.
Upon completion of its current rebuild of the Winchester, Kentucky system, the
Company will serve approximately 29.8% of its Kentucky Systems subscribers with
at least 78 channel capacity plant. In addition, the Company continues to expend
capital to complete a fiber ring surrounding Lexington, Kentucky. When complete,
this fiber loop will serve approximately 60,000 subscribers from a single
headend facility, interconnecting approximately fifteen existing headend
facilites. The Kentucky Systems will then be effectively positioned to offer
broadband telecommunications services as high speed Internet access, distance
learning and point-to-point telephony. The Company plans to utilize excess
channel capacity to introduce new basic and premium services to the Kentucky
Systems. While the Kentucky Systems' basic penetration rate at December 31, 1996
was marginally greater than the Kentucky state average of 76.9%, their pay
penetration rate was approximately 24.7% below the Kentucky state average pay
penetration rate of 48.6% according to Warren Publishing, Inc.'s TELEVISION &
CABLE FACTBOOK, 1997.
Also as part of its technical improvement program, the Company plans to increase
the deployment of addressable converters, which were available to only 58.0% of
the Kentucky Systems subscribers as of December 31, 1996, and more aggressively
market pay-per-view and other interactive services. Additionally, the Company
plans to leverage the existing centralized advertising facilities and
advertising sales personnel acquired from ACE to increase advertising revenue in
all of the Kentucky Systems where such efforts had not existed prior to
acquisition.
NEW ENGLAND SYSTEMS. As of December 31, 1996, the New England Systems passed
approximately 95,200 homes and served approximately 67,100 basic subscribers and
27,800 premium units. The New England Systems are comprised primarily of systems
located in communities in southern and coastal Maine and central New Hampshire.
The majority of the Maine systems are located within a 60 minute drive of
Portland and Bangor in predominantly blue-collar, middle income bedroom
communities. In addition, the Company serves resort communities in Maine's
Carrabassett Valley that include Sugarloaf/USA and Sunday River. Most of the
approximately 4,900 subscribers in New Hampshire are within commuting
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distance of Laconia, Plymouth and Littleton, New Hampshire. The 1996 median
household income and projected household growth rates (from 1996 to 2001) in the
areas served by the New England Systems meet or exceed U.S. averages for
Comparable Counties, according to Equifax National Decision Systems, 1996.
Approximately 48.3% of the current plant design for the New England Systems
offers at least 54 channels. Upon completion of the plant rebuild and upgrade
projects in Rockland, Calais, Bridgeton, Freeport and Portage, Maine,
approximately 18.5% of the plant in the New England systems will have channel
capacities of 78 channels or higher and approximately 64.3% will be served by
plant offering at least 54 channels. The Company plans to utilize excess channel
capacity by introducing new basic and premium services. The New England Systems'
basic and pay penetration rates are 11.6% and 1.7% below the Maine state average
penetration rates of 79.8% and 42.1%, respectively, according to Warren
Publishing, Inc.'s TELEVISION & CABLE FACTBOOK, 1997.
The Company has begun to introduce addressability in the New England Systems to
improve revenue derived from pay-per-view and other interactive services such as
video games, including The Sega Channel. As of December 31, 1996, only 6.0% of
the New England subscribers had access to addressable services. As systems are
interconnected and consolidated, the Company will more aggressively pursue spot
advertising revenue, which accounted for only $.15 per subscriber per month
during the last quarter of 1996.
SOUTHEAST SYSTEMS. As of December 31, 1996, the Southeast Systems passed
approximately 94,700 homes and served approximately 58,100 basic subscribers and
29,600 premium units. The Southeast Systems are comprised of groups of systems
located in the following states: (i) Tennessee, which served approximately
16,500 basic subscribers; (ii) North Carolina, which served approximately 14,800
basic subscribers; (iii) Virginia, which served approximately 19,800 basic
subscribers; and (iv) Maryland/Pennsylvania, which served approximately 7,000
basic subscribers. The Tennessee systems are located primarily in Greeneville,
Tennessee and surrounding communities, the North Carolina systems near Rocky
Mount, North Carolina and the Virginia systems in north central Virginia between
Charlottesville and Winchester and in Eastern Virginia near Richmond. The
Maryland/Pennsylvania systems are located along the Maryland and Pennsylvania
border, approximately 120 miles west of Washington, D.C. The 1996 median
household income and actual and projected growth rate in the number of
households (from 1990 to 2001) in the areas served by the Southeast Systems
exceed U.S. averages for Comparable Counties, according to Equifax National
Decision Systems, 1996.
The Company plans either to consolidate further the Southeast Systems through
acquisitions, trade certain of the systems for properties within its primary
clusters in Ohio, Kentucky and New England, or sell the systems outright. As
such, the Company's operating and capital expenditure plans for the Southeast
Systems will be limited to maintenance and discretionary projects that will
increase the value of the systems to a potential buyer or trading partner.
Approximately 27.3% of the current plant design for the Southeast Systems is at
least 54 channels. The Company will continue to evaluate capital expenditures to
rebuild and upgrade plant based on the sales or trading status of the Southeast
Systems.
PENDING ACQUISITIONS. In early 1997, the Company expects to close up to eight
additional acquisitions, which are under contract or letter of intent, of
geographically contiguous cable systems or cable systems in close proximity to
its Existing Systems which served as of December 31, 1996, in the aggregate,
approximately 44,100 basic subscribers. Of the total subscribers to be acquired,
approximately 27,000 will be added to the Ohio Systems, 11,000 to the Kentucky
Systems and 6,100 to the Southeast Systems. These systems possess technical
profiles generally consistent with the profiles for the Company's Existing
Systems. There can be no assurance that any or all of these acquisitions will be
consummated and while there can be no assurances that the Company can
successfully integrate any acquired business with its existing operations or
realize any efficiencies therefrom, the Company intends to aggressively pursue
these opportunities. On March 20, 1997, the Company closed the acquisition of
cable television system assets
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serving approximately 7,000 basic subscribers in Kentucky from Bluegrass Cable
Partners, Limited Partnership for a cash purchase price of $9.9 million.
THE CABLE TELEVISION INDUSTRY
A cable television system receives television, radio and data signals that are
transmitted to the system's headend site by means of off-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial, and in some instances,
fiber optic cable, to customers who pay a fee for this service. Cable television
systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years, generally for extended periods of up to 15 years.
The cable television industry developed in the United States in the late 1940's
and early 1950's in response to the needs of residents in predominantly rural
and mountainous areas of the country where the quality of off-air television
reception was inadequate due to factors such as topography and remoteness from
television broadcast towers. In the late 1960's, cable television systems also
developed in small and medium-sized cities and suburban areas that had a limited
availability of clear off-air television station signals. All of these markets
are regarded within the cable industry as "classic" cable television station
markets. In more recent years, cable television systems have been constructed in
large urban cities and nearby suburban areas, where good off-air reception from
multiple television stations usually is already available, in order to receive
the numerous, satellite-delivered channels carried by cable television systems
which are not otherwise available via broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of cable
services consisting of (i) off-air television signals of local network,
independent and educational stations, (ii) a limited number of television
signals from so-called "superstations" originating from distant cities (such as
WTBS and WGN), (iii) various satellite-delivered, non-broadcast channels (such
as Cable News Network ("CNN"), MTV: Music Television, the USA Network ("USA"),
Entertainment and Sports Programming Network ("ESPN") and Turner Network
Television ("TNT")), (iv) certain programming originated locally by the cable
television system (such as public, governmental and educational access programs)
and (v) informational displays featuring news, weather, stock market and
financial reports and public service announcements. For an extra monthly charge,
cable television systems also offer premium television services to their
customers. These services (such as Home Box Office ("HBO"), Showtime and
regional sports networks) are satellite-delivered channels consisting
principally of feature films, live sports events, concerts and other special
entertainment features, usually presented without commercial interruption.
A customer generally pays an initial installation charge and fixed monthly fees
for basic and premium television services and for other services (such as the
rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenue for cable television operators. In
addition to customer revenue from these services, cable television operators
generate revenue from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Cable television
operators frequently also offer to their customers home shopping services, which
pay the systems a share of revenue from sales of products in the systems'
service areas. See "--Programming, Services and Rates."
PROGRAMMING, SERVICES AND RATES
The Company has various contracts to obtain basic and premium programming for
its systems from program suppliers whose compensation is typically based on a
fixed fee per customer. The Company's programming contracts are generally for a
fixed period of time and are subject to negotiated renewal. Some program
suppliers provide volume discount pricing structures or offer marketing support
to the Company. In particular, the Company has negotiated programming agreements
with premium service
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suppliers that offer cost incentives to the Company under which premium service
unit prices decline as certain premium service growth thresholds are met. The
Company's successful marketing of multiple premium service packages emphasizing
customer value has enabled the Company to take advantage of such cost
incentives. In addition, the Company is a member of a programming consortium
consisting of small to medium-sized MSOs serving, in the aggregate, over three
million cable subscribers. The consortium was formed to help create efficiencies
in the areas of securing and administering programming contracts, as well as to
establish more favorable programming rates and contract terms for small to
medium-sized operators. Going forward, the Company intends to negotiate
programming contract renewals both directly and through the consortium to obtain
the best possible contract terms. The Company also has various retransmission
consent arrangements with commercial broadcast stations. Some of these consents
require direct payment of nominal fees for carriage. In some other instances no
payment is required; however, the Company has entered into agreements with
certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations. A substantial portion of
these retransmission consent agreements were required to be renewed before
December 1996, at which time the Company renewed or renegociated such agreements
through December 1999 under substantially the same terms. See "Legislation and
Regulation".
Although services vary from system to system due to differences in channel
capacity, viewer interests and community demographics, the majority of the
Company's systems offer a "basic service tier," consisting of local television
channels (network and independent stations) available over-the-air and local
public, governmental, home-shopping and leased access channels. The majority of
the Company's systems offer, for a monthly fee, an expanded basic tier of
"superstations" originating from distant cities (such as WTBS and WGN), various
satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN and
TNT) and certain programming originated locally by the cable system (such as
public, governmental and educational access programs) providing information with
respect to news, time, weather and the stock market. In addition to these
services, the Company's systems typically provide one or more premium services
purchased from independent suppliers and combined in different formats to appeal
to the various segments of the viewing audience, such as HBO, Cinemax, Showtime,
The Movie Channel, Starz! and The Disney Channel. These services are
satellite-delivered channels consisting principally of feature films, original
programming, live sports events, concerts and other special entertainment
features, usually presented without commercial interruption. Such premium
programming services are offered by the Company's systems both on an a la carte
basis and as part of premium service packages designed to enhance customer value
and to enable the Company's systems to take advantage of programming agreements
offering cost incentives based on premium unit growth. Subscribers may subscribe
for one or more premium units. Additionally, the Company plans to upgrade
certain of its systems with fiber optic cable, which will allow the Company to
expand its ability to use "tiered" packaging strategies for marketing premium
services and promoting niche programming services. The Company believes that
this ability will increase basic and premium penetration as well as revenue per
subscriber.
Rates to subscribers vary from market to market and in accordance with the type
of service selected. As of December 31, 1996, the average monthly rate for the
Existing Systems was $24.41 for the basic and expanded basic service tiers.
These rates reflect reductions effected in response to the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act")
re-regulation of cable television industry rates, and in particular, the FCC's
rate regulations implementing the 1992 Cable Act, which became effective in
1993. A one-time installation fee, which may be waived in part during certain
promotional periods, is charged to new subscribers. Management believes that the
Company's rate practices are generally consistent with the current practices in
the industry. See "Legislation and Regulation."
MARKETING, CUSTOMER SERVICE AND COMMUNITY RELATIONS
The Company aggressively markets and promotes its cable television services with
the objective of adding and retaining customers and increasing subscriber
revenue. The Company actively markets its basic and premium program packages
through a number of coordinated marketing techniques, which include (i)
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direct consumer sales and subscriber audit programs, (ii) direct mail for basic
and upgrade acquisition campaigns, (iii) monthly subscriber statement inserts,
(iv)local newspaper and broadcast/radio advertising where population densities
are sufficient to provide a reasonable cost per sale and (vi) cross channel
promotion of new services and pay-per-view. Towards this end, the Company has
established a single centralized telemarketing center.
The Telemarketing Center, located in Pittsfield, Massachusetts, is to provide
the outbound telemarketing support for all operating regions. The facility,
expected to be fully operational by the second quarter of 1997, will initially
be staffed by up to 26 telemarketers with capacity to support up to 50 such
personnel. Using a predictive dialing system platform, the operation will focus
on (i) basic and pay unit acquisition, (ii) delinquent account collection
activities, (iii) customer satisfaction surveys and (iv) targeted marketing
campaigns.
The Company is dedicated to providing superior customer service. To meet this
objective, the Company provides its customers with a full line-up of
programming, a wide variety of programming options and packages, timely and
reliable service and improved technical quality. The Company's employees receive
ongoing training in customer service, sales and subscriber retention and
technical support. In general, following a new installation, a customer service
representative will follow up by telephone contact with the subscriber to assess
the quality of installation and the service the subscriber is receiving and to
ensure overall subscriber satisfaction. Customer service representatives and
technicians are also trained to market upgrades or cross-sell services at the
point of sale of service. As part of its consolidation efforts, the Company has
established centralized customer service facilities, increased hours of
operation, and installed state-of-the-art telephone, information and billing
systems to improve responsiveness to customer needs. In addition, the Company
has retained local payment and technical offices to maintain its local presence
and visibility within its communities.
Recognizing that strong governmental, franchise and public relations are crucial
to the overall success of the Company, an aggressive initiative has been
undertaken to maintain and improve the working relationships with all
governmental entities within the franchise areas. Regional management meets
regularly with local officials for the purposes of keeping them advised on the
Company's activities within the communities, to receive information and feedback
on the Company's standing with officials and customers alike and to ensure that
the Company can maximize its growth potential in areas where new housing
development is occurring or where significant technical plant improvement is
underway. The regional management is also responsible for franchise renewal
negotiations as well as the maintenance of Company visibility through
involvement in various community and civic organizations and charities. In
addition, the Company recently hired experienced community relations personnel
in the Maine, Ohio and Kentucky regions to enhance local visibility and
long-term relationships.
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Company maintains high
technical performance standards in all of its cable systems, and systems are
selectively upgraded and maintained to maximize channel capacity and to improve
picture quality and reliability of the delivery of additional programming and
new services. Before committing the capital to upgrade or rebuild a system,
Company management carefully assesses (i) subscribers' demand for more channels,
(ii) requirements in connection with franchise renewals, (iii)
currently-available competing technologies, (iv) subscriber demand for other
cable and broadband telecommunications services, (v) the extent to which system
improvements will increase the attractiveness of the property to a future buyer
and (vi) the cost effectiveness of any such capital outlay.
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<TABLE>
<CAPTION>
----------------------------------------------------------
Up to 32 33 to 53 54 to 77 78 to 112
Channels Channels Channels Channels Total
--- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Miles of plant 517 8,501 4,562 1,358 14,938
% of total miles of plant 3.5% 56.9% 30.5% 9.1% 100.0%
% of total basic subscribers 4.0% 46.9% 31.5% 17.6% 100.0%
</TABLE>
The Company's systems have an average capacity by subscriber of approximately 53
channels and delivered an average of 41 channels of programming to its
subscribers as of December 31, 1996. Approximately 33.3% of the Company's
subscribers currently have access to addressable technology. Addressable
technology enables the Company, from the office or headend, to change the
premium channels being delivered to each subscriber or to activate pay-per-view
services. These service level changes can be effectuated without the delay or
expense associated with dispatching a technician to the subscriber's home.
Addressable technology also reduces premium service theft and allows the Company
to automatically disconnect delinquent accounts electronically from the customer
service center.
The use of fiber optic technology in concert with coaxial cable has
significantly enhanced cable system performance. Fiber optic strands are capable
of carrying hundreds of video, data and voice channels over extended distances
without the extensive signal amplification typically required for coaxial cable.
To date, the Company has used fiber to interconnect headends, to eliminate
headends by installing fiber backbones and to reduce amplifier cascades, thereby
improving both picture quality, system reliability and operational efficiencies.
Recently, digital set-top boxes and high speed cable modems have become
commercially viable. These developments will increase services available to
cable subscribers and may allow the introduction of alternative communications
delivery systems for data and voice. The Company plans to test such digital
technology and cable modems during 1997. The test results will be used to
formulate the Company's business strategy for the launch of these new services
in the future.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act") and the 1992 Cable Act (collectively, the "Cable Acts"). See "Legislation
and Regulation."
As of December 31, 1996, the Company held 416 franchises. These franchises, most
of which are non-exclusive, provide for the payment of fees to the issuing
authority. In all of the Existing Systems, such franchise fees are passed
through directly to the customers. The Cable Acts prohibit franchising
authorities from imposing franchise fees in excess of 5% of gross revenue and
also permit the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. See "Legislation
and Regulation."
Approximately 87.0% of the Company's basic subscribers are in service areas that
require a franchise. The table below groups the franchises of the Existing
Systems by date of expiration and presents the approximate number and percentage
of basic subscribers for each group of franchises as of December 31, 1996.
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<TABLE>
<CAPTION>
--------------------------------------------------------------------
Percentage of Percentage
Number of of Total Number of of Franchised
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
- ----------------------- --- ----- ------- -----
<C> <C> <C> <C> <C>
1997 through 2001 179 43.0% 133,600 42.8%
2002 and thereafter 237 57.0% 178,300 57.2%
--- ----- ------- -----
Total 416 100.0% 311,900 100.0%
</TABLE>
The Cable Acts provide, among other things, for an orderly franchise renewal
process in which franchise renewal will not be unreasonably withheld or, if
renewal is denied and the franchising authority acquires ownership of the system
or effects a transfer of the system to another person, the operator generally is
entitled to the "fair market value" for the system covered by such franchise. In
addition, the Cable Acts established comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
COMPETITION
Cable television systems face competition from alternative methods of receiving
and distributing television signals and from other sources of news, information
and entertainment such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive online computer services and
home video products, including videotape cassette recorders. The extent to which
a cable communications system is competitive depends, in part, upon the cable
system's ability to provide, at a reasonable price to customers, a greater
variety of programming and other communications services than those which are
available off-air or through other alternative delivery sources and upon
superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted on a
nonexclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable television systems. It is possible that a
franchising authority might grant a second franchise to another company
containing terms and conditions more favorable than those afforded the Company.
Well-financed businesses from outside the cable industry (such as the public
utilities that own the poles to which cable is attached) may become competitors
for franchises or providers of competing services. Competition from other video
service providers exists in areas served by the Company. In a limited number of
the Company's franchise areas, the Company faces direct competition from another
franchised cable television system.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. The 1992 Cable Act contains provisions, which the FCC implemented
with regulations, to enhance the ability of cable competitors to purchase and
make available to HSD owners certain satellite-delivered cable programming at
competitive costs. The Telecommunications Act of 1996 (the "1996 Telecom Act")
and FCC regulations implementing that law preempt certain local restrictions on
the use of HSDs and roof-top antennae to receive satellite programming and
over-the-air broadcasting services. See "Legislation and Regulation."
Cable operators also face competition from private satellite master antenna
television ("SMATV") systems that serve condominiums, apartment and office
complexes and private residential developments. The 1996 Telecom Act broadens
the definition of SMATV systems not subject to regulation as a franchised cable
television system. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services
offered by franchised cable television systems. SMATV operators often enter into
exclusive agreements with building owners or homeowners' associations, although
some states have enacted laws that authorize franchised cable operators access
to such private complexes. These laws have been challenged in the courts with
varying results. In addition, some
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<PAGE>
companies are developing and/or offering to these private residential and
commercial developments packages of telephony, data and video services. The
ability of the Company to compete for customers in residential and commercial
developments served by SMATV operators is uncertain.
The FCC and the Congress have adopted policies providing a more favorable
operating environment for new and existing technologies that provide, or have
the potential to provide, substantial competition to cable television systems.
These technologies include, among others, DBS service, whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
Programming is currently available to the owners of DBS dishes through
conventional, medium and high-powered satellites. DBS systems are increasing
channel capacity and are providing movies, broadcast stations, and other program
services comparable to those of cable television systems. Currently, Primestar
Partners (a consortium comprised of cable operators and a satellite company),
DirecTV (which includes AT&T Corp. as an investor), and EchoStar Communications
Corp. ("EchoStar") are providing nation-wide DBS services, with each company
offering in excess of 100 channels of video programming to subscribers. In
addition, American Sky Broadcasting ("ASkyB"), a joint venture between MCI
Telecommunication Corp. and News Corp., is currently constructing satellites
that reportedly, when operational, will provide approximately 200 channels of
DBS service nationwide. Recently ASkyB announced that it will merge with
EchoStar. There are other companies that are currently providing or are planning
to provide domestic DBS services.
Digital satellite service ("DSS") offered by DBS systems currently has certain
advantages over cable systems with respect to programming and digital quality,
as well as disadvantages that include high upfront costs and a lack of local
programming, service and equipment distribution. While DSS presents a
competitive threat, the Company currently has excess channel capacity available
in most of its systems, as well as strong local customer service and technical
support, which will enhance its ability to compete. By selectively increasing
channel capacities of systems to between 54 and 100 channels and introducing new
premium channels, pay-per-view and other services, the Company will seek to
maintain programming parity with DSS and magnify competitive service price
points. Based on internal tracking of subscriber disconnects, the Company
believes it has lost less than one percent of its customers to date to DSS
providers. The Company will continue to monitor closely the activity level and
the product and service needs of its customer base to counter potential erosion
of its market position or unit growth to DSS.
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low power microwave frequencies to transmit
video programming over the air to customers. Additionally, the FCC recently
adopted new regulations allocating frequencies in the 28 GHz band for a new
multichannel wireless video service similar to MMDS. Wireless distribution
services generally provide many of the programming services provided by cable
systems, and digital compression technology is likely to increase significantly
the channel capacity of their systems. Because MMDS service requires
unobstructed "line of sight" transmission paths, the ability of MMDS systems to
compete may be hampered in some areas by physical terrain and large buildings.
In the majority of the Company's franchise service areas, prohibitive topography
and limited "line of sight" access has limited, and is likely to continue to
limit, competition from MMDS systems. The Company is not aware of any
significant MMDS operation currently within its cable franchise service areas.
The 1996 Telecom Act makes it easier for local exchange telephone companies
("LECs") and others to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
subscribers. See "Legislation and Regulation." Various LECs currently are
providing video programming services within and outside their telephone service
areas through a variety of distribution methods, including both the deployment
of broadband wire facilities and the use of wireless (MMDS ) transmission. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs are not
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross-subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however,
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<PAGE>
that the small to medium-sized markets in which it provides or expects to
provide cable services are unlikely to support competition in the provision of
video and telecommunications broadband services given the lower population
densities and high costs per subscriber of installing plant. The 1996 Telecom
Act's provision promoting facilities-based broadband competition are primarily
targeted at larger markets, and its prohibition on buy outs and joint ventures
between incumbent cable operators and LECs exempts small operators and carriers
meeting certain criteria. See "Legislation and Regulation." The Company believes
that significant growth opportunities exist for the Company by establishing
cooperative rather than competitive relationships with LECs within its service
areas, to the extent permitted by law. The Company has initiated discussions
with such carriers regarding possible joint ventures.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The FCC has
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and businesses. The FCC also permits
commercial and noncommercial FM stations to use their subcarrier frequencies to
provide nonbroadcast services including data transmissions. The FCC established
an over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. LECs and other common carriers provide facilities for the
transmission and distribution to homes and businesses of video services,
including interactive computer-based services like the Internet, data and other
nonvideo services. The FCC has held spectrum auctions for licenses to provide
PCS. PCS will enable license holders, including cable operators, to provide
voice and data services.
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environments are constantly occurring. Thus, it
is not possible to predict the effect that ongoing or future developments might
have on the cable industry or on the operations of the Company.
EMPLOYEES
At December 31, 1996, the Company had approximately 521 equivalent full-time
employees, seven of whom belonged to a collective bargaining unit. The Company
considers its relations with its employees to be good.
LEGISLATION AND REGULATION
The cable television industry currently is regulated by the FCC and certain
state and local governments. In addition, legislative and regulatory proposals
under consideration by the Congress and federal agencies may materially affect
the cable television industry.
The Cable Acts and the 1996 Telecom Act amended the Communications Act of 1934,
as amended (the "Communications Act"), and established a national policy to
guide the development and regulation of cable television systems. Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act is allocated between the FCC and state or local franchising
authorities. The FCC and state regulatory agencies are required to conduct
numerous rulemaking and regulatory proceedings to implement the 1996 Telecom Act
and such proceedings may materially affect the cable television industry. The
following is a summary of federal laws and regulations materially affecting the
growth and operation of the cable television industry and a description of
certain state and local laws.
THE COMMUNICATIONS ACT AND FCC REGULATIONS
THE TELECOMMUNICATIONS ACT OF 1996. The 1996 Telecom Act, which became effective
on February 8, 1996, is the most comprehensive reform of the nation's
telecommunications laws since the Communications Act. Although the long term
goal of the 1996 Telecom Act is to promote competition and decrease regulation
of various communications industries, in the short term, the law delegates to
the FCC (and in some cases to the states) broad new rulemaking authority. The
new law requires many of these
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<PAGE>
rulemakings to be completed in a very limited period of time. The following is a
brief summary of the important features of the 1996 Telecom Act that will affect
the cable and telephone industries.
CABLE COMMUNICATIONS. The 1996 Telecom Act deregulates cable programming service
tier ("CPST") rates for most MSOs (including the Company) after March 31, 1999,
except that such rates are immediately deregulated for certain small operators.
Deregulation will occur sooner for systems in markets where comparable video
programming services, other than DBS, are offered by local telephone companies,
or their affiliates, or by third parties using the local telephone company's
facilities, or where "effective competition" is established under the 1992 Cable
Act. The 1996 Telecom Act also modifies the uniform rate provisions of the 1992
Cable Act by prohibiting regulation of non-predatory, bulk discount rates
offered to subscribers in commercial and residential developments and permits
regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level. The
1996 Telecom Act eliminates the right of individual customers to file rate
complaints with the FCC concerning certain CPSTs and requires the FCC to issue a
final order within 90 days after receipt of CPST rate complaints filed by any
franchising authority after the date of enactment of the 1996 Telecom Act. The
1996 Telecom Act also modifies the existing statutory provisions governing cable
system technical standards, equipment compatibility, customer notice
requirements and program access, permits certain operators to include losses
incurred prior to September 1992 in setting regulated rates and repeals the
three-year anti-trafficking prohibition adopted in the 1992 Cable Act. The 1996
Telecom Act prohibits certain local restrictions that impair a viewer's ability
to receive video programming services using HSDs and over-the-air antennae, and
the FCC adopted regulations implementing this provision that preempt certain
local restrictions on satellite and over-the-air antenna reception of video
programming services, including zoning, land-use or building regulations, or any
private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user.
The 1996 Telecom Act eliminates the requirement that LECs obtain FCC approval
under Section 214 of the Communications Act before providing video services in
their telephone service areas and removes the statutory telephone company/cable
television cross-ownership prohibition, thereby allowing LECs to offer video
services in their telephone service areas. LECs may provide service as
traditional cable operators with local franchises or they may opt to provide
their programming over unfranchised "open video systems," subject to certain
conditions, including, but not limited to, setting aside a portion of their
channel capacity for use by unaffiliated program distributors on a
nondiscriminatory basis. Under certain limited circumstances, cable operators
also may elect to offer services through open video systems. The 1996 Telecom
Act also prohibits a local telephone company from acquiring a cable operator in
its telephone service area except in limited circumstances.
TELEPHONE. The 1996 Telecom Act removes barriers to entry in the local telephone
exchange market that is now monopolized by the seven Regional Bell Operating
Companies ("RBOCs") and other LECs by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators, wireless
telecommunications providers and long distance companies. At the same time, the
new law eliminates the prospective effects of the AT&T, GTE and McCaw consent
decrees and permits the RBOCs to enter the market for long distance services
(through a separate subsidiary) after they satisfy certain competitive
requirements intended to open the local telephone markets to competition. The
1996 Telecom Act also permits interstate utility companies to enter the
telecommunications market for the first time.
While the 1996 Telecom Act imposes new requirements with regard to
interconnection, it also directs the FCC to substantially relax much of its
regulation of telecommunications providers. The new law also eliminates or
streamlines many of the requirements applicable to local exchange carriers, such
as the requirement to obtain prior approval of the extension or construction of
telephone plant. In addition, the 1996 Telecom Act requires the FCC and states
to review universal service programs and to encourage access to advanced
telecommunications services by schools, libraries and other public institutions.
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OTHER COMMUNICATIONS SERVICES. The 1996 Telecom Act also contains provisions
regulating the content of video programming and computer services. Specifically,
the new law prohibits the use of computer services to transmit "indecent"
material to minors. Several special three-judge federal district courts have
issued preliminary injunctions enjoining the enforcement of these provisions as
unconstitutional to the extent they regulated the transmission of indecent
material. The United States Supreme Court recently announced that it would
review one of these decisions. The 1996 Telecom Act also requires the FCC to
prescribe guidelines for a ratings system for violent and indecent video
programming (unless video programming distributors adopt voluntary guidelines)
and requires all new television sets to contain a so-called "V-chip" capable of
blocking all programs with a given rating. The new law also substantially
relaxes current broadcast ownership rules by eliminating, among other things,
the statutory broadcast/cable television cross-ownership restriction that had
been codified by the 1984 Cable Act and by directing the FCC to eliminate its
network/cable cross-ownership regulation and review the need for its rule
prohibiting broadcast/cable cross-ownership.
RATE REGULATION. The 1992 Cable Act authorized rate regulation for certain cable
communications services and equipment in communities that are not subject to
"effective competition" as defined by federal law. Under the 1992 Cable Act,
virtually all cable television systems were subject to rate regulation for basic
cable service and equipment by local officials under the oversight of the FCC,
which prescribed detailed guidelines for such rate regulation. The 1992 Cable
Act also required the FCC to resolve complaints about rates for nonbasic cable
programming services (other than programming offered on a per channel or per
program basis) and to reduce any such rates found to be unreasonable. The 1992
Cable Act limited the ability of cable television systems to raise rates for
basic and certain cable programming services (collectively the "Regulated
Services") and eliminated the 5% annual basic service rate increase permitted by
the 1984 Cable Act without local approval. Cable services offered on a per
channel (a la carte) or per program (pay-per-view) basis are not subject to rate
regulation by either local franchising authorities or the FCC.
The 1996 Telecom Act deregulates rates for CPSTs after March 31, 1999 for most
MSOs (including the Company) and, for certain small cable operators, immediately
eliminates rate regulation of CPSTs and, in certain circumstances, basic
services and equipment. The deregulation of a smaller cable operator's rates
only applies in franchise areas in which the small cable operator serves 50,000
or fewer subscribers. To qualify for the "small cable operator" rate
deregulation under the 1996 Telecom Act, the operator (and its affiliates) must
serve in the aggregate less than one percent (currently estimated by the FCC to
be approximately 617,000 subscribers) of all U.S. cable television subscribers
and may not be affiliated with an entity or group of entities that in the
aggregate has annual gross revenue exceeding $250 million. The FCC has adopted
interim rules in which it has defined "affiliate" as any entity that has a 20%
or greater equity interest in the small cable operator (active or passive) or
that holds de jure or de facto control over the small cable operator. The FCC is
currently conducting a rulemaking to implement the 1996 Telecom Act's "small
cable operator" rate deregulation, including adoption of permanent affiliation
standards.
On April 1, 1993, the FCC adopted regulations pursuant to the 1992 Cable Act
governing the rates charged to customers for Regulated Services and ordered an
interim freeze on these rates effective April 5, 1993. The FCC's rate
regulations became effective on September 1, 1993 and the FCC's rate freeze was
extended until the earlier of May 15, 1994 or the date on which a cable system's
basic service rate was regulated by a franchising authority.
In implementing the 1992 Cable Act, the FCC adopted a benchmark method of
regulating rates for Regulated Services. Cable operators with rates above the
allowable level under the FCC's benchmark methodology may justify such rates
using a cost-of-service methodology. As of September 1, 1993, cable operators
subject to rate regulation whose then current rates were above FCC benchmark
levels were required, absent a successful cost-of-service showing, to reduce
those rates to the benchmark level or by up to 10% of the rates in effect on
September 30, 1992, whichever reduction was less, adjusted for equipment costs
and inflation and programming modifications occurring subsequent to September
30, 1992. Effective May 15, 1994, the FCC modified its benchmark methodology to
require reductions of up to 17% of the
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rates for Regulated Services in effect on September 30, 1992, adjusted for
inflation, channel modifications, equipment costs and increases in certain
operating costs. The FCC's modified benchmark regulations were designed to cause
an additional 7% reduction in the rates for Regulated Services on top of any
rate reductions implemented under the FCC's initial benchmark regulations.
The FCC's initial "going-forward" regulations limited rate increases for
Regulated Services after the establishment of an initial regulated rate to an
inflation-indexed amount plus increases for channel additions and certain
external costs beyond the cable operator's control, such as franchise fees,
taxes and increased programming costs. Under these regulations, cable operators
are entitled to take a 7.5% markup on certain programming cost increases. In
November 1994, the FCC authorized an alternative three-year flat fee markup plan
for charges relating to new channels added to the CPST. Under this alternative
methodology, cable operators may charge customers for channels added to the CPST
after May 14, 1994 at a monthly rate of up to $0.20 per added channel, up to a
total of $1.20 plus an additional $0.30 for programming license fees per
customer over the first two years of the three-year period. Cable operators may
charge an additional $0.20 plus the cost of the programming in the third year
(1997) for one additional channel added in that year. Alternatively, operators
may increase rates by the amount of any programming license fees in connection
with such added channels, provided that the total monthly rate increase per
customer for the added channels, including license fees, does not exceed $1.50
over the first two years, and $1.70, plus any increase in the license fees for
the added channels, in the third year. Operators must make a one-time election
for each system to use either the flat fee adjustment or the 7.5% markup on
programming cost increases for all channels added after December 31, 1994. The
FCC is currently considering whether to modify or eliminate the regulation
allowing operators to receive the 7.5% markup on increases in existing
programming license fees.
In November 1994, the FCC adopted regulations permitting cable operators to
create new product tiers ("NPTs") that are not subject to rate regulation if
certain conditions are met. The FCC also revised its previously adopted policy
and concluded that packages of a la carte services are subject to rate
regulation by the FCC as CPSTs. Because of the uncertainty created by the FCC's
prior a la carte package guidelines, the FCC allows cable operators, under
certain circumstances, to treat previously offered a la carte packages as NPTs.
In September 1995, the FCC authorized a new, alternative method of implementing
rate adjustments which allows cable operators to increase rates for Regulated
Services annually on the basis of projected increases in external costs
(inflation, costs of programming, franchise-related obligations and changes in
the number of regulated channels) rather than on the basis of cost increases
incurred in the preceding calendar quarter. Under the annual rate adjustment
methodology, operators electing not to recover all of their accrued external
costs and inflation pass-throughs each year may recover them (with interest) in
subsequent years.
In addition to rate deregulation for certain small cable operators under the
1996 Telecom Act, the FCC adopted regulations in June 1995 ("Small System
Regulations") pursuant to the 1992 Cable Act that were designed to reduce the
substantive and procedural burdens of rate regulation on "small cable systems."
For purposes of these FCC regulations, a "small cable system" is a system
serving 15,000 or fewer subscribers that is owned by or affiliated with a cable
company which serves, in the aggregate, 400,000 or fewer subscribers. Under the
FCC's Small System Regulations, qualifying systems may justify their regulated
service and equipment rates using a simplified cost-of-service formula. The
regulatory benefits accruing to qualified small cable systems under certain
circumstances remain effective even if such systems are later acquired by a
larger cable operator that serves in excess of 400,000 subscribers. Various
franchising authorities and municipal groups have requested the FCC to
reconsider its Small System Regulations. The FCC recently determined that the
1996 Telecom Act does not require modification of its Small System Regulations.
The Company believes that many of the Existing Systems currently satisfy the
eligibility criteria under the FCC's Small System Regulations and would
therefore be eligible to use the FCC's simplified cost-of-service methodology to
justify basic service, CPST and equipment rates if regulated by a franchising
authority or the FCC.
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Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used by
customers to receive the basic service tier, such as converter boxes and remote
control units. The FCC's rules require franchising authorities to regulate these
rates on the basis of actual cost plus a reasonable profit as defined by the
FCC. The FCC recently revised its regulations to permit operators to compute
regulated equipment rates by aggregating costs of broad categories of equipment
at the franchise, system, regional or company level.
Cable operators required to reduce rates may also be required to refund
overcharges with interest. Rate reductions will not be required where a cable
operator can demonstrate that rates for Regulated Services are reasonable using
the FCC's cost-of-service rate regulations which require, among other things,
the exclusion of 34% of system acquisition costs related to intangible and
tangible assets used to provide Regulated Services. The FCC's cost-of-service
regulations contain a rebuttable presumption of an industry-wide 11.25%
after-tax rate of return on an operator's allowable rate base, but the FCC has
initiated a further rulemaking in which it proposes to use an operator's actual
debt cost and capital structure to determine an operator's cost of capital or
rate of return.
"ANTI-BUY THROUGH" PROVISIONS. The 1992 Cable Act also requires cable systems to
permit customers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capacity to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Most of
the Company's cable systems do not have the technological capability to offer
programming in the manner required by the statute and currently are exempt from
complying with the requirement. The Company cannot predict the extent to which
this provision of the 1992 Cable Act and the corresponding FCC rules may cause
customers to discontinue optional nonbasic service tiers in favor of the less
expensive basic cable service.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local noncommercial television
stations are also given mandatory carriage rights; however, such stations are
not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all "distant" commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WTBS), commercial radio stations and certain low power television stations
carried by such systems after October 6, 1993. In April 1993, a special
three-judge federal district court issued a decision upholding the
constitutional validity of the mandatory signal carriage requirements. In June
1994, the United States Supreme Court vacated this decision and remanded it to
the district court to determine, among other matters, whether the statutory
carriage requirements are necessary to preserve the economic viability of the
broadcast industry. In December 1995, the district court upheld the mandatory
carriage requirements of the 1992 Cable Act. The United States Supreme Court is
currently reviewing this decision. The Company cannot predict the ultimate
outcome of this litigation. Pending final action by the Supreme Court, the
mandatory broadcast signal carriage requirements remain in effect.
As a result of the mandatory carriage rules, some of the Company's systems have
been required to carry television broadcast stations that otherwise would not
have been carried and have caused displacement of possibly more attractive
programming. The retransmission consent rules have resulted in the deletion of
certain local and distant televisions broadcast stations which various Company
systems were carrying. To the extent retransmission consent fees must be paid
for the continued carriage of certain television stations,
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the Company's cost of doing business will increase with no assurance that such
fees can be recovered through rate increases.
DESIGNATED CHANNELS. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. Federal law also requires a cable system
with 36 or more channels to designate a portion of its channel capacity for
commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. In August 1996, a federal
appellate court generally upheld the constitutionality of these designated
channel provisions, but indicated that in certain situations the requirement to
provide such channels might be found unconstitutional. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity. The U.S. Supreme Court recently held parts of the 1992 Cable
Act regulating "indecent" programming on local access channels to be
unconstitutional, but upheld the statutory right of cable operators to prohibit
or limit the provision of "indecent" programming on commercial leased access
channels.
FRANCHISE PROCEDURES. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises, (ii) preventing franchising authorities from granting
exclusive franchises or unreasonably refusing to award additional franchises
covering an existing cable system's service area, and (iii) prohibiting (with
limited exceptions) the common ownership of cable systems and co-located MMDS or
SMATV systems. In January 1995, the FCC relaxed its restrictions on ownership of
SMATV systems to permit a cable operator to acquire SMATV systems in the
operator's existing franchise area so long as the programming services provided
through the SMATV system are offered according to the terms and conditions of
the cable operator's local franchise agreement. The 1996 Telecom Act provides
that the cable/SMATV and cable/MMDS cross-ownership rules do not apply in any
franchise area where the cable operator faces "effective competition" as defined
by federal law. The 1996 Telecom Act also permits local telephone companies to
provide video programming services as traditional cable operators with local
franchises.
The Cable Acts also provide that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit franchise fees to 5% of cable system
revenue and permit cable operators to obtain modification of franchise
requirements by the franchising authority or judicial action if warranted by
changed circumstances. The Company's franchises typically provide for payment of
fees to franchising authorities in the range of 3% to 5% of "revenue" (as
defined by each franchise agreement). The 1996 Telecom Act generally prohibits
franchising authorities from (i) imposing requirements in the cable franchising
process that require, prohibit or restrict the provision of telecommunications
services by an operator, (ii) imposing franchise fees on revenue derived by the
operator from providing telecommunications services over its cable system, or
(iii) restricting an operator's use of any type of subscriber equipment or
transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act makes
several changes to the renewal process which could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The
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Company believes that it has generally met the terms of its franchises and has
provided quality levels of service, and it anticipates that its future franchise
renewal prospects generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit franchise awards to a single cable operator and to impose certain
substantive franchise requirements (i.e., access channels, universal service and
other technical requirements). These decisions have been somewhat inconsistent
and, until the U.S. Supreme Court rules definitively on the scope of cable
operators' First Amendment protections, the legality of the franchising process
generally and of various specific franchise requirements is likely to be in a
state of flux.
OWNERSHIP LIMITATIONS. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national customer limits and limits on the number of channels that
can be occupied on a cable system by a video programmer in which the cable
operator has an attributable interest. The FCC's horizontal ownership limits
have been stayed because a federal district court found the statutory limitation
to be unconstitutional. An appeal of that decision is pending and has been
consolidated with an appeal of the FCC's regulations which implemented the
national customer and channel limitation provisions of the 1992 Cable Act. The
1996 Telecom Act eliminates the statutory prohibition on the common ownership,
operation or control of a cable system and a television broadcast station in the
same service area and directs the FCC to eliminate its regulatory restrictions
on cross-ownership of cable systems and national broadcasting networks and to
review its broadcast-cable ownership restrictions to determine if they are
necessary in the public interest. Pursuant to the mandate of the 1996 Telecom
Act, the FCC eliminated its regulatory restriction on cross-ownership of cable
systems and national broadcasting networks.
TELEPHONE COMPANY OWNERSHIP OF CABLE SYSTEMS. The 1996 Telecom Act makes
far-reaching changes in the regulation of telephone companies that provide video
programming services. The new law eliminates federal legal barriers to
competition in the local telephone and cable communications businesses, preempts
legal barriers to competition that previously existed in state and local laws
and regulation and sets basic standards for relationships between
telecommunications providers. The 1996 Telecom Act generally limits acquisitions
and prohibits certain joint ventures between LECs and cable operators in the
same market. There are some statutory exceptions to the buy out and joint
venture prohibitions, including exceptions for certain small cable systems (as
defined by federal law) and for cable systems or telephone facilities serving
certain rural areas, and the FCC is authorized to grant waivers of the
prohibitions under certain circumstances. The FCC and, in some cases, states are
required to conduct numerous rulemaking proceedings to implement the 1996
Telecom Act. The FCC adopted regulations implementing the 1996 Telecom Act
requirement that LECs open their telephone networks to competition by providing
competitors interconnection, access to unbundled network elements and retail
services at wholesale rates. Numerous parties have appealed these regulations,
and the appeals have been consolidated and will be reviewed by the United States
Court of Appeals for the Eighth Circuit which has stayed the FCC's pricing and
nondiscrimination regulations. The ultimate outcome of these rulemakings, and
the ultimate impact of the 1996 Telecom Act or any final regulations adopted
pursuant to the new law on the Company or its business, cannot be determined at
this time.
POLE ATTACHMENT. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates through the use of a
formula that it has devised. In some cases, utility companies have increased
pole attachment fees for cable systems that have installed fiber optic cables
and that are using such cables for the distribution of nonvideo services. The
FCC concluded that, in the absence of state regulation, it has jurisdiction to
determine whether utility companies have justified their demand for additional
rental fees and that the Communications Act does not permit disparate rates
based on the type of service provided over the equipment attached to the
utility's pole.
The 1996 Telecom Act and the FCC's implementing regulations modify the current
pole attachment provisions of the Communications Act by immediately permitting
certain providers of telecommunications
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services to rely upon the protections of the current law and by requiring that
utilities provide cable systems and telecommunications carriers with
nondiscriminatory access to any pole, conduit or right-of-way controlled by the
utility. Additionally, within two years of enactment of the 1996 Telecom Act,
the FCC is required to adopt new regulations to govern the charges for pole
attachments used by companies providing telecommunications services, including
cable operators. These new pole attachment rate regulations will become
effective five years after enactment of the 1996 Telecom Act, and any increase
in attachment rates resulting from the FCC's new regulations will be phased in
equal annual increments over a period of five years beginning on the effective
date of the new FCC regulations.
OTHER STATUTORY PROVISIONS. The 1992 Cable Act, the 1996 Telecom Act and FCC
regulations preclude a satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly to
customers, from favoring an affiliated company over competitors and require such
a programmer to sell its programming to other multichannel video distributors.
These provisions limit the ability of cable program suppliers affiliated with
cable companies or with common carriers providing satellite-delivered video
programming to offer exclusive programming arrangements to their affiliates. The
Communications Act also includes provisions, among others, concerning horizontal
and vertical ownership of cable systems, customer service, customer privacy,
marketing practices, equal employment opportunity, technical standards, consumer
equipment compatibility and obscene or indecent programming.
OTHER FCC REGULATIONS. The FCC has numerous rulemaking proceedings pending that
will implement various provisions of the 1996 Telecom Act; it also has adopted
regulations implementing various provisions of the 1992 Cable Act and the 1996
Telecom Act that are the subject of petitions requesting reconsideration of
various aspects of its rulemaking proceedings. In addition to the FCC
regulations noted above, there are other FCC regulations covering such areas as
equal employment opportunity, syndicated program exclusivity, network program
nonduplication, registration of cable systems, maintenance of various records
and public inspection files, microwave frequency usage, lockbox availability,
origination cablecasting and sponsorship identification, antenna structure
notification, marking and lighting, carriage of local sports broadcast
programming, application of the fairness doctrine and rules governing political
broadcasts, limitations on advertising contained in nonbroadcast children's
programming, consumer protection and customer service, leased commercial access,
ownership of home wiring, indecent programming, programmer access to cable
systems, programming agreements, technical standards, consumer electronics
equipment compatibility and DBS implementation. The FCC has the authority to
enforce its regulations through the imposition of substantial fines, the
issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations.
The 1992 Cable Act, the 1996 Telecom Act and the FCC's rules implementing the
statutory provisions generally have increased the administrative and operational
expenses of cable systems and have resulted in additional regulatory oversight
by the FCC and local franchise authorities. The Company will continue to develop
strategies to minimize the adverse impact that the FCC's regulations and the
other provisions of the 1992 Cable Act and the 1996 Telecom Act have on the
Company's business. However, no assurances can be given that the Company will be
able to develop and successfully implement such strategies to minimize the
adverse impact of the FCC's rate regulations, or the 1992 Cable Act or the 1996
Telecom Act on the Company's business.
COPYRIGHT
Cable systems are subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports
and contributing a percentage of their revenue to a federal copyright royalty
pool, cable operators can obtain blanket permission to retransmit copyrighted
material on broadcast signals. The nature and amount of future payments for
broadcast signal carriage cannot be predicted at this time. The possible
simplification, modification or elimination of the compulsory copyright license
is the subject of continuing legislative review. The elimination or substantial
modification of the
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cable compulsory license could adversely affect the Company's ability to obtain
suitable programming and could substantially increase the cost of programming
that remained available for distribution to the Company's customers. The Company
cannot predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use music controlled
by the two major music performing rights organizations, ASCAP and BMI. In
October 1989, the special rate court of the United States District Court for the
Southern District of New York imposed interim rates on the cable industry's use
of ASCAP-controlled music. The same federal district court recently established
a special rate court for BMI. BMI and certain cable industry representatives
recently concluded negotiations for a standard licensing agreement covering the
usage of BMI music contained in advertising and other information inserted by
operators into cable programming and on certain local access and origination
channels carried on cable systems. ASCAP and cable industry representatives have
met to discuss the development of a standard licensing agreement covering ASCAP
music in local origination and access channels and pay-per-view programming.
Although the Company cannot predict the ultimate outcome of these industry
negotiations or the amount of any license fees it may be required to pay for
past and future use of ASCAP-controlled music, it does not believe such license
fees will be material to the Company's operations.
STATE AND LOCAL REGULATION
Cable systems are subject to state and local regulation, typically imposed
through the franchising processing because they use local streets and
rights-of-way. Regulatory responsibility for essentially local aspects of the
cable business such as franchisee selection, billing practices, system design
and construction, and safety and consumer protection remains with either state
or local officials and, in some jurisdictions, with both.
Cable systems generally are operated pursuant to nonexclusive franchises,
permits or licenses granted by a municipality or other state or local government
entity. Franchises generally are granted for fixed terms and in many cases are
terminable if the franchisee fails to comply with material provisions. The terms
and conditions of franchises vary materially from jurisdiction to jurisdiction.
Each franchise generally contains provisions governing payment of franchise
fees, franchise term, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards,
franchise renewal, sale or transfer of the franchise, territory of the
franchisee, indemnification of the franchising authority, use and occupancy of
public streets and types of cable services provided. A number of states subject
cable systems to the jurisdiction of centralized state governmental agencies,
some of which impose regulation of a character similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. To date, no state in which the Company operates has
enacted such state level regulation. The Company cannot predict whether any of
the states in which it currently operates will engage in such regulation in the
future. State and local franchising jurisdiction is not unlimited, however, and
must be exercised consistently with federal law. The 1992 Cable Act immunizes
franchising authorities from monetary damage awards arising from regulation of
cable systems or decisions made on franchise grants, renewals, transfers and
amendments.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative and legislative proposals
which could change, in varying degrees, the manner in which cable systems
operate. Neither the outcome of these proceedings nor the impact on the cable
communications industry or the Company can be predicted at this time.
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Item 2. PROPERTIES
The Company's principal physical assets consist of cable television operating
plant and equipment, including signal receiving, encoding and decoding devices,
headends and distribution systems and customer house drop equipment for each of
its cable television systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headends, consisting of associated electronic
equipment necessary for the reception, amplification and modulation of signals,
are located near the receiving devices. The Company's distribution system
consists primarily of coaxial and fiber optic cables and related electronic
equipment. Customer devices consist of decoding converters, which expand channel
capacity to permit reception of more than twelve channels of programming. Some
of the Existing Systems utilize converters that can be addressed by sending
coded signals from the headend over the cable network. See "--Technological
Developments."
The Company owns or leases parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices, and
owns most of its service vehicles. The Company believes that its properties,
both owned and leased, are in good condition and are suitable and adequate for
the Company's business operations.
The Company's cables generally are attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in underground ducts or trenches. The physical components of the
Company's systems require maintenance and periodic upgrading to keep pace with
technological advances.
Item 3. LEGAL PROCEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its properties are subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's classes of
common equity.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial data derived from the Company's
financial statements as of and for the year ended December 31, 1996 and for the
period from April 17, 1995 (inception) through December 31, 1995 and which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
and selected unaudited operating data for such periods. Selected financial and
operating data presented for the three months ended December 31, 1996 has not
been audited. This information, as of and for the three months ended December
31, 1996 and for the years ended December 31, 1996 and 1995 represents the
financial data of certain of the Existing Systems subsequent to their respective
dates of acquisition. The financial data include the results of operations of
the UVC Systems and the Longfellow Systems during the period in 1995 when such
systems were owned by the Company. The statement of operations data for 1996
include the results of operations of the C4 Systems, the Americable Systems, the
Cox Systems, the Grassroots Systems, the Triax Systems, the ACE Systems, the
Penn/Ohio Systems, and the Deep Creek Systems from the date that such systems
were purchased by the Company.
The following table also presents combined historical financial data as of and
for the years ended December 31, 1995, 1994 and 1993 for the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems (the
"Predecessor Systems"). The summary unaudited combined selected historical
financial data are derived from the audited and unaudited historical financial
statements of the Existing Systems and should be read in conjunction with the
audited financial statements and related notes thereto of the Predecessor
Systems and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. The combined
selected financial data set forth below represent the combined results of
operations for the systems for the periods during which the systems were not
owned by the Company and, accordingly, do not reflect any purchase accounting
adjustments or any changes in the operation or management of the systems that
the Company has made since the date of acquisition or intends to make in the
future. Accordingly, the Company does not believe that such operating results
are indicative of future operating results of the Company.
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<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
FVOP Predecessor Systems
--------------------------------------- ----------------------------------------
For the Three For the Year From April 17, For the Year For the Year For the Year
Months Ended Ended 1995 (inception) Ended Ended Ended
December 31, December 31, to December 31, December 31, December 31, December 31,
1996 1996 1995 1995(1)(2) 1994(3)(4) 1993(3)(4)
--------- --------- --------- --------- --------- ---------
In thousands except ratios and
operating statistical data
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenue ................................... $ 30,257 76,464 4,369 109,765 105,368 96,171
Operating expenses ........................ 15,524 39,181 2,311 62,098 58,643 52,702
Corporate administrative expenses ......... 959 2,930 127 -- -- --
Depreciation and amortization ............. 12,950 35,336 2,308 42,354 46,345 41,863
Pre-acquisition expenses .................. -- -- 940 -- -- --
--------- --------- --------- --------- --------- ---------
Operating income/(loss) ................... 824 (983) (1,317) 5,313 380 1,606
Interest expense, net (5) ................. (10,805) (22,422) (1,386) (37,898) (34,506) (31,230)
Other income/(expenses) ................... (297) (396) -- (4,409) (2,570) (3,450)
--------- --------- --------- --------- --------- ---------
Net income/(loss) ......................... $ (10,278) (23,801) (2,703) (36,994) (36,696) (33,074)
========= ========= ========= ========= ========= =========
BALANCE SHEET DATA (END OF PERIOD):
Total assets .............................. $ 549,168 549,168 143,512 288,253 228,820 181,899
Total debt ................................ 398,194 398,194 93,159 270,418 266,297 255,319
Partners' capital ......................... 130,003 130,003 46,407
FINANCIAL RATIOS AND OTHER DATA:
EBITDA (6) ................................ $ 13,774 34,353 991 47,667 46,725 43,469
EBITDA margin ............................. 45.5% 44.9% 22.7% 43.4% 44.3% 45.2%
Total debt to EBITDA (7) .................. 6.75 6.75
EBITDA to interest expense (8) ............ 1.45 1.45
Net cash flows from operating activities .. $ 8,766 18,911 1,907
Net cash flows from investing activities .. (232,016) (418,215) (131,345)
Net cash flows from financing activities .. 221,844 400,293 132,088
Deficiency of earnings to fixed charges (9) 10,278 23,801 2,703
OPERATING STATISTICAL DATA (END OF
PERIOD EXCEPT AVERAGE):
Homes passed .............................. 498,900 498,900 125,300
Basic subscribers ......................... 356,400 356,400 92,700
Basic penetration ......................... 71.4% 71.4% 74.0%
Premium units ............................. 152,100 152,100 35,700
Premium penetration ....................... 42.7% 42.7% 38.5%
Average monthly revenue per basic
subscriber (10) ......................... $ 29.73 29.73 27.76
</TABLE>
- ----------
(1) Includes the combined results of operations of the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems for the year
ended December 31, 1995 (except for the UVC Systems, which is for the period
ended November 8, 1995). As the results of operations of the UVC Systems are
included in the Company's historical results of operations subsequent to the
date of the Company's acquisition thereof (November 9, 1995), the amounts do not
include $4.2 million in revenue, $2.4 million in operating expenses and $2.2
million in depreciation and amortization (computed after the application of
purchase accounting adjustments) attributable to such systems.
28
<PAGE>
(2) Includes combined balance sheet data for the UVC Systems as of November 9,
1995, the date of the Company's acquisition thereof, and combined balance sheet
data for the C4 Systems, the Cox Systems, the ACE Systems and the Triax Systems
as of December 31, 1995, because such acquisitions occurred subsequent to that
date.
(3)Includes the combined results of operations of the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems for the years
ended December 31, 1994 and 1993.
(4) Includes combined balance sheet data for the UVC Systems, the C4 Systems,
the Cox Systems, the ACE Systems and the Triax Systems as of December 31, 1994
and 1993.
(5) Interest expense of $10,805, $22,422, and $1,386 is net of interest income
of $161, $471 and $60.
(6) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's senior bank
indebtedness (the "Senior Credit Facility") and the Indenture governing the 11%
Senior Subordinated Notes due 2006 (the "the Note Indenture") contain certain
covenants, compliance with which is measured by computations substantially
similar to those used in determining EBITDA. However, EBITDA is not intended to
be a performance measure that should be regarded as an alternative either to
operating income or net income as an indicator of operating performance or to
cash flows as a measure of liquidity, as determined in accordance with generally
accepted accounting principles.
(7) For purposes of this computation, EBITDA is annualized for the quarter ended
December 31, 1996, and certain pro forma adjustments are made to include the
pre-acquisition results of operations for those systems purchased by the Company
during the quarter. This presentation is consistent with the incurrence of
indebtedness test in the Note Indenture. In addition, this ratio is commonly
used in the cable television industry as a measure of leverage.
(8)For purposes of this computation, EBITDA is annualized for the quarter ended
December 31, 1996, and certain pro forma adjustments are made to include the
pre-acquisition results of operations for those systems purchased by the Company
during the quarter. Interest expense is annualized for the quarter ended
December 31, 1996, and adjusted for interest expense on the subordinated note to
UVC. This ratio is commonly used in the cable television industry as a measure
of interest coverage.
(9) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges. Fixed charges are defined as the sum of
(i) interest costs (including capitalized interest expense) and (ii)
amortization of deferred financing costs.
(10) Average monthly revenue per basic subscriber for the year and the three
months ended December 31, 1996 and for the period from inception (April 17,
1995) to December 31, 1995 equals revenue for the last month of the period
divided by the average number of basic subscribers for such period.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the financial condition and results of operations of
the Company, the description of the Company's business as well as other sections
of this Form 10-K contain certain forward-looking statements. The Company's
actual results could differ materially from those discussed herein and its
current business plans could be altered in response to market conditions and
other factors beyond the Company's control. Important factors that could cause
or contribute to such differences or changes include those discussed under "Risk
Factors" in the Company's post-effective amendment to Form S-1 filed March 27,
1997 (Commission file no. 333-9535).
The Company commenced operations in November 1995. The Company acquired the UVC
Systems on November 9, 1995, the Longfellow Systems on November 21, 1995, the C4
Systems on February 1, 1996, the Americable Systems on March 29, 1996, the Cox
Systems on April 9, 1996, the Grassroots Systems on August 29, 1996, the Triax
Systems on October 7, 1996, the ACE Systems on October 9, 1996, the Penn/Ohio
Systems on October 31, 1996 and the Deep Creek Systems on December 23, 1996, for
aggregate consideration of approximately $564.9 million. See
"Business--Development of the Systems--The Existing Systems" for a description
of the Existing Systems. The Company has operated the Existing Systems for a
limited period of time and had no operations prior to November 9, 1995. All
acquisitions have been accounted for under the purchase method of accounting
and, therefore, the Company's historical results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date.
As a result of the Company's limited operating history, the Company believes
that its results of operations for the year ended December 31, 1996 and for the
period ended December 31, 1995 are not indicative of the Company's results of
operations in the future. The three month period ended December 31, 1996, is the
only period that includes all of the Existing Systems, although certain systems
were purchased during
29
<PAGE>
the period and are reflected only for that portion of the period that such
systems were owned by the Company. The three month period ended September 30,
1996, is the first period that represents the full integration of the C4
Systems, the Americable Systems, the Cox Systems, and the Grassroots Systems
into the operations of the Company, although the Grassroots Systems were
purchased during the period and are reflected only for that portion of the
period that such systems were owned by the Company.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended Twelve Months Ended Period From April 17, 1995
December 31, 1996 September, 1996 December 31, 1996 to December 31, 1995 (a)
--------------------------------------------------------------------------------------------------------
Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue
-------- ----- -------- ----- -------- ----- -------- -----
Amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 30,257 100.0% $ 18,668 100.0% $ 76,464 100.0% $ 4,369 100.0%
Expenses
Operating expenses 15,524 51.3 9,989 53.5 39,181 51.2 2,311 52.9
Corporate expenses 959 3.2 706 3.8 2,930 3.8 127 2.9
Depreciation and
amortization expenses 12,950 42.8 8,791 47.1 35,336 46.2 2,308 52.8
Pre-acquisition expenses -- -- -- -- -- -- 940 21.5
-------- ----- -------- ----- -------- ----- -------- -----
Total expenses 29,433 97.3 19,486 104.4 77,447 101.3 5,686 130.1
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss) 824 2.7 (818) (4.4) (983) (1.3) (1,317) (30.1)
Interest expense, net (10,805) (35.7) (4,313) (23.1) (22,422) (29.3) (1,386) (31.7)
Other Expenses (297) (1.0) (99) (0.5) (396) (0.5) -- --
-------- ----- -------- ----- -------- ----- -------- -----
Net loss ($10,278) (34.0%) ($ 5,230) (28.0%) ($23,801) (31.1%) ($ 2,703) (61.9%)
======== ===== ======== ===== ======== ===== ======== =====
Other Data:
EBITDA (b) $ 13,774 45.5% $ 7,973 42.7% $ 34,353 44.9% $ 991 22.7%
</TABLE>
- --------
(a) Reflects the historical financial statements for the period from inception
(April 17, 1995) through December 31, 1995.
(b) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's Senior
Credit Facility and Note Indenture contain certain covenants, compliance of
which is measured by computations substantially similar to those used in
determining EBITDA. However, EBITDA is not intended to be a performance
measure that should be regarded as an alternative to either operating income
or net income as an indicator of operating performance or to cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles.
ACTUAL
The Company continues its strategy of consolidating headends and regionalizing
its customer service, local advertising and marketing and sales functions.
Towards that end, the Company hired several management-level personnel during
the third and fourth quarters of 1996 and early 1997; marketing and sales
managers with significant experience in cable television were employed in the
Maine, Ohio and Kentucky operating regions, the corporate and regional
engineering staff was augmented with experienced personnel charged with
implementing the Company's headend consolidation and technical upgrade program,
individuals in charge of coordinating public and government relations were hired
in the Maine, Ohio and Kentucky operating regions and the Company hired
experienced personnel to establish an in-house telemarketing center and
centralized advertising sales function. In addition, the Company has dedicated
financial and human resources to focus on the evaluation and introduction of new
broadband services such as Internet access, alternative telephone access and
digital programming on certain systems owned by the Company. The Company plans
to initiate trials in selected systems of such new business opportunities to
evaluate a broader roll-out to the Company's customers in the future.
30
<PAGE>
After acquisition of the Existing Systems, the Company intensified marketing
efforts in conjunction with new channel launches of basic, tiered basic and
premium services. The Company's initial activities in this area were
concentrated in the New England and Ohio Systems where in 1996 the Company
introduced between 3 and 7 new basic and tiered basic channels to over 50% of
its subscribers. The channel line-up enhancements were augmented by direct mail
promotions and follow-up tele-marketing campaigns and enabled the Company to
raise its average combined basic and tier service rates in those systems from
$23.38 per month in May to $25.36 per month in December. During 1996, the
Company also launched its "Ultimate TV" service, a premium programming package
consisting of several premium services and offered at a discount from retail
rates to approximately 65,000 subscribers, resulting in the addition of
approximately 9,400 pay units. Although there can be no assurances as to the
long-term effect of these activities, the Company plans to continue these
marketing efforts. During 1997, the Company expects to launch expanded basic and
tiered basic service throughout its systems and to introduce the "Ultimate TV"
service to an additional 140,000 subscribers.
To supplement its marketing activities, the Company expects to complete the
construction of a centralized telemarketing facility located in Pittsfield,
Massachusetts during the second quarter of 1997. The Company expects that this
center, to be staffed initially by 20 to 25 telemarketers, will allow the
Company to efficiently introduce its new programming offerings to maximize
productivity, marketing costs and revenue. In addition to pay and basic unit
acquisition activities, telemarketing personnel are expected to assist in
delinquent account collection activities, customer satisfaction surveys and
other targeted marketing campaigns.
During late February and early March of 1997, certain of the communities served
by the Company in Ohio, Kentucky and Indiana along the Ohio River experienced
devastating floods. The effect of the flooding on the Company's cable television
infrastructure, as well as its effect on the Company's subscribers living in
these communities, is unknown. The Company is currently evaluating the immediate
as well as long-term financial effect of the flooding and is evaluating its
options relative to insurance coverage and ongoing operations.
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
The Company generated revenue in the amount of $30.3 million for the three
months ended December 31, 1996, and $18.7 million for the three months ended
September 30, 1996. Operating and corporate expenses totaled $16.5 million for
the quarter ended December 31, 1996, and $10.7 million for the quarter ended
September 30, 1996, and EBITDA totaled $13.8 million for the three months ended
December 31, 1996 and $8.0 million for the three months ended September 30,
1996. Increases in revenue, operating and corporate expenses and EBITDA are
primarily attributable to the acquisition of the Triax Systems, the ACE Systems
and the Penn/Ohio Systems during October 1996.
As a percentage of revenue, the Company incurred operating expenses and
corporate expenses of approximately 51.3% and 3.2%, respectively, for the three
months ended December 31, 1996 and approximately 53.5% and 3.8%, respectively,
for the three months ended September 30, 1996. Operating margins (revenue less
operating expense as a percent of revenue) of 48.7% for the three months ended
December 31, 1996 and 46.5% for the three months ended September 30, 1996, and
EBITDA margins (EBITDA as a percent of revenue) of 45.5% for the three months
ended December 31, 1996 and 42.7% for the three months ended September 30, 1996
were generated by the Company. Such increases in operating margins and EBITDA
margins represent the initial effects of customer service consolidation, the
elimination of duplicative functions in the Existing Systems and the realization
of efficiencies in corporate support functions, as well as the effect of the
roll-out of new programming packages and services and increased advertising and
pay-per-view revenue generated during the fourth quarter.
Although there can be no assurance, the Company believes that EBITDA will
continue to increase with the realization of additional revenue attributable to
continued subscriber growth through certain pending
31
<PAGE>
acquisitions, with increased marketing activities and expense control programs
and with expected ongoing service rate increases.
Interest expense was $10.8 million for the three months ended December 31, 1996
and $4.3 million for the three months ended September 30, 1996. The increase in
the cost of capital relative to the Company's revenue represents the issuance of
the 11% Senior Subordinated Notes due 2006 (the "Notes") in October 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THE PERIOD FROM APRIL 17,
1995 (INCEPTION) TO DECEMBER 31, 1995
Revenue increased to $76.5 million in the twelve months ended December 31, 1996
from $4.4 million in the period ended December 31, 1995. These increases were
attributable to having a full year of operations from the UVC Systems and the
Longfellow Systems (both acquired in November 1995). Revenue for the twelve
months ended December 31, 1996 also reflects operations for the following
systems from the date of their respective acquisitions: C4 Systems on February
1, 1996, the Americable Systems on March 29, 1996, the Cox Systems on April 9,
1996, the Grassroots Systems on August 29, 1996, the Triax Systems on October 7,
1996, the ACE Systems on October 9, 1996, the Penn/Ohio Systems on October 31,
1996 and the Deep Creek Systems on December 23, 1996.
Operating and corporate expenses were reduced to 55.0% of revenue in the twelve
months ended December 31, 1996 from 55.8% of revenue in the period ended
December 31, 1995 due primarily to cost-cutting measures implemented by the
Company. These efforts included the establishment of centralized regional
service centers in Rockland, Maine, Greeneville, Tennessee, Richmond, Kentucky
and Chillicothe, Ohio and the elimination of certain customer service offices.
Other cost reductions have been realized through the elimination of duplicative
expenses, such as customer billing, accounting, accounts payable and payroll
administration.
As a result of such cost efficiencies and the aforementioned acquisitions,
EBITDA increased to 44.9% of revenue in the twelve months ended December 31,
1996 from 22.7% of revenue in the period ended December 31, 1995.
COMBINED HISTORICAL ACQUIRED PREDECESSOR SYSTEMS
The discussion of the results of operations for the years ended December 31,
1995, 1994 and 1993 is based on the combined historical results of the acquired
Predecessor Systems (the UVC Systems, the Cox Systems, the C4 Systems, the ACE
Systems and the Triax Systems), which do not reflect changes in the operation or
management of the acquired Predecessor Systems that the Company has made or
intends to make and are not necessarily indicative of the results that would
have been achieved had such systems been owned and operated by the Company
during the periods presented. See "Selected Financial Data."
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenue increased to $114.0 million (including $4.2 million attributable to the
operations of the UVC Systems for the period after acquisition by the Company)
in the year ended December 31, 1995 from $105.4 million in the year ended
December 31, 1994 due to increases in service rates, internal subscriber growth
and the acquisition of approximately 9,000 subscribers in the Triax Systems
during the first quarter of 1995. For the UVC Systems, the Cox Systems and the
C4 Systems, during this period, basic subscribers increased by approximately
2.9%, primarily in the Cox Systems and the C4 Systems, which grew by 1,800 and
1,200 subscribers, respectively. Over this period, the number of basic
subscribers and premium units increased by approximately 7.1% and 13.1%,
respectively, for the ACE Systems and the Triax Systems. Basic penetration
improved to 71.1% at year-end 1995 from 69.7% at year-end 1994, and premium
penetration over the period declined to 42.1% at year-end 1995 from 45.9% at
year-end 1994, for the UVC Systems, the Cox Systems and the C4 Systems. For the
Triax Systems and the ACE Systems, basic
32
<PAGE>
penetration improved to approximately 73.2% at year-end 1995 from approximately
71.9% at year-end 1994, and premium penetration increased to 44.9% at year-end
1995 from 42.5% at year-end 1994. Operating expenses grew at rates generally
approximating revenue growth, increasing to $64.5 million (including $2.4
million attributable to the operations of the UVC Systems for the period after
acquisition by the Company) in the year ended December 31, 1995 from $58.6
million in the year ended December 31, 1994. EBITDA increased to $49.5 million
in 1995 (including $1.8 million attributable to the operations of the UVC
Systems for the period after acquisition by the Company) from $46.7 million in
1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenue increased to $105.4 million in the year ended December 31, 1994 from
$96.2 million in the year ended December 31, 1993, primarily due to growth in
the number of basic subscribers and premium units as well as the integration of
system acquisitions. In 1993, the Triax Systems completed three acquisitions,
totaling over 23,000 subscribers, 90% of which were acquired in December 1993.
For the UVC Systems, the Cox Systems and the C4 Systems, basic subscribers and
premium units increased over the period by approximately 2.9% and 20.9%,
respectively. For the ACE Systems and the Triax Systems, basic subscribers and
premium units increased over the period by approximately 4.1% and 17.2%,
respectively. Basic penetration improved to 70.1% at year-end 1994 from 69.0% at
year-end 1993, while premium penetration increased to 45.9% from 42.1% over the
same period for the UVC Systems, the Cox Systems and the C4 Systems. For the ACE
Systems and the Triax Systems, basic penetration improved to 71.9% at year-end
1994 from 69.3% at year-end 1993, while premium penetration increased to 42.5%
from 36.4% over the same period. In spite of these increases, revenue growth was
limited by regulations relating to basic service rates which were instituted by
the 1992 Cable Act. See "Legislation and Regulation" for a further discussion of
recent cable television regulation. Operating expenses increased to $58.6
million in the year ended December 31, 1994 from $52.7 million in the year ended
December 31, 1993. Increases in expenses were partially attributable to higher
administrative costs of complying with regulatory reporting requirements under
the 1992 Cable Act, as well as the addition of new services and shifting of
service tiers in response to regulation. As a result, EBITDA increased modestly
to $46.7 million in 1994 from $43.5 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for the
construction, expansion and maintenance of the delivery system. In addition, the
Company has pursued, and intends to pursue in the future, a business strategy
which includes selective acquisitions. The Company has financed these
expenditures to date through a combination of cash from operations, indebtedness
from outside sources and equity capital from its partners. The Company intends
to continue to finance such expenditures in the future though these same
sources.
On April 9, 1996, the Company entered into the $265.0 million Amended and
Restated Credit Agreement with The Chase Manhattan Bank, as Administrative
Agent, J.P. Morgan Securities Inc., as Syndication Agent, CIBC Inc., as Managing
Agent, and the other lenders signatory thereto. The Company used these proceeds
to refinance an existing $130.0 million senior credit facility, to finance the
purchase of the Cox Systems and for general business purposes. As of December
31, 1996, borrowings under the Senior Credit Facility totaled $190.0 million.
The Senior Credit Facility includes a $75.0 million, 8.25-year reducing
revolving credit facility ("Revolving Credit Facility"), a $100.0 million,
8.25-year term loan ("Facility A Term Loan") and a $90.0 million, 9.25-year term
loan ("Facility B Term Loan"). At December 31, 1996, the Company had no
outstanding borrowings under the Revolving Credit Facility, $100.0 million
outstanding under the Facility A Term Loan and $90.0 million outstanding under
the Facility B Term Loan. The weighted average interest rates at December 31,
1996 on the outstanding borrowings under the Facility A Term Loan and the
Facility B Term Loan were approximately 8.35% and 8.88%, respectively. The
Company has entered into
33
<PAGE>
interest rate protection agreements to hedge the underlying LIBOR rate exposure
for $170.0 million of borrowings through November 1999 and October 2000.
In general, the Senior Credit Facility requires the Company to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the Senior Credit Facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting the Company to use such proceeds to fund certain permitted
acquisitions, provided that the Company is otherwise is compliance with the
terms of the Senior Credit Facility.
The Senior Credit Facility is secured by a pledge of all limited and general
partnership interests in the Company and in any subsidiaries of the Company and
a first priority lien on all the tangible and intangible assets of the Company
and each of its subsidiaries. In addition, in the event of the occurrence and
continuance of an event of default under the Senior Credit Facility, the
Administrative Agent is entitled to replace the general partner of the Company
with its designee.
In addition, during the year ended December 31, 1996, the Company received
approximately $107.4 million of equity contributions from its partners. Such
equity contributions and senior debt, along with cash flow generated from
operations, has been sufficient to finance capital improvement projects as well
as acquisitions. The Company has adequately serviced its debt load in accordance
with the provisions of the Senior Credit Facility from EBITDA of approximately
$34.4 million generated by the Company for the year ended December 31, 1996.
On September 30, 1996, the Company amended the Senior Credit Facility primarily
to allow the issuance of $200.0 million aggregate principal amount of the Notes.
The Notes mature on October 15, 2006 and bear interest at 11%, with interest
payments due semiannually commencing on April 15, 1997. The public offering of
the Notes was consummated on October 7, 1996 and the net proceeds of
approximately $192.5 million received by the Company was fully expended in the
acquisition of the Triax Systems and the ACE Systems on October 7 and 9, 1996,
respectively. The Notes are general unsecured obligations of the Company and
rank subordinate in right of payment to all existing and any future senior
indebtedness. In anticipation of the issuance of the Notes, the Partnership
entered into deferred interest rate setting agreements to reduce the interest
rate exposure related to the Notes. The financial statement effect of these
agreements will be to increase the effective interest rate which the Company
incurs over the life of the Notes.
In addition, in connection with the acquisition of the ACE Systems and the Triax
Systems, the Company received additional equity contributions of approximately
$40.0 million. On March 11, 1997, FVP called an additional $15.0 million of
contributions and currently has available for use an additional $21.0 million in
commitments, the net proceeds of which will be contributed to the Company over
time to fund future acquisitions. Substantially all of the $15.0 million has
been collected as of March 26, 1997. The size of the equity commitments to be
made available to the Company may be reduced if no later than six months after
August 15,1996, FVP and its advisory committee (the "Advisory Committee")
determine that the remaining commitments exceed the Company's projected
requirements. Such remaining commitments will expire on June 30, 1997, subject
to election by FVP, and approval by the Advisory Committee to extend the
commitment period to June 30, 1998.
In connection with the acquisition of the UVC Systems, the Company issued a
subordinated note to UVC in the aggregate principal amount of $7.2 million (the
"UVC Note"). It is possible that the Company will cause the conversion of $5.0
million aggregate principal amount of the UVC Note into limited partnership
interests of the Company and repay the balance of the UVC Note. In addition, the
Company may pay off the UVC Note at any time. However, as of March 31, 1997, the
UVC Note had not yet been converted or repaid, and the Company is currently
considering all options related thereto.
The Company had capital expenditures of $9.3 million during the twelve months
ended December 31, 1996, primarily consisting of expenditures for the
construction and expansion of the delivery system;
34
<PAGE>
additional costs were incurred related to the expansion of customer service
facilities. In addition, the Company capitalized approximately $2.0 million
attributable to the cost of obtaining certain franchise, leasehold and other
long-term agreements. The Company expects to spend in excess of $50.0 million
over the next two years for capital improvement related projects consisting
primarily of installation of fiber optic cable and microwave links which will
allow for the anticipated reduction in the number of headends, analog and
digital converter boxes which will allow the Company to more effectively market
premium and pay-per-view services and the continued deployment of coaxial cable
to build-out existing systems. Capital expended during the twelve months ended
December 31, 1996 represents the first phase of the Company's strategic capital
improvement plan.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company appear on page F-1 of this Form 10-K.
The financial statement schedules required under Regulation S-X are filed
pursuant to Item 14 of this Form 10-K, and appear on page S-1 of this Form 10-K.
All other schedules are omitted as the required information is not applicable or
the information is presented in the financial statements, related notes or other
schedules.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During 1996, the Company dismissed its independent public accountants, Arthur
Andersen LLP ("AA") and subsequently engaged KPMG Peat Marwick LLP as the
Company's principal independent public accountants. The Company had no
disagreements with AA since formation and through the date of dismissal nor did
any of AA's reports on the financial statements of the Company contain an
adverse opinion or disclaimer of opinion, nor was any report modified as to
uncertainty, audit scope, or accounting principle. The change in accountants is
fully disclosed in the Company's Form 8-K filed with the SEC on October 29,
1996.
35
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF FRONTIERVISION INC.
FVOP's sole general partner is FrontierVision Partners, L.P. ("FVP"), whose sole
general partner is FVP GP, L.P. ("FVP GP"). FVP GP's sole general partner is
FrontierVision Inc. Information with respect to the directors and executive
officers of FrontierVision Inc. and Capital, respectively, is set forth below:
FRONTIERVISION INC.
Name Age Position
- ---------------------- --- -----------------------------------------------
James C. Vaughn 51 President, Chief Executive Officer and Director
John S. Koo 35 Senior Vice President, Chief Financial Officer,
Secretary and Director
William J. Mahon, Jr. 55 Vice President of Operations
David M. Heyrend 46 Vice President of Engineering
William P. Brovsky 40 Vice President of Marketing and Sales
James W. McHose 33 Vice President and Treasurer
Richard G. Halle 33 Vice President of Business Development
Todd E. Padgett 31 Vice President of Finance
FRONTIERVISION CAPITAL CORPORATION
Name Age Position
- ---------------------- --- -----------------------------------------------
James C. Vaughn 51 President, Chief Executive Officer and Director
John S. Koo 35 Senior Vice President, Chief Financial Officer,
Secretary and Director
James W. McHose 33 Vice President and Treasurer
JAMES C. VAUGHN, President, Chief Executive Officer and a Director of
FrontierVision Inc. and Capital and a founder of the Company, is a cable
television system operator and manager with over 30 years of experience in the
cable television industry. From 1987 to 1995, he served as Senior Vice President
of Operations for Triax Communications Corp., a top 40 MSO, where he was
responsible for managing all aspects of small and medium-sized cable television
systems. These systems grew from serving 57,000 subscribers to over 376,000
subscribers during Mr. Vaughn's tenure. Prior to joining Triax Communications,
Mr. Vaughn served as Director of Operations for Tele-Communications, Inc. from
1986 to 1987, with responsibility for managing the development of Chicago-area
cable television systems. From 1985 to 1986, Mr. Vaughn was Division Manager for
Harte-Hanks Communications. From 1983 to 1985, Mr. Vaughn served as Vice
President of Operations for Bycom, Inc. From 1979 to 1983, Mr. Vaughn served as
Director of Engineering for the Development Division of Cox Cable Communications
Corp. From 1970 to 1979, Mr. Vaughn served as Senior Staff Engineer for Viacom,
Inc.'s cable division, and a Director of Engineering for Showtime, a division of
Viacom International, Inc.
JOHN S. KOO, Senior Vice President, Chief financial Officer, Secretary and a
Director of FrontierVision Inc. and Capital and founder of the Company, has over
eleven years of banking experience in the telecommunications industry. From 1990
to 1995, Mr. Koo served as a Vice President at Canadian Imperial Bank of
Commerce ("CIBC"), where he co-founded CIBC's Mezzanine Finance Group, targeted
at emerging media and telecommunications businesses. From 1986 to 1990, Mr. Koo
was a Vice President at Bank of New England specializing in media finance. From
1984 to 1986, he was a management consultant to the financial services industry.
WILLIAM J. MAHON, JR., Vice President of Operations of FrontierVision Inc. since
December 1995, has over fifteen years of cable television operations management
experience. Prior to joining the Company,
36
<PAGE>
Mr. Mahon served as Vice President of Operations for UVC, a top 50 MSO, from
1990 to 1995, where he was responsible for the day-to-day operations of
approximately 130 cable systems located in twelve states. From 1983 to 1989, Mr.
Mahon served as President and General Manager of Heritage Cable Vision, a 90,000
subscriber MSO. Mr. Mahon is a member of the Society of Cable Engineers and
serves on the Board of Directors of the New England Cable Television
Association.
DAVID M. HEYREND, Vice President of Engineering of FrontierVision Inc., has 23
years of cable television engineering management and operations experience.
Prior to joining the Company in 1996, Mr. Heyrend served from 1988 to 1995 as
Director of Engineering for UVC, where he developed technical standards,
employee development programs and oversaw plant construction projects. From 1985
to 1988, as Director of Programs for Tele-Engineering Corporation, he developed
and managed broadband LAN projects for clients such as Allen Bradley, Ford Motor
Company and TRW. Mr. Heyrend also worked for several years with Daniels &
Associates in system technical operations and engineering management.
WILLIAM P. BROVSKY, Vice President of Marketing and Sales of FrontierVision
Inc., has fourteen years of cable television experience and is responsible for
programming and contract negotiations in addition to overseeing the sales and
marketing activities of the Company's operating divisions. Before joining the
Company in 1996, Mr. Brovsky managed day-to-day sales and marketing operations
from 1989 to 1996 for Time Warner Cable of Cincinnati, serving almost 200,000
subscribers. He also served as Project Manager, supervising all aspects of
system upgrades to fiber optics. From 1982 to 1989, Mr. Brovsky served as
General Sales Manager for American Television and Communications, where he was
responsible for sales, marketing and tele-marketing operations for Denver and
its suburban markets.
JAMES W. MCHOSE, Vice President and Treasurer of FrontierVision Inc. and Capital
since July 1996, has over ten years of accounting and tax experience, including
six years providing tax, accounting and consulting services to companies engaged
in the cable television industry. Prior to joining the Company, Mr. McHose was a
Senior Manager in the Information, Communications, and Entertainment practice of
KPMG Peat Marwick, LLP, where he specialized in taxation of companies in the
cable television industry. In this capacity, Mr. McHose served MSOs with over 14
million subscribers in the aggregate. Mr. McHose is a member of the Cable
Television Tax Professional's Institute and is a Certified Public Accountant.
RICHARD G. HALLE, Vice President of Business Development of FrontierVision Inc.
since February 1997, is responsible for the evaluation and development of new
businesses including cable modems and Internet access, digital programming
delivery, distance learning and alternative telephone access. Prior to joining
the Company, from 1995 to 1996 Mr. Halle served as the Vice President of
Operations and then as the Vice President of Development at Fanch
Communications, a top 20 MSO, where he was initially responsible for the
management of an operating region of 100,000 subscribers and subsequently
responsible for the planning and deployment of all advanced services including
digital television, dial-up Internet access and high speed cable modems. Prior
to that, he spent nine years in the banking industry, specializing in media and
telecommunications finance.
TODD E. PADGETT, Vice President of Finance of FrontierVision Inc. since January
of 1997 and Director of Finance of FrontierVision Inc. since July 1995, has over
six years of project management and corporate finance experience. From 1990 to
1995, Mr. Padgett served as Project Manager for Natural Gas Pipeline Company of
America, a subsidiary of MidCon Corp., which is a division of Occidental
Petroleum Corporation, where he specialized in developing, evaluating,
negotiating and financing natural gas pipeline and international power projects.
Mr. Padgett is a Certified Public Accountant and has an MBA from the University
of Chicago.
37
<PAGE>
ADVISORY COMMITTEE
The partnership agreement of FVP provides for the establishment of an Advisory
Committee to consult with and advise FVP GP, the general partner of FVP, with
respect to FVP's business and overall strategy. The Advisory Committee has broad
authority to review and approve or disapprove matters relating to all material
aspects of FVP's business. The approval of seventy-five percent (75%) of the
members of the Advisory Committee that are entitled to vote on the matter is
required in order for the Company to effect any cable television system
acquisition. The Advisory Committee consists of four representatives of the
Attributable Class A Limited Partners of FVP and one representative of FVP GP.
Subject to certain conditions, each of the four Attributable Class A Limited
Partners of FVP listed in "Principal Security Holders" is entitled to designate
(directly or indirectly) one of the four Attributable Class A Limited Partner
representatives on the Advisory Committee. The designees of J.P. Morgan
Investment Corporation, 1818 II Cable Corp. (whose designee is selected by two
affiliated individuals specified in the FVP Partnership Agreement), Olympus
Cable Corp. and First Union Capital Partners Inc. are John W. Watkins, Richard
H. Witmer, Jr., James A. Conroy and L. Watts Hamrick, III, respectively. FVP
GP's designee is Mr. Vaughn.
Item 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to FrontierVision Inc.'s
Chief Executive Officer and to each of its other most highly compensated
officers receiving compensation in excess of $100,000 for services rendered
during the fiscal years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------------------------------
Annual Compensation
------------------------------- All Other
Name and Principal Position Year Salary Bonus Compensation (1)
- --------------------------- ---- ------- ------ -----
<S> <C> <C> <C> <C>
James C. Vaughn 1996 283,885 (2) 7,882
President and Chief Executive Officer 1995 169,635 110,000 (3)
John S. Koo 1996 170,192 (2) 4,760
Senior Vice President, Chief Financial Officer and Secretary 1995 93,416 90,000 (3)
- --------
</TABLE>
(1) Consists of FVP's contributions to the 401(k) Plan.
(2) Bonuses for Messrs. Vaugn and Koo for 1996 have not yet been finally
determined.
(3) Bonus paid for the employment contract year ending April 16, 1996. Mr.
Vaughn and Mr. Koo deferred $35,000 and $50,000, respectively, of the bonus
to the Deferred Compensation Plan described below.
DEFERRED COMPENSATION PLAN
FVP established the FrontierVision Partners, L.P. Executive Deferred
Compensation Plan (the "Deferred Compensation Plan") effective January 1, 1996
to allow key employees the opportunity to defer the payment of compensation to a
later date and to participate in any appreciation of FVP's business. The
Deferred Compensation Plan is administered by FVP's Advisory Committee.
Participation in the Deferred Compensation Plan is limited to James C. Vaughn,
John S. Koo and other key executives of FVP or its affiliates approved by the
Compensation Committee of the Advisory Committee (the "Compensation Committee").
Under the Deferred Compensation Plan, eligible participants may elect to defer
the payment of a portion of their compensation each year up to an amount
determined by the Compensation Committee. Any amount deferred is credited to a
bookkeeping account, which is credited with interest at the rate of 12% per
annum.
38
<PAGE>
Each participant's account also has a phantom equity component through which the
account will be credited with earnings in excess of 12% per annum to the extent
the Net Equity Value of FVP appreciates in excess of 12% per annum during the
term of the deferral. Net Equity Value of FVP is determined by multiplying each
cable television system's EBITDA for the most recent fiscal quarter by the
weighted average multiple of EBITDA paid by FVP to acquire each cable television
system; provided that if substantially all of the assets or partnership
interests of FVP are sold, Net Equity Value shall be based upon such actual sale
price adjusted to reflect any prior distributions to the partners and any
payments during the term of the deferral to the holders of certain subordinated
notes issued to the limited partners of FVP. Accounts shall be paid following
(i) the sale of all of FVP's partnership interests or upon liquidation of FVP,
other than sales or liquidations which are part of a reorganization, or (ii) the
death or disability of the participant prior to termination of employment with
FVP. The Compensation Committee may agree to pay the account in the event the
participant incurs a severe financial hardship or if the participant agrees to
an earlier payment. There are ten employees currently participating in the
Deferred Compensation Plan, including Messrs. Vaughn and Koo.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
A Compensation Committee of the Advisory Committee of FVP, consisting of Messrs.
Watkins and Witmer, as representative of J.P. Morgan Investment Corporation and
1818 II Cable Corp., respectively, sets the compensation of the executive
officers of the Company. See "See Certain Relationships and Related
Transactions."
EMPLOYMENT AGREEMENT
James. C. Vaughn has entered into an employment agreement with FVP, dated as of
April 17, 1995 (the "Employment Agreement"). The Employment Agreement provides
that Mr. Vaughn will be employed as President and Chief Executive Officer of
FVP. The Employment Agreement establishes a base salary to be paid to Mr. Vaughn
each year which is subject to annual adjustment to reflect increases in the
Consumer Price Index for All Urban Consumers, as published by the Bureau of
Labor Statistics of the United States Department of Labor (or, in the event of
the discontinuance thereof, another appropriate index selected by FVP, with the
approval of the Advisory Committee). Mr. Vaughn's base salary may from time to
time be increased if FVP shall deem it advisable to do so. For the contract
period beginning April 17, 1996, Mr. Vaughn's base salary was $286,000. In
addition, he is entitled to annual bonuses of up to $75,000, subject to the
attainment of certain performance objectives set forth in the Employment
Agreement. Mr. Vaughn's bonus for the contract period beginning April 17, 1996,
has not yet been determined. If FVP terminates Mr. Vaughn's employment without
"cause" (as defined in the Employment Agreement), then Mr. Vaughn is entitled to
receive a severance payment equal to 25% of his then base salary. Mr. Vaughn has
agreed not to compete with FVP for the term of his employment with FVP and for
an additional period of two years thereafter and to keep certain information in
connection with FVP confidential.
39
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 31, 1996, (i) the percentage of
the total partnership interests of the Company beneficially owned by the
directors and executive officers of FrontierVision Inc. and each person who is
known to the Company to own beneficially more than 5.0% of any class of the
Company's partnership interests and (ii) the percentage of the equity securities
of FrontierVision Inc., FVP GP, FVP and the Company owned by each director or
executive officer of FrontierVision Inc. named in the Summary Compensation Table
and by all executive officers of the Company as a group. For a more detailed
discussion of the ownership of the Company, see "Certain Relationships and
Related Transactions."
<TABLE>
<CAPTION>
Name and Address of Beneficial Owners Type of Interest % of Class
- ------------------------------------- ---------------- ---------
<S> <C> <C>
FrontierVision Partners, L.P. (1) General Partner Interest in the Company 99.90%
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
FVP GP, L.P. (1) General Partner Interest in FVP 1.00%
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
J.P. Morgan Investment Corporation Limited Partnership Interest in FVP 22.83%
101 California Street, Suite 3800 (Attributable Class A Limited Partner)
San Francisco, CA 94111 Limited Partnership Interest in FVP GP 7.18%
1818 II Cable Corp. Limited Partnership Interest in FVP 23.63%
c/o Brown Brothers Harriman & Co. (Attributable Class A Limited Partner)
59 Wall Street Limited Partnership Interest in FVP GP 7.18%
New York, NY 10005
Olympus Cable Corp. Limited Partnership Interest in FVP 14.77%
Metro Center--One Station Place (Attributable Class A Limited Partner)
Stamford, CT 06920 Limited Partnership Interest in FVP GP 7.18%
First Union Capital Partners, Inc. Limited Partnership Interest in FVP 15.05%
One First Union Center, 5th Floor (Attributable Class A Limited Partner)
Charlotte, NC 28288 Limited Partnership Interest in FVP GP 4.31%
James C. Vaughn Stockholder of FrontierVision Inc. 66.67%
1777 South Harrison Street, Suite P-200 Limited Partnership Interest in FVP GP 48.78%
Denver, Colorado 80210
John S. Koo Stockholder of FrontierVision Inc. 33.33%
1777 South Harrison Street, Suite P-200 Limited Partnership Interest in FVP GP 24.39%
Denver, Colorado 80210
All other executive officers and directors as a 0.00%
group
</TABLE>
- ----------
(1) FVOP's sole general partner (owning 99.9% of the partnership interests
therein) is FVP, a Delaware limited partnership, and FVOP's sole limited
partner (owning 0.1% of the partnership interests therein) is
FrontierVision Operating Partners, Inc., a Delaware corporation which is a
wholly owned subsidiary of FVP, FVP's sole general partner (owning 1% of
the partnership interests therein) is FVP GP, a Delaware limited
partnership, FVP's limited partners (owning 99% of the partnerships
interests therein) are various institutional investors and accredited
investors. FVP GP's sole general partner (owning 1% of the partnership
interests therein) is FrontierVision Inc., which is owned by James C.
Vaughn and John S. Koo, FVP GP's limited partners (owning 99% of the
partnership interests therein) consist of various institutional investors,
James C. Vaughn and John S. Koo.
40
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's sole general partner (owning 99.9% of the partnership interests
therein) is FVP. The Company's sole limited partner (owning 0.1% of the
partnership interests therein) is FrontierVision Operating Partners, Inc., which
is a wholly owned subsidiary of FVP. FVP's sole general partner (owning 1% of
the partnership interests therein) is FVP GP. FVP's limited partners (owning 99%
of the partnership interests therein) consist of J.P. Morgan Investment
Corporation, an affiliate of J.P. Morgan Securities Inc., First Union Capital
Partners, Inc., an affiliate of First Union Capital Markets Corp., and various
institutional investors and accredited investors. FVP GP's sole general partner
(owning 1% of the partnership interests therein) is FrontierVision Inc., which
is owned by James C. Vaughn and John S. Koo. See "Principal Security Holders."
As of December 31, 1996, J.P. Morgan Investment Corporation and First Union
Capital Partners, Inc. have committed approximately $45,502,845 and $30,000,000,
respectively, to FVP. As of December 31, 1996, FrontierVision Inc. has committed
approximately $20,343 to FVP, representing commitments of approximately $13,563
and $6,780 by James C. Vaughn and John S. Koo, respectively, who are directors
of FrontierVision Inc. Such capital commitments are contributed as equity to
FVOP in connection with the closing of acquisitions by FVOP. As of December 31,
1996, J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
have paid $35,278,231 and $22,894,737 of such commitments, respectively, to fund
the closing of acquisitions by FVOP, for escrow deposits for acquisitions by
FVOP under contract and for FVOP working capital requirements.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc. are
"Special Class A" limited partners of FVP. Upon the termination of FVP and in
connection with distributions to its partners in respect of their partnership
interests, J.P. Morgan Investment Corporation, First Union Capital Partners,
Inc. and FVP GP will be entitled to receive "carried interest" distributions or
will be allocated a portion of 15% of any remaining capital to be distributed by
FVP after certain other distributions are made. J.P. Morgan Securities Inc.
acted as placement agent for the initial offering of limited partnership
interests of FVP (other than with respect to the investment made by J.P. Morgan
Investment Corporation) and the placement of debt securities of FVP and in
connection with those activities received customary fees and reimbursement of
expenses.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., the Chase Manhattan Bank, an affiliate of Chase Securities
Inc., and CIBC Inc., an affiliate of CIBC Wood Gundy Securities Corp., are
agents and lenders under the Senior Credit Facility and have received customary
fees for acting in such capacities.
In addition, J.P. Morgan Securities Inc., Chase Securities Inc., CIBC Wood Gundy
Securities Corp. and First Union Capital Markets Corp. (collectively, the
"Underwriters") received compensation in the aggregate of approximately $6.0
million in connection with the issuance of the Notes. There are no other
arrangements between the Underwriters and their affiliates and the Company or
any of its affiliates pursuant to which the Underwriters or their affiliates
will receive any additional compensation from the Company or any of its
affiliates.
41
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
(A) (1) Financial Statements. The following financial statements are included in Item 8 of Part II:
PAGE
<S> <C>
FrontierVision Operating Partners, L.P. and Subsidiary
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the year ended December 31, 1996 and
the period from inception (April 17, 1995) through December 31, 1995 F-5
Consolidated Statements of Partners' Capital for the year ended December 31, 1996
and the period from inception (April 17, 1995) through December 31, 1995 F-6
Consolidated Statements of Cash Flows for the year ended December 31, 1996 and
the period from inception (April 17, 1995) through December 31, 1995 F-7
Notes to Consolidated Financial Statements F-8
FrontierVision Capital Corporation
Independent Auditors' Report F-18
Balance Sheets as of December 31, 1996 and July 26, 1996 (inception) F-19
Statement of Operations for the period from July 26, 1996 (inception) through
December 31, 1996 F-20
Statement of Owner's Equity for the period from July 26, 1996 (inception) through
December 31, 1996 F-21
Statement of Cash Flows for the period from July 26, 1996 (inception) through
December 31, 1996 F-22
Note to Financial Statements F-23
United Video Cablevision, Inc. (Selected Assets Acquired by FVOP)
Independent Auditors' Report F-24
Divisional Balance Sheets as November 8, 1995 and December 31, 1994 F-25
Statements of Divisional Operations for the period from January 1, 1995 through
November 8, 1995 and for the years ended December 31, 1994 and 1993 F-26
Statements of Divisional Equity for the period from January 1, 1995 through
November 8, 1995 and for the years ended December 31, 1994 and 1993 F-27
Statements of Divisional Cash Flows for the period from January 1, 1995 through
November 8, 1995 and for the years ended December 31, 1994 and 1993 F-28
Notes to Divisional Financial Statements F-29
Ashland and Defiance Clusters (Selected Assets Acquired From Cox Communications, Inc. by FVOP)
Independent Auditors' Report F-32
Combined Statements of Net Assets as of December 31, 1995 and 1994 F-33
Combined Statements of Operations for the eleven-month period ended December
31, 1995, for the one-month period ended January 31, 1995 and for the years
ended December 31, 1994 and 1993 F-34
Statements of Changes in Net Assets for the eleven-month period ended December
31, 1995, for the one-month period ended January 31, 1995 and
for the years ended December 31, 1994 and 1993 F-35
Combined Statements of Cash Flows for the eleven-month period ended December
31, 1995, for the one-month period ended January 31, 1995 and for the years
ended December 31, 1994 and 1993 F-36
Notes to Combined Financial Statements F-37
42
<PAGE>
C4 Media Cable Southeast, Limited Partnership
Independent Auditors' Report F-45
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-46
Consolidated Statements of Loss for the years ended December 31, 1995 and 1994 F-47
Consolidated Statements of Partners' Deficit for the years ended December 31,
1995 and 1994 F-48
Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1994 F-49
Notes to Consolidated Financial Statements F-50
American Cable Entertainment of Kentucky-Indiana, Inc.
Independent Auditors' Report F-55
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and
1994 F-56
Statements of Operations for the nine-month period ended September 30, 1996
(unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-57
Statements of Shareholders' Deficiency for the nine-month period ended September
30, 1996(unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-58
Statements of Cash Flows for the nine-month period ended September 30, 1996
(unaudited)and for the years ended December 31, 1995,1994 and 1993 F-59
Notes to Financial Statements F-60
Triax Southeast Associates, L.P.
Report of Independent Public Accountants F-68
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and
1994 F-69
Statements of Operations for the nine-month period ended September 30, 1996
(unaudited)and for the years ended December 31, 1995,
1994 and 1993 F-70
Statements of Partners' Capital for the nine-month period ended September 30,
1996 (unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-71
Statements of Cash Flows for the nine-month period ended September 30, 1996
(unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-72
Notes to Financial Statements F-73
(2) FINANCIAL STATEMENT SCHEDULES. The following Financial Statement
Schedules are submitted herewith:
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
</TABLE>
(3) LIST OF EXHIBITS.
<TABLE>
<S> <C>
3.1 The Company's Agreement of Limited Partnership. (1)
3.2 Certificate of Limited Partnership of the Company. (1)
3.9 Certificate of Incorporation of FrontierVision Capital Corporation. (1)
3.10 Bylaws of FrontierVision Capital Corporation. (1)
4.1 Indenture dated as of October 7, 1996, among FrontierVision Operating Partners, L.P.,
FrontierVision Capital Corporation and Colorado National Bank, as Trustee. (3)
10.1 Senior Credit Facility. (1)
10.2 Employment Agreement of James C. Vaughn. (1)
10.3 Asset Purchase Agreement dated July 20, 1995 between United Video Cablevision,
Inc. and FrontierVision Operating Partners, L.P. (1)
10.4 Asset Acquisition Agreement (July 27, 1995 Auction Sale) dated as of July 27, 1995
among Stephen S. Gray in his capacity as Receiver of Longfellow Cable Company,
</TABLE>
43
<PAGE>
<TABLE>
<S> <C>
Inc., Carrabassett Electronics and Carrabassett Cable Company, Inc. and
FrontierVision Operating Partners, L.P.(1)
10.5 Asset Purchase Agreement dated October 27, 1995 among C4 Media Cable Southeast,
Limited Partnership, County Cable Company, L.P. and FrontierVision Operating
Partners, L.P. (1)
10.6 Asset Purchase Agreement dated November 17, 1995 among Cox Communications
Ohio, Inc., Times Mirror Cable Television of Defiance, Inc., Chillicothe Cablevision,
Inc. Cox Communications Eastern Kentucky, Inc. and FrontierVision Operating
Partners, L.P. (1)
10.7 Asset Purchase Agreement dated February 27, 1996 between Americable International
Maine, Inc. and FrontierVision Operating Partners, L.P.(1)
10.8 Asset Purchase Agreement dated May 16, 1996 among Triax Southeast Associates,
L.P., Triax Southeast General Partner, L.P. and FrontierVision Operating Partners, L.P.
(1)
10.9 Asset Purchase and Sale Agreement dated June 21, 1996 between HPI Acquisition Co.
LLC (assignee of Helicon Partners I, LP) and FrontierVision Operating Partners, L.P.
(1)
10.10 Asset Purchase Agreement dated July 15, 1996 between American Cable
Entertainment of Kentucky-Indiana, Inc. and FrontierVision Operating Partners, L.P.
(1)
10.11 Asset Purchase Agreement dated as of July 30, 1996 between Shenandoah Cable
Television Company and FrontierVision Operating Partners, L.P.(1)
10.12 Purchase Agreement dated as of August 6, 1996 between Penn/Ohio Cablevision, L.P.
and FrontierVision Operating Partners, L.P. (1)
10.13 Asset Purchase Agreement dated July 19, 1996 between Phoenix Grassroots Cable
Systems, L.L.C. and FrontierVision Operating Partners, L.P.(1)
10.14 Amendment No. 1 to Senior Credit Facility. (1)
10.15 Consent and Amendment No. 2 to Senior Credit Facility. (3)
12.1 Statement of Computation of Ratios.
16.1 Report of change in accountants. (2)
27.2 Financial Data Schedule as of and for the period ended December 31, 1996.
Footnote References
(1) Incorporated by reference to the exhibits to the Registrant's Registration Statement on
Form S-1, Registration No. 333-9535.
(2) Incorporated by reference to the exhibits to the Registrant's Current Report on Form 8-
K, File No. 333-9535 dated October 22, 1996.
(3) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form
10-Q, File No. 333-9535 for the quarter ended September 30, 1996.
</TABLE>
(B) REPORTS ON FORM 8-K.
1. Item 2, Form 8-K dated October 7, 1996. Substantially the same
financial information required by Item 7 was previously reported
in the Registrants' Registration Statement on Form S-1 (File No.
333-9535) and, therefore, pursuant to General Instruction B.3 of
Form 8-K, an additional report of such information was not made
in the Form 8-K.
2. Item 4, Form 8-K dated October 22, 1996.
(C) EXHIBITS. The exhibits required by this Item are listed under Item 14
(A)(3).
(D) FINANCIAL STATEMENT SCHEDULES. The financial statement schedules
required by this Item are listed under Item 14(A)(2).
44
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED
WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF
THE EXCHANGE ACT BY REGISTRANT'S WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE EXCHANGE ACT
Other than a copy of this Form 10-K, no annual report or proxy material has
been or will be sent to security holders of FrontierVision Operating Partners,
L.P. or FrontierVision Capital Corporation.
45
<PAGE>
GLOSSARY
The following is a description of certain terms used in this Form 10-K.
A La Carte -- The purchase of programming services on a per-channel or
per-program basis.
Addressability -- "Addressable" technology permits the cable operator to
activate remotely the cable television services to be delivered to subscribers
who are equipped with addressable converters. With addressable technology, a
cable operator can add to or reduce services provided to a subscriber from the
headend site without dispatching a service technician to the subscriber's home.
Basic Penetration -- Basic subscribers as a percentage of the total number of
homes passed in the system.
Basic Service -- A package of over-the-air broadcast stations, local access
channels and certain satellite-delivered cable television services (other than
premium services).
Basic Subscriber -- A subscriber to a cable or other television distribution
system who receives the basic level of cable television service and who is
usually charged a flat monthly rate for a number of channels. A home with one or
more television sets connected to a cable system is counted as one basic
subscriber.
Cable Plant -- A network of coaxial and/or fiber optic cables that transmit
multiple channels carrying video-programming, sound and data between a central
facility and an individual customer's television set. Networks may allow one-way
(from a headend to a residence and/or business) or two-way (from a headend to a
residence and/or business with a data return path to the headend) transmission.
Channel Capacity -- The number of video programming channels that can be carried
over a communications system.
Clustering -- A general term used to describe the strategy of operating cable
television systems in a specific geographic region, thus allowing for the
achievement of economies of scale and operating efficiencies in such areas as
system management, marketing and technical functions.
Coaxial Plant -- Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
copper wire, but less than is possible with optical fiber.
Competitive Access Provider (CAP) - A company that provides its customers with
an alternative to the local telephone company for local transport of private
line, special access services and switched access services, CAPs are also
referred to in the industry as alternative access vendors, alternative local
telecommunications service providers (ALTS) and metropolitan area network
providers (MANs).
Cost-Of-Service -- A general term used to refer to the regulation of prices
charged to a customer. Existing prices are set and price increases are regulated
by allowing a company to earn a reasonable rate of return, as determined by the
regulatory authority.
Density -- A general term used to describe the number of homes passed per mile
of cable plant.
Digital Compression -- The conversion of the standard analog video signal into
digital signal, and the compression of that signal so as to facilitate multiple
channel transmission through a single channel's bandwidth.
Direct Broadcast Satellite (DBS) - A service by which packages of
satellite-delivered television programming are transmitted directly into
individual homes, each serviced by a single satellite dish.
46
<PAGE>
ESMR - Enhanced specialized mobile radio, a wireless telecommunications service
using digital technology to provide enhanced mobile telecommunications services,
including two-way radio dispatch and paging services. ESMR services may be
interconnected with the public switched telephone network.
Expanded Basic Service -- A package of satellite-delivered cable programming
services available only for additional subscription over and above the basic
level of television service.
FCC - Federal Communications Commission.
Fiber Optics -- Technology that involves sending laser light pulses across glass
strands to transmit digital information; fiber is virtually immune to electrical
interference and most environmental factors that affect copper wiring and
satellite transmissions. Use of fiber optic technology reduces noise on the
cable system, improves signal quality and increases system channel capacity and
reliability.
Fiber Optic Backbone Cable -- The principal fiber optic trunk lines for a cable
system which is using a hybrid fiber-coaxial architecture to deliver signals to
customers.
Fiber Optic Trunk Lines -- Cables made of glass fibers through which signals are
transmitted as pulses of light to the distribution portion of the cable
television system which in turn goes to the customer's home. Capacity for a very
large number of channels can be more easily provided.
Fiber-To-The-Feeder -- Network topology/architecture using a combination of
fiber optic cable and coaxial cable transmission lines to deliver signals to
customers. Initially signals are transmitted from the headend on fiber optic
trunk lines into neighborhood nodes (an individual point of origination and
termination or intersection on the network, usually where electronics are
housed) and then from the nodes to the end user on a combination of coaxial
cable distribution/feeder and drop lines. The coaxial feeder and drop lines
typically represent the operator's "last mile" of plant to the end user.
Headend -- A collection of hardware, typically including satellite receivers,
modulators, amplifiers and video cassette playback machines, within which
signals are processed and then combined for distribution within the cable
network.
Homes Passed -- Homes that can be connected to a cable distribution system
without further extension of the distribution network.
Internet --A worldwide collection of communications networks.
Microwave Links -- The transmission of voice, video or data using microwave
radio frequencies, generally above 1 GHz, from one location to another.
MMDS -- Multichannel Multipoint Distribution Service. A one-way radio
transmission of programming over microwave frequencies from a fixed station
transmitting to multiple receiving facilities located at fixed points.
MSO -- A term used to describe cable television companies that are "multiple
system operators."
New Product Tiers -- A general term used to describe unregulated cable
television services.
Over-The-Air Broadcast Stations -- A general term used to describe signals
transmitted by local television broadcast stations, including network affiliates
or independent television stations, that can be received directly through the
air by the use of a standard rooftop receiving antenna.
Pay-Per-View -- Payment made for individual movies, programs or events as
opposed to a monthly subscription for a whole channel or group of channels.
47
<PAGE>
PCS -- Personal Communications Services, or PCS, is the name given to a new
generation of cellular-like telecommunications services which are expected to
provide customers new choices in wireless mobile telecommunications using
digital technology for voice and data service compared to traditional analog
technology.
Premium Penetration -- Premium service units as a percentage of the total number
of basic service subscribers. A customer may purchase more than one premium
service, each of which is counted as a separate premium service unit. This ratio
may be greater than 100% if the average customer subscribes to more than one
premium service unit.
Premium Service -- An individual cable programming service available only for
additional subscription over and above the basic or expanded basic levels of
cable television service.
Premium Units -- The number of subscriptions to premium services which are paid
for on an individual basis.
Pro Forma Acquisition Cash Flow -- Net income of a system, as of the date of
acquisition of such system, before interest, taxes, depreciation, amortization
and corporate administrative expenses.
Rebuild -- The replacement or upgrade of an existing cable system usually to
improve either its technological performance, or expand the channel, bandwidth
capacity in order to provide more services.
SMATV - Satellite Master Antenna Television System. A video programming delivery
system to multiple dwelling units utilizing satellite transmissions.
Telephony -- The provision of telephone service.
Tiers -- Varying levels of cable services consisting of differing combinations
of several over-the-air broadcast and satellite-delivered cable television
programming services.
48
<PAGE>
<TABLE>
<CAPTION>
PAGE
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
<S> <C>
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the year ended December 31, 1996 and for the
period from inception (April 17, 1995) through December 31, 1995 F-5
Consolidated Statements of Partners' Capital for the year ended December 31, 1996 and for the
period from inception (April 17, 1996) through December 31, 1995 F-6
Consolidated Statements of Cash Flows for the year ended December 31, 1996 and for the
period from inception (April 17, 1996) through December 31, 1995 F-7
Notes to Consolidated Financial Statements F-8
FRONTIERVISION CAPITAL CORPORATION
Independent Auditors' Report F-18
Balance Sheets as of December 31, 1996 and uly 26, 1996 (inception) F-19
Statement of Operations for the period from July 26, 1996 (inception)through December 31, 1996 F-20
Statement of Owner's Equity for the period from July 26, 1996 (inception) through December F-21
31, 1996
Statement of Cash Flows for the period from July 26, 1996 (inception) through December 31, F-22
1996
Note to the Financial Statements F-23
UNITED VIDEO CABLEVISION, INC. (SELECTED ASSETS ACQUIRED BY FVOP)
Independent Auditors' Report F-24
Divisional Balance Sheets as November 8, 1995 and December 31, 1994 F-25
Statements of Divisional Operations for the period from January 1, 1995 through November 8,
1995 and for the years ended December 31, 1994 and 1993 F-26
Statements of Divisional Equity for the period from January 1, 1995 through
November 8, 1995 and for the years ended December 31, 1994 and 1993 F-27
Statements of Divisional Cash Flows for the period from January 1, 1995 through November 8,
1995 and for the years ended December 31, 1994 and 1993 F-28
Notes to Divisional Financial Statements F-29
ASHLAND AND DEFIANCE CLUSTERS (SELECTED ASSETS ACQUIRED FROM COX COMMUNICATIONS, INC. BY FVOP)
Independent Auditors' Report F-32
Combined Statements of Net Assets as of December 31, 1995 and 1994 F-33
Combined Statements of Operations for the eleven-month period ended December 31, 1995,
for the one-month period ended January 31, 1995 and for the years ended December 31, 1994
and 1993 F-34
Statements of Changes in Net Assets for the eleven-month period ended December 31, 1995,
for the one-month period ended January 31, 1995 and for the years ended December 31, 1994
and 1993 F-35
Combined Statements of Cash Flows for the eleven-month period ended December 31, 1995,
for the one-month period ended January 31, 1995 and for the years ended December 31, 1994
and 1993 F-36
Notes to Combined Financial Statements F-37
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
<S> <C>
Independent Auditors' Report F-45
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-46
Consolidated Statements of Loss for the years ended December 31, 1995 and 1994 F-47
Consolidated Statements of Partners' Deficit for the years ended December 31, 1995 and 1994 F-48
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-49
Notes to Consolidated Financial Statements F-50
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
Independent Auditors' Report F-55
Balance Sheets as of September 30, 1996(unaudited)and
December 31, 1995 and 1994 F-56
Statements of Operations for the nine-month period ended September 30, 1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993 F-57
Statements of Shareholders' Deficiency for the nine-month period ended September 30, 1996
(unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-58
Statements of Cash Flows for the nine-month period ended September 30, 1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993 F-59
Notes to Financial Statements F-60
TRIAX SOUTHEAST ASSOCIATES, L.P.
Report of Independent Public Accountants F-68
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and 1994 F-69
Statements of Operations for the nine-month period ended September 30, 1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993 F-70
Statements of Partners' Capital for the nine-month period ended September 30, 1996
(unaudited)and for the years ended December 31, 1995, 1994 and 1993 F-71
Statements of Cash Flows for the nine-month period ended September 30, 1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993 F-72
Notes to Financial Statements F-73
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
FrontierVision Operating Partners, L.P.:
We have audited the accompanying consolidated balance sheets of FrontierVision
Operating Partners, L.P. and subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of operations, cash flows and partners'
capital for the year ended December 31, 1996 and the period from inception
(April 17, 1995 -- see Note 1) through December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FrontierVision
Operating Partners, L. P. and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the year ended December
31, 1996 and the period from inception (April 17, 1995 - see Note 1) through
December 31, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 12, 1997
F-3
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
<CAPTION>
-------------------------
December 31, December 31,
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,639 2,650
Accounts receivable, net of allowance for doubtful accounts
of $322 and $40 4,544 358
Other receivables 846 1,667
Prepaid expenses and other 2,231 201
Investment in cable television systems, net:
Property and equipment 199,461 42,917
Franchise costs 248,055 50,270
Covenants not to compete 12,650 -
Subscriber lists 36,321 29,000
Goodwill 27,879 4,094
-------- --------
Total investment in cable television systems, net 524,366 126,281
-------- --------
Deferred financing costs, net 13,042 2,853
Earnest money deposits 500 9,502
-------- --------
Total assets $549,168 143,512
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 1,994 1,606
Accrued liabilities 10,825 1,558
Subscriber prepayments and deposits 1,862 362
Accrued interest payable 6,290 420
Debt 398,194 93,159
-------- --------
Total liabilities 419,165 97,105
-------- --------
Partners' capital:
FrontierVision Partners, L.P. 129,874 46,361
FrontierVision Operating Partners, Inc. 129 46
-------- --------
Total partners' capital 130,003 46,407
-------- --------
Commitments
Total liabilities and partners' capital $549,168 143,512
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
In Thousands
<TABLE>
<CAPTION>
------------------------------
For the Period
From Inception
For the Year Ended (April 17, 1995 --
December 31, see Note 1) through
1996 December 31, 1995
-------- --------
<S> <C> <C>
Revenue $ 76,464 4,369
Expenses:
Operating expenses 39,181 2,311
Corporate administrative expenses 2,930 127
Depreciation and amortization 35,336 2,308
Pre-acquisition expenses -- 940
-------- --------
Total expenses 77,447 5,686
-------- --------
Operating loss (983) (1,317)
Interest expense, net (22,422) (1,386)
Other expense (396) --
-------- --------
Net loss $(23,801) (2,703)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
<CAPTION>
-------------------------------------------------
FrontierVision
FrontierVision Operating
Partners, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
--------- --------- ---------
<S> <C> <C> <C>
Balance, at inception
(April 17, 1995 -- see Note 1) $ -- -- --
Capital contributions 49,061 49 49,110
Net loss (2,700) (3) (2,703)
--------- --------- ---------
Balance, December 31, 1995 46,361 46 46,407
Capital contributions 107,289 108 107,397
Net loss (23,776) (25) (23,801)
--------- --------- ---------
Balance, December 31, 1996 $ 129,874 129 130,003
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Thousands
<TABLE>
<CAPTION>
-----------------------------
For the Period
From Inception
For the Year (April 17, 1995 --
Ended see Note 1)through
December 31, December 31,
1996 1995
--------- ---------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (23,801) (2,703)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 35,336 2,308
Net loss on disposal of assets 388 --
Amortization of deferred debt issuance costs 999 69
Interest expense deferred and included in
long-term debt 924 0
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (1,946) (261)
Receivable from seller 1,377 --
Prepaid expenses and other (1,266) 75
Accounts payable and accrued liabilities 3,423 1,637
Subscriber prepayments and deposits (2,393) 362
Accrued interest payable 5,870 420
--------- ---------
Total adjustments 42,712 4,610
--------- ---------
Net cash flows from operating activities 18,911 1,907
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures (9,304) (573)
Cash paid for franchise costs (2,009) --
Earnest money deposits (500) (9,502)
Proceeds from disposition of cable television systems 15,065 --
Cash paid in acquisitions of cable television systems (421,467) (121,270)
--------- ---------
Net cash flows from investing activities (418,215) (131,345)
--------- ---------
Cash Flows From Financing Activities:
Debt borrowings 137,700 85,900
Payments on debt borrowings (33,600) --
Proceeds of issuance of Senior Subordinated Notes 200,000 --
Principal payments on capital lease obligations (16) --
Increase in deferred financing fees (5,163) (2,922)
Offering costs related to Senior Subordinated Notes (6,025) --
Partner capital contributions 107,397 49,110
--------- ---------
Net cash flows from financing activities 400,293 132,088
--------- ---------
Net Increase in Cash and Cash Equivalents 989 2,650
Cash and Cash Equivalents, at beginning of period 2,650 --
--------- ---------
Cash and Cash Equivalents, end of period $ 3,639 2,650
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 15,195 957
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands
(1) THE COMPANY
ORGANIZATION AND CAPITALIZATION
FrontierVision Operating Partners, L.P. (the "Company") is a Delaware limited
Partnership formed on July 14, 1995 for the purpose of acquiring and operating
cable television systems. As of December 31, 1996, the Company owned and
operated cable television systems in three primary operating regions - Ohio,
Kentucky and New England - with a fourth, smaller group of cable television
systems in the Southeast. The Company was initially capitalized in November 1995
with approximately $38 from its sole limited partner, FrontierVision Operating
Partners, Inc. ("FVOP Inc."), a Delaware corporation, and approximately $38,300
from its sole general partner, FrontierVision Partners, L.P. ("FVP"), a Delaware
Company. FVOP Inc. is a wholly owned subsidiary of FVP. During the period from
January 1, 1996 to December 31, 1996 the Company received additional capital
contributions of approximately $107,397 from its partners. FVP allocates certain
administrative expenses to FVOP which are included as capital contributions from
its partners. Such expense allocations were approximately $735 and $1,228 for
the periods ended December 31, 1996 and 1995, respectively.
FrontierVision Capital Corporation (Capital), a Delaware Corporation, is a
wholly owned subsidiary of the Company, and was organized on July 26, 1996 for
the sole purpose of acting as co-issuer with the Company of $200 million
aggregate principal amount of the 11% Senior Subordinated Notes due 2006 (the
"Notes"). Capital has nominal assets and does not have any material operations.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS
Generally, the Company's Partnership agreement provides that profits, losses and
distributions will be allocated to the general partner and the limited partner
pro rata based on capital contributions.
PRE-ACQUISITION EXPENSES
The Company had no substantive operations of its own until the date of the
acquisitions described in Note 3. However, FVP, which was formed on April 17,
1995, incurred certain general and administrative costs deemed attributable to
FVOP prior to the Company's legal formation. Such expenditures have been
reflected in the accompanying financial statements as pre-acquisition expenses
as if the Company had incurred those costs directly. In addition, the
accompanying balance sheet as of December 31, 1995 and 1996 reflects earnest
money deposits paid by FVP on behalf of the Company related to planned
acquisitions (see Note 3). All such amounts have been reflected as capital
contributions in the accompanying financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH AND CASH EQUIVALENTS
For purposes of the financial statements, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include the following:
distribution facilities, support equipment and leasehold improvements.
Replacements, renewals and improvements are capitalized and costs for repairs
and maintenance are charged to expense when incurred. The Company capitalized
direct labor and overhead related to installation activities of approximately
$1,577 and $39 for the periods ended December 31, 1996 and 1995.
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives:
-------------------------------------
December 31, December 31,
1996 1995 Life
--------- ------ -------
Property and equipment $ 217,148 43,906 8 years
Less - Accumulated depreciation (17,687) (989)
--------- ------
$ 199,461 42,917
========= ======
FRANCHISE COSTS, COVENANTS NOT TO COMPETE, SUBSCRIBER LISTS AND GOODWILL
Franchise costs, covenants not to compete, subscriber lists and goodwill result
from the application of the purchase method of accounting to business
combinations. Amounts are being amortized using the straight-line method over
the following periods, which for franchise costs consider the Company's ability
to renew existing franchise agreements:
-----------------------------------------
December 31, December 31,
1996 1995 Life
--------- ----- ----
Franchise costs $ 258,453 50,834 15 years
Less - Accumulated amortization (10,398) (564)
--------- -----
$ 248,055 50,270
========= =====
Covenants not to compete $ 14,934 -- 5 years
Less - Accumulated amortization (2,284) --
--------- -----
$ 12,650 --
========= =====
Subscriber lists $ 41,777 29,707 7 years
Less - Accumulated amortization (5,456) (707)
--------- -----
$ 36,321 29,000
========= =====
Goodwill $ 28,845 4,140 15 years
Less - Accumulated amortization (966) (46)
--------- -----
$ 27,879 4,094
========= =====
F-9
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the straight line method over
the life of the loans:
---------------------------------------
December 31, December 31,
1996 1995 Life
-------- ----- ----
Deferred financing costs $ 14,110 2,922 1-9 years
Less -- Accumulated amortization (1,068) (69)
-------- -----
$ 13,042 2,853
======== =====
REVENUE RECOGNITION
Revenue is recognized in the period in which the related services are provided
to the subscribers.
INCOME TAXES
No provision has been made for federal, state or local income taxes related to
the Company because they are the responsibility of the individual partners. The
principal difference between results reported for financial reporting purposes
and for income tax purposes results from differences in depreciable lives and
amortization methods utilized for tangible and intangible assets.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which is
required to be adopted by affected companies for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted the
principles of this statement on January 1, 1996. The provisions of SFAS 121 did
not have an effect on the Company's reported results of operations or financial
condition through December 31, 1996.
RECLASSIFICATION
Certain amounts have been reclassified for comparability with the 1996
presentation.
(3) ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
The Company has completed several acquisitions from its inception through
December 1996. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition.
F-10
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(3) ACQUISITIONS AND DISPOSITIONS (continued)
On November 9, 1995, the Company purchased certain cable television system
assets, primarily in Maine and Ohio, from United Video Cablevision, Inc. ("UVC")
for a purchase price of approximately $121,800, excluding working capital.
On November 21, 1995, the Company acquired certain cable television assets
located in Maine from Longfellow Cable Company, Inc. and two of its affiliates
for a purchase price of approximately $6,100, excluding working capital.
On February 1, 1996, the Company acquired certain cable television assets,
primarily in Virginia and Tennessee, from C4 Media Cable Southeast L.P. ("C4"),
for a purchase price of approximately $47,600 (subject to adjustment), excluding
working capital. As of December 31, 1995, the Company had advanced $2,502 as an
earnest money deposit related to this transaction.
On April 9, 1996, the Company acquired certain cable television system assets,
primarily in Ohio, from affiliates of Cox Communications, Inc. ("Cox") for a
purchase price of approximately $135,900, excluding working capital. As of
December 31, 1995, the Company had advanced $7,000 as an earnest money deposit
related to this transaction.
On October 7, 1996, the Company acquired certain cable television assets,
primarily in Kentucky and Ohio, from Triax Southeast Associates, L.P. ("Triax"),
for purchase price of approximately $85,900 (subject to adjustment), excluding
working capital.
On October 9, 1996, the Company acquired certain cable television assets,
primarily in Kentucky and Indiana, from American Cable Entertainment of
Kentucky-Indiana, Inc. ("ACE") for a purchase price of approximately $147,400,
excluding working capital.
During 1996, in addition to the transactions mentioned above, the Company
acquired certain cable television assets, located in Maine, New Hampshire, Ohio,
Pennsylvania, and Maryland for a purchase price of approximately $21,300,
excluding working capital.
The combined purchase price of these acquisitions have been allocated to the
acquired assets and liabilities as follows:
---------------------------
1996 1995
Acquisitions Acquisitions
--------- ---------
Property, plant and equipment $ 169,240 43,333
Franchise Costs 215,329 50,748
Subscriber Lists 12,070 29,707
Covenant not to compete 16,041 --
Goodwill 25,396 4,140
--------- ---------
Subtotal 438,076 127,928
--------- ---------
Net working capital (deficit) (7,107) 542
Less - Earnest money deposits applied (9,502)
Less - Subordinated promissory note to seller -- (7,200)
--------- ---------
Total cash paid for acquisitions $ 421,467 121,270
========= =========
F-11
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(3) ACQUISITIONS AND DISPOSITIONS (continued)
The Company has reported the operating results of its acquired cable systems and
disposed cable systems from the date of their respective acquisition and has
reported the operating results of its disposed cable systems up to the
respective disposal date. Unaudited pro forma summarized operating results of
the Company, assuming the UVC, C4, Cox, Triax and ACE acquisitions had been
consummated on January 1, 1995, are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
-------------------------------- -------
Historical Pro Forma
Results Acquisitions (a) Results
-------- ------- -------
<S> <C> <C> <C>
Revenue $ 76,464 44,627 121,091
Operating, selling, general and administrative expenses (42,111) (23,412) (65,523)
Depreciation and amortization (35,336) (22,207) (57,543)
-------- ------- -------
Operating income (loss) (983) (992) (1,975)
Interest and other expenses (22,818) (20,769) (43,587)
-------- ------- -------
Net loss $(23,801) (21,761) (45,562)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1995
----------------------------------------
Pro Forma
Results Acquisitions (a) Results
-------- ------- -------
<S> <C> <C> <C>
Revenue $ 4,369 106,204 110,573
Operating, selling, general and administrative expenses (2,438) (60,100) (62,538)
Depreciation and amortization (2,308) (55,213) (57,521)
Pre-acquisition expenses (940) -- (940)
-------- ------- -------
Operating income (loss) (1,317) (9,109) (10,426)
Interest and other expenses (1,386) (39,001) (40,387)
-------- --------
Net loss $ (2,703) (48,110) (50,813)
======== ======= =======
</TABLE>
(a) Represents acquistions consummated on or before December 31, 1996 (UVC, C4,
Cox, Triax and ACE).
The pro forma financial information presented above is not necessarily
indicative of the operating results that would have occurred had the UVC, C4,
Cox, Triax and ACE acquisitions actually been consummated on January 1, 1995.
Furthermore, the above pro forma financial information does not include the
effect of certain acquisitions or dispositions of cable systems because these
transactions were not material on an individual or aggregated basis.
DISPOSITIONS
The Company has completed two dispositions from its inception through December
1996.
On July 24, 1996, the Company sold certain cable television system assets
located primarily in Chatsworth, Georgia to an affiliate of Helicon Partners for
an aggregate sales price of approximately $7,900.
On September 30, 1996, the Company sold certain cable television system assets
located in Virginia to Shenandoah Cable Television Company, an affiliate of
Shenandoah Telephone Company, for an aggregate sales price of approximately
$7,100.
F-12
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(4) DEBT
The Company's debt was comprised of the following:
<TABLE>
<CAPTION>
-----------------------
December 31, December 31,
1996 1995
-------- --------
Bank Credit Facility (a) --
<S> <C> <C>
Revolving credit loan, due June 30, 2004, interest based
on various floating rate options (8.69% weighted average on $50,000
and 8.50% weighted average on $5,900 at December 31, 1995),
payable monthly $ -- 55,900
Term loans, due June 30, 2004, interest based on various
floating rate options(8.6% and 8.69% weighted average at
December 31, 1996 and 1995, respectively), payable monthly 190,000 30,000
11% Senior Subordinated Notes due 2006 (b) 200,000 --
Subordinated promissory notes to UVC, due December 31,
2004, with interest as described below (c) 8,124 7,200
Capital lease obligations, monthly payments of $3, including average
interest at 9.1%, due November 1998 and May 1999 70 59
-------- --------
Total debt $398,194 93,159
======== ========
</TABLE>
(a) Bank Credit Facility.
As of December 31, 1995, the Company had entered into a credit agreement
(the "Senior Credit Facility") with a maximum availability of $130,000
of which $30,000 was available in term loans and $100,000 was available
as a revolving line of credit. The Company had drawn $30,000 in term
loans and $55,900 under the revolver as of December 31, 1995. On April
9, 1996, the Company entered into an Amended and Restated Credit
Facility increasing the available Senior Debt by $135,000, for a total
availability of $265,000. Under the Amended and Restated Credit
Facility, the Company has $100,000 available under the Facility A Term
Loan, $75,000 available under the Revolving Credit Loan and $90,000
available under the Facility B Term Loan. The Facility A Term Loan and
the Revolving Credit Loan both mature on June 30, 2004. Escalating
principal payments are due quarterly beginning September 30, 1998 under
the Facility A Term Loan with quarterly principal reductions of the
Revolving Credit Loan also beginning September 30, 1998. The Facility B
Term Loan matures June 30, 2005 with 91% of the principal being repaid
in the last four quarters of the term of the facility. On September 30,
1996, the Company amended the Amended and Restated Credit Facility
primarily to allow for the issuance of the 11% Senior Subordinated
Notes (the "Notes").
Under the terms of the Amended and Restated Credit Facility, with
certain exceptions, the Company has a mandatory prepayment obligation
upon any sale of new partnership interests and the sale of any of its
operating systems. Further, beginning with the year ended December 31,
1998, the Company is required to make prepayments equal to 50% of its
excess cash flow, as defined in the credit agreement. The Company also
pays commitment fees of 1/2% per annum, on the average unborrowed
portion of the total amount available for borrowings under the bank
credit facility.
F-13
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(4) DEBT (continued)
The Amended and Restated Credit Facility also requires the Company to
maintain compliance with various financial covenants including, but not
limited to, covenants relating to total indebtedness, debt ratios,
interest coverage ratio, fixed charges ratio, and capital expenditures.
In addition, the Senior Credit Facility has restrictions on certain
Partnership distributions. As of December 31, 1996, the Company was in
compliance with the financial covenants of the Amended and Restated
Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Senior Credit
Facility.
In order to convert certain of the interests payable at variable rates
under the Amended and Restated Credit Facility, to interest at fixed
rates, the Company has entered into interest rate swap agreements for
notional amounts totaling $170,000, and maturing between November 15,
1999 and October 7, 2000. According to these agreements, the Company
pays or receives the difference between (1) an average fixed rate of
5.932% and (2) various available floating rate options applied to the
same $170,000 notional amount every three months during the term of the
agreement. Through the year ended December 31, 1996, the Company had
recognized an increase in interest expense of approximately $195 as a
result of these interest rate swap agreements.
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering
(the "Offering"), $200,000 aggregate principal amount of the Notes. Net
proceeds from the Offering of $192,500, after costs of approximately
$7,500, were available to the Company on October 7, 1996.
In connection with the anticipated issuance of the Notes, the
Partnership entered into deferred interest rate setting agreements to
reduce the Partnership's interest rate exposure in anticipation of
issuing the Notes. The cost of such agreements amounting to $1,390 will
be recognized as a component of interest expense over the term of the
Notes.
The Notes are unsecured subordinated obligations of the Company
(co-issued by FrontierVision Capital Corporation) that mature on
October 15, 2006. Interest accrues at 11% per annum beginning from the
date of issuance, and is payable each April 15 and October 15,
commencing April 15, 1997.
The Subordinated Note Indenture (the "Indenture") also requires the
Company to maintain compliance with covenants relating to total
indebtedness. In addition, the Indenture has certain restrictions on
distributions, mergers, asset sales and changes in control of the
Company. As of December 31, 1996, the Company was in compliance with
the financial covenants of the Indenture.
(c) Subordinated Promissory Note to UVC
The subordinated promissory note to UVC bears interest at 9% for the
first three years. At the end of each subsequent year, the annual
interest rate increases 2% per year. Under the terms of the
subordinated promissory note, the Company may issue additional
subordinated promissory notes rather than making cash interest
payments. In this event, the subordinated promissory note bears
interest equal to the annual interest of the original promissory note
plus 2.5% for the first three
F-14
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(4) DEBT (continued)
years and 3% for each of the subsequent years. Further, in the event
the Company's leverage ratio exceeds certain specified amounts, the
interest rate also increases by 2%. Under the terms of the subordinated
promissory note, the Company can prepay the balance at any time.
The debt of the Company matures as follows:
Year ended December 31 --
1997 $ 33
1998 3,709
1999 9,353
2000 13,350
2001 17,350
Thereafter 354,399
--------
$398,194
(5) INCOME TAXES
Income taxes have not been recorded in the accompanying financial statements
because they accrue directly to the partners. Taxable losses reported to the
partners are different from those reported in the accompanying statements of
operations due primarily to differences in depreciation and amortization methods
and estimated useful lives under regulations prescribed by the Internal Revenue
Service.
A reconciliation between the net loss reported for financial reporting purposes
and the net loss reported for federal income tax purposes is as follows:
<TABLE>
<CAPTION>
------------------------
1996 1995
-------- --------
<S> <C> <C>
Net loss for financial reporting purposes $(23,801) $ (2,703)
Excess depreciation and amortization recorded for income tax purposes (15,647) (192)
Other temporary differences 326 186
-------- --------
Net loss for federal income tax purposes $(39,122) $ (2,709)
======== ========
</TABLE>
(6) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate their fair value
due to the nature and length of maturity of the investments.
The estimated fair value of the Company's debt instruments is based on the
borrowing rates that approximate existing rates at December 31, 1996; therefore,
there is no material difference in the fair market value and the carrying value
of such debt instruments.
(7) COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the year ended December 31, 1996 and for the
period from inception (April 17, 1995) to December 31, 1995 was $2,365 and $194,
respectively.
F-15
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(7) COMMITMENTS AND CONTINGENCIES (continued)
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1996 are as follows:
Year ended December 31 --
1997 $ 480
1998 344
1999 260
2000 170
2001 131
Thereafter 288
------
$1,673
======
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services which allowed cable operators to justify regulated
rates in excess of the FCC benchmarks through cost of service showings at both
the franchising authority level for basic service and to the FCC in response to
complaints on rates for cable programming services.
On February 22, 1994, the FCC issued further regulations which modified the
FCC's previous benchmark approach, adopted interim rules to govern cost of
service proceedings initiated by cable operators, and lifted the stay of rate
regulations for small cable systems, which were defined as all systems serving
1,000 or fewer subscribers.
On November 10, 1994, the FCC adopted "going forward" rules that provided cable
operators with the ability to offer new product tiers priced as operators elect,
provided certain limited conditions are met, permit cable operators to add new
channels at reasonable prices to existing cable programming service tiers, and
created an additional option pursuant to which small cable operators may add
channels to cable programming service tiers.
In May 1995, the FCC adopted small company rules that provided small systems
regulatory relief by implementing an abbreviated cost of service rate
calculation method. Using this methodology, for small systems seeking to
establish monthly rates no higher than $1.24 per subscriber per channel, the
rates are deemed to be reasonable.
As a result of such actions, The Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the provisions of the 1992
Cable Act. However, the Company's rates for Regulated Services are subject to
review by the FCC, if a complaint has been filed, or if the appropriate
franchise authority has certified the system. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions.
F-16
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts in Thousands
(7) COMMITMENTS AND CONTINGENCIES (continued)
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 5% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended period of up to fifteen years.
(8) SUBSEQUENT EVENTS (unaudited)
On March 11, 1997, FVP called an additional $15,000 of the equity offering
commitment. As of March 26, 1997 substantially all of this capital call had been
received by FVP.
On December 18, 1996, the Company entered into an asset purchase agreement with
Bluegrass Cable Partners, Limited Partnership, to acquire certain cable
television assets, primarily in Northern Kentucky for a cash purchase price of
$9,900. As of December 31, 1996, the Company had advanced $500 as an earnest
money deposit related to this transaction. On March 20, 1997, the acquisition
was consummated.
Subsequent to December 31, 1996, the Company entered into letters of intent or
asset purchase agreements to acquire certain cable television systems, primarily
located in Ohio and Kentucky, in seven separate transactions, for aggregate
consideration of approximately $54.8 million. The transactions are expected to
close by the third quarter of 1997.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholder of
FrontierVision Capital Corporation:
We have audited the accompanying balance sheets of FrontierVision Capital
Corporation as of December 31, 1996 and July 26, 1996 (inception) and the
related statements of operations, cash flows and owner's equity for the period
from July 26, 1996 (inception) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FrontierVision Capital
Corporation as of December 31, 1996 and July 26, 1996 (inception) and the
results of its operations and its cash flows for the period from July 26
(inception) through December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 12, 1997
F-18
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
------------------
December 31, July 26,
1996 1996 (inception)
----- -----
ASSETS
<S> <C> <C>
Cash $ 188 --
----- -----
Receivable from affiliate for issuance of common stock - collected subsequent
to balance sheet date -- 100
----- -----
Total assets $ 188 100
===== =====
LIABILITIES AND OWNER'S EQUITY
Payable to FVOP $ 100 --
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding
1 1
Additional paid-in capital 99 99
Retained deficit (12) --
----- -----
Total owner's equity 88 100
----- -----
Total liabilities and owner's equity $ 188 100
===== =====
</TABLE>
See accompanying note to financial statements.
F-19
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OPERATIONS
-------------
For the period
from July 26,
1996 (inception)
through
December 31,
1996
--------
Revenue $ --
General and administrative expenses
12
----
Net loss $(12)
====
See accompanying note to financial statements.
F-20
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OWNER'S EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------
Common Additional Retained Total owner's
stock paid-in capital deficit equity
----- ----- ----- -----
<S> <C> <C> <C> <C>
Balance, at July 26, 1996 (inception) $ $ -- $ -- $ --
Issuance of Common Stock 1 99 -- 100
Net loss -- -- (12) (12)
----- ----- ----- -----
Balance, December 31, 1996 $ 1 $ 99 $ (12) $ 88
===== ===== ===== =====
</TABLE>
See accompanying note to financial statements.
F-21
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
-------------
For the period
from July 26,
1996 through
December 31,
1996
-----
Cash flows from operating activities:
Net loss $ (12)
Decrease in receivable from affiliate 100
-----
Net cash flows used in operating activities 88
-----
Cash flows from investing activities --
-----
Cash flows from financing activities:
Advance from FVOP 100
-----
Net cash flows from financing activities 100
-----
Net increase in cash and cash equivalents 188
Cash and cash equivalents, at beginning of period --
-----
Cash and cash equivalents, at end of period $ 188
=====
See accompanying note to financial statements.
F-22
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
NOTE TO THE FINANCIAL STATEMENTS
FrontierVision Capital Corporation, a Delaware corporation, is a wholly owned
subsidiary of FrontierVision Operating Partners, L.P. (FVOP), and was organized
on July 26, 1996 for the sole purpose of acting as co-issuer with FVOP of $200
million aggregate principal amount of the 11% Senior Subordinated Notes.
FrontierVision Capital Corporation has nominal assets and does not have any
material operations.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
United Video Cablevision, Inc.:
We have audited the accompanying divisional balance sheet of United Video
Cablevision, Inc. -- Maine and Ohio Divisions as of November 8, 1995 and
December 31, 1994, and the related statements of divisional operations, cash
flows and equity for the period of January 1, 1995 through November 8, 1995, and
for the years ended December 31, 1994 and 1993. These financial statements are
the responsibility of the Divisions' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the divisional financial position of United Video
Cablevision, Inc. -- Maine and Ohio Divisions as of November 8, 1995 and
December 31, 1994, and the results of its divisional operations and its cash
flows for the period ending November 8, 1995, and the years ending December 31,
1994 and 1993 in conformity with generally accepted accounting principles.
PIAKER & LYONS, P.C.
May 7, 1996
Vestal, NY
F-24
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
DIVISIONAL BALANCE SHEETS
------------ ------------
November 8, December 31,
1995 1994
------------ ------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 75,100 $ 35,461
Accounts Receivable (1)
Accounts Receivable, Trade 143,673 206,576
Accounts Receivable, Other 25,980 31,034
Less: Allowance for Doubtful Accounts (53,994) (34,928)
------------ ------------
Net Accounts Receivable 115,659 202,682
------------ ------------
Prepaid Expenses 165,080 108,045
------------ ------------
Total Current Assets 355,839 346,188
------------ ------------
Property, Plant and Equipment-- At Cost
Land 61,556 61,223
Buildings and Improvements 1,586,150 1,570,888
Vehicles 2,608,730 2,628,936
Cable Television Distribution Systems 85,010,454 83,296,885
Office Furniture, Tools and Equipment 1,386,288 1,363,828
Less: Accumulated Depreciation (1) (68,243,467) (59,163,656)
------------ ------------
Net Property, Plant and Equipment 22,409,711 29,758,104
------------ ------------
Intangible Assets
Franchise Rights 1,994,336 1,984,349
Non Compete Agreements 71,753 71,753
Other Intangible Assets 1,943,836 1,943,836
Less: Accumulated Amortization (1) (2,930,019) (2,550,708)
------------ ------------
Net Intangible Assets 1,079,906 1,449,230
------------ ------------
Total Assets $ 23,845,456 $ 31,553,522
============ ============
LIABILITIES AND DIVISIONAL EQUITY
Liabilities
Accounts Payable $ -- $ 684,264
Subscriber Deposits and Unearned Income 341,263 401,606
Accrued Franchise Fees 424,312 469,578
Accrued Programming Fees 686,599 513,151
Other Accrued Expenses 1,596,134 1,154,024
------------ ------------
Total Current Liabilities 3,048,308 3,222,623
------------ ------------
Divisional Equity 20,797,148 28,330,899
------------ ------------
TOTAL LIABILITIES AND DIVISIONAL EQUITY $ 23,845,456 $ 31,553,522
============ ============
See the accompanying notes to divisional financial statements.
F-25
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL OPERATIONS
------------ ------------ ------------
Period from
January 1,
1995 For the For the
through Year Ended Year Ended
November 8, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
Revenues (1) $ 25,417,064 $ 27,964,550 $ 27,917,090
Operating Expenses
Programming 5,350,664 5,717,160 5,361,127
Plant and Operation 3,741,207 4,185,894 3,902,847
General and Administrative 3,754,474 4,415,919 4,628,442
Marketing and Advertising 276,712 248,572 409,890
Corporate Overhead (3) 1,270,072 1,327,127 1,470,702
Depreciation and Amortization (1) 9,625,116 11,225,978 9,960,536
------------ ------------ ------------
Total Expenses 24,018,245 27,120,650 25,733,544
------------ ------------ ------------
Operating Income 1,398,819 843,900 2,183,546
------------ ------------ ------------
Other (Income) Expense
Interest Expense (1) 4,086,738 4,892,250 4,960,032
Gain on Sale of Fixed Assets (25,034) (33,835) (33,810)
------------ ------------ ------------
Total Other (Income) Expense 4,061,704 4,858,415 4,926,222
------------ ------------ ------------
Net Loss $ (2,662,885) $ (4,014,515) $ (2,742,676)
============ ============ ============
See the accompanying notes to divisional financial statements.
F-26
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL EQUITY
------------ ------------ ------------
1995 1994 1993
------------ ------------ ------------
Balance, January 1, $ 28,330,899 $ 32,700,089 $ 37,526,944
Net Loss (2,662,885) (4,014,515) (2,742,676)
Payments to Corporate
Division, Net (4,870,866) (354,675) (2,084,179)
------------ ------------ ------------
Balance, November 8, 1995 $ 20,797,148
============
Balance, December 31, $ 28,330,899 $ 32,700,089
============ ============
See the accompanying notes to divisional financial statements.
F-27
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1,
1995 For the For the
through Year Ended Year Ended
November 8, December 31, December 31,
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities
Net Loss $(2,662,885) $(4,014,515) $(2,742,676)
---------- ----------- ----------
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation 9,245,805 10,771,263 9,497,062
Amortization of Intangibles 379,311 454,715 463,474
Allowance for Doubtful Accounts 19,066 6,124 (3,077)
Gain on Sale of Assets (25,034) (33,835) (33,810)
Changes in Operating Assets and Liabilities,
Net of Effects from Acquisition of Corporate
Entities:
Accounts Receivable and Other Receivables 67,957 (132,182) 122,248
Prepaid Expenses (57,035) 13,897 (158,603)
Accounts Payable and Accrued Expenses (113,972) (846,244) (52,046)
Subscriber Deposits and Unearned Income (60,343) (45,895) (72,253)
---------- ----------- ----------
Total Adjustments 9,455,755 10,187,843 9,762,995
---------- ----------- ----------
Net Cash Provided by Operating Activities 6,792,870 6,173,328 7,020,319
---------- ----------- ----------
Investing Activities
Purchase of Property, Plant and Equipment (2,037,144) (5,712,592) (5,024,998)
Acquisition of Intangible Assets (9,987) (216,154) (1,928)
Proceeds from Sale of Assets 164,766 41,789 37,660
---------- ----------- ----------
Net Cash Used in Investing Activities (1,882,365) (5,886,957) (4,989,266)
---------- ----------- ----------
Payments to Corporate Division, Net (4,870,866) (354,675) (2,084,179)
---------- ----------- ----------
Net Increase (Decrease) in Cash Equivalents 39,639 (68,304) (53,126)
Cash and Cash Equivalents at Beginning of
Period 35,461 103,765 156,891
---------- ----------- ----------
Cash and Cash Equivalents at End of Period $ 75,100 $ 35,461 $ 103,765
========== =========== ==========
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $ 4,086,738 $ 4,892,250 $ 4,960,032
Income Taxes Paid -- -- --
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the statement of cash flows, the Divisions consider all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
See the accompanying notes to divisional financial statements.
F-28
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
November 8, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING, POLICIES
BUSINESS ACTIVITY
The accompanying divisional financial statements include the Maine and Ohio
Divisions of United Video Cablevision, Inc. (the "Divisions"). The Divisions are
engaged in providing cable television programming services to subscribers in
their franchised areas. The Corporate division allocates debt to the operating
divisions based upon the respective acquisition and construction costs relative
to the debt incurred. Accordingly, interest has been allocated to the operating
divisions by the Corporate division in the same manner. For the purpose of the
divisional financial statements, debt has been reflected as division equity in
the accompanying financial statements under the terms of the agreement with
FrontierVision Operating Partners, L.P., as no such debt will be assumed.
CONCENTRATIONS OF CREDIT RISK
The Divisions' trade receivables are comprised of amounts due from subscribers
in varying regions throughout the states. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Divisions' customer base and geographic dispersion.
REVENUE RECOGNITION
The Divisions recognize service revenues on the accrual basis in the month in
which the service is to be provided. Payments received in advance are included
in deferred revenue until the month they become due at which time they are
recognized as income.
CAPITALIZATION AND DEPRECIATION
In accordance with Statement No. #51 of the Financial Accounting Standards
Board, the Divisions have adopted the policy of capitalizing certain expenses
applicable to the construction and operating of a cable television system during
the period while the cable television system is partially under construction and
partially in service. For the period ended November 8, 1995, the total
capitalized costs amounted to $314,347. During 1994 and 1993, the total
capitalized costs amounted to $244,276 and $300,429, respectively.
The Divisions, for financial reporting purposes, provide depreciation on the
straight-line method, which is considered adequate for the recovery of the cost
of the properties over their estimated useful lives. For income tax purposes,
however, the Divisions utilize both accelerated methods and the accelerated cost
recovery system. For the period ended November 8, 1995, the provision for
depreciation in the accompanying statements of operations amounted to
$9,245,805. For the years ended December 31, 1994 and 1993, the provision
amounted to $10,771,263 and $9,497,062, respectively.
F-29
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING, POLICIES (continued)
Depreciation lives for financial statement purposes are as follows:
Headend Equipment
Tower 12 Years
Antennae 7 Years
Other Headend Equipment 8 Years
Trunk and Distribution Equipment
Traps, Descramblers, Converters, Decoders 5 Years
Other Trunk and Distribution Equipment 8 Years
Test Equipment 5 Years
Local Origination Equipment 8 Years
Vehicles 3 Years
Furniture and Fixtures 10 Years
Leasehold Improvements 8 Years
Computer and EDP Equipment 5 Years
AMORTIZATION
The Divisions are amortizing various intangible assets acquired and incurred on
a straight-line basis, generally from 5 to 40 years. For the period ended
November 8, 1995, the provision for amortization in the accompanying statements
of operations amounted to $379,311. For the years ended December 31, 1994 and
1993, the provision amounted to $454,715 and $463,474, respectively.
INCOME TAXES
The Divisions are a part of United Video Cablevision, Inc. which has elected to
be taxed as a small business corporation under "Sub-Chapter S" of the Internal
Revenue Code effective January 1, 1987, wherein the stockholders of United Video
Cablevision, Inc. are taxed on any earnings or losses of the Company.
BAD DEBTS
The Divisions have adopted the reserve method for recognizing bad debts for
financial statement purposes and continue to utilize the direct write-off method
for tax purposes.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
(2) COMMITMENTS
The Divisions were committed to annual pole rentals of approximately $823,000 at
November 8, 1995 and $830,000 and $832,000 at December 31, 1994 and 1993,
respectively, to various utilities. These agreements are subject to termination
rights by both parties.
F-30
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS (continued)
(2) COMMITMENTS (continued)
The Divisions lease in various systems the land upon which their towers and
antennae are constructed. The annual rental payments under these leases amounted
to approximately $37,000 at November 8, 1995, approximately $37,000 at December
31, 1994 and approximately $46,000 at December 31, 1993.
(3) MANAGEMENT AGREEMENT WITH RELATED PARTY
The Divisions are being provided with certain management and technical services
by a related party by means of a management agreement. For the period ended
November 8, 1995, the allocated billings amounted to $1,270,072, and for the
years ended December 31, 1994 and 1993, billings amounted to $1,327,127 and
$1,470,702, respectively.
(4) SALE OF DIVISIONS
On November 9, 1995, United Video Cablevision, Inc. consummated an agreement by
which it sold substantially all of the net assets and associated current
liabilities in its Maine and Ohio franchise areas (the Divisions) for
approximately $120,500,000. Upon the completion of the transaction, United Video
Cablevision, Inc. realized a gain of approximately $100,000,000.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Cox Communications, Inc.:
We have audited the accompanying combined statements of net assets of the
combined operations of Cox Communications, Inc.'s ("CCI") cable television
systems serving 57 communities in Ashland, Kentucky and Defiance, Ohio
(collectively referred to as the "Ashland and Defiance Clusters" or "Successor")
whose assets and certain liabilities were acquired by FrontierVision Operating
Partners, L.P. on April 9, 1996, as of December 31, 1994 ("Predecessor") and
1995 ("Successor"), and the related combined statements of operations, changes
in net assets, and cash flows for the years ended December 31, 1993 and 1994
(Predecessor), for the one-month period ended January 31, 1995 (Predecessor),
and for the eleven-month period ended December 31, 1995 (Successor). These
financial statements are the responsibility of the Ashland and Defiance
Clusters' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Ashland and
Defiance Clusters at December 31, 1994 (Predecessor) and 1995 (Successor), and
the combined results of its operations and its cash flows for years ended
December 31, 1993 and 1994 (Predecessor), for the one-month period ended January
31, 1995 (Predecessor), and for the eleven-month period ended December 31, 1995
(Successor), in conformity with generally accepted accounting principles.
As discussed in Note 1, effective February 1, 1995, CCI acquired the Ashland and
Defiance Clusters in connection with the acquisition of Times Mirror Cable
Television, Inc.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 10, 1996
F-32
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF NET ASSETS
In Thousands
<TABLE>
<CAPTION>
--------------------
Successor Predecessor
December 31, December 31,
1995 1994
-------- --------
ASSETS
<S> <C> <C>
Cash $ 188
Accounts Receivable-- Less allowance for doubtful accounts
of $43 and $37 $ 1,784 1,563
Amounts Due From Affiliate 5,848
Intercompany Income Taxes Receivable 1,182
Net Plant and Equipment 25,621 18,096
Intangible Assets 110,796 51,210
Other Assets 1,149 580
-------- --------
$146,380 $ 71,637
======== ========
LIABILITIES AND NET ASSETS
Accounts Payable $ 580 $ 692
Accrued Expenses 966 915
Intercompany Income Taxes Payable 2,160
Deferred Income 1,355 1,142
Deferred Income Taxes 7,644 3,147
Other Liabilities 146 99
Amounts Due to Affiliate 52,317
-------- --------
Total liabilities 10,691 60,472
NET ASSETS 135,689 11,165
-------- --------
$146,380 $ 71,637
======== ========
</TABLE>
See notes to combined financial statements.
F-33
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF OPERATIONS
In Thousands
<TABLE>
<CAPTION>
-----------------------------------------------
Successor Predecessor
-------- ----------------------------------
Eleven Months One Month
Ended Ended Year Ended
December 31, January 31, December 31,
---------------------
1995 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 24,628 $ 2,096 $ 25,235 $ 24,679
Costs and Expenses
Operating 8,035 689 7,188 6,773
Selling, general, and administrative 4,919 503 5,507 5,398
Depreciation 5,480 214 3,293 3,413
Amortization 2,727 128 1,830 2,129
-------- -------- -------- --------
Total costs and expenses 21,161 1,534 17,818 17,713
-------- -------- -------- --------
Operating Income 3,467 562 7,417 6,966
Interest Income-- Net 79 434 133
Other-- Net (29) (3) (4)
-------- -------- -------- --------
Income Before Income Taxes 3,438 641 7,848 7,095
Income Taxes 3,749 248 3,982 3,559
-------- -------- -------- --------
NET INCOME (LOSS) $ (311) $ 393 $ 3,866 $ 3,536
======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
In Thousands
PREDECESSOR
Balance, January 1, 1993 $ 11,303
Net income for the year ended December 31, 1993 3,536
Dividends to Affiliate (1,570)
---------
Balance, December 31, 1993 13,269
Net income for the year ended December 31, 1994 3,866
Dividends to Affiliate (5,970)
---------
Balance, December 31, 1994 11,165
Net income for the one month ended January 31, 1995 393
---------
Balance, January 31, 1995 $ 11,558
=========
SUCCESSOR
Fair Value of Assets Acquired and Liabilities Assumed from
Times Mirror Cable Television, Inc. on February 1, 1995 $ 136,000
Net loss for the eleven months ended December 31, 1995 (311)
---------
BALANCE, DECEMBER 31, 1995 $ 135,689
=========
See notes to combined financial statements.
F-35
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF CASH FLOWS
In Thousands
<TABLE>
<CAPTION>
-----------------------------------------------------------
Successor Predecessor
-------- ------------------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, -------------------------
1995 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (311) $ 393 $ 3,866 $ 3,536
Adjustments to reconcile net income (loss)to net cash
provided by operating activities:
Depreciation and amortization 8,207 342 5,123 5,542
Deferred income taxes (142) (70) 298 293
(Increase) decrease in accounts receivable (287) 66 114 (45)
Increase (decrease) in accounts payable and
accrued expenses 467 (360) (214) (92)
Income taxes payable (1,182) 31 1,914 (906)
Other, net 274 45 162 (61)
-------- -------- -------- --------
Net cash provided by operating activities 7,026 447 11,263 8,267
INVESTING ACTIVITIES:
Capital expenditures (1,362) (65) (3,795) (6,075)
Advances to Affiliate (5,848)
-------- -------- -------- --------
Net cash used in investing activities (7,210) (65) (3,795) (6,075)
FINANCING ACTIVITIES:
Net change in amounts due to Affiliate (386) (1,466) (580)
Dividends paid (5,970) (1,570)
-------- -------- -------- --------
Net cash used in financing activities (386) (7,436) (2,150)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH (184) (4) 32 42
CASH AT BEGINNING OF PERIOD 184 188 156 114
-------- -------- -------- --------
CASH AT END OF PERIOD $ 184 $ 156
-------- -------- -------- --------
CASH PAID DURING THE PERIOD FOR:
interest $ -- $ 79 $ 434 $ 133
-------- -------- -------- --------
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994,
ONE MONTH ENDED JANUARY 31, 1995, AND
ELEVEN MONTHS ENDED DECEMBER 31, 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION
These combined financial statements represent the combined operations of Cox
Communications, Inc.'s ("CCI") cable television systems serving 57 communities
in Ashland, Kentucky and Defiance, Ohio (collectively referred to as the
"Ashland and Defiance Clusters") whose assets and certain liabilities were
acquired by FrontierVision Operating Partners, L.P. on April 9, 1996. These
cable television systems were acquired by CCI, a majority owned subsidiary of
Cox Enterprises, Inc. ("CEI"), from The Times Mirror Company ("Times Mirror") in
connection with CCI's acquisition of Times Mirror Cable Television, Inc.
("TMCT") on February 1, 1995. The operations of the Ashland and Defiance
Clusters prior to February 1, 1995 are referred to as "Predecessor" and as
"Successor" after February 1, 1995.
All significant intercompany accounts and transactions have been eliminated in
combination. The acquisition of the Ashland and Defiance Clusters was accounted
for by the purchase method of accounting, whereby the allocable share of the
TMCT purchase price was pushed down to the assets acquired and liabilities
assumed based on their fair values at the date of acquisition as follows
(thousands of dollars):
Net working capital $ (2,836)
Plant and equipment 30,022
Deferred taxes related to plant and equipment write-up (4,709)
Intangible Assets 113,523
---------
$ 136,000
=========
The historical combined financial statements do not necessarily reflect the
results of operations or financial position that would have existed had the
Ashland and Defiance Clusters been an independent company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Ashland and Defiance Clusters bill their customers in advance; however,
revenue is recognized as cable television services are provided. Receivables are
generally collected within 30 days. Credit risk is managed by disconnecting
services to customers who are delinquent generally greater than 60 days. Other
revenues are recognized as services are provided. Revenues obtained from the
connection of customers to the cable television systems are less than related
direct selling costs; therefore, such revenues are recognized as received.
PLANT AND EQUIPMENT
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of 5 to 20 years for buildings and building
improvements, 5 to 12 years for cable television systems, and 3 to 10 years for
other plant and equipment.
The costs of initial cable television connections are capitalized as cable plant
at standard rates for the Ashland and Defiance Clusters' labor and at actual
costs for materials and outside labor. Expenditures for maintenance and repairs
are charged to operating expense as incurred. At the time of retirements, sales
or other dispositions of property, the original cost and related accumulated
depreciation are written off.
F-37
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and franchise costs recorded in
business combinations which is amortized on a straight-line basis over 40 years.
The Ashland and Defiance Clusters assess on an on-going basis the recoverability
of intangible assets based on estimates of future undiscounted cash flows for
the applicable business acquired compared to net book value.
INCOME TAXES
Through January 31, 1995, the accounts of the Ashland and Defiance Clusters were
included in the consolidated federal income tax returns and certain state income
tax returns of Times Mirror. Beginning on February 1, 1995, the accounts of the
Ashland and Defiance Clusters were included in the consolidated federal income
tax returns and certain state income tax returns of CEI. Current federal and
state income tax expenses and benefits are allocated on a separate return basis
to the Ashland and Defiance Clusters based on the current year tax effects of
the inclusion of their income, expenses, and credits in the consolidated income
tax returns of Times Mirror, CEI, or based on separate state income tax returns.
Deferred income taxes arise from temporary differences between income taxes and
financial reporting and principally relate to depreciation and amortization.
FEES AND TAXES
The Ashland and Defiance Clusters incur various fees and taxes in connection
with the operation of their cable television systems, including franchise fees
paid to various franchise authorities, copyright fees paid to the U.S. Copyright
Tribunal, and business and franchise taxes paid to the States of Ohio and
Kentucky. A portion of these fees and taxes are passed through to the Ashland
and Defiance Clusters' subscribers. Amounts collected from subscribers are
recorded as a reduction of operating expenses.
PENSION AND POSTRETIREMENT BENEFITS
CCI generally provides defined pension benefits to all employees based on years
of service and compensation during those years. CEI provides certain health care
and life insurance benefits to substantially all retirees and employees. For
employees and retirees of the Ashland and Defiance Clusters, these benefits are
provided through the CCI plans. Expense related to these plans is allocated to
the Ashland and Defiance Clusters through the intercompany account. The amount
of the allocations is generally based on actuarial determinations of the effects
of the Ashland and Defiance Clusters employees' participation in the plans.
Times Mirror Cable generally provides defined pension benefits to all employees
based on years of service and the employee's compensation during the last five
years of employment. Prior to December 31, 1992, these benefits were primarily
provided under the Times Mirror Cable Television, Inc. Pension Plan (the "Times
Mirror Cable Plan") in conjunction with the Times Mirror Employee Stock
Ownership Plan. On December 31, 1992, the Times Mirror Cable Plan was merged
with the Times Mirror Pension Plan.
Net periodic pension expense for 1993 and 1994 was estimated by an actuary under
the assumption that the Times Mirror Cable Plan continued to be a stand-alone
plan. This expense was allocated to the Ashland and Defiance Clusters based on
its salary expense as a percentage of total TMCT salary expense.
F-38
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed of," was issued. This Statement requires
that long-lived assets and certain intangibles be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, with any impairment losses being reported in the period
in which the recognition criteria are first applied based on the fair value of
the asset. Long-lived assets and certain intangibles to be disposed of are
required to be reported at the lower of carrying amount or fair value less cost
to sell. CCI, including the Ashland and Defiance Clusters, adopted SFAS No. 121
in the first quarter of 1996. The effect on the combined financial statements
upon adoption of SFAS No. 121 was not significant.
(3) CASH MANAGEMENT SYSTEM
The Ashland and Defiance Clusters participate in CEI's cash management system,
whereby the bank sends daily notification of checks presented for payment. CEI
transfers funds from other sources to cover the checks presented for payment.
Prior to February 1, 1995, the Ashland and Defiance Clusters participated in a
similar cash management system with Times Mirror.
(4) PLANT AND EQUIPMENT
Plant and equipment is summarized as follows (Thousands of Dollars):
-----------------------
Successor Predecessor
December 31, December 31,
1995 1994
-----------------------
Land $ 5 $ 10
Buildings and building improvements 207 646
Transmission and distribution plant 30,235 34,543
Miscellaneous equipment 343 472
Construction in progress 3 59
-------- --------
Plant and equipment, at cost 30,793 35,730
Less accumulated depreciation (5,172) (17,634)
-------- --------
Net plant and equipment $ 25,621 $ 18,096
======== ========
F-39
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(5) INTANGIBLE ASSETS
Intangible assets are summarized as follows (Thousands of Dollars):
----------------------------
Successor Predecessor
December 31, December 31,
1995 1994
--------- ---------
Goodwill $ 113,523 $ 60,907
Other 134
--------- ---------
Total 113,523 61,041
Less accumulated amortization (2,727) (9,831)
--------- ---------
Net intangible assets $ 110,796 $ 51,210
========= =========
(6) INCOME TAXES
Income tax expense (benefit) is summarized as follows (Thousands of Dollars):
------------------------------------------
Successor Predecessor
------- ------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, ------------------
1995 1995 1994 1993
------- ------- ------- -------
Current:
Federal $ 3,054 $ 248 $ 2,866 $ 2,614
State 837 70 818 652
------- ------- ------- -------
Total current 3,891 318 3,684 3,266
------- ------- ------- -------
Deferred:
Federal (113) (68) 183 250
State) (29 (2) 115 43
------- ------- ------- -------
Total deferred (142) (70) 298 293
------- ------- ------- -------
Total income taxes $ 3,749 $ 248 $ 3,982 $ 3,559
======= ======= ======= =======
The tax effects of significant temporary differences which comprise the net
deferred tax liabilities are as follows (Thousands of Dollars):
-----------------------
December 31,
-----------------------
1995 1994
------- -------
Plant and equipment $ 7,942 $ 3,408
Other (298) (261)
------- -------
Net deferred tax liability $ 7,644 $ 3,147
======= =======
F-40
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(6) INCOME TAXES (continued)
Income tax expense computed using the United States federal statutory rates is
reconciled to the reported income tax provisions as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Successor Predecessor
------- ---------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, -------------------
1995 1995 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal statutory income tax rate 35% 35% 35% 35%
Computed tax expense at federal statutory rates on
income before income taxes $ 1,203 $ 224 $ 2,747 $ 2,483
State income taxes (net of federal tax benefit) 534 33 560 424
Acquisition adjustments 2,033 44 543 541
1% increase in enacted tax rate 76
Other, net (21) (53) 132 35
------- ------- ------- -------
Income tax provision $ 3,749 $ 248 $ 3,982 $ 3,559
======= ======= ======= =======
</TABLE>
(7) RETIREMENT PLANS
As a result of the acquisition of TMCT by CCI, effective January 1, 1996, CEI
established the Cox Communications, Inc. Pension Plan (the "CCI Plan"), a
noncontributory defined benefit plan for substantially all of CCI's employees
including Ashland and Defiance Clusters' employees. The Ashland and Defiance
Clusters employees will become participants in the CCI Plan retroactive to the
Merger date of February 1, 1995. The CCI Plan will be established with a
transfer of plan assets from CEI and Times Mirror. The CCI Plan assets are
expected to have an estimated fair value equal to or greater than the projected
benefit obligation attributable to substantially all of the Ashland and Defiance
Clusters employees. Prior to February 1, 1995, substantially all of the Ashland
and Defiance Clusters' employees participated in a similar defined benefit plan
provided by TMCT. Several of the Ashland and Defiance Clusters' employees were
covered under a separate defined benefit plan funded by the Communication
Workers of America.
Assumptions used in the actuarial computations were:
---------------------
December 31,
---------------------
1995 1994 1993
---- ---- ----
Discount rate 7.25% 8.25% 7.50%
Rate of increase in compensation levels 5.00 6.00 6.25
Expected long-term rate of return on assets 9.00 9.50 9.75
---- ---- ----
Total pension expense allocated to the Ashland and Defiance Clusters was
$53,000, $44,000, $0, and $64,000 for the years ended December 31, 1993 and
1994, for the one-month period ended January 31, 1995, and the eleven-month
period ended December 31, 1995, respectively.
Beginning February 1, 1995, CEI provides certain health care and life insurance
benefits to substantially all retirees of CEI and its subsidiaries,
Postretirement expense allocated to the Ashland and Defiance Clusters by CEI was
$14,000 for the eleven months ended December 31, 1995.
F-41
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(7) RETIREMENT PLANS (continued)
The funded status of the portion of the postretirement plan covering the
employees of the Ashland and Defiance Clusters is not determinable. The
accumulated postretirement benefit obligation for the postretirement plan of CEI
substantially exceeded the fair value of assets held in the plan at December 31,
1995.
Beginning February 1, 1995, substantially all of the Ashland and Defiance
Clusters employees were eligible to participate in the savings and investment
plan of CEI. Under the terms of the plan, the Ashland and Defiance Clusters
match 50% of employee contributions up to a maximum of 6% of the employee's base
salary. Prior to February 1, 1995, the Ashland and Defiance Clusters employees
were eligible to participate in a similar savings and investment plan with Times
Mirror. The Ashland and Defiance Clusters' expense under the plan was $39,000,
$43,000, $3,000, and $44,000 for the years ended December 31, 1993 and 1994, for
the one-month period ended January 31, 1995, and the eleven-month period ended
December 31, 1996, respectively.
(8) TRANSACTIONS WITH AFFILIATED COMPANIES
The Ashland and Defiance Clusters borrow funds for working capital and other
needs from CEI. Certain management services are provided to the Ashland and
Defiance Clusters by CCI and CEI. Such services include legal, corporate
secretarial, tax, treasury, internal audit, risk management, benefits
administration, and other support services. Prior to February 1, 1995, the
Ashland and Defiance Clusters had similar arrangements with Times Mirror. The
Ashland and Defiance Clusters were allocated expenses for the years ended
December 31, 1993 and 1994, for the one-month period ended January 31, 1995, and
the eleven-month period ended December 31, 1995 of approximately $1,040,000,
$1,298,000, $117,000, and $1,513,000, respectively, related to these services.
Such expenses are estimated by management and are generally allocated based on
the number of customers served. Management believes that these allocations were
made, on a reasonable basis. However, the allocations are not necessarily
indicative of the level of expenses that might have been incurred had the
Ashland and Defiance Clusters contracted directly with third parties. Management
has not made a study or any attempt to obtain quotes from third-parties to
determine what the cost of obtaining such services from third parties would have
been. The fees and expenses to be paid by the Ashland and Defiance Clusters are
subject to change.
The amounts due from affiliate represent the net of various transactions,
including those described above. Prior to February 1, 1995, amounts due from/to
Times Mirror bore interest at Times Mirror's estimated ten-year financing rate
and ranged between 6% and 8% between 1993 and 1994. Interest income for 1993 and
1994 was $133,000 and $434,000, respectively. Effective February 1, 1995,
advances to affiliate are noninterest-bearing.
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Ashland and Defiance Clusters have
estimated the fair value of its intercompany advances. Given the short-term
nature of these advances, the carrying amounts reported in the balance sheets
approximate fair value.
(9) COMMITMENTS AND CONTINGENCIES
The Ashland and Defiance Clusters lease office facilities and various items of
equipment under noncancelable operating leases. Rental expense under operating
leases amounted to $119,000 and $122,000 for the years ended December 31, 1993
and 1994 and $163,000 for the eleven-month period ended December 31, 1995.
Future minimum lease payments as of December 31, 1995 for all noncancelable
operating leases are as follows (Thousands of Dollars),
F-42
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(9) COMMITMENTS AND CONTINGENCIES (continued)
1996 $126
1997 103
1998 59
1999 50
2000 42
Thereafter 4
----
Total $383
====
At December 31, 1995, the Ashland and Defiance Clusters had outstanding purchase
commitments totaling approximately $2,000.
The Ashland and Defiance Clusters are a party to various legal proceedings that
are ordinary and incidental to its business. Management does not expect that any
legal proceedings currently pending will have a material adverse impact on the
Ashland and Defiance Clusters' combined financial position or combined results
of operations.
(10) RATE REGULATION AND OTHER DEVELOPMENTS
In 1993 and 1994, the FCC adopted rate regulations required by the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), which utilized a benchmark price cap system, or alternatively a
cost-of-service regime, for establishing the reasonableness of existing basic
and cable programming service rates. The regulations resulted in, among other
things, an overall reduction of up to 17% in basic rates and other charges in
effect on September 30, 1992, before inflationary and other allowable
adjustments, if those rates exceeded the revised per-channel benchmarks
established by the FCC and could not otherwise be justified under a
cost-of-service showing.
In September 1995, the FCC authorized a new, alternative method of implementing
rate adjustments which will allow cable operators to increase rates for
programming annually on the basis of projected increases in external costs
rather than on the basis of cost increases incurred in the preceding quarter.
Many franchising authorities have become certified by the FCC to regulate rates
charged by the Ashland and Defiance Clusters for basic cable service and
associated basic cable service equipment. Some local franchising authority
decisions have been rendered that were adverse to the Ashland and Defiance
Clusters. In addition, a number of such franchising authorities and customers of
the Ashland and Defiance Clusters filed complaints with the FCC regarding the
rates charged for cable programming services.
In September 1995, CCI and the Cable Services Bureau of the FCC reached a
settlement in the form of a resolution of all outstanding rate complaints
covering the CCI, the Ashland and Defiance Clusters, and the former Times Mirror
cable television systems. In December 1995, the FCC approved the Resolution
which, among other things, provided for refunds ($115,000 to the Ashland and
Defiance Clusters' customers) in January 1996, and the removal of additional
outlet charges for regulated services from all of the Times Mirror cable
television systems, which accounts for a majority of the refund amounts. The
resolution also finds that the Ashland and Defiance Clusters' cable programming
services tier rates as of June 30, 1995 are not unreasonable. At December 31,
1995, refunds under the resolution were fully provided for in the Ashland and
Defiance Clusters' financial statements.
F-43
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(10) RATE REGULATION AND OTHER DEVELOPMENTS (continued)
On February 1, 1996, Congress passed the Telecommunications Competition and
Deregulation Act of 1996 ("the 1996 Act") which was signed into law by the
President on February 8, 1996, The 1996 Act is intended to promote substantial
competition in the delivery of video and other services by local telephone
companies (also known as local exchange carriers or "LECs") and other service
providers, and permits cable television operators to provide telephone services.
Among other provisions, the 1996 Act deregulates the Cable Programming Services
("CPS") tier of large cable television operators on March 31, 1999 and upon
enactment, the CPS rates of small cable television operators where a small cable
operator serves 50,000 or fewer subscribers, revises the procedures for filing a
CPS complaint, and adds a new effective competition test.
The 1996 Act establishes local exchange competition as a national policy by
preempting laws that prohibit competition in the telephone local exchange and by
establishing uniform requirements and standards for entry, competitive carrier
interconnection, and unbundling of LEC monopoly services. Both the FCC and state
commissions have substantial new responsibilities to promote the 1996 Act's
competition policy. Depending on the degree and form of regulatory flexibility
afforded the LECs as part of the 1996 Act's implementation, the Ashland and
Defiance Clusters' ability to offer competitive telephony services may be
adversely affected.
The 1996 Act repeals the cable television/telephone cross-ownership ban and
allows LECs and other common carriers, as well as cable systems providing local
exchange service, to provide video programming services as either cable
operators or as open video system ("OVS") operators within their service areas
upon certification from the FCC and pursuant to regulations which the FCC is
required to adopt. The 1996 Act exempts OVS operators from many of the
regulatory obligations that currently apply to cable operators such as rate
regulation and franchise fees, although other requirements are still applicable.
OVS operators, although not subject to franchise fees as defined by the 1992
Cable Act may be subject to fees charged by local franchising authorities or
other governmental entities in lieu of franchise fees.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
C4 Media Cable Southeast, Limited Partnership
Lockney, Texas 79241
We have audited the consolidated balance sheets of C4 Media Cable Southeast,
Limited Partnership and its subsidiary (the Partnership) as of December 31,
1995, and 1994, and the related consolidated statements of loss, partners'
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of C4 Media Cable
Southeast Limited Partnership and its subsidiary as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Partnership will continue as a going concern. As discussed in Note 7 to
the consolidated financial statements, the Partnership sold substantially all
assets on February 1, 1996. The sales price was not sufficient to satisfy the
liabilities of the Partnership. The remaining unpaid principal and interest on
Senior and Junior loans have been due and payable since September 30, 1990.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 7. The historical consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Williams, Rogers, Lewis & Co., P.C.
Plainview, Texas
March 11, 1996
F-45
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
---------------------------
1995 1994
---------------------------
ASSETS
CURRENT ASSETS
Cash $ 203,955 $ 204,255
Accounts Receivable, Net 168,823 141,025
Prepaid Expense and Other 211,289 201,952
------------ ------------
Total Current Assets 584,067 547,232
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Plant and Equipment 41,057,969 39,251,506
Less: Accumulated Depreciation (20,386,652) (16,172,050)
------------ ------------
Net Property, Plant and Equipment 20,671,317 23,079,456
------------ ------------
OTHER ASSETS
Deposits and Other 17,314 17,899
Franchises, Net 2,967,669 4,031,170
Acquisition Costs, Net 874,863 1,148,913
Covenant Not to Compete -0- -0-
------------ ------------
Total Other Assets 3,859,846 5,197,982
------------ ------------
Total Assets $ 25,115,230 $ 28,824,670
============ ============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 735,138 $ 691,305
Other Current Liabilities 393,423 568,455
Accrued Interest Payable 30,022,386 24,315,384
Notes Payable 60,165,844 60,165,844
------------ ------------
Total Current Liabilities 91,316,791 85,740,988
------------ ------------
MINORITY INTEREST (371,926) (268,729)
------------ ------------
PARTNERS' DEFICIT
General Partners (65,829,635) (56,647,589)
------------ ------------
Total Liabilities and Partners' Deficit $ 25,115,230 $ 28,824,670
============ ============
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF LOSS
December 31, 1995 AND 1994
-----------------------------
1995 1994
------------ ------------
REVENUE
Cable Service $ 11,755,860 11,231,123
------------ ------------
EXPENSE
Programming Costs 3,003,682 2,602,692
Salaries 1,124,203 1,046,895
Other Operating Expenses 2,607,023 2,642,777
Management Fees 545,641 561,114
Depreciation 4,214,602 4,113,809
Amortization 1,337,551 1,575,551
Interest 8,208,401 7,447,251
------------ ------------
21,041,103 19,990,089
------------ ------------
Loss Before Minority Interest (9,285,243) (8,758,966)
Minority Interest in Loss of Subsidiary 103,197 116,472
------------ ------------
NET LOSS $ (9,182,046) (8,642,494)
============ ============
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNER'S DEFICIT
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
--------------------------------------------------------
Class A
General General Limited
Partners Partners Partners Total
----------- ----------- --- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 (539,910) (47,465,185) -0- (48,005,095)
Loss, 1994 (86,425) (8,556,069) -0- (8,642,494)
----------- ----------- --- -----------
Balance, December 31, 1994 (626,335) (56,021,254) -0- (56,647,589)
Loss, 1995 (91,820) (9,090,226) -0- (9,182,046)
----------- ----------- --- -----------
BALANCE, DECEMBER 31, 1995 $ (718,155) (65,111,480) -0- (65,829,635)
=========== =========== === ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $(9,182,046) $(8,642,494)
Adjustments to reconcile net loss to net cash:
Minority interest in loss of subsidiary (103,197) (116,472)
Depreciation 4,214,602 4,113,809
Amortization 1,337,551 1,575,551
Changes in Assets and Liabilities:
Accounts receivable (27,798) 2,330
Prepaid expenses and other (8,752) (7,701)
Accounts payable 43,833 20,388
Other liabilities (175,032) 51,392
Accrued interest 5,707,002 3,928,106
----------- -----------
Net cash provided by operating activities 1,806,163 924,909
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of plant, equipment and other assets (1,806,463) (854,999)
----------- -----------
Net cash used in investing activities (1,806,463) (854,999)
----------- -----------
Net Increase (Decrease) in Cash (300) 69,910
Cash, Beginning of Year 204,255 134,345
----------- -----------
Cash, End of Year $ 203,955 $ 204,255
=========== ===========
Supplemental Disclosure for Statements of Cash Flows:
Cash Paid for Interest 2,470,936 3,519,145
Non-Cash Investing Activities:
Deposit added to cost of plant and equipment -0- 39,622
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-49
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ENTITIES:
C4 Media Cable Southeast, Limited Partnership and its subsidiary (the
"Partnership") is a Delaware limited partnership organized to own and operate
cable television systems in various communities throughout Virginia, Tennessee,
and Georgia. The Partnership provides basic and pay cable television service to
approximately 40,500 subscribers in these states. General partners are C4 Media
Cable, Inc. and C4 Media Cable Employees Investment Corporation. C4 Media Cable,
Inc. also participates as a limited partner. Under a letter agreement dated May
9, 1992, Philips Credit Corporation ("Philips") has exercised its rights under
certain pledge agreements to exercise voting control over all partnership
interests. Accordingly, effective October 30, 1992, C4 Media Cable, Inc. was
replaced by Southeast Cable, Inc., a corporate affiliate of Philips, as the
managing general partner. The managing general partner utilized Doucette
Management Company ("DMC") as the business manager for the Partnership until
December 30, 1993 at which time the management agreement was assigned to
Cablevision of Texas III, LP ("CAB III"). See note 4.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of C4 Media Cable
Southeast, Limited Partnership and County Cable Company, Limited Partnership of
which the Partnership is an 80% owner and general partner. All significant
intercompany transactions have been eliminated.
REVENUE RECOGNITION:
The Partnership recognizes cable service revenue on the accrual basis in the
month the cable service is provided. Payments received in advance are included
in deferred revenue until the month the service is provided at which time they
are recognized as income.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:
Property, plant and equipment used in the business are stated at cost and
depreciated over estimated useful lives generally on the straight line method
for financial statement purposes. Expenditures which significantly increase
asset values or extend useful lives are capitalized, limited by projected
recoverability of such current year expenditures in the ordinary course of
business from expected future revenue.
The useful lives of property, plant and equipment for purposes of computing
depreciation range from 3 to 10 years.
FRANCHISES:
The company has been granted rights to operate within the locations wherein it
has cable television systems. Such franchises grant certain operating rights and
impose certain costs and restrictions. The Partnership pays its franchise fees
annually on most of its locations based upon either gross or basic service
revenues. Franchise fee expense for the years ended December 31, 1995 and 1994
was $327,088 and $303,375, respectively.
F-50
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Such franchises have varying lives and are renewable at the discretion of the
franchise's governing boards. For financial statement purposes, franchise costs
acquired in connection with the purchase of cable systems are being amortized
over the remaining average lives of the related cable television franchises at
the date of acquisition, which approximates 7 to 13 years. Franchise
amortization expense for the years ended December 31, 1995 and 1994 was
$1,063,501 in each year.
ACQUISITION COSTS:
Acquisition costs are those costs incurred related to the acquisition of new
systems. For financial statement purposes, such costs are amortized by using the
straight-line method over 10 years. Amortization expense for acquisition costs
for the years ended December 31, 1995 and 1994 was $274,050, and $274,050,
respectively.
COVENANTS NOT TO COMPETE:
The portion of the purchase price of systems allocated to non-competition
agreements with former owners is capitalized and amortized by using the
straight-line method over the life of the agreements. Amortization expense for
non-competition agreements for the year ended December 31, 1994 was $238,000.
INCOME TAXES:
The partnership does not pay federal income tax, but is a pass through entity so
that partners are taxed on their share of partnership earnings. Partnership net
income or loss is allocated to each partner under a formula established in the
partnership agreement.
CASH EQUIVALENTS:
For cash flow purposes, cash equivalents are cash and cash items with a maturity
of less than 90 days.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
(2) ACCOUNTS RECEIVABLE, NET
Following is a summary of accounts receivable at December 31, 1995 and 1994:
--------------------------
1995 1994
--------- ---------
Trade Accounts $ 175,671 $ 146,239
Other 281 642
Related Parties (4) -0- 194,873
Less: Allowance for Doubtful Accounts (4) (7,129) (200,729)
--------- ---------
$ 168,823 $ 141,025
========= =========
F-51
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) NOTES PAYABLE
Following is a summary of notes payable at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Senior loan payable to Philips, due September 30,
1990, interest due at prime + 2.25%, secured by
substantially all assets of the partnership and the
pledge of partnership interests. In addition, the loan
is collateralized by the pledge of all stock held in
C4 Media Cable, Inc. and C4 Media Cable,
Employees Investment Corporation by the President
and Chairman of C4 Media Cable, Inc. $44,185,831 $44,185,831
Junior Loan payable to Philips, due September 30,
1990 interest due at 20%, secured by substantially
all assets of the partnership and the pledge of
partnership interests. In addition, the loan is
collateralized by the pledge of all stock held in
C4 Media Cable, Inc. and C4 Media Cable Employees
Investment Corporation by the President and Chairman
of C4 Media Cable, Inc. 15,980,013 15,980,013
----------- -----------
Total $60,165,844 $60,165,844
=========== ===========
</TABLE>
The Philips notes contain performance covenants concerning homes passed,
subscriber levels, miles of plant, etc., some of which the Partnership had
violated as of December 31, 1995 and 1994. Philips has not waived compliance
with these provisions.
All notes payable and accrued interest to Philips were due September 30, 1990.
Philips has not extended the due date of the notes and has the right to demand
payment at any time. A significant amount of accrued interest and principle was
paid when substantially all operating assets of the Partnership were sold
February 1, 1996. See note 7.
(4) RELATED PARTY TRANSACTIONS
Effective October 30, 1992, C4 Media Cable, Inc. was replaced by Southeast
Cable, Inc., a corporate affiliate of Philips, as the managing general partner.
Effective May 10, 1992 under the provisions of an agreement with Philips, the
Partnership terminated its management agreement with C4 Media Cable, Inc. and
entered into a management agreement with DMC for a term extending to December
30, 1993. At December 30, 1993 the management agreement was assigned to CAB III.
The agreement provides for fixed fees and the reimbursement of direct expenses
incurred on behalf of the Partnership as defined in the agreement. Management
fees paid under these agreements for the years ended December 31, 1995 and 1994
were $545,641 and $550,214, respectively. Other fees and expense reimbursements
paid under the agreements for the years ended December 31, 1995 and 1994 were
$120,000 and are included in Other Operating Expenses.
Other related parties include Caribbean Cable TV ("CCTV") and MCT Cablevision
("MCT"). Related party lending was done without independent business judgment,
terms, collateral or a method of settlement. Due to the manner in which this
lending was done and questions surrounding the collectability of these accounts,
all the related party receivables were reserved in the allowance for doubtful
accounts prior to 1994 and were written off in 1995. See note 2. Related party
receivables at December 31, 1994 were as follows:
F-52
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) RELATED PARTY TRANSACTIONS (continued)
--------
1994
--------
CCTV $ 23,965
MCT 35,968
C4 Media Cable, Inc. 134,940
--------
$194,873
========
The Partnership purchased leasehold improvements from J-D Partnership, Ltd.
("J-D") for the Lockney, Texas office of $5,366 on April 24, 1995. J-D is a
limited partnership 99% owned by James and Denise Doucette (Doucette). Doucette
is also the managing general partner and owns 62% of CAB III, as well as being
the sole stockholder of DMC, an S-Corporation. The Partnership paid a management
fee to Doucette of $10,900 for the year ended December 31, 1994.
(5) COMMITMENTS
The Company has certain obligations under pole rental agreements, tower site
leases, etc. for assets utilized in the operation of the systems. These are
mostly short term agreements. Expenses charged to operations for the periods
ended December 31, 1995 and 1994 were $536,368 and $518,837, respectively, and
are included in Other Operating Expenses.
(6) CONTINGENCIES
The Company is to a significant degree self-insured for risks consisting
primarily of physical loss to property and plant. The headend equipment is
insured, but the plant itself is not and represents a potential exposure for the
Company. Management is of the opinion that the various systems' distance from
each other make the likelihood of a complete loss to the plant unlikely.
(7) SUBSEQUENT EVENT AND CONSIDERATION OF ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
On February 1, 1996 substantially all assets of the Partnership were sold to
FrontierVision Operating Partners, L.P. The agreement had a stated sales price
of $48,000,000 and a net payment amount of $46,237,708 after escrow holdback of
$1,375,200 and other adjustments. At the date of the auditors' report the
Partnership was still liable for the remaining balance of the note payable to
Philips with no significant assets to satisfy that liability, and the escrow
items remain open.
An unaudited pro forma consolidated balance sheet is presented below giving
effect to the sale as if it had occurred December 31, 1995 including escrowed
items. The pro forma information is presented for the purpose of additional
analysis and is not a required part of the basic consolidated financial
statements.
F-53
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SUBSEQUENT EVENT AND CONSIDERATION OF ABILITY TO CONTINUE AS A GOING CONCERN
(continued)
------------
Pro Forma
Unaudited
1995
------------
Current Assets $ 685,773
Other Assets 1,392,514
------------
Total Assets $ 2,078,287
============
Current Liabilities $ 45,303,939
Partners' Deficit (43,225,652)
------------
Total Liabilities and Partners' Deficit $ 2,078,287
============
The Partnership has been unable to pay all of its principle and interest as
required under its loan agreements since the loans matured September 30, 1990.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The historical consolidated financial statements do
not include any adjustments that might result from this sale of assets or this
uncertainty. Management has not fully evaluated the options for the Partnership
subsequent to the sale.
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
American Cable Entertainment of Kentucky-Indiana, Inc.
We have audited the accompanying balance sheets of American Cable Entertainment
of Kentucky-Indiana, Inc. (the "Company") as of December 31, 1995 and 1994 and
the related statements of operations, shareholders' deficiency and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of American Cable Entertainment of
Kentucky-Indiana, Inc. as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that American
Cable Entertainment of Kentucky-Indiana, Inc. will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company is unable to
meet its scheduled debt maturity repayments which raises substantial doubt about
the Company's ability to continue as a going concern. Consequently, the Company
has entered into an agreement to sell substantially all of its assets, has
entered into agreements with its creditors who have consented, under certain
circumstances, to forbear taking any action against the Company pending the sale
of the Company's assets and has filed a prepackaged bankruptcy under Chapter 11
of the Federal Bankruptcy Code. Management's plans in regard to these matters
are described further in Note 1. The accompanying financial statements do not
purport to reflect or provide for the consequences of the sale of the Company or
the filing of the prepackaged bankruptcy. In particular, such financial
statements do not purport to show the realizable value of assets or liabilities
on a liquidation basis nor do they include any adjustments that might result
from the outcome of these uncertainties.
The accompanying balance sheet as of September 30, 1996, and the statements of
operations, cash flows and shareholders' deficiency for the nine-month period
ended September 30, 1996 were not audited by us and, accordingly, we do not
express an opinion on them. As described in Note 10, these unaudited financial
statements have not been prepared in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
which is required under generally accepted accounting principles for entities
that have filed petitions with the Bankruptcy Court and expect to reorganize as
going concerns under Chapter 11. Pre-petition liabilities subject to compromise
by the Bankruptcy Court as of the bankruptcy filing date have not been
segregated on the September 30, 1996 balance sheet or reported based on the
expected amount of the allowed claims. Expenses directly related to the
reorganization of the Company since the filing of the prepackaged bankruptcy
have not been separately disclosed and interest on the Company's Step Coupon
Senior Subordinated Notes and Junior Subordinated Debentures continued to be
accrued during the bankruptcy period although such interest was not probable of
being paid in the future.
DELOITTE & TOUCHE LLP
Stamford, CT
March 15, 1996 (Except for Note 1, as to
which the date is August 1, 1996.)
F-55
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
------------- ------------- -------------
September 30, December 31, December 31,
1996 1995 1994
------------- ------------- -------------
Unaudited
ASSETS
<S> <C> <C> <C>
INVESTMENT IN CABLE TELEVISION SYSTEMS:
Land and land improvements $ 247,561 $ 247,561 $ 247,561
Vehicles 1,811,308 1,702,997 1,507,850
Buildings and improvements 1,007,624 998,414 967,794
Office furniture and equipment 812,985 802,377 733,465
CATV distribution systems and related
equipment 55,094,378 51,757,161 49,161,506
------------- ------------- -------------
Total Fixed Assets 58,973,856 55,508,510 52,618,176
Less accumulated depreciation 32,840,157 28,897,790 23,683,730
------------- ------------- -------------
Total Fixed Assets-- net 26,133,699 26,610,720 28,934,446
Franchise costs-- net 278,753 2,785,425 5,964,805
Subscriber lists-- net 154,331 1,543,307 3,531,021
Covenant not to compete-- net 8,068 80,682 242,045
------------- ------------- -------------
Investment in cable television systems-- net 26,574,851 31,020,134 38,672,317
GOODWILL-- net 3,499,898 3,579,784 3,686,299
DEFERRED CHARGES-- net 134,767 371,691 963,949
CASH AND CASH EQUIVALENTS 907,718 3,704,823 3,427,849
ACCOUNTS RECEIVABLE-- less allowance for
doubtful accounts of $313,661 in 1996, $240,212
in 1995 and $195,736 in 1994 859,836 304,734 276,709
PREPAID AND OTHER 387,763 197,802 194,514
------------- ------------- -------------
TOTAL ASSETS $ 32,364,833 $ 39,178,968 $ 47,221,637
============= ============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Notes and loans payable $ 187,404,112 $ 182,430,902 $ 167,707,411
Accrued interest-- Senior debt 0 1,314,032 329,004
Accrued interest -- Senior/Junior Subordinated
Debentures 10,537,714 3,068,862 4,345,047
Accounts payable and accrued expenses 5,019,665 4,244,348 3,973,224
Unearned income 146,702 124,109 124,344
Converter deposits 126,852 134,366 136,588
------------- ------------- -------------
Total Liabilities 203,235,045 191,316,619 176,615,618
------------- ------------- -------------
COMMITMENTS (See Note 7)
SHAREHOLDERS' DEFICIENCY:
Capital stock-- all series 10,000 10,000 26
Additional paid-in capital 1,490,000 1,490,000 1,499,974
Deficit (172,370,212) (153,637,651) (130,893,981)
------------- ------------- -------------
Total shareholders' deficiency (170,870,212) (152,137,651) (129,393,981)
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' $ 32,364,833 $ 39,178,968 $ 47,221,637
============= ============= =============
DEFICIENCY
</TABLE>
See notes to financial statements
F-56
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------ ------------ ------------ ------------
For the
Nine Months For the Year For the Year For the Year
Ended Ended Ended Ended
September 30, December 31, December 31, December 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
Revenue $ 22,911,386 $ 28,088,127 $ 25,879,525 $ 24,976,818
------------ ------------ ------------ ------------
Costs and expenses:
Operating expenses 8,681,583 10,880,854 9,388,813 8,699,878
Selling, general and administrative
expenses 3,884,865 4,948,493 4,912,150 4,743,783
Management fees 696,942 842,644 819,095 749,305
Depreciation and amortization 8,265,739 11,284,315 18,054,371 18,231,734
Expenses incurred in connection with
override and forbearance agreements 912,865 557,664 0 0
------------ ------------ ------------ ------------
Total costs and expenses 22,441,994 28,513,970 33,174,429 32,424,700
------------ ------------ ------------ ------------
Operating income (loss) 469,392 (425,843) (7,294,904) (7,447,882)
Interest expense-- net 19,201,953 22,366,189 20,241,202 18,410,503
Net gain on sale of cable television
system and marketable securities 0 48,362 1,266,020 0
------------ ------------ ------------ ------------
NET LOSS $(18,732,561) $(22,743,670) $(26,270,086) $(25,858,385)
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-57
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED September, 1996 Unaudited
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Common Stock
-------------------------------------------------
Number of
Shares Additional Total
Issued and Par Paid-in Shareholders'
Outstanding Value Capital Deficit Deficiency
---- ------- --- ------- ----------- ------------- -------------
Class Class
---- ------- --- -------
A D A D
---- ------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 255 $26 $ 1,499,974 $ (78,765,510) $ (77,265,510)
Net Loss (25,858,385) (25,858,385)
---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1993 255 26 1,499,974 (104,623,895) (103,123,895)
Net Loss (26,270,086) (26,270,086)
---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1994 255 26 1,499,974 (130,893,981) (129,393,981)
Net Loss (22,743,670) (22,743,670)
Recapitalization of Common (254) 99,999 (26) $10,000 (9,974)
Stock ---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1995 1 99,999 0 10,000 1,490,000 (153,637,651) (152,137,651)
Net Loss Unaudited (18,732,561) (18,732,561)
---- ------- --- ------- ----------- ------------- -------------
Balance at September 30, 1996
Unaudited 1 99,999 $ 0 $10,000 $ 1,490,000 $(172,370,212) $(170,870,212)
==== ======= === ======= =========== ============= =============
</TABLE>
See notes to financial statements
F-58
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------ ------------ ------------ ------------
For the
Nine Months For the Year For the Year For the Year
Ended Ended Ended Ended
September 30, December 31, December 31, December 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,732,561) $(22,743,670) $(26,270,086) $(25,858,385)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation 3,980,667 5,257,085 6,397,956 5,452,940
Amortization 4,285,072 6,027,230 11,656,415 12,778,794
Accretion of discount on step coupon
senior subordinated notes 8,583,143 10,171,124 9,519,095 8,189,478
Accretion of discount on junior
subordinated debentures 4,429,619 5,416,469 4,820,269 4,231,918
Net gain on sale of cable television
system, marketable securities, and other
assets 0 (48,362) (1,266,020)
Change in assets and liabilities:
Decrease (increase) in accounts
receivable (555,102) (28,025) (94,868) 23,917
Decrease (increase) in prepaid and other
assets (189,961) (3,288) 51,799 (59,414)
(Decrease) increase in accounts payable
and accrued expenses 775,317 271,124 (414,333) 169,808
(Decrease) increase in accrued
interest-senior debt (1,314,032) 985,028 129,505
Increase (decrease) in converter
deposits (7,514) (2,222) (237) (9,384)
Increase (decrease) in unearned income 22,593 (235) (91,827) 9,518
------------ ------------ ------------ ------------
Net cash provided by operating
activities 1,277,241 5,302,258 4,437,668 4,929,190
------------ ------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to reception and distribution
facilities and equipment (3,471,098) (2,933,359) (3,605,498) (5,083,401)
Net proceeds from sale of assets 0 48,362 1,523,137
------------ ------------ ------------ ------------
Net cash used in investing activities (3,471,098) (2,884,997) (2,082,361) (5,083,401)
------------ ------------ ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on senior bank loan (229,016) (1,262,542) (309,165)
Payments on senior revolving credit
facility (55,862) (131,616) (3,668)
Payments on senior secured notes (315,121) (742,447) (20,712)
Increase in deferred charges 0 (186,563) (598)
(Decrease) increase in obligations under
capital lease (3,249) (3,682) 7,281
------------ ------------ ------------ ------------
Net cash used in financing activities (603,248) (2,140,287) (512,827) (598)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (2,797,105) 276,974 1,842,480 (154,809)
Cash and cash equivalents at beginning of
period 3,704,823 3,427,849 1,585,369 1,740,178
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 907,718 $ 3,704,823 $ 3,427,849 $ 1,585,369
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,002,809 $ 6,900,613 $ 5,952,791 $ 6,038,557
============ ============ ============ ============
Cash paid for restructuring costs 912,865 0 0 0
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-59
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(1) DEBT MATURITIES AND THE SALE OF THE COMPANY
During the fourth quarter of 1995 the Company's senior debt obligations matured
without being paid. In addition, the Company failed to make the full payment of
interest on the Step Coupon Senior Subordinated Notes which became due in 1995.
Prompted by these payment defaults, effective December 31, 1995, the Company,
its shareholders, and Kentucky-Indiana Management Company, Inc. ("KYMC"), which
acts as manager for the Company, entered into two agreements: a "Forbearance
Agreement" with its senior lenders; and an "Override Agreement" with the holders
of its Senior Subordinated and Junior Subordinated Notes.
Under the terms of the Forbearance Agreement the senior lenders have agreed to
forebear in the exercise of their rights and remedies with respect to the
payment default described above as well as defaults with respect to certain
specified financial covenants, through September 30, 1996 which allows the
Company time to sell its assets in an orderly manner. It contains certain
financial covenants as well as procedures that the Company and KYMC have agreed
to follow during the sales process. Subsequent to September 30, 1996, certain
financial covenants, which the Company is currently in default upon, revert back
to the terms in the original agreements.
The Override Agreement requires that the Company undertake to sell substantially
all of its assets, and to enter into a contract for sale and to consummate that
sale in accordance with an agreed upon time schedule. It also contains certain
financial covenants and procedures to be followed.
Effective July 15, 1996, the Company entered into an asset purchase agreement
with FrontierVision Operating Partners, L.P. ("FrontierVision") for the sale of
substantially all of the assets of the Company for $146 million, subject to
certain purchase price adjustments. Due to the expected shortfall of payments to
existing creditors from the sale proceeds, the Company filed a prepackaged
bankruptcy under Chapter 11 of the Federal Bankruptcy code with the Federal
Bankruptcy court on August 1, 1996. Management anticipates the sale to
FrontierVision to be consummated in the fourth quarter of 1996, subject to the
required regulatory approvals and the approval of the bankruptcy court.
As a result of the matters discussed above, Management does not believe that it
is practical to estimate the fair value of the Company's debt facilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
reflect adjustments or provide for the potential consequences of the sale of the
Company's assets. In particular, the financial statements do not purport to show
the realizable value of assets on a liquidation basis or their availability to
satisfy liabilities.
The accompanying balance sheet as of September 30, 1996, the statements of
operations, and cash flows for the nine months ended September 30, 1996 and the
statement of shareholders' deficiency for the nine months ended September 30,
1996 are unaudited but, in the opinion of management, include all
F-60
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for these interim periods in accordance
with Generally Accepted Accounting Principles, except as disclosed in Note 10.
The interim financial information as of and for the years ended September 30,
1996 included within the notes to the financial statements is also unaudited.
FORMATION OF COMPANY
On November 7, 1989 cable systems were purchased from Centel Cable Television
Company to form Simmons Cable TV of Kentucky-Indiana, Inc. (the "Company"). The
Company owns and operates cable systems in Kentucky and Indiana. On April 12,
1994 the Company changed its name to American Cable Entertainment of
Kentucky-Indiana, Inc.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
INVESTMENT IN CABLE TELEVISION SYSTEMS
Reception and distribution facilities and equipment additions are stated at
cost. Depreciation is provided using the straight-line method over the useful
lives of the assets (four to ten years for CATV distribution facilities and
related equipment, vehicles, building improvements and office furniture and
equipment; forty years for buildings). Included in depreciation expense for the
year ended December 31, 1994 were write-offs related to a rebuilt cable system
of $942,850.
Franchise acquisition costs are amortized over the average remaining term of the
franchises as of November 7, 1989 of seven years using the straight-line method,
Accumulated amortization of franchise costs at September 30, 1996, December 31,
1995 and 1994 aggregated $21,976,905, $19,470,233 and $16,290,853, respectively.
Covenants not to compete are amortized over the life of the agreements (five
years). Accumulated amortization of such covenants at September 30, 1996
December 31, 1995, and 1994 aggregated $798,749, $726,315 and $564,772,
respectively.
Subscriber lists are amortized over seven years. Accumulated amortization of
subscriber lists at September 30, 1996, December 31, 1995 and 1994 aggregated
$13,759,669, $12,370,693 and $10,382,979, respectively.
Deferred charges consist of $882,408 of organizational costs and $3,616,230 of
loan acquisition costs at September 30, 1996. The loan acquisition costs are
amortized over the average life of the related debt, and organizational costs
are amortized over five years. Accumulated amortization at September 30, 1996,
December 31, 1995 and 1994 was $4,363,871, $4,126,947 and $3,534,689,
respectively.
F-61
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill is amortized over forty years. Accumulated amortization of
goodwill at September 30, 1996, December 31, 1995 and 1994 aggregated $760,711,
$680,825 and $574,310, respectively.
VALUATION OF INTANGIBLE ASSETS
The Company, on an annual basis, undertakes a review and valuation of the net
carrying value, recoverability and write-off of all categories of its intangible
assets. The Company in its valuation considers current market values of its
properties, competition, prevailing economic conditions, government policy
including taxation, and the Company's and the industry's historical and current
growth patterns, as well as the recoverability of the cost of its intangible
assets based on a comparison of estimated undiscounted operating cash flows.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and liquid investments with a maturity
of three months or less from the date of purchase.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the Internal
Revenue Code and, accordingly, pays no federal income taxes. The income or loss
of the Company for its tax year is passed through to its shareholder(s) and
reported in the income tax returns of the shareholder(s).
SUBSCRIPTION REVENUES
Subscription revenues received in advance of services rendered are deferred and
recorded in income in the period in which the related services are provided.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations or
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate or short-term maturity of these
financial instruments. Management does not believe it is practicable to estimate
the fair value of the Company's debt facilities. (See Note 4).
(3) DISPOSITIONS
On June 30, 1994 the Company sold its cable television system serving Jackson
County, Kentucky. The carrying value of the assets sold at the date of sale, net
of accumulated depreciation and amortization was as follows:
F-62
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(3) DISPOSITIONS (continued)
Reception and distribution facilities and equipment $69,527
Franchise cost 55,714
Goodwill and other intangible assets 50,300
The net loss on this transaction was $157,630, recognized in 1994. Additional
proceeds of $48,362 were received in 1995 and recorded as a gain.
On October 17, 1994 the Company tendered all of its holding in QVC, Inc., which
resulted in a gain of $1,423,650.
These transactions are reflected in the statements of operations for the years
ended December 31, 1995 and 1994.
(4) NOTES AND LOANS PAYABLE
Notes and loans payable at September 30, 1996 and December 31, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
------------ ------------ ------------
September 30, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Senior Debt
Bank Credit Agreement (a) $ 23,199,277 $ 23,428,293 $ 24,690,835
Revolving Credit Facility (b) 5,658,854 5,714,716 5,846,332
Senior Secured Notes (c) 31,921,720 32,236,841 32,979,288
Step Coupon Senior Subordinated Notes (d) 83,593,122 78,016,664 66,137,000
Junior Subordinated Debentures (e) 43,030,789 43,030,789 38,046,675
Capitalized lease obligation 350 3,599 7,281
------------ ------------ ------------
$187,404,112 $182,430,902 $167,707,411
============ ============ ============
</TABLE>
(a) The Company has a credit agreement with Crestar Bank providing for total
borrowings of $25,000,000. This agreement provided for interest up to 1.5
percentage points over the bank's prime rate (or from 1.0 to 2.5 percentage
points over LIBOR). Interest only was payable quarterly in arrears on the
last day of March, June, September and December, and at the end of any LIBOR
borrowing period. The total commitment terminated at its maturity date of
October 31, 1995. Upon the payment default at maturity, the default rate of
prime plus 4% was charged. Upon the effective date of the Override
Agreement, interest is payable monthly at the rate of 11.75% per annum.
(b) The Company has a revolving credit facility with Sanwa Business Credit
Corporation which originally provided for borrowings of up to $15,000,000.
The total commitment was reduced to $7,000,000 in early 1994, and in
December 1994, the balance of the unused commitment was terminated. The
agreement provided for interest of up to 1.5 points over the Sanwa's prime
rate (or from 1.0 to 2.5 percentage points over LIBOR). Interest was payable
quarterly in arrears on the last day of March, June, September and December,
and at the end of any LIBOR borrowing period. The total commitment
terminated at its maturity date of October 31, 1995. Upon the payment
default at maturity, the default rate of prime plus 4% was charged. Upon the
effective date of the Override Agreement, interest is payable monthly at the
rate of 11.75% per annum.
F-63
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(4) NOTES AND LOANS PAYABLE (continued)
(c) Senior Secured Notes were issued on November 7, 1989 bearing interest at
10.125% and matured November 7, 1995. The interest rate increased to 10.225%
effective January 1, 1991. Interest only was payable quarterly in arrears on
the last day of March, June, September and December. Upon the payment
default at maturity, interest was charged at 12.25%. Upon the effective date
of the Override Agreement, interest is payable monthly at the rate of 11.75%
per annum.
(d) Step Coupon Senior Subordinated Notes due April 30, 1996 were issued on
November 7, 1989 in the principal amount of $66,137,000 with a stated
interest rate of 15.7472%. Interest accreted and compounded semi- annually
through October 31, 1994. Although interest payments of $5,125,618 were
payable semi-annually beginning April 30, 1995 until maturity, only
$1,300,000 of interest has been paid. These notes were issued with warrants
to purchase up to 150 shares of Class C Non-voting Common Stock for an
aggregate exercise price of $330,000. As a result of the recapitalization
(See Note 5), the number of shares the warrant holders were entitled to
purchase was increased to 58,531 shares of the Class C stock. There are
certain restrictions as to when the warrants may be exercised, and they
expire on November 7, 2001. Total proceeds from the issuance of these
warrants amounted to $200,000. Accreted interest was $17,456,122,
$11,879,664 and $1,708,540 at September 30, 1996, December 31, 1995 and
December 31, 1994, respectively.
(e) Junior Subordinated Debentures due October 31, 1997, were issued on November
7, 1989 for $20,800,000, bearing interest at 13.1%. Interest is deferred and
compounds annually on September 30 of each year and is payable on the
maturity date. On the maturity date, the Company shall pay as additional
interest on the Notes, an amount equal to the greater of 4% of net operating
income of the Company from November 7, 1989 through and including the
maturity date, or 15% of the fair market value of the Company, but in no
event shall the amount exceed $2,153,000. Accreted and accrued interest was
$29,729,270, $25,299,651 and $19,883,183 at September 30, 1996, December 31,
1995 and December 31, 1994, respectively. These notes were issued with
warrants to purchase up to 595 shares of common stock and up to 1,000 shares
of 6% non-cumulative preferred stock. These warrants are exercisable in
whole or in part through November 7, 1999 for an aggregate exercise price of
$2,000,000. Upon exercise, the warrants can be converted into either Class A
Voting Stock or Class B Non-Voting Stock at the option of the warrant
holder. Shares will be issued in the ratio of .595 shares of common stock to
each share of preferred stock. As a result of the recapitalization (See Note
5), the number of shares the warrant holders were entitled to purchase was
increased to 233,359 shares of common stock, in the ratio of 233.359 shares
of common stock to each share of preferred stock. Total proceeds from the
issuance of these warrants amounted to $1,200,000.
The Senior Subordinated and Junior Subordinated Notes will continue to earn
interest at the rate of 15.5% and 13.1%, respectively, although, unless any of
certain specified defaults occur, net proceeds of a sale will be distributed as
provided for in the Override Agreement. The Company leased equipment under a
lease agreement which is classified as a capital lease. The lease term is 3
years and expires in December, 1996.
In 1989 the Company entered into an interest cap agreement and an interest floor
agreement covering $25,000,000 of borrowings which expired November 1, 1994.
Under the cap agreement, Fleet Bank, (as successor to Bank of New England), made
payments to the Company on a quarterly basis in an amount equal to $25,000,000
multiplied by the excess of the then current three month LIBOR rate over 9%.
Under the floor agreement, the Company made payments to Crestar Bank on a
quarterly basis in an amount equal to $25,000,000 multiplied by the difference
between the then current three month LIBOR rate and 8%, to the extent that the
three month LIBOR rate is less than 8%. Approximately $793,000 was charged to
interest expense and paid in 1994 relating to the floor agreement.
F-64
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(4) NOTES AND LOANS PAYABLE (continued)
The Senior Debt and Senior Subordinated Notes are secured by substantially all
the assets of the Company. The Company's debt agreements contain certain
restrictive covenants requiring the maintenance of minimum subscriber levels and
certain financial ratios. The Company has not been in compliance with certain
covenants in its debt agreements, including the timely payment of principal and
interest. (See Note 1).
DEBT MATURITIES
All of the Company's debt is due upon the consummation of the sale of the
Company in accordance with the Forbearance and Override Agreements. (see Note
1).
(5) CAPITAL STOCK
The Company's Board of Directors adopted a resolution on December 31, 1995
which, among other things, established a new class of common stock (Class D),
and authorized the exchange of the outstanding Class A shares for one share of
Class A and 99,999 shares of Class D. Additional shares of Class B and Class C
stock were authorized as well. The Company's Certificate of Incorporation was
amended on February 29, 1996 to reflect these changes.
Capital stock of the Company at December 31, 1994 and prior to the December 31,
1995 resolution noted above, consisted of the following:
Number of Shares
-------------------------
Issued and
Authorized Outstanding
---------- -----------
Common Stock
Class A-- $.10 par value 850 255
Class B-- $.10 par value 595
Class C-- $.10 par value 150
6% Non-cumulative Preferred
Stock $1,000 par value 1,000
Capital stock of the Company after the recapitalization consists of the
following at September 30, 1996 and December 31, 1995:
Number of Shares
-------------------------
Issued and
Authorized Outstanding
---------- -----------
Common Stock
Class A-- $.10 par value 233,360 1
Class B-- $.10 par value 231,940
Class C-- $.10 par value 58,531
Class D-- $.10 par value 99,999 99,999
6% Non-cumulative Preferred
Stock $1,000 par value 1,000
The Class A common stock is voting. The Class B, Class C and Class D shares are
non-voting. Class B shares are convertible into Class A shares at a rate of one
for one. See Note 4 for disclosure of warrants for unissued capital stock at
September 30, 1996, December 31, 1995 and 1994.
F-65
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(6) TRANSACTIONS WITH RELATED PARTIES
KYMC acts as manager for the Company. In accordance with the management
agreement, KYMC is paid a management fee equal to 3% of total revenue (as
defined in the management agreement) plus out-of-pocket expenses not to exceed
1% of total revenue. The management fee for the nine months ended September 30,
1996 and the years ended December 31, 1995, 1994 and 1993 was $696,942,
$842,644, $819,095 and $749,305 respectively.
Included in accounts payable and accrued expenses at December 31, 1994 is a
payable in the amount of $151,190 to Scott Cable Communications, Inc. ("Scott"),
an affiliated Company, for certain administrative costs paid by Scott on behalf
of the Company.
(7) COMMITMENTS
The Company rents pole space, office space and equipment under operating leases.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more are as follows:
1996 $132,081
1997 104,417
1998 59,412
1999 56,006
2000 45,182
Thereafter 53,675
--------
Total $450,773
========
Rent expense for the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was $165,497, $202,652, $204,164 and $207,901
respectively.
(8) 401K RETIREMENT/SAVINGS PLAN
The Company's employees are covered by a 401(k) retirement/savings plan covering
all employees who meet service requirements. Total plan expenses for the nine
months ended September 30, 1996 and the years ended December 31, 1995, 1994 and
1993 was $5,049, $7,660, $5,769 and $7,099, respectively.
(9) REGULATORY MATTERS
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act") which regulates the cable
television industry. Pursuant to the 1992 Cable Act, the Federal Communications
Commission (the "FCC") has issued numerous regulations which include provisions
regarding rates and other matters. As a result of these rules, the Company was
required to reduce many of its basic service rates effective September 1, 1993,
and again on August 1, 1994.
On June 5, 1995, the FCC extended regulatory relief to small cable operators.
All of the Company's cable systems qualified for this regulatory relief, which
allows for greater flexibility in establishing rates (including increases). On
February 8, 1996, Congress enacted the 1996 Telecommunications Act which, among
other things, immediately deregulated all levels of service except broadcast
basic service for small cable operators for which all of the Company's cable
systems qualified.
F-66
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(10) Sale of the Company's Cable Television Systems and Emergence from
Bankruptcy (Unaudited)
As described in Note 1, the Company filed a prepackaged bankruptcy under Chapter
11 of the Federal Bankruptcy Code on August 1, 1996. The prepackaged bankruptcy,
which was agreed to by the Company, the Company's Step Coupon Senior
Subordinated Noteholders and the Company's Junior Subordinated Noteholders,
called for, among other things: the sale of the Company's cable television
systems to FrontierVision; the payment in full of the Senior Debtholders from
the proceeds of the sale; the payment in full of trade creditors in the ordinary
course of business; and the allocation of the remaining sale proceeds among the
Step Coupon Senior Subordinated Noteholders, the Junior Subordinated Noteholders
and KYMC.
On October 9, 1996 the Company consummated the sale of its cable television
systems to FrontierVision for $146 million, subject to certain purchase price
adjustments and effectively emerged from the prepackaged bankruptcy. Senior
Debtholders and trade creditors were paid in full as a result of the prepackaged
bankruptcy. Step Coupon Senior Subordinated Noteholders, Junior Subordinated
Noteholders and KYMC, with aggregate debt of $137,161,625, at September 30, 1996
were paid $78,343,097, as a result of the prepackaged bankruptcy. During the
nine months ended September 30, 1996 the Company incurred expenses totaling
$912,865 in connection with the Forbearance Agreement, the Override Agreement
and in connection with the reorganization of the Company under Chapter 11.
Under Generally Accepted Accounting Principles, entities in reorganization under
the bankruptcy code are required to comply with the provisions of Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"), which requires, among other things: a segregation
of liabilities subject to compromise by the Bankruptcy Court as of the
bankruptcy filing date; the reporting of prepetition liabilities on the basis of
the expected amount of the allowed claims; and separate disclosure of expenses
directly related to the reorganization of the Company. Given the sale of the
Company's cable television systems and the Company's emergence from bankruptcy
on October 9, 1996, the Company's unaudited financial statements as of and for
the nine months ended September 30, 1996 have not been prepared in accordance
with SOP 90-7. These unaudited interim financial statements have been prepared
in accordance with the basis of presentation indicated in Note 2.
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Triax Southeast Associates, L.P.:
We have audited the accompanying balance sheets of Triax Southeast Associates,
L.P. (a Delaware limited partnership) as of December 31, 1995 and 1994, and the
related statements of operations, partners' capital and cash flows for the years
ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triax Southeast Associates,
L.P. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1996.
F-68
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31,
September 30, ------------------------------------
1996 1995 1994
------------ ------------ ------------
Unaudited
ASSETS
<S> <C> <C> <C>
Cash $ 852,907 $ 3,380,723 $ 699,077
Receivables, net of allowance of $7,747, $29,985 and
$52,302 at September 30, 1996 and December 31, 1995 and
1994, respectively 703,356 600,866 542,832
Prepaid Expenses 100,628 167,908 174,821
Inventory -- 346,274 444,624
Property, Plant and Equipment, net 35,966,591 38,761,227 36,496,820
Purchased Intangibles, net 8,292,119 9,542,002 10,105,115
Other Assets, net 959,186 933,591 1,118,718
------------ ------------ ------------
TOTAL ASSETS $ 46,874,787 $ 53,732,591 $ 49,582,007
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accrued Interest Expense $ 24,924 $ 258,223 $ 168,559
Accounts Payable and Other Accrued Expenses 1,611,149 1,710,636 1,962,757
Subscriber Prepayments and Deposits 58,724 71,105 42,470
Payable to Affiliates 274,686 239,021 227,355
Debt 37,242,965 42,546,539 35,787,218
------------ ------------ ------------
Total Liabilities 39,212,448 44,825,524 38,188,359
Partners' Capital:
General Partner (63,376) (50,929) (26,063)
Limited Partners 7,725,715 8,957,996 11,419,711
------------ ------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 46,874,787 $ 53,732,591 $ 49,582,007
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-69
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Nine Months
Ended December 31,
September 30, -----------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -----------
Unaudited
<S> <C> <C> <C> <C>
REVENUES $ 14,520,733 $ 17,780,041 $ 15,057,652 $ 7,810,891
------------ ------------ ------------ -----------
EXPENSES:
Programming 2,892,862 3,400,604 2,661,058 1,128,730
Operating, selling, general
and administrative 3,953,135 5,104,803 4,489,003 2,268,325
Overhead expenses paid to
affiliate 221,847 211,993 176,705 74,393
Management fees paid to
affiliate 726,036 888,996 752,882 390,545
Depreciation and amortization 5,505,387 7,344,035 6,252,573 3,307,310
------------ ------------ ------------ -----------
13,299,267 16,950,431 14,332,221 7,169,303
Operating Income 1,221,466 829,610 725,431 641,588
Loss on sale of assets 244,180 -- -- --
Interest Expense, net 2,222,014 3,316,191 2,359,980 1,056,256
------------ ------------ ------------ -----------
NET LOSS $ (1,244,728) $ (2,486,581) $ (1,634,549) $ (414,668)
============ ============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-70
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
------------------------------------------------------
General Limited
Partner Partners Total
-------- ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1992 $ (5,571) $ 6,448,436 $ 6,442,865
Contributions -- 7,000,000 7,000,000
Net loss (4,147) (410,521) (414,668)
-------- ------------ ------------
Balances, December 31, 1993 (9,718) 13,037,915 13,028,197
Net loss (16,345) (1,618,204) (1,634,549)
-------- ------------ ------------
Balances, December 31, 1994 (26,063) 11,419,711 11,393,648
Net loss (24,866) (2,461,715) (2,486,581)
-------- ------------ ------------
Balances, December 31, 1995 (50,929) 8,957,996 8,907,067
Net loss unaudited (12,447) (1,232,281) (1,244,728)
-------- ------------ ------------
Balances, September 30, 1996 unaudited $(63,376) $ 7,725,715 $ 7,662,339
======== ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-71
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------
Nine Months
Ended Years Ended December 31,
September 30, --------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $(1,244,728) $(2,486,581) $(1,634,549) $ (414,668)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 5,505,387 7,344,035 6,252,573 3,307,310
Write-off of assets 9,111
(Increase) decrease in receivables, net (102,490) (58,034) 6,042 (345,197)
(Increase) decrease in prepaid expenses 67,280 6,913 (128,309) (20,657)
(Decrease) increase in accrued interest
expense (233,299) 89,664 26,923 (45,894)
(Decrease) increase in accounts payable
and other accrued expenses (99,487) (252,121) 803,714 274,125
(Decrease) increase in subscriber
prepayments and deposits (12,381) 28,635 (3,886) 17,495
(Decrease) increase in payable to
affiliates 35,665 11,666 72,286 30,849
----------- ----------- ----------- ------------
Net cash flows from operating activities 3,925,058 4,684,177 5,394,794 2,803,363
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties, including
purchased intangibles (184,000) (6,065,116) (74,203) (25,342,487)
Purchase of property, plant and equipment (1,420,160) (2,369,183) (3,643,894) (1,269,346)
Proceeds from sale of property, plant and 108,043
equipment -- -- -- --
(Increase) decrease in inventory 346,274 98,350 263,815 (610,502)
Increase in franchise costs and other assets (183,457) (10,387) (121,663) --
----------- ----------- ----------- ------------
Net cash flows from investing activities (1,333,300) (8,346,336) (3,575,945) (27,222,335)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 9,400,000 1,000,000 19,400,000
Repayment of borrowings (5,020,000) (2,880,000) (2,500,000) (1,400,000)
Partners' contributions -- -- -- 7,000,000
Cash paid for loan costs -- (66,520) (117,107) (340,789)
Repayment of capital lease obligations (99,574) (109,675) (60,007) (24,725)
----------- ----------- ----------- ------------
Net cash flows from financing activities (5,119,574) 6,343,805 (1,677,114) 24,634,486
----------- ----------- ----------- ------------
NET INCREASE IN CASH (2,527,816) 2,681,646 141,735 215,514
CASH, beginning of period 3,380,723 699,077 557,342 341,828
----------- ----------- ----------- ------------
CASH, end of period $ 852,907 $ 3,380,723 $ 699,077 $ 557,342
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 2,549,048 $ 3,268,546 $ 2,333,057 $ 1,102,150
=========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisitions with capital leases $ -- $ 164,996 $ 233,047 $ 66,236
=========== =========== =========== ============
Note issued for acquisition of properties $ -- $ 184,000 $ -- $ --
=========== =========== =========== ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-72
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) THE PARTNERSHIP
ORGANIZATION AND CAPITALIZATION
Triax Southeast Associates, L.P. (the "Partnership") is a Delaware limited
partnership formed January 23, 1992 for the purpose of acquiring, constructing,
owning, and operating cable television systems, located primarily in Kentucky,
North Carolina, West Virginia and Ohio. The Partnership was capitalized and
commenced operations on July 28, 1992, with $7,000,000 of limited partner
contributions and a $70,000 demand non-interest bearing note from its general
partner, Triax Southeast General Partner, L.P. ("Southeast, G.P."). Triax
Investors Southeast, L.P. ("Investors"), a limited partnership in which Triax
Southeast Associates, Inc. ("Southeast Inc."), a Delaware corporation, is the
general partner, contributed $1,000,000 to the Partnership.
Southeast Inc. is a wholly owned subsidiary of Triax Communications Corporation
("TCC"), a Delaware corporation. Southeast Inc. contributed capital of
$1,000,000 and a $59,500 demand non-interest bearing note to Investors for a
general partnership interest. In addition, Southeast Inc. contributed a $700
demand non-interest bearing note to Southeast, G.P. for a general partnership
interest. Investors contributed a $59,500 demand non-interest bearing note for a
limited partner interest in Southeast, G.P.
On December 15, 1993, the Partnership Agreement was amended to reflect
additional capital contributions of $7,000,000 by certain limited partners.
Southeast Inc. contributed $1,250,000 to Investors, who in turn contributed an
additional $1,250,000 to the Partnership.
The Partnership Agreement, as amended, provides that at any time after April 30,
1997, upon notice from a majority of the limited partners that they desire to
cause a sale of the Partnership's assets and business (or all of the interests
in the Partnership), TCC may purchase all of the Partnership's assets and
business (or all of the interests in the Partnership), subject to the approval
of the majority of limited partners. In addition, after July 31, 1998, each
limited partner who has made capital contributions in excess of $1,000,000 may
cause the sale of the Partnership's assets and business and liquidation of the
Partnership. The above dates may be extended to 1998 or 1999 to coincide with
the revised termination date of one of the limited partner's partnership
agreement, if and when the limited partner extends the termination date.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS
Profits
The Partnership Agreement, as amended, provides that profits will be allocated
as follows: (i) 1% to the general partner and 99% to the limited partners until
profits allocated to them equal losses previously allocated; (ii) to the limited
partners until the limited partners have been allocated profits equal to a 12%
per annum cumulative preferred return on their capital contributions plus the
amount of losses previously allocated; then, (iii) 20% to the general partner
and 80% to the limited partners.
F-73
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) THE PARTNERSHIP (continued)
Losses
The Partnership Agreement, as amended, provides that losses will be allocated 1%
to the general partner and 99% to the limited partners, except no losses shall
be allocated to any limited partner which would cause the limited partner's
capital account to become negative by an amount greater than the limited
partner's share of the Partnership's "minimum gain" (the excess of the
Partnership's nonrecourse debt over its adjusted basis in the assets encumbered
by nonrecourse debt), as defined, plus any amount of Partnership debt assumed by
the limited partner or any amount the limited partner is obligated to contribute
to the Partnership; then 100% to the general partner.
Distributions
The Partnership Agreement, as amended, provides that Distributable Cash, as
defined, will be distributed as follows: (i) to the partners in proportion to
their Capital Contribution Accounts, as defined, until the balances are reduced
to zero; (ii) to the limited partners until the limited partners have received a
12% per annum cumulative preferred return on their capital contributions and
then, (iii) 20% to the general partner and 80% to the limited partners.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and related footnote disclosures as of September 30,
1996 and for the nine months ended September 30, 1996 are unaudited. In
management's opinion, the unaudited financial statements as of September 30,
1996 and for the nine months ended September 30, 1996 include all adjustments
necessary for a fair presentation. Such adjustments were of a normal recurring
nature.
REVENUE RECOGNITION
Revenues are recognized in the period the related services are provided to the
subscribers.
INCOME TAXES
No provision has been made for federal, state or local income taxes because they
are the responsibility of the individual partners. The principal difference
between net income or loss for income tax and financial reporting purposes
results from the use of accelerated depreciation for tax purposes.
F-74
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY
Inventory is carried at historical cost, which approximates market value, and
consists primarily of installation materials and addressable trap changers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Replacements, renewals and
improvements are capitalized and costs for repairs and maintenance are charged
directly to expense when incurred. The Partnership capitalized a portion of
technician and installer salaries to property , plant, and equipment which
amounted to approximately $299,692 for the nine months ended September 30, 1996
and $283,000 and $422,000 for the years ended December 31, 1995 and 1994,
respectively. Depreciation and amortization are computed using the straightline
method over the following estimated useful lives:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994 Life
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
Property, plant and equipment $ 52,400,285 $ 51,188,466 $ 43,704,363 5-10 years
Less: Accumulated depreciation (16,433,694) (12,427,239) (7,207,543)
------------ ------------ ------------
$ 35,966,591 $ 38,761,227 $ 36,496,820
============ ============ ============
</TABLE>
PURCHASED INTANGIBLES
Purchased intangibles are being amortized using the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
----------------------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994 Life
------------ ------------ ------------ --------
Unaudited
<S> <C> <C> <C> <C>
Franchise costs $ 13,026,848 $ 13,026,720 $ 11,832,807 10 years
Noncompete agreements 850,000 850,000 1,700,000 3 years
------------ ------------ ------------
13,876,848 13,876,720 13,532,807
Less: Accumulated amortization (5,584,729) (4,334,718) (3,427,692)
------------ ------------ ------------
$ 8,292,119 $ 9,542,002 $ 10,105,115
============ ============ ============
</TABLE>
During 1995, the Partnership wrote-off approximately $1,000,000 of noncompete
agreements, and the associated accumulated amortization, as the noncompete
agreements had expired.
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of" ("SFAS 121"). SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is required to be adopted by the Company in fiscal 1996.
Management believes the adoption of SFAS 121 will not have a material impact on
the financial statements.
F-75
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
OTHER ASSETS
Other assets are being amortized using the straight-line method over the
following estimated useful lives:
-------------------------------------------------------
December 31,
September 30, ---------------------------
1996 1995 1994 Life
----------- ------------ ------------ --------
Unaudited
Loan costs $ 1,111,608 $ 1,111,608 $ 1,084,999 5 years
Organization costs 441,435 441,435 441,435 5 years
Other 187,204 3,875 -- 10 years
----------- ----------- ----------
1,740,247 1,556,918 1,526,434
Less: Accumulated
amortization (781,061) (623,327) (407,716)
----------- ----------- ----------
$ 959,186 $ 933,591 $1,118,718
=========== =========== ==========
(3) ACQUISITIONS
On February 28, 1995, the Partnership acquired certain cable television systems
and related assets of Rodgers Cable TV, Inc. ("Rodgers"). The purchase price of
approximately $5,700,000, including closing costs, was accounted for by the
purchase method of accounting and allocated as follows:
Property, plant and equipment $4,580,000
Franchise costs 1,019,400
Non-compete 100,600
----------
Total cash paid $5,700,000
==========
On March 31, 1995, the Partnership acquired cable television systems and related
assets of Green Tree Cable T.V., Inc. The purchase price of approximately
$570,000, including closing costs, was accounted for by the purchase method of
accounting and allocated as follows:
Property, plant and equipment $4,580,000
Franchise costs 1,019,400
Non-compete 100,600
----------
Total cash paid $5,700,000
==========
On December 15, 1993, the Partnership acquired cable television systems and
related assets of C4 Media Cable South, L.P. for approximately $17 million, and
on December 21, 1993, acquired additional cable television system assets and
related liabilities of Charter Cable, Inc. for approximately $6.5 million.
Acquisition-related fees totaled approximately $700,000. The acquisitions were
financed by additional limited partners' contributions of $7 million, the
drawdown by the Partnership of $17.6 million under its amended Revolving Credit
and Term Loan and available cash of $750,000. The acquisitions were accounted
for by the purchase method of accounting and allocated as follows:
Property, plant and equipment $20,144,000
Franchise costs 2,756,000
Non-compete 600,000
-----------
Total cash paid $23,500,000
===========
F-76
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(4) DEBT
Debt consisted of the following at September 30, 1996, and December 31, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
----------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994
------------ ------------ -----------
Unaudited
<S> <C> <C> <C>
Revolving Credit and Term Loan, interest
payable quarterly based on varying interest
rate options $37,000,000 $42,020,000 $35,500,000
Note Payable to seller -- 184,000 --
Vehicle leases 242,965 342,539 287,218
----------- ----------- -----------
$37,242,965 $42,546,539 $35,787,218
=========== =========== ===========
</TABLE>
The Revolving Credit and Term Loan Agreement, as amended through February 28,
1995 (the "Revolver"), is collateralized by all property, plant and equipment,
inventory and accounts receivable of the Partnership and all rights under
present and future permits, licenses and franchises. On September 30, 1995, the
outstanding principal was converted into a term loan with quarterly payments
from December 31, 1995 through June 30, 2002. Commencing in 1996, within 120
days after the close of the fiscal year, the Partnership must make a mandatory
prepayment in an amount equal to 50% of the excess cash flow, as defined, for
the prior year. A commitment fee of 1/2% per annum is charged on the daily
unused portion of the commitment amount.
The Partnership entered into LIBOR interest rate agreements with the banks
related to the Revolver. The Partnership fixed the interest rate on $40 million
at 7.21% for the period from June 4, 1996 to August 5, 1996. The remaining
outstanding balance bears interest at prime plus 1%.
On July 1, 1994 the Partnership paid $135,000 for an interest rate cap of 7% on
the LIBOR rate on $18 million effective July 1, 1994 through July 1, 1996, and
on March 27, 1995, paid $62,000 for an interest rate cap of 7.5% on the LIBOR
rate on $10 million effective March 27, 1995 through March 27, 1997.
The loan agreement contains certain covenants, the more significant of which
include leverage and interest coverage ratios and limitations on capital
expenditures.
Debt maturities required as of December 31, 1995 are as follows:
Year Amount
---------------------
1996 $ 3,174,759
1997 4,731,241
1998 5,578,235
1999 6,842,304
2000 7,920,000
Thereafter 14,300,000
-----------
$42,546,539
===========
(5) RELATED PARTY TRANSACTIONS
TCC provides management services to the Partnership for a fee equal to 5% of
gross revenues, as defined. The Partnership incurred management fees totaling
$726,036 for the nine months ended September 30, 1996, and $888,996, $752,882
and $390,545 in 1995, 1994 and 1993, respectively.
F-77
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(5) RELATED PARTY TRANSACTIONS (continued)
TCC also allocates certain overhead expenses to the Partnership, based on
proportionate subscriber revenues, which primarily relate to employment costs,
which expenses are limited to 1.25% of gross revenues. These overhead expenses
amounted to $168,609 for the nine months ended September 30, 1996, and $211,993,
$176,705 and $74,393 in 1995, 1994 and in 1993, respectively.
TCC was paid acquisition fees of $235,000 in 1993 related to the acquisition of
certain assets. Such fees are included in purchased intangibles in the
accompanying balance sheets. TCC may be paid a disposition fee of 1% of the
sales price of the Partnership after certain approvals of the limited partners,
and after certain other conditions are met.
The Partnership purchases programming from TCC at TCC's cost, which includes
volume discounts TCC might earn.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximates fair value
because of the nature of the investments and the length of maturity of the
investments.
The estimated fair value of the Partnership's debt instruments are based on
borrowing rates that would be equal to existing rates, therefore, there is no
material difference in the fair market value and the current value.
(7) REGULATORY MATTERS
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services (other than programming offered on a per-channel or
per-program basis). The FCC implemented regulation which allowed cable operators
to justify regulated rates in excess of the FCC benchmarks through cost of
service showings at both the franchising authority level for basic service and
to the FCC in response to complaints on rates for cable programming services.
On February 22, 1994, the FCC issued further regulations which modified the
FCC's previous benchmark approach, adopted interim rules to govern cost of
service proceedings initiated by cable operators, and lifted the stay of rate
regulations for small cable systems, which were defined as all systems serving
1,000 or fewer subscribers.
On November 10, 1994, the FCC adopted "going forward" rules that provided cable
operators with the ability to offer new product tiers priced as operators elect,
provided certain limited conditions are met, permit cable operators to add new
channels at reasonable prices to existing cable programming service tiers, and
created an additional option pursuant to which small cable operators may add
channels to cable programming service tiers.
In May 1995, the FCC adopted small company rules that provided small systems
regulatory relief by implementing an abbreviated cost of service rate
calculation method. Using this methodology, for small systems seeking to
establish rates no higher than $1.24 per channel, the rates are deemed to be
reasonable.
F-78
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(7) REGULATORY MATTERS (continued)
In February 1996, the Telecommunications Act of 1996 was enacted which, among
other things, deregulated cable rates for small systems on their programming
tiers.
To date, the FCC's regulations have not had a material adverse effect on the
Partnership due to the lack of certifications by the local franchising
authorities.
F-79
<PAGE>
FINANCIAL STATEMENT SCHEDULES
FRONTIERVISION OPERATING PARTNERS, L.P. PAGE
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Under date of March 12, 1997, we reported on the consolidated balance sheets of
FrontierVision Operating Partners, L.P. and subsidiary (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, cash flows and partners' capital for the year ended December 31,
1996 and the period from inception (April 17, 1995 - see Note 1) through
December 31, 1995, as contained in this annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned financial statements,
we also audited the related financial statement schedule on Page S-3. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 12, 1997
S-2
<PAGE>
FRONTIERVISION OPERERATING PARTNERS, L.P. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Amounts in Thousands
<TABLE>
<CAPTION>
--------------------------------------------------------
Charge to
Beginning Costs and Deductions/ Balance at
of Period Expenses Writeoffs End of Period
--------------------------------------------------------
Allowance for uncollectible trade receivables:
<S> <C> <C> <C> <C>
Period from inception (April 17, 1995) through $ -- 58 (18) 40
December 31, 1995
Year ended December 31, 1996
$ 40 627 (345) 322
</TABLE>
See accompanying independent auditors' report.
S-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), the Registrants have duly caused this report
to be signed on their behalf by the undersigned, thereunto duly authorized, on
March 27, 1997.
FRONTIERVISION OPERATING PARTNERS, L.P.
By: FrontierVision Partners, L.P., its general partner,
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general partner
By: /s/ JAMES C. VAUGHN
----------------------------------------
James C. Vaughn
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrants and
in the capacities and on the dates indicated.
FRONTIERVISION OPERATING PARTNERS, L.P.
Signature Title Date
/s/ JAMES C. VAUGHN President and Chief March 27, 1997
- --------------------------- Executive Officer (Principal
James C. Vaughn Executive Officer)
/s/ JOHN S. KOO Senior Vice President and Chief March 27, 1997
- --------------------------- Financial Officer (Principal
John S. Koo Financial Officer)
/s/ JAMES W. MCHOSE Vice President and Treasurer March 27, 1997
- --------------------------- (Principal Accounting Officer)
James W. McHose
FRONTIERVISION CAPITAL CORP.
/s/ JAMES C. VAUGHN President and Chief March 27, 1997
- --------------------------- Executive Officer, Director
James C. Vaughn (Principal Executive Officer)
/s/ JOHN S. KOO Senior Vice President and Chief March 27, 1997
- --------------------------- Financial Officer, Director
John S. Koo (Principal Financial Officer)
/s/ JAMES W. MCHOSE Vice President and Treasurer March 27, 1997
- --------------------------- (Principal Accounting Officer)
James W. McHose
EXHIBIT 12.1
FrontierVision Operating Partners, L.P.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
For the Period
From Inception
For the Year Ended (April 17, 1995) to
December 31, 1996 December 31, 1996
-------- --------
Net Loss (23,801) (2,703)
Add (Deduct):
Income Tax Provision (Benefit) --
Less: Minority Interest
-------- --------
Pre Tax Income (Loss) (23,801) (2,703)
Add: Fixed Charges
Interest 22,898 2,488
Amortization of debt offering
expenses 999 69
-------- --------
Total fixed charges 23,897 2,557
-------- --------
$ 96 $ (146)
-------- --------
Fixed Charges $ 23,897 $ 2,557
======== ========
Ratio of Earnings to Fixed
Charges N/A N/A
Deficiency of Earnings to Fixed
Charges $ 23,801 $ 2,703
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K.
</LEGEND>
<CIK> 0001019504
<NAME> FRONTIERVISION OPERATING PARTNERS, LP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,639
<SECURITIES> 0
<RECEIVABLES> 5,712
<ALLOWANCES> (322)
<INVENTORY> 0
<CURRENT-ASSETS> 11,260
<PP&E> 199,461<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 549,168
<CURRENT-LIABILITIES> 21,004
<BONDS> 398,161
0
0
<COMMON> 0
<OTHER-SE> 130,003
<TOTAL-LIABILITY-AND-EQUITY> 549,168
<SALES> 0
<TOTAL-REVENUES> 76,464
<CGS> 0
<TOTAL-COSTS> 39,181
<OTHER-EXPENSES> 2,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,422
<INCOME-PRETAX> (23,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,801)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
