Registration Nos. 333-9535 and 333-9535-01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation
(Exact names of Registrants as specified in their charters)
Delaware 4841 84-1316775
Delaware 4841 84-1353734
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification
organization) Numbers)
1777 South Harrison Street, Suite P-200, Denver,
Colorado 80210 (303) 757-1588
(Address, including Zip Code, and telephone number, including area code, of
Registrants' principalexecutive offices)
-----------------
JAMES C. VAUGHN
President and Chief Executive Officer
FrontierVision Inc.
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
(303) 757-1588
(Name, address, including Zip Code, and telephone number, including
area code, of Registrants' agent for service)
-----------------
Please address a copy of all communications to:
LEONARD J. BAXT, ESQ. GERALD S. TANENBAUM, ESQ.
Dow, Lohnes & Albertson, PLLC Cahill Gordon & Reindel
1200 New Hampshire Avenue, N.W. 80 Pine Street
Washington, D.C. 20036 New York, New York 10005
(202) 776-2000 (212) 701-3000
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
1
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Prospectus
[FRONTIERVISION LOGO]
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
11% Senior Subordinated Notes due 2006
Interest payable April 15 and October 15
This Prospectus relates to offers and sales by J.P. Morgan Securities Inc. and
First Union Capital Markets Corp. of 11% Senior Subordinated Notes due 2006 (the
"Notes") which have been issued by FrontierVision Operating Partners, L.P., a
Delaware limited partnership ("FVOP" or the "Company"), and FrontierVision
Capital Corporation, a Delaware corporation ("Capital") which is a wholly owned
subsidiary of FVOP. The Notes are the joint and several obligations of FVOP and
Capital (collectively, the "Issuers"). The Notes were originally purchased by
J.P. Morgan Securities Inc. and First Union Capital Markets Corp. directly from
the Issuers as part of the original offering (the "Offering") of the Notes
described herein.
The Notes mature on October 15, 2006, unless previously redeemed. Interest on
the Notes is payable semiannually on each April 15 and October 15, commencing
April 15, 1997. The Notes are not redeemable prior to October 15, 2001, except
as set forth below. The Notes will be redeemable at the option of the Issuers,
in whole or in part, at any time on or after October 15, 2001, at the redemption
prices set forth herein, together with accrued and unpaid interest to the
redemption date. In addition, prior to October 15, 1999, the Issuers may redeem
up to 35% of the principal amount of the Notes with the net cash proceeds
received from one or more Public Equity Offerings or Strategic Equity
Investments (as such terms are defined herein) at a redemption price of 111% of
the principal amount thereof, together with accrued and unpaid interest to the
redemption date; provided, however, that at least 65% in aggregate principal
amount of the Notes originally issued remains outstanding immediately after any
such redemption.
Upon a Change of Control (as defined herein), the Issuers will be required to
make an offer to purchase all outstanding Notes at 101% of the principal amount
thereof, together with accrued and unpaid interest to the purchase date.
The Notes are general unsecured obligations of the Issuers and rank subordinate
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Issuers. The Notes rank pari passu in right of payment with any
other senior subordinated indebtedness of the Issuers. At December 31, 1996, the
Company had approximately $398.2 million of total indebtedness outstanding.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
This Prospectus has been prepared for and is to be used by J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. in connection with offers
and sales of the Notes related to market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of sale. The Company will not receive any of the proceeds of such
sales. J.P. Morgan Securities Inc. and First Union Capital Markets Corp. may act
as principals or agents in such transactions. The closing of the Offering
referred to herein, which constituted the delivery of the Notes by the Company,
occurred on October 7, 1996. See "Plan of Distribution."
J.P. Morgan & Co. First Union Capital Markets Corp.
[Date of Effectiveness.]
2
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No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Issuers, J.P. Morgan Securities Inc. or First Union Capital Markets Corp.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the Notes in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof or that there has been no change in the affairs of the Issuers since the
date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
Available Information ....................... 4 Certain Relationships and Related Transactions 50
Prospectus Summary .......................... 5 Principal Security Holders ................... 51
Risk Factors ................................ 9 Ownership Structure .......................... 52
Use of Proceeds ............................. 14 The Partnership Agreements ................... 53
Capitalization .............................. 14 Description of the Notes ..................... 62
Selected Financial Data ..................... 15 Plan of Distribution ......................... 92
Management's Discussion and Analysis of ..... Legal Matters ................................ 93
Financial Condition and Results of Operations 18 Experts ...................................... 93
Business .................................... 24 Glossary ..................................... 94
Legislation and Regulation .................. 38 Index to Financial Statements ................ F-1
Management .................................. 46
</TABLE>
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AVAILABLE INFORMATION
The Issuers have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part and
which term shall encompass any amendments thereto) on Form S-1, pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Notes offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement, and the exhibits and schedules thereto. For further
information about the Issuers and the Notes, reference is hereby made to the
Registration Statement, and to such exhibits and schedules. Statements contained
herein concerning the provisions of any documents filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
As a result of the Offering, the Issuers are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports and other information with the
Commission. In addition, under the Indenture governing the Notes, the Issuers
are required to furnish to the Trustee and to registered holders of the Notes
audited annual consolidated financial statements, unaudited quarterly
consolidated financial reports and certain other reports. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports and
other information filed by the Issuers with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected without charge
and copied upon payment of certain fees at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048, and Chicago Regional Office, Northwestern Atrium, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports and other information regarding registrants that file
electronically with the Commission.
---------------
FVOP was organized as a Delaware limited partnership in 1995. Capital is a
Delaware corporation formed solely for the purpose of serving as an Issuer of
the Notes and is wholly owned by FVOP. The principal office of each of the
Issuers is located at 1777 South Harrison Street, Suite P-200, Denver, Colorado
80210, and their telephone number is (303) 757-1588.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Capital is a wholly-owned subsidiary of the Company and has
nominal assets and no operations. See "Risk Factors" for a discussion of certain
risks associated with an investment in the Notes. See "Glossary" for the
definitions of certain terms used herein.
The Company
The Company owns, operates and develops cable television systems in small and
medium-sized suburban and exurban communities, primarily concentrated in three
operating regions -- Ohio, Kentucky and New England -- with a fourth, smaller
group of cable television systems in the Southeast. To date, the Company has
acquired strategically located cable television systems at historically
attractive values, thus establishing its core geographic base and building
subscriber mass. Since closing its initial acquisition in November 1995, the
Company has become one of the 25 largest multiple system cable operators
("MSOs") in the United States. The cable television systems owned by the Company
on December 31, 1996 (the "Existing Systems") passed approximately 498,900 homes
in eleven states and served approximately 356,400 basic subscribers,
representing basic penetration of 71.4%, as of such date. For the years ended
December 31, 1996 and 1995, the Company had revenues 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.
The Existing Systems represent 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 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 Company sold three systems in the
Southeast (the "Disposition Systems") in the quarter ended September 30, 1996
for aggregate disposition proceeds of approximately $15.0 million. The next
phase of the Company's business plan will focus on additional strategic
acquisitions and smaller "fill-in" acquisitions within its existing operating
regions, the integration of business operations, significant investment and
improvement in technical plant and the development of additional cable and
telecommunications services.
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. FrontierVision Partners, L.P. ("FVP"), is the sole general
partner and the owner, directly and indirectly, of substantially all of the
partnership interests of the Company. The investors in FVP include affiliates of
J.P. Morgan & Co. Incorporated, Brown Brothers Harriman & Co., Olympus Partners
and First Union Capital Partners, Inc. Including $76.0 million of capital
commitments received in September 1996, FVP has obtained aggregate capital
commitments of approximately $199.4 million, of which $156.5 million has been
invested in the Company.
During the fourth quarter of 1996, FVP contributed $40.0 million to the Company
which was used to fund the acquisition of certain of the Existing Systems. On
March 11, 1997, FVP called an additional $15.0 million of $36.0 million of
available capital commitments. The Offering, the sale of the Disposition
Systems, the purchase of cable systems from American Cable Entertainment of
Kentucky-Indiana, Inc. ("ACE"), Triax Southeast Associates, L.P. ("Triax"),
Phoenix Grassroots Cable Systems, L.L.C. ("Phoenix"), and Penn/Ohio Cablevision,
L.P. ("Penn/Ohio") and the repayment of indebtedness under the Company's Senior
Credit Facility (see "Use of Proceeds" below) are collectively referred to as
the "Acquisition Transactions."
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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 growth
through strategic acquisitions by targeting clusters in small and medium-sized
markets and implementing operating efficiencies. In addition, the Company
continually seeks to provide superior customer service and aggressively promote
and expand its service offerings. The Company intends to selectively upgrade its
cable systems to increase channel capacities, enhance signal quality and improve
technical reliability. See "Business Acquisition Strategy" and "--Business
Strategy."
The Existing Systems
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 as of
and for the period from April 17, 1995 (inception) through December 31, 1995
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. 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 the period and are reflected only for that portion of the
period that such systems were owned by the Company. 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. See
"Business - Development of the Systems."
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<TABLE>
<CAPTION>
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FVOP
-------------------------------------------
For the Three For the Year From April 17,
Months Ended Ended 1995(inception)
December 31, December 31, to December 31,
1996 1996 1995
-------- -------- --------
In thousands except ratios and
operating statistical data
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenue ................................................................ $ 30,257 76,464 4,369
Operating expenses ..................................................... 15,524 39,181
2,311
Corporate administrative expenses ...................................... 959 2,930 127
Depreciation and amortization .......................................... 12,950 35,336 2,308
Pre-acquisition expenses ............................................... - - 940
-------- -------- --------
Operating income/(loss) ................................................ 824 (983) (1,317)
Interest expense, net (1) .............................................. (10,805) (22,422) (1,386)
Other income/(expenses) ................................................ (297) (396) -
-------- -------- --------
Net income/(loss) ...................................................... $ (10,278) (23,801) (2,703)
========= ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Total assets ........................................................... $ 549,168 549,168 143,512
Total debt ............................................................. 398,194 398,194 93,159
Partners' capital ...................................................... 130,003 130,003 46,407
FINANCIAL RATIOS AND OTHER DATA:
EBITDA (2) ............................................................. 13,774 34,353 991
EBITDA margin .......................................................... 45.5% 44.9% 22.7%
Total debt to EBITDA (3) ............................................... 6.75 6.75
EBITDA to interest expense (4) ......................................... 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 (5)............................. 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 (6) ....................................................... $ 29.73 29.73 27.76
</TABLE>
- -------------
(1) Interest expense of $10,805, $22,422, and $1,386 is net of interest income
of $161, $471 and $60.
(2) 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.
(3) 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.
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(4) 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.
(5) 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.
(6) Average monthly revenue per basic subscriber (i) 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.
The following table illustrates certain subscriber and operating statistics for
the Company's primary operating regions as of December 31, 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Avg. Monthly
Revenue Per
Homes Basic Basic Premium Basic
Cable Systems Passed Subscribers Penetration Penetration Subscriber(1)
------- ------- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Ohio 157,600 113,500 72.0% 45.5% $ 29.53
Kentucky 151,400 117,700 77.7 36.6 31.78
New England 95,200 67,100 70.5 41.4 28.58
Southeast 94,700 58,100 61.4 50.9 26.82
------- ------- ---- ---- ---------
Total Systems 498,900 356,400 71.4% 42.7% $ 29.73
======= ======= ==== ==== =========
</TABLE>
(1) Average monthly revenue per basic subscriber equals revenue for the month
ended December 31, 1996 divided by the number of basic subscribers generating
revenue during such period.
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RISK FACTORS
Prior to purchasing any of the Notes offered hereby, prospective investors
should consider carefully the following factors in addition to the other
information contained in this Prospectus. This Prospectus contains
forward-looking statements, within the meaning of Section 27A of the Securities
Act, which are inherently uncertain. Actual results and events may differ
significantly from those discussed in such forward-looking statements. In
addition to the other information set forth in this Prospectus, factors that
might cause or contribute to such differences include, but are not limited to,
the following risk factors.
SUBSTANTIAL LEVERAGE; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company is, and will continue to be, highly leveraged as a result of the
substantial indebtedness it has incurred, and intends to incur, to finance
acquisitions and expand its operations. As of December 31, 1996, the Company's
total indebtedness outstanding was approximately $398.2 million. In addition,
subject to the restrictions in the Senior Credit Facility and the Indenture, the
Company may incur additional indebtedness, including indebtedness constituting
Senior Indebtedness (as defined in the Indenture), from time to time, to finance
acquisitions in the future, for capital expenditures or for general business
purposes. The Company anticipates that, in light of the amount of its existing
indebtedness, it will continue to have substantial leverage for the foreseeable
future. The degree to which the Company is leveraged could adversely affect the
Company's ability to (i) service the Notes, (ii) finance its operations and fund
its capital expenditure requirements, (iii) compete effectively, (iv) expand its
business, (v) comply with its obligations under its franchise agreements or (vi)
operate under adverse economic conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's earnings before income taxes and fixed charges would have been
insufficient to cover its fixed charges for the year ended December 31, 1996 and
for the year ended December 31, 1995 by $23.8 million and $2.7 million,
respectively. However, for both periods, earnings are reduced by substantial
non-cash charges, principally consisting of depreciation and amortization.
Since its founding in 1995 through December 31, 1996, the Company has received
from FVP aggregate capital contributions of approximately $156.5 million and, as
of December 31, 1996, the Company had an aggregate of $190.0 million in bank
indebtedness outstanding. The Company's cash from these sources has been
sufficient to finance its acquisitions and, together with cash generated from
operating activities, also has been sufficient to meet the Company's debt
service, working capital and capital expenditure requirements. The ability of
the Company to meet its debt service and other obligations will depend upon the
future performance of the Company which, in turn, is subject to general economic
conditions and to financial, political, competitive, regulatory and other
factors, many of which are beyond the Company's control. The Company's ability
to meet its debt service and other obligations also may be affected by changes
in prevailing interest rates, as borrowings under the Senior Credit Facility
will bear interest at floating rates, subject to certain deferred interest rate
setting agreements. The Company believes that it will continue to generate cash
and obtain financing sufficient to meet such requirements in the future;
however, there can be no assurances that the Company will be able to meet its
debt service and other obligations. If the Company were unable to do so, it
would have to refinance its indebtedness or obtain new financing. Although in
the past the Company has been able to obtain financing through equity
investments and bank borrowings, there can be no assurances that the Company
will be able to do so in the future or that, if the Company were able to do so,
the terms available will be favorable to the Company. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Description of the Notes."
SUBORDINATION OF THE NOTES
The Notes are general unsecured obligations of the Issuers and rank subordinate
in right of payment to all existing and future Senior Indebtedness of the
Issuers, including the Company's obligations under the Senior Credit Facility.
The Notes rank pari passu in right of payment with any other senior subordinated
indebtedness of the Issuers, other than indebtedness, if any, that by its terms
is expressly subordinated in
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right and priority of payment to the Notes. At December 31, 1996, the Company
had approximately $398.2 million of total Senior Indebtedness (including
approximately $70,000 outstanding under capital leases and excluding unused
commitments of approximately $75.0 million under the Senior Credit Facility) and
Capital had no Senior Indebtedness. Additional Senior Indebtedness may be
incurred by the Issuers from time to time subject to restrictions in the Senior
Credit Facility and the Indenture. The lenders under the Senior Credit Facility
have a security interest in substantially all the assets of, and partnership
interests in, the Company and thereby have available to them all of the remedies
available to a secured creditor under applicable law. See "--Substantial
Leverage; Insufficiency of Earnings to Cover Fixed Charges" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
the event of a bankruptcy, insolvency or liquidation of the Company, there may
not be sufficient assets remaining to pay amounts due on any or all of the Notes
then outstanding. See "Description of the Notes-- Subordination."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture and the Senior Credit Facility impose restrictions that, among
other things, limit the amount of additional indebtedness that may be incurred
by the Company and impose limitations on, among other things, investments, loans
and other payments, certain transactions with affiliates and certain mergers and
acquisitions. The Senior Credit Facility also requires the Company to maintain
specified financial ratios and meet certain financial tests. As of December 31,
1996, the Company was in compliance with such financial ratios and tests. The
ability of the Company to continue to comply with such covenants and
restrictions can be affected by events beyond its control, and there can be no
assurances that the Company will achieve operating results that would permit
compliance with such provisions. The breach of any of the provisions of the
Senior Credit Facility would, under certain circumstances, result in defaults
thereunder, permitting the lenders under the Senior Credit Facility to
accelerate the indebtedness under the Senior Credit Facility. If the Company
were unable to pay the amounts due in respect of the Senior Credit Facility, the
lenders thereunder could foreclose upon the assets pledged to secure such
payment. In such event, the holders of the Notes might not be able to receive
any payments, if ever, until the payment default was cured or waived, any such
acceleration was rescinded or the indebtedness under the Senior Credit Facility
was discharged or paid in full. Any of such events would adversely affect the
Issuers' ability to service the Notes.
KEY PERSONNEL
The Company's business is substantially dependent upon the performance of
certain key individuals, including Mr. Vaughn and Mr. Koo. Although the Company
maintains a strong management team, the loss of the services of Mr. Vaughn or
Mr. Koo could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY
The Company was formed in July 1995 and has grown principally through
acquisitions. Prospective investors, therefore, have limited historical
financial information about the Company, and about the results that can be
achieved by the Company in managing the cable systems not previously managed by
the Company, upon which to base an evaluation of its performance and an
investment in the Notes. In addition, as a result of the Company's rapid growth
through acquisitions, past operating history is not necessarily indicative of
future results.
SIGNIFICANT CAPITAL EXPENDITURES
Consistent with its business strategy, the Company expects to upgrade a
significant portion of its cable television distribution systems over the next
several years to, among other things, increase bandwidth and channel capacity.
The Company's inability to upgrade its cable television systems could have a
material adverse effect on its operations and competitive position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business."
10
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SIGNIFICANT COMPETITION IN THE CABLE TELEVISION INDUSTRY
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, online computer services and home video
products, including videotape cassette recorders. Because the Company's
franchises are generally non-exclusive, there is the potential for competition
with the Company's systems from other operators of cable television systems,
including systems operated by local governmental authorities, and from other
distribution systems capable of delivering programming to homes or businesses,
including direct broadcast satellite ("DBS") systems and multichannel,
multipoint distribution service ("MMDS") systems. In recent years, there has
been significant national growth in the number of subscribers to DBS services.
Subscribership to MMDS also is increasing and can be expected to grow as a
result of recent significant investments in and acquisitions of MMDS companies
by local telephone companies. Additionally, recent changes in federal law and
recent administrative and judicial decisions have removed certain of the
restrictions that have limited entry into the cable television business by
potential competitors such as telephone companies, registered utility holding
companies and their subsidiaries. Such developments will enable local telephone
companies to provide a wide variety of video services in the telephone company's
own service area which will be directly competitive with services provided by
cable television systems.
Many of the Company's potential competitors have substantially greater resources
than the Company, and the Company cannot predict the extent to which competition
will materialize in its franchise areas from other cable television operators,
other distribution systems for delivering video programming and other broadband
telecommunications services to the home, or from other potential competitors,
or, if such competition materializes, the extent of its effect on the Company.
See "Business--Competition" and "Legislation and Regulation."
NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES
Cable television companies operate under franchises granted by local authorities
which are subject to renewal and renegotiation from time to time. The Company's
business is dependent upon the retention and renewal of its local franchises. A
franchise is generally granted for a fixed term ranging from five to 15 years
but in many cases is terminable if the franchisee fails to comply with the
material provisions thereof. The Company's franchises typically impose
conditions relating to the use and operation of the cable television system,
including requirements relating to the payment of fees, system bandwidth
capacity, customer service requirements, franchise renewal and termination. The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") prohibits franchising authorities from granting exclusive cable
television franchises and from unreasonably refusing to award additional
competitive franchises; it also permits municipal authorities to operate cable
television systems in their communities without franchises. The Cable
Communications Policy Act of 1984 (the "1984 Cable Act" and collectively with
the 1992 Cable Act, the "Cable Acts") provides, 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. Although the Company believes that it
generally has good relationships with its franchising authorities, no assurances
can be given that the Company will be able to retain or renew such franchises or
that the terms of any such renewals will be on terms as favorable to the Company
as the Company's existing franchises. The non-renewal or termination of
franchises relating to a significant portion of the Company's subscribers could
have a material adverse effect on the Company's results of operations. See
"Business--Franchises."
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable Acts, both
of which amended the Communications Act of 1934 (as amended, the "Communications
Act"), established a national policy to guide the development and regulation of
cable television systems. The Communications Act was recently substantially
amended by the
11
<PAGE>
Telecommunications Act of 1996 (the "1996 Telecom Act"). Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act has been allocated between the Federal Communications Commission
(the "FCC") and state or local franchising authorities.
FEDERAL LAW AND REGULATION. The 1996 Telecom Act, 1992 Cable Act and the FCC's
rules implementing these laws generally have increased the administrative and
operational expenses of cable television systems and have resulted in additional
regulatory oversight by the FCC and local or state franchise authorities. The
Cable Acts and the corresponding FCC regulations have established, among other
things, (i) rate regulations, (ii) mandatory carriage and retransmission consent
requirements that require a cable system under certain circumstances to carry a
local broadcast station or to obtain consent to carry a local or distant
broadcast station, (iii) rules for franchise renewals and transfers, and (iv)
other requirements covering a variety of operational areas such as equal
employment opportunity and technical standards and customer service
requirements.
The 1996 Telecom Act deregulates rates for certain cable programming services
tiers ("CPSTs") in 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 FCC is currently
developing permanent regulations to implement the rate deregulation provisions
of the 1996 Telecom Act. The Company is currently unable to predict the ultimate
effect of the 1992 Cable Act or the 1996 Telecom Act, the ultimate outcome of
the various FCC rulemaking proceedings, or the litigation challenging various
aspects of this federal legislation and the FCC's regulations implementing the
legislation.
STATE AND LOCAL REGULATION. Cable television systems generally operate pursuant
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local governmental entity. The terms and conditions of franchises
vary materially from jurisdiction to jurisdiction. A number of states subject
cable systems to the jurisdiction of centralized state governmental agencies. To
date, no state in which the Company operates has enacted 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. See "Legislation and
Regulation."
RISKS RELATING TO ACQUISITION STRATEGY
A significant element of the Company's acquisition strategy is to expand in
certain regions of the United States by acquiring cable television systems
located in reasonable proximity to existing systems or of a sufficient size to
enable the acquired system to serve as the basis for a new local cluster. Any
acquisition may have an adverse effect upon the Company's operating results or
cash flow, particularly for acquisitions of new systems which must be integrated
with the Company's existing operations. There can be no assurances that the
Company will be able to integrate successfully any acquired business with its
existing operations or realize any efficiencies therefrom. There can also be no
assurances that any such acquisition, if consummated, will be profitable or that
the Company will be able to obtain any required financing to acquire additional
systems in the future. See "Business--Business Strategy."
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
In order to purchase the Notes upon the occurrence of a Change of Control (as
defined in the Indenture), the Issuers may be required to seek additional
financings or engage in asset sales or similar transactions. There can be no
assurance that the Issuers will have sufficient funds to purchase the Notes upon
a Change of Control. In addition, the Senior Credit Facility includes "change of
control" provisions that permit the bank lenders thereunder to accelerate the
repayment of indebtedness under the Senior Credit Facility (which is senior in
right of payment to the Notes), as well as other provisions that restrict the
ability of the Issuers to consummate an offer to purchase outstanding Notes in
connection with a Change of Control. See "Description of the Notes."
12
<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are not listed, and will not be listed, on any securities exchange or
automated quotation system. The Notes may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities and other factors. J.P. Morgan Securities Inc., First Union Capital
Markets Corp., Chase Securities, Inc. and CIBC Wood Gundy Securities Corp.
currently make a market in the Notes. However, they are not obligated to do so,
and any such market making may be discontinued at any time without notice.
Therefore, no assurances can be given as to whether a market will be available
for the Notes. See "Plan of Distribution."
13
<PAGE>
USE OF PROCEEDS
The amount of net proceeds received by the Company from the Offering was
approximately $192.5 million. The Company used such net proceeds, together with
(i) $40.0 million of capital contributions from FVP, and (ii) $15.0 million of
proceeds (net of transaction costs) from the sale of the Disposition Systems to
(i) pay the purchase prices for the acquisition of such systems to be acquired,
adjusted for net working capital adjustments of $6.1 million related to the
systems purchased from ACE (the "ACE Systems"), Triax (the "Triax Systems"),
Phoenix (the "Grassroots Systems") and Penn/Ohio (the "Penn/Ohio Systems"), (ii)
pay transaction costs associated with the purchase of such systems and (iii)
repay indebtedness of $4.9 million outstanding under the Senior Credit Facility.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
December 31, 1996. See "Use of Proceeds."
--------
December 31,
1996
--------
In thousands
Indebtedness:
Senior Credit Facility(1) $190,000
11% Senior Subordinated Notes due 2006 200,000
Capital leases 70
UVC Note(2) 8,124
--------
Total indebtedness 398,194
--------
Partners' Capital:
Class A Partnership Interests(2)
Other partnership interests 130,003
Total partners' capital 130,003
--------
Total capitalization $528,197
========
- ----------
(1) At December 31, 1996, $75.0 million aggregate principal amount was unused
and available for borrowing.
(2) 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. See "The Partnership
Agreements--The Company Partnership Agreement--Class A Partnership Interests."
As of March 26, 1997, the UVC Note had not yet been converted or repaid, and the
Company is currently considering all options related thereto.
14
<PAGE>
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. See "Business--Development of the Systems."
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 Prospectus. 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.
15
<PAGE>
<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.
16
<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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company commenced operations in November 1995. The Company acquired certain
cable television systems from United Video Cablevision, Inc. (the "UVC Systems")
in Maine and Ohio on November 9, 1995, from Longfellow Cable Company, Inc. (the
"Longfellow Systems") in central Maine on November 21, 1995, from C4 Media Cable
Southeast, Limited Partnership (the "C4 Systems") on February 1, 1996, from
Americable International Maine, Inc. (the "Americable Systems") on March 29,
1996, from Cox Communications (the "Cox Systems") on April 9, 1996, from Phoenix
Grassroots Cable Systems, LLC (the "Grassroots Systems") on August 29, 1996,
from Triax Southeast Associates, L.P. (the "Triax Systems") on October 7, 1996,
from American Cable Entertainment of Kentucky-Indiana, Inc. (the "ACE Systems")
on October 9, 1996, from SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio
Systems") on October 31, 1996 and from SRW, Inc.'s Deep Creek Cable TV, L.P.
(the "Deep Creek System") 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 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>
- --------
18
<PAGE>
(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.
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.
19
<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
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 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.
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
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<PAGE>
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; 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.
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<PAGE>
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.
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
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<PAGE>
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
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.
25
<PAGE>
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.
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.
26
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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 the UVC Systems in Maine and Ohio for an aggregate purchase price
of approximately $121.8 million, and 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 (i) the C4
Systems on February 1, 1996 for an aggregate purchase price of approximately
$47.6 million (subject to adjustment), (ii) the Americable Systems on March 29,
1996 for an aggregate purchase price of approximately $4.8 million, (iii) the
Cox Systems on April 9, 1996 for an aggregate purchase price of approximately
$135.9 million, (iv) the Grassroots Systems on August 29, 1996 for an aggregate
purchase price of approximately $9.7 million, (v) the Triax Systems on October
7, 1996 for an aggregate purchase price of approximately $85.9 million (subject
to adjustment), (vi) the ACE Systems on October 9, 1996 for an aggregate
purchase price of approximately $147.4 million, (vii) the Penn/Ohio Systems on
October 31, 1996 for an aggregate purchase price of approximately $3.8 million,
and (viii) 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.
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
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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.
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
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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 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
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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 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.
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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 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
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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) 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
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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.
<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
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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.
<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> <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
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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 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.
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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, 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.
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."
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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.
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.
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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, 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 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
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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.
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
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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 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.
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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.
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
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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, 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
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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 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
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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 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.
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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 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.
45
<PAGE>
MANAGEMENT
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, 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
46
<PAGE>
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.
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
47
<PAGE>
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.
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. 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.
48
<PAGE>
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.
49
<PAGE>
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.
50
<PAGE>
PRINCIPAL SECURITY HOLDERS
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.
51
<PAGE>
OWNERSHIP STRUCTURE
<TABLE>
<S> <C>
---------------------------------------------------|
| |
| James C. Vaughn |
| John S. Koo |
| |
---------------------------------------------------|
| (100% interest)
|
|--------------------------------------------| |-------------------------------------------------|
| Institutional Investors | | |
| James C. Vaughn | | FrontierVision Inc. |
| John S. Koo | | |
|--------------------------------------------| |-------------------------------------------------|
| Limited Partners | General Partner
| (99.0% interest) | (1.0% interest)
| |
| |--------------------------------------------------|
| | |
| | FVP GP, L.P. |
|----------------------------------------------| |
| ("FVP GP") |
|--------------------------------------------| | |
| | | |
| | |--------------------------------------------------|
| Institutional Investors | | General Partner
| Other Limited Partners | | (1.0% interest)
| | |
|--------------------------------------------| |
| Limited Partners |
| (99.0% interest) |--------------------------------------------------|
| | |
| | FrontierVision Partners, L.P. |
|----------------------------------------------| |
| ("FVP") |
|----------------------------------------------| |
| (100% interest) | |
| |--------------------------------------------------|
| | General Partner
| | (99.9% interest)
| |
| |
|--------------------------------------------| |---------------------------------------------------|
| | | |
| FrontierVision Operating Partners, Inc. | | FrontierVision Operating Partners, L.P. |
| |------------------| |
| | Limited Partner | ("FVOP" or the "Company") |
| | (0.1% interest) | |
|--------------------------------------------| |---------------------------------------------------|
| (100% interest)
|
|---------------------------------------------------|
| |
| FrontierVision Capital Corporation |
| ("Capital") |
| |
|---------------------------------------------------|
</TABLE>
52
<PAGE>
THE PARTNERSHIP AGREEMENTS
The following is a summary of certain material terms of the Agreement of Limited
Partnership of FVOP, as amended (the "Company Partnership Agreement"), the First
Amended and Restated Agreement of Limited Partnership of FVP, as amended (the
"FVP Partnership Agreement") and the First Amended and Restated Agreement of
Limited Partnership of FVP GP, as amended (the "FVP GP Partnership Agreement"
and together with the Company Partnership Agreement and FVP Partnership
Agreement, the "Partnership Agreements"). The statements under this caption are
summaries and do not purport to be complete, and where reference is made to
particular provisions of the Partnership Agreements, such provisions, including
the definitions of certain terms, are incorporated by reference as a part of
such summaries or terms, which are qualified in their entirety by such
reference. Complete copies of the form of Partnership Agreements have been filed
as exhibits to the Registration Statement of which this Prospectus is a part and
are available in the manner described in "Additional Information." All
capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the respective Partnership Agreement.
THE COMPANY PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. The Company was formed as a limited partnership
pursuant to the provisions of the Delaware Revised Uniform Limited Partnership
Act, as amended (the "Delaware Act"), and a certificate of limited partnership
of the Company was filed with the Secretary of State of Delaware on July 14,
1995. The purpose of the Company, as set forth in the Company Partnership
Agreement, is to conduct and promote the business of acquiring, investing in,
disposing of, operating, managing and financing cable systems and to engage in
all activities necessary, desirable or incidental for such purpose.
The Company will be dissolved and its affairs shall be wound up upon the
earliest to occur of the following: (i) June 30, 2007; (ii) all of the partners
of the Company approve such action in writing; (iii) the Company sells or
otherwise disposes of its interest in all or substantially all of its property;
(iv) an event of withdrawal of the General Partner has occurred under the
Delaware Act; or (v) an entry of a decree of judicial dissolution has occurred
under the Delaware Act.
CONTROL OF OPERATIONS. The Company Partnership Agreement provides that the
powers of the General Partner include all powers, statutory and otherwise,
possessed by general partners under the laws of Delaware, including the right
and power to manage and control the business and affairs of the Company and to
delegate to one or more other persons such right and power. Upon the occurrence
and continuance of any Event of Default under and as defined in the Senior
Credit Facility, Chase Manhattan Bank, N.A. (the "Administrative Agent") shall
be entitled to be admitted (or to have a designee of its choice admitted) as a
new general partner of the Company (the "New General Partner"). On and after the
admission of the New General Partner to the Company, the New General Partner
shall have all powers, statutory and otherwise, possessed by general partners
under the laws of Delaware and shall have the authority to manage the business
and affairs of the Company and the General Partner shall have no further powers
or privileges with respect to the management of the Company.
CAPITAL CONTRIBUTIONS. Under the Company Partnership Agreement, the partners
have made certain capital contributions to the Company. Each partner of the
Company may, but is not required to, make additional capital contributions to
the Company. The Company Partnership Agreement provides that upon the admission
of any additional Limited Partners or Substituted Limited Partners to the
Company, the Company's Limited Partner shall withdraw from the Company and shall
be entitled to receive the return of its capital contribution, without interest
or deduction. In the event of the admission of the New General Partner to the
Company, no capital contribution by the New General Partner shall be required.
Following the admission of the New General Partner to the Company, if requested
by the Administrative Agent, the partnership interest held by the General
Partner shall be converted into a limited partnership interest and in that
connection, the New General Partner may make such additional capital
contributions and alter the allocation of the Company profits and losses among
the partners in such manner as it determines to be appropriate to preserve the
status of the Company as a partnership for federal income tax purposes.
53
<PAGE>
WITHDRAWAL OR REMOVAL OF PARTNERS. In general, no right is given to any partner
of the Company to withdraw from the Company. The General Partner may admit (i)
additional Limited Partners, (ii) an assignee of the Limited Partner's
partnership interest in the Company as a Substituted Limited Partner of the
Company and (iii) one or more additional general partners to the Company. In
addition, upon the occurrence and continuance of any Event of Default under and
as defined in the Senior Credit Facility, the Administrative Agent shall be
entitled to be admitted (or to have a designee of its choice admitted) as a New
General Partner.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the Company Partnership Agreement,
the Limited Partner may assign all or any part of its partnership interest in
the Company only with the consent of the General Partner. The Limited Partner
has no right to grant an assignee of its partnership interest in the Company the
right to become a Substituted Limited Partner of the Company. Following the
admission of the New General Partner to the Company, neither the General Partner
nor the Limited Partner may transfer its partnership interest in the Company
without the prior written consent of the New General Partner.
CLASS A PARTNERSHIP INTERESTS. UVC has the right to convert $5.0 million
aggregate principal amount of the UVC Note into limited partnership interests of
the Company represented by the Class A Partnership InterestsThe Class A
Partnership Interests, if issued, would be redeemable in whole or in part, at
the option of the Company at any time, at a redemption price equal to 100% of
the aggregate capital contribution represented thereby plus a return on the
undistributed portion thereof at a rate of 17% per annum, compounded annually
(the "Liquidation Value"). The Class A Partnership Interests also would be
redeemable in full at their Liquidation Value upon consummation of the sale of
all or substantially all of the Company's assets following repayment of all of
the Company's indebtedness. In addition, the Class A Partnership Interests
wouldbe redeemable in full at their Liquidation Value, at the option of the
holders thereof (within six months of notice to the Company) following the
earlier to occur of (i) the twelfth anniversary of the issue date of such
Interests or (ii) the fifth anniversary of the issue date if, as of such date,
the Company has no unmatured indebtedness for borrowed money outstanding (which
indebtedness was part of a major senior or subordinated debt financing).
FVP PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. FVP was formed as a limited partnership pursuant to
the provisions of the Delaware Act, and a certificate of limited partnership of
FVP was filed with the Secretary of State of Delaware on April 17, 1995. The
principal purpose of FVP, as set forth in the FVP Partnership Agreement, is to
(i) acquire, invest in, own, finance, operate, improve, develop, maintain,
promote, sell, dispose of and otherwise exploit cable television systems and
properties and interests therein, (ii) conduct related business activities,
including telephony and other communications businesses and activities that are
related to FVP's cable television businesses and activities, directly or
indirectly through other entities, alone or with others, and (iii) do any and
all acts necessary, desirable or incidental to the accomplishment of such
purpose.
FVP will be dissolved and its affairs wound up upon the earliest to occur of the
following: (i) June 30, 2007; (ii) the Incapacity, withdrawal, removal or other
event of withdrawal (as defined in the Delaware Act) of a General Partner; (iii)
on or after the time when all of the Capital Commitments and Loan Amounts have
been paid, upon the sale or other disposition by FVP of all or substantially all
of the Investments it then owns; or (iv) the entry of a decree of judicial
dissolution under the Delaware Act. In the case of dissolution described in
clause (ii), if at such time there is at least one remaining General Partner,
the remaining General Partner(s) may unanimously elect to carry on the business
of FVP. In addition, within 90 days thereafter, Class A Limited Partners
representing at least a majority in Interest of the remaining partners (based on
their profits interests and capital interests), or such greater percentage in
Interest as may be required under the Delaware Act, may agree to continue the
business of FVP and to the appointment of one or more additional general
partners to be effective as of the date of such event.
CONTROL OF OPERATIONS. The FVP Partnership Agreement provides that the General
Partner has the full, exclusive and complete right, power and discretion to
operate, manage and control the affairs and business of FVP and to make all
decisions affecting FVP's affairs and business, subjec t to the terms and
provisions of the FVP Partnership Agreement. Among, but not limited to, the
limitations on its power, the General
54
<PAGE>
Partner does not have the right: (i) to possess any FVP property or assign
rights to such property for other than a partnership purpose; (ii) to perform
any act or employ any assets of FVP in contravention of the FVP Partnership
Agreement; (iii) to take any action which requires approval of the Advisory
Committee, unless such action shall first have been so approved; (iv) to permit
FVP to take any action or operate in any manner as would cause FVP to be
classified as an "investment company" for purposes of the Investment Company Act
of 1940, as amended, or as would cause all or any portion of the assets of FVP
to constitute "plan assets" for federal income tax purposes; (v) to admit a
person as a Partner except as otherwise provided in the FVP Partnership
Agreement; (vi) to transfer its Interest as General Partner, or (vii) to amend
the FVP Partnership Agreement, except as provided by the FVP Partnership
Agreement.
ADVISORY COMMITTEE. The FVP Partnership Agreement provides for the establishment
of an Advisory Committee to consult with and advise the General Partner with
respect to FVP's business and overall strategy. Under the FVP Partnership
Agreement, the Advisory Committee has broad authority to review and approve or
disapprove matters relating to all material aspects of FVP's business,
including, but not limited to, determinations with respect to (i) the
acquisition by FVP of any Investment (including any cable television system
acquisition), (ii) the sale, exchange or other disposition by FVP of
Investments, (iii) financing or refinancing of FVP or any Operating Entity, (iv)
borrowings, loans or guarantees by FVP or any Operating Entity relating to
indebtedness for borrowed money, (v) capital calls under the FVP Partnership
Agreement, (vi) the admission of additional partners to FVP or additional
partners to the General Partner and their obligations and liabilities thereto,
(vii) the issuance of additional Interests in the General Partner and the
amendment of the allocation provisions of the FVP GP Partnership Agreement,
(viii) the issuance of additional shares or transfer of capital stock of
FrontierVision Inc. or the merger or consolidation of FrontierVision Inc., (ix)
the creation and issuance of additional classes or series of Limited Partnership
Interests and (x) the termination of the Vaughn Employment Agreement. Upon
termination of the Vaughn Employment Agreement, the General Partner may be
removed from FVP. In addition, the failure of the General Partner to follow any
such direction of the Advisory Committee in connection with such determinations
shall constitute a material breach of the FVP Partnership Agreement whereby the
General Partner may be removed from FVP. As provided in the FVP Partnership
Agreement, 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 the General Partner. Subject to
certain conditions, each of the four Attributable Class A Limited Partners
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.
VOTING RIGHTS. Except as to matters for which consent or approval is expressly
required under the FVP Partnership Agreement, the Limited Partners of FVP have
no right to vote on any partnership matters. Where consent of a majority or
specified percentage in Interest of the Limited Partners of FVP or of a class or
classes of Limited Partners is required, such consent will be determined by
reference to the aggregate Capital Commitments of the Limited Partners entitled
to approve the act or thing for which approval is sought in accordance with the
terms of the FVP Partnership Agreement.
AMENDMENTS AND MODIFICATIONS. In general, the FVP Partnership Agreement is
subject to modification or amendment only with the written consent of the
General Partner and a majority in Interest of the Class A and Class B Limited
Partners of FVP; provided, however, the FVP Partnership Agreement may be amended
from time to time by the General Partner without the consent of any of the
Limited Partners to (i) add to the representations, duties or obligations of the
General Partner or surrender any right or power granted to the General Partner
by the FVP Partnership Agreement, (ii) admit one or more additional Limited
Partners or Substituted Limited Partners, or withdraw one or more Limited
Partners in accordance with the FVP Partnership Agreement, (iii) provide any
necessary information regarding any Partner, (iv) adjust certain allocations of
net profit and loss with the approval of the Advisory Committee and (v) reflect
any change in the amount of the Capital Commitments of any Partner in accordance
with the terms of the FVP Partnership Agreement; provided, however, such
amendment shall not be adopted if, in the opinion of counsel for FVP, such
amendment alters, or results in the alteration of, the limited liability of the
Limited Partners or the status of FVP as a partnership for federal income tax
purposes.
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Notwithstanding the foregoing, no amendment to the FVP Partnership Agreement may
add to, detract from or otherwise modify the purposes of FVP. In addition,
amendments with respect to certain liabilities or responsibilities of certain
Limited Partners require the consent of certain Limited Partners.
CAPITALIZATION AND CERTAIN DISTRIBUTIONS. In connection with its initial
formation, FVP issued to its Limited Partners units consisting of limited
partnership interests in FVP, 12% Senior Subordinated Notes due 2004 and 14%
Junior Subordinated Notes due 2004. Pursuant to such transaction, and under the
FVP Partnership Agreement, each General Partner and Limited Partner of FVP has
made certain capital contributions and loans to FVP. The General Partner is
required under the FVP Partnership Agreement to make such Capital Commitments to
FVP as are necessary to maintain at all times a Capital Commitment equal to not
less than one percent (1%) of the total Capital Commitments of all Partners. The
Limited Partners are not required to make additional capital contributions to
FVP in excess of their respective Capital Commitments. Except for provisions
allowing for the return of capital to Partners upon dissolution of FVP, the FVP
Partnership Agreement provides that no Partner of FVP shall have the right to
withdraw or demand return of its capital contribution.
The FVP Partnership Agreement provides that certain "Special" Limited Partners,
in consideration of significant Capital Commitments to FVP during its initial
formation, and the General Partner are entitled to receive a portion of 15% of
any remaining distributions to be distributed by FVP after certain distributions
are made to the Class A Limited Partners and Class B Limited Partners and the
General Partner in accordance with the FVP Partnership Agreement. The Special
Class A Limited Partners and the Special Class B Limited Partners will be
allocated 8% (in the aggregate) of such remaining capital, in proportion to the
amount of their respective Capital Commitments. The General Partner will be
allocated 7% (in the aggregate) of such remaining capital; provided, however,
that such percentage shall be subject to adjustment by the General Partner, with
the approval of the Advisory Committee, under certain circumstances pursuant to
the terms of the FVP Partnership Agreement.
ADMISSION OF ADDITIONAL PARTNERS. The General Partner is authorized, subject to
certain conditions and the approval of the Advisory Committee, to cause FVP to
(i) admit additional Limited Partners to the partnership, (ii) permit any
existing Limited Partner to increase its Capital Commitment or (iii) create and
issue such additional classes or series of Limited Partnership Interests having
such designations, preferences and relative, participating or other special
rights, powers and duties as the General Partner, with the approval of the
Advisory Committee, shall determine.
PREEMPTIVE RIGHTS. The FVP Partnership Agreement provides that, except under
certain circumstances, the General Partner, without the consent of a majority in
Interest of the Class A Limited Partners, shall not be able to (i) issue, sell
or grant (x) Limited Partnership Interests in FVP, (y) warrants, options, or
other rights to purchase Limited Partnership Interests in FVP or (z) securities
convertible or exchangeable for Limited Partnership Interests in FVP or (ii)
permit any Limited Partner to increase its Capital Commitment to FVP until the
Capital Commitments of all of the Class A Limited Partners and Class B Limited
Partners have been fully drawn upon or expired. Except under certain
circumstances, after the Capital Commitments of all of the Class A Limited
Partners and Class B Limited Partners have been fully drawn upon or have
expired, if FVP proposes to admit additional Limited Partners to the partnership
or permit any Limited Partner to increase its Capital Commitment to the
partnership pursuant to the FVP Partnership Agreement, the General Partner must
give notice to each Limited Partner of such proposed action. Thereafter, each
Limited Partner will have the right to acquire its pro rata share of any such
additional Limited Partnership Interests or increase its Capital Commitment
subject to the provisions of the FVP Partnership Agreement.
RIGHTS OF FIRST REFUSAL; TAG-ALONG RIGHTS. The FVP Partnership Agreement
provides that in the event of a proposed transfer of a Limited Partnership
Interest or Note by a Limited Partner (to the extent permitted under the FVP
Partnership Agreement), such Limited Partner must provide 45 days' written
notice to the General Partner and to all of the Class A Limited Partners and
Class B Limited Partners of such proposed transfer and the proposed cash
purchase price. During the first 30 days of such period, the General Partner and
each of the Class A Limited Partners and Class B Limited Partners (other than
any Defaulting Partner) will have the right to propose to acquire such Interest
or Note, or some portion thereof, for the proposed cash purchase price. If the
Partners as a group propose to acquire more than the Interest or Note, then each
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such Partner shall have the right to propose to acquire its pro rata portion of
the Interest or Note; provided, however, that the Limited Partner that proposes
such transfer shall not be obligated to sell any portion of the Interest or Note
to any Partner unless the Partners have collectively proposed to purchase all of
the Interest or Note.
In the case of a proposed transfer in a single transaction or a series of
related transactions of fifty percent (50%) or more of the outstanding Limited
Partnership Interests, if the Partners do not exercise their rights of first
refusal, then, as a further condition to the transfer by a Limited Partner, such
Limited Partner shall obtain for each other Class A Limited Partner and Class B
Limited Partner the right to sell the same proportion of its Limited Partnership
Interests as that being sold by the selling Limited Partner at the same purchase
price, subject to certain adjustments.
LIABILITY OF GENERAL PARTNER. In general, under the FVP Partnership Agreement,
FVP will indemnify and hold harmless, out of its assets, the General Partner,
its partners and their respective officers, directors, employees, agents or
stockholders (including when any of the foregoing is serving at the request of
the General Partner on behalf of FVP as a partner, officer, director, employee
or agent of any other Person) against losses, damages, expenses (including
reasonable attorneys' fees), judgments and settlement amounts incurred by such
party by reason of actions or omissions in connection with activities performed
on behalf of FVP and not constituting fraud, breach of fiduciary duty, willful
misconduct or gross negligence. In the event that the General Partner of FVP
ceases to be a General Partner, it shall remain liable for obligations and
liabilities incurred on account of its activities as General Partner prior to
the time it ceased to be a General Partner, but shall be free of any obligation
or liability as a General Partner incurred on account of the activities of FVP
from and after the time it ceased to be a General Partner.
WITHDRAWAL OR REMOVAL OF PARTNERS. The General Partner may not voluntarily
dissolve, retire or withdraw as a General Partner of FVP. In addition, the
General Partner may not directly or indirectly assign, sell, exchange, transfer,
pledge, hypothecate or otherwise dispose of all or any fraction of its Interest
as a General Partner of FVP. Subject to certain procedures, the General Partner
may be removed at any time after the occurrence of a Vaughn Expiration Date (as
defined below) or for "cause," in each case with the consent of a majority in
Interest of the Attributable Class A Limited Partners with the approval of the
Advisory Committee. In addition, in the event that FVP shall or would suffer an
FCC Regulatory Issue due to a GP Principal or any of its Affiliates, at the
request of the Advisory Committee, the General Partner shall cause the GP
Principal to divest all direct and indirect Interests in FVP.
Under the FVP Partnership Agreement, "cause" is defined as one or more of the
following: (i) any action by the General Partner or GP Principal which
constitutes dishonesty, a violation of law or a fraud against FVP; (ii) the
indictment of the General Partner or GP Principal for a felony; (iii) willful
misconduct, drunkenness or abuse of any controlled substance by the General
Partner or any GP Principal; (iv) any material violation by the General Partner
or any GP Principal of its fiduciary obligations to FVP or the Partners; (v) any
material breach by the General Partner or any GP Principal of the FVP
Partnership Agreement or any material breach by FrontierVision Inc. or any GP
Principal of the General Partner Partnership Agreement or (vi) in the event that
FVP shall or would suffer an FCC Regulatory Issue due to the General Partner,
any GP Principal or any of their Affiliates, unless such FCC Regulatory Issue is
cured within 15 days after the General Partner becomes aware thereof. Under the
FVP Partnership Agreement, "Vaughn Expiration Date" means the earliest of the
following dates: (i) the date on which Mr. Vaughn is neither a General Partner
nor a GP Principal; (ii) the date on which the Vaughn Employment Agreement is
terminated pursuant to its terms, and (iii) the date on which Mr. Vaughn ceases
to own beneficially for his own account, directly or indirectly, at least one of
the following: (x) at least two-thirds of the General Partner's share of
distributions under the FVP Partnership Agreement or (y) at least two-thirds of
the Interests of the General Partner that correlate to the General Partner's
share of distributions pursuant to the FVP Partnership Agreement.
Upon the removal of the General Partner, at the election of a majority in
Interest of the Attributable Class A Limited Partners with the approval of the
Advisory Committee, FVP shall redeem the Interest of the removed General Partner
for a price equal to the fair market value thereof as determined pursuant to the
FVP Partnership Agreement. In the absence of such election and approval, the
General Partner's Interest in
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FVP shall be converted to a nonvoting, nonconvertible Limited Partnership
Interest. Upon the removal of the General Partner, a majority in Interest of the
Attributable Class A Limited Partners with the approval of the Advisory
Committee shall have the power to appoint a new General Partner.
MANDATORY TRANSFERS. In the event of the Incapacity of a Limited Partner, to the
fullest extent permitted by law, the General Partner may require the transfer of
the Interest in and/or certain debt securities of FVP held by such Limited
Partner. The General Partner shall provide at least 60 days' notice of such
transfer. "Incapacity" is defined by the FVP Partnership Agreement to mean, as
to any person, (i) the adjudication of incompetence or insanity of such person,
or the Bankruptcy of such person, or (ii) the death, dissolution or termination
(other than by merger or consolidation), as the case may be, of such person. In
addition, the General Partner, with the approval of the Advisory Committee,
shall also have the right to cause any Defaulting Partner to transfer its
Limited Partnership Interest in accordance with the FVP Partnership Agreement.
Under certain circumstances where FVP would suffer an FCC Regulatory Issue due
to a Limited Partner or an Attributable Person through such Limited Partner,
such Limited Partner may be required to use all commercially reasonable efforts
to sell such portion of its Limited Partnership Interests as may be necessary to
cure such FCC Regulatory Issue. If such Limited Partner is unable to sell its
Limited Partnership Interest within 180 days of the date that the General
Partner requests that such Interest be sold (or within the time established by
the FCC), then for a specified period, the General Partner, with the approval of
the Advisory Committee, may elect on behalf of FVP to make Buyout Payments to
such Limited Partner in accordance with the FVP Partnership Agreement. The
economic interest of such Limited Partner shall be deemed to have been converted
into debt and such Limited Partner shall immediately cease to be a Partner.
LIABILITY OF LIMITED PARTNERS. Limited Partners of FVP do not have any personal
liability for the repayment or discharge of the debts and obligations of FVP;
provided, however, that each Limited Partner shall be liable to FVP for its
Unused Capital Commitment and Loan Amount in accordance with the terms of the
FVP Partnership Agreement.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the FVP Partnership Agreement, the
General Partner may not directly or indirectly assign, sell, exchange, transfer,
pledge, hypothecate or otherwise dispose of all or any fraction of its Interest
as a General Partner of FVP.
A Limited Partner may transfer all or any fraction of such Limited Partner's
Limited Partnership Interest (subject in certain cases to the rights of first
refusal discussed above and more fully set forth in the FVP Partnership
Agreement) to another person only if such transfer meets the conditions set
forth in the FVP Partnership Agreement.
FVP GP PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. FVP GP was formed as a limited partnership pursuant
to the provisions of the Delaware Act and a certificate of limited partnership
of FVP GP was filed with the Secretary of State of Delaware on April 17, 1995.
The purpose of FVP GP, as set forth in the FVP GP Partnership Agreement, is to
(i) serve as general partner of FVP and (ii) do all other lawful things
necessary, desirable or incidental to the accomplishment of such purposes.
FVP GP will be dissolved and its affairs wound up upon the earliest to occur of
the following: (i) June 30, 2007; (ii) the Incapacity, withdrawal, removal or
other event of withdrawal (as defined in the Delaware Act) of the General
Partner; or (iii) the entry of a decree of judicial dissolution under the Act.
In the case of dissolution described in clause (ii), if at such time there is at
least one remaining General Partner, the remaining General Partner(s) may
unanimously elect to carry on the business of FVP GP. In addition, within 90
days thereafter, Class X Limited Partners and Class Y Limited Partners
representing at least a majority in Interest of the remaining Partners (based on
their profits interests and capital interests), or such greater percentage in
Interest as may be required under the Delaware Act, may agree to continue the
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business of FVP GP and to the appointment of one or more additional general
partners to be effective as of the date of such event.
CONTROL OF OPERATIONS. The FVP GP Partnership Agreement provides that the
General Partner has the full, exclusive and complete right, power and discretion
to operate, manage and control the affairs and business of FVP GP and to make
all decisions affecting FVP GP's affairs and business, subject to certain
customary exceptions specified in the FVP GP Partnership Agreement.
VOTING RIGHTS. Except as to matters for which consent or approval is expressly
required under the FVP GP Partnership Agreement, the Limited Partners of FVP GP
have no right to vote on any partnership matters. Where consent of a majority or
specified percentage in Interest of the Limited Partners of FVP GP or of a class
or classes of Limited Partners is required, such consent will be determined by
reference to the aggregate capital commitments of the Limited Partners entitled
to approve the act or thing for which approval is sought in accordance with the
terms of the FVP GP Partnership Agreement.
AMENDMENTS AND MODIFICATIONS. In general, the FVP GP Partnership Agreement is
subject to modification or amendment only with the written consent of the
General Partner and a majority in Interest of the Class X and Class Z Limited
Partners of FVP GP and a majority in Interest of the Class Y Limited Partners;
provided, however, the FVP GP Partnership Agreement may be amended from time to
time by the General Partner without the consent of any of the Limited Partners
to (i) add to the representations, duties or obligations of the General Partner
or surrender any right or power granted to the General Partner by the FVP GP
Partnership Agreement, (ii) admit one or more additional Limited Partners or
Substituted Limited Partners, or withdraw one or more Limited Partners in
accordance with the FVP GP Partnership Agreement, (iii) provide any necessary
information regarding any Partner, (iv) adjust certain allocations of net profit
and loss with the consent of a majority in Interest of the Class X Limited
Partners and (v) reflect any change in the amount of the Capital Commitments of
any Partner in accordance with the terms of the FVP GP Partnership Agreement;
provided, however, such amendment shall not be adopted if, in the opinion of
counsel for FVP GP, such amendment alters, or results in the alteration of, the
limited liability of the Limited Partners or the status of FVP GP as a
partnership for federal income tax purposes.
Notwithstanding the foregoing, no amendment to the FVP GP Partnership Agreement
may add to, detract from or otherwise modify the purposes of FVP GP. In
addition, amendments with respect to certain liabilities or responsibilities of
certain Limited Partners require the consent of certain Limited Partners.
CAPITAL CONTRIBUTIONS. Under the FVP GP Partnership Agreement, the Partners have
made certain capital contributions to FVP GP. The General Partner is required
under the FVP GP Partnership Agreement to make such Capital Commitments to FVP
GP as are necessary to maintain at all times a Capital Commitment equal to not
less than one percent (1%) of the total Capital Commitments of all Partners. The
Limited Partners are not required to make additional capital contributions to
FVP GP. Except for provisions allowing for the return of capital to Partners
upon dissolution of FVP GP, the FVP GP Partnership Agreement provides that no
Partner of FVP GP shall have the right to withdraw or demand return of its
capital contribution.
RIGHTS OF FIRST REFUSAL. The FVP GP Partnership Agreement provides that in the
event of a proposed transfer of a Limited Partnership Interest by a Limited
Partner (to the extent permitted by the FVP GP Partnership Agreement), such
Limited Partner must provide 45 days' written notice to the General Partner and
to all of the Limited Partners of such proposed transfer and the proposed cash
purchase price. During the first 30 days of such period, the General Partner and
each of the Limited Partners (other than any Defaulting Partner) will have the
right to propose to acquire such Interest or some portion thereof for the
proposed cash purchase price. If the Partners as a group propose to acquire more
than the Interest, then each such Partner shall have the right to propose to
acquire its pro rata portion of the Interest; provided, however, that the
Limited Partner that proposes such transfer shall not be obligated to sell any
portion of the Interest to any Partner unless the Partners have collectively
proposed to purchase all of the Interest.
LIABILITY OF GENERAL PARTNER. In general, under the FVP GP Partnership
Agreement, FVP GP will indemnify and hold harmless, out of its assets, the
General Partner, its partners and their respective officers,
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directors, employees, agents or stockholders (including when any of the
foregoing is serving at the request of the General Partner on behalf of FVP GP
or FVP as a partner, officer, director, employee or agent of any other Person)
against losses, damages, expenses (including reasonable attorneys' fees),
judgments and settlement amounts incurred by such party by reason of actions or
omissions in connection with activities performed on behalf of FVP GP and not
constituting fraud, breach of fiduciary duty, willful misconduct or gross
negligence. In the event that the General Partner of FVP GP ceases to be a
General Partner, it shall remain liable for obligations and liabilities incurred
on account of its activities as General Partner prior to the time it ceased to
be a General Partner, but shall be free of any obligation or liability as a
General Partner incurred on account of the activities of FVP GP from and after
the time it ceased to be a General Partner.
WITHDRAWAL OR REMOVAL OF PARTNERS. The General Partner may not voluntarily
dissolve, retire or withdraw as a General Partner of FVP GP. In addition, the
General Partner may not directly or indirectly assign, sell, exchange, transfer,
pledge, hypothecate or otherwise dispose of all or any fraction of its Interest
as a General Partner of FVP GP. Subject to certain procedures, the General
Partner may be removed at any time after the occurrence of a Vaughn Expiration
Date or for "cause," in each case by the consent of a majority in Interest of
the Attributable Class X and Class Y Limited Partners. In addition, in the event
that FVP GP shall or would suffer an FCC Regulatory Issue due to a GP Principal
or any of its Affiliates, the General Partner shall cause the GP Principal to
divest all direct or indirect Interests in FVP GP.
Under the FVP GP Partnership Agreement, "cause" is defined as under the FVP
Partnership Agreement. Under the FVP GP Partnership Agreement, "Vaughn
Expiration Date" means the earliest of the following dates: (i) the date on
which Mr. Vaughn is neither a General Partner nor a GP Principal, (ii) the date
on which the Vaughn Employment Agreement is terminated pursuant to its terms and
(iii) the date on which Mr. Vaughn ceases to own beneficially for his own
account, directly or indirectly, at least one of the following: (x) at least
two-thirds of the Special Distribution (as defined in the FVP GP Partnership
Agreement) or (y) at least two-thirds of the Interests in FVP GP that correlate
to the Special Distribution.
Upon the removal of the General Partner, at the election of a majority in
Interest of the Attributable Class X Limited Partners, FVP GP shall redeem the
Interest of the removed General Partner for a price equal to the fair market
value thereof as determined pursuant to the FVP GP Partnership Agreement. In the
absence of such election and approval, the General Partner's Interest in FVP
shall be converted to that of a nonvoting, nonconvertible Limited Partnership
Interest. Upon the removal of the General Partner, a majority in Interest of the
Attributable Class X Limited Partners shall have the power to appoint a new
General Partner.
MANDATORY TRANSFERS. In the event of the Incapacity of a Limited Partner, to the
fullest extent permitted by law, the General Partner may require the transfer of
the Interest of such Limited Partner. The General Partner shall provide at least
60 days' notice of such transfer. "Incapacity" is defined by the FVP GP
Partnership Agreement to mean, as to any person, (i) the adjudication of
incompetence or insanity of such person, or the Bankruptcy of such person or
(ii) the death, dissolution or termination (other than by merger or
consolidation), as the case may be, of such person. In addition, the General
Partner shall also have the right to cause any Defaulting Partner (in the case
of a default by a Class X Limited Partner or Class Z Limited Partner) to
transfer its Limited Partnership Interest in accordance with the FVP GP
Partnership Agreement. A majority in Interest of the Class X Limited Partners
shall have the right to cause any Defaulting Partner (in the case of a default
by a Class Y Limited Partner) to transfer its Limited Partnership Interest in
accordance with the FVP GP Partnership Agreement.
Under certain circumstances where FVP GP would suffer an FCC Regulatory Issue
due to a Limited Partner or an Attributable Person through such Limited Partner,
such Limited Partner may be required to use all commercially reasonable efforts
to sell such portion of its Limited Partnership Interests as may be necessary to
cure such FCC Regulatory Issue. If such Limited Partner is unable to sell its
Limited Partnership Interest within 180 days of the date that the General
Partner requests that such Interest be sold (or within the time established by
the FCC), then for a specified period, the General Partner (with the consent of
a majority in Interest of the Class X Limited Partners if the Limited Partner is
a Class Y Limited Partner) may elect on behalf of FVP GP to make Buyout Payments
to such Limited Partner in accordance
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with the FVP GP Partnership Agreement. The economic interest of such Limited
Partner shall be deemed to have been converted into debt and such Limited
Partner shall immediately cease to be a partner.
LIABILITY OF LIMITED PARTNERS. Limited Partners of FVP GP do not have any
personal liability for the repayment or discharge of the debts and obligations
of FVP GP; provided, however, that Limited Partners shall be liable to FVP GP
for their Unused Capital Commitments in accordance with the terms of the FVP GP
Partnership Agreement.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the FVP GP Partnership Agreement, the
General Partner may not directly or indirectly assign, sell, exchange, transfer,
pledge, hypothecate or otherwise dispose of all or any fraction of its Interest
as a General Partner of FVP GP.
A Limited Partner may transfer all or any fraction of such Limited Partner's
Limited Partnership Interest (subject in certain cases to the rights of first
refusal discussed above and more fully set forth in the FVP GP Partnership
Agreement) to another person only if such transfer meets the conditions set
forth in the FVP GP Partnership Agreement.
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DESCRIPTION OF THE NOTES
As used below in this "Description of the Notes" section, the "Company" means
FrontierVision Operating Partners, L.P., but not any of its subsidiaries, unless
otherwise specified. The Notes were issued on October 7, 1996 under an
Indenture, dated that date (the "Indenture"), among the Issuers and Colorado
National Bank, as Trustee (the "Trustee"). The Indenture is subject to and
governed by the Trust Indenture Act of 1939, as amended. The statements under
this caption relating to the Notes and the Indenture are summaries and do not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, are
incorporated by reference as a part of such summaries or terms, which are
qualified in their entirety by such reference. A copy of the proposed form of
Indenture has been filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part.
GENERAL
The Notes are joint and several obligations of the Company and Capital. The
Notes are general unsecured senior subordinated obligations of the Issuers, are
limited to $200 million aggregate principal amount and rank subordinate in right
of payment to all existing and future Senior Indebtedness. The Notes rank pari
passu in right of payment with all other senior subordinated indebtedness of the
Company. At December 31, 1996, the Company had approximately $398.2 million of
total Senior Indebtedness (including $70,000 outstanding under capital leases
and excluding unused commitments of approximately $75,000 under the Senior
Credit Facility). Secured creditors of the Company have a claim on the assets
which secure such obligations prior to claims of the holders of the Notes
against those assets. Capital has nominal assets and does not conduct any
operations.
The Notes will mature on October 15, 2006 and bear interest at the rate per
annum shown on the front cover of this Prospectus from the date of issuance or
from the most recent interest payment date to which interest has been paid or
provided for. Interest is payable semiannually on April 15 and October 15 of
each year, commencing October 15, 1997, to the Person in whose name a Note is
registered at the close of business on the preceding April 1 or October 1 (each,
a "Record Date"), as the case may be. Interest on the Notes will be computed on
the basis of a 360-day year of twelve 30-day months. Holders must surrender the
Notes to the paying agent for the Notes to collect principal payments. The
Issuers will pay principal and interest by check and may mail interest checks to
a holder's registered address.
The Notes were issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Issuers may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Initially, the Trustee will
act as paying agent and registrar for the Notes. The Notes may be presented for
registration of transfer and exchange at the offices of the registrar for the
Notes.
OPTIONAL REDEMPTION
The Notes are not redeemable prior to October 15, 2001, except as set forth
below. The Notes are subject to redemption, at the option of the Issuers, in
whole or in part, at any time on or after October 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of Notes to be redeemed at his address appearing in the register for the
Notes, in amounts of $1,000 or an integral multiple of $1,000, at the following
redemption prices (expressed as percentages of principal amount) plus accrued
and unpaid interest to but excluding the date fixed for redemption (subject to
the right of holders of record on the relevant Record Date to receive interest
due on an interest payment date that is on or prior to the date fixed for
redemption), if redeemed during the 12-month period beginning on October 15 of
the years indicated:
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Year Percentage
------------------ ----------
2001 105.50%
2002 103.67
2003 101.83
2004 and thereafter 100.00
In addition, prior to October 15, 1999, the Issuers may redeem up to 35% of the
principal amount of the Notes with the net cash proceeds received by the Company
from one or more Public Equity Offerings or Strategic Equity Investments, at a
redemption price (expressed as a percentage of the principal amount) of 111% of
the principal amount thereof, plus accrued and unpaid interest to the date fixed
for redemption; provided, however, that at least 65% in aggregate principal
amount of the Notes originally issued remains outstanding immediately after any
such redemption (excluding any Notes owned by the Issuers or any of their
Affiliates). Notice of redemption pursuant to this paragraph must be mailed to
holders of Notes not later than 60 days following the consummation of such
Public Equity Offering or Strategic Equity Investment.
Selection of Notes for any partial redemption shall be made by the Trustee, in
accordance with the rules of any national securities exchange on which the Notes
may be listed or, if the Notes are not so listed, pro rata or by lot or in such
other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. Notice of redemption will be mailed before the date fixed
for redemption to each holder of Notes to be redeemed at his registered address.
On and after the date fixed for redemption, interest will cease to accrue on
Notes or portions thereof called for redemption.
The Notes do not have the benefit of any sinking fund.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, to the extent and in the manner provided in
the Indenture, to the prior payment in full in cash of all Senior Indebtedness.
Upon any payment or distribution of assets or securities of either of the
Issuers of any kind or character, whether in cash, property or securities
(including any payment made to the holders of the Notes under the terms of
Indebtedness subordinated to the Notes, but excluding any payment or
distribution of Permitted Junior Securities), upon any dissolution or winding-up
or total liquidation or reorganization of either of the Issuers, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or other
proceedings, all Senior Indebtedness shall first be paid in full in cash before
the holders of the Notes or the Trustee on behalf of such holders shall be
entitled to receive any payment by the Issuers of the principal of, premium, if
any, or interest on the Notes, or any payment to acquire any of the Notes for
cash, property or securities, or any distribution with respect to the Notes of
any cash, property or securities. Before any payment may be made by, or on
behalf of, the Issuers of the principal of, premium, if any, or interest on the
Notes upon any such dissolution or winding-up or liquidation or reorganization,
any payment or distribution of assets or securities of either of the Issuers of
any kind or character, whether in cash, property or securities (including any
payment made to the holders of the Notes under the terms of Indebtedness
subordinated to the Notes, but excluding any payment or distribution of
Permitted Junior Securities), to which the holders of the Notes or the Trustee
on their behalf would be entitled, but for the subordination provisions of the
Indenture, shall be made by the Issuers or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, directly to the holders of the Senior Indebtedness (pro rata to
such holders on the basis of the respective amounts of Senior Indebtedness held
by such holders) or their representatives or to the trustee or trustees under
any indenture pursuant to which any of such Senior Indebtedness may have been
issued, as their respective interests may appear, to the extent necessary to pay
all such Senior Indebtedness in full in cash after giving effect to any
concurrent payment, distribution or provision therefor to or for the holders of
such Senior Indebtedness.
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No direct or indirect payment (including any payment made to the holders of the
Notes under the terms of Indebtedness subordinated to the Notes, but excluding
any payment or distribution of Permitted Junior Securities) by or on behalf of
the Issuers of principal of, premium, if any, or interest on the Notes, whether
pursuant to the terms of the Notes, upon acceleration or otherwise, will be made
if, at the time of such payment, there exists a default in the payment of all or
any portion of the Obligations on any Designated Senior Indebtedness, whether at
maturity, on account of mandatory redemption or prepayment, acceleration or
otherwise, and such default shall not have been cured or waived or the benefits
of this sentence waived by or on behalf of the holders of such Designated Senior
Indebtedness. In addition, during the continuance of any non-payment default or
non-payment event of default with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be immediately accelerated, and upon
receipt by the Trustee of written notice (a "Payment Blockage Notice") from the
holder or holders of such Designated Senior Indebtedness or the trustee or agent
acting on behalf of such Designated Senior Indebtedness, then, unless and until
such default or event of default has been cured or waived or has ceased to exist
or such Designated Senior Indebtedness has been discharged or repaid in full, no
direct or indirect payment (including any payment made to the holders of the
Notes under the terms of Indebtedness subordinated to the Notes, but excluding
any payment or distribution of Permitted Junior Securities) will be made by or
on behalf of the Issuers of principal of, premium, if any, or interest on the
Notes, except from those funds held in trust for the benefit of the holders of
any Notes, pursuant to the procedures set forth under "--Satisfaction and
Discharge of Indenture; Defeasance" below, to such holders, during a period (a
"Payment Blockage Period") commencing on the date of receipt of such notice by
the Trustee and ending 179 days thereafter. Notwithstanding anything in the
subordination provisions of the Indenture or the Notes to the contrary, in no
event will a Payment Blockage Period extend beyond 179 days from the date the
Payment Blockage Notice in respect thereof was given. Not more than one Payment
Blockage Period may be commenced with respect to the Notes during any period of
360 consecutive days. No default or event of default that existed or was
continuing on the date of commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period (to the extent the holder of Designated Senior Indebtedness, or trustee
or agent, giving notice commencing such Payment Blockage Period had knowledge of
such existing or continuing default or event of default) may be, or be made, the
basis for the commencement of any other Payment Blockage Period by the holder or
holders of such Designated Senior Indebtedness or the trustee or agent acting on
behalf of such Designated Senior Indebtedness, whether or not within a period of
360 consecutive days, unless such default or event of default has been cured or
waived for a period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the Notes
by reason of the provisions of the Indenture described under this
"Subordination" heading will not be construed as preventing the occurrence of an
Event of Default described in clause (a) or (b) of the first paragraph under
"--Events of Default."
By reason of the subordination provisions described above, in the event of
insolvency of either of the Issuers, funds which would otherwise be payable to
holders of the Notes will be paid to the holders of Senior Indebtedness to the
extent necessary to pay the Senior Indebtedness in full in cash, and the Issuers
may be unable to fully meet their obligations with respect to the Notes. Subject
to the restrictions set forth in the Indenture, in the future the Issuers may
issue additional Senior Indebtedness.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, directly or
indirectly, Incur any Indebtedness (including Acquired Indebtedness) or
issue any Disqualified Equity Interests except for Permitted Indebtedness;
provided, however, that the Company or any Restricted Subsidiary may Incur
Indebtedness and the Company or any Restricted Subsidiary may issue
Disqualified Equity Interests if, at the time of and immediately after
giving pro forma effect to such Incurrence of Indebtedness or issuance of
Disqualified Equity Interests and the application of the proceeds therefrom,
the Debt to Operating Cash Flow Ratio would
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be less than or equal to (i) 7.0 to 1.0 if the date of such Incurrence is on
or before December 31, 1997 and (ii) 6.75 to 1.0 thereafter.
The foregoing limitations do not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be
given independent effect:
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness and Disqualified Equity Interests of the Company and the
Restricted Subsidiaries outstanding on the Issue Date;
(c) Indebtedness under the Senior Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed the sum of (A) $265.0
million, which amount shall be reduced by (x) any permanent reduction of
commitments thereunder and (y) any other repayment accompanied by a
permanent reduction of commitments thereunder (other than in connection
with any refinancing thereof) plus (B) any amounts outstanding under the
Senior Credit Facility that utilizes subparagraph (i) below;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Wholly Owned Restricted Subsidiary and (y) Indebtedness
of the Company owed to and held by any Wholly Owned Restricted
Subsidiary which is unsecured and subordinated in right of payment to
the payment and performance of the Issuers' obligations under any Senior
Indebtedness, the Indenture and the Notes; provided, however, that an
Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon (i) any sale or other disposition
of any Indebtedness of the Company or a Wholly Owned Restricted
Subsidiary referred to in this clause (d) to a Person (other than the
Company or a Wholly Owned Restricted Subsidiary), (ii) any sale or other
disposition of Equity Interests of a Wholly Owned Restricted Subsidiary
which holds Indebtedness of the Company or another Wholly Owned
Restricted Subsidiary such that such Wholly Owned Restricted Subsidiary
ceases to be a Wholly Owned Restricted Subsidiary or (iii) designation
of a Wholly Owned Restricted Subsidiary which holds Indebtedness of the
Company as an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Indebtedness of the Company;
(f) Interest Rate Protection Obligations of the Company or any Restricted
Subsidiary relating to Indebtedness of the Company or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be
Incurred under this covenant); provided, however, that the notional
principal amount of such Interest Rate Protection Obligations does not
exceed the principal amount of the Indebtedness to which such Interest
Rate Protection Obligations relate;
(g) Purchase Money Indebtedness and Capitalized Lease Obligations of the
Company or any Restricted Subsidiary which do not exceed $5.0 million in
the aggregate at any one time outstanding;
(h) Indebtedness or Disqualified Equity Interests of the Company or any
Restricted Subsidiary to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness or Disqualified Equity Interests of the Company or any
Restricted Subsidiary Incurred in compliance with the Debt to Operating
Cash Flow Ratio of the first paragraph of this covenant or clause (a) or
(b) of this paragraph of this covenant; provided, however, that (i)
Indebtedness or Disqualified Equity Interests of the Company may not be
refinanced under this clause (h) with Indebtedness or Disqualified
Equity Interests of any Restricted Subsidiary, (ii) any such refinancing
shall not exceed the sum of the principal amount (or, if such
Indebtedness or Disqualified Equity Interests provide for a lesser
amount to be due and payable upon a declaration of acceleration thereof
at the time of such refinancing, an amount no greater than such lesser
amount) of the Indebtedness or Disqualified Equity Interests being
refinanced plus the amount of accrued interest or dividends thereon and
the amount of any reasonably determined
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prepayment premium necessary to accomplish such refinancing and such
reasonable fees and expenses incurred in connection therewith, (iii)
Indebtedness representing a refinancing of Indebtedness other than
Senior Indebtedness shall have a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of the
Indebtedness being refinanced, and (iv) Indebtedness that is pari passu
with the Notes may only be refinanced with Indebtedness that is made
pari passu with or subordinate in right of payment to the Notes and
Subordinated Indebtedness or Disqualified Equity Interests may only be
refinanced with Subordinated Indebtedness or Disqualified Equity
Interests; and
(i) in addition to the items referred to in clauses (a)through (h) above,
Indebtedness of the Company (including any Indebtedness under the Senior
Credit Facility that utilizes this subparagraph (i)) having an aggregate
principal amount not to exceed $20.0 million at any time outstanding.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. The Indenture provides that (i)
the Issuers will not, directly or indirectly, Incur any Indebtedness that by its
terms would expressly rank senior in right of payment to the Notes and expressly
rank subordinate in right of payment to any Senior Indebtedness and (ii) the
Company will not permit any Subsidiary Guarantor to and no Subsidiary Guarantor
will, directly or indirectly, Incur any Indebtedness that by its terms would
expressly rank senior in right of payment to the Subsidiary Guarantee of such
Subsidiary Guarantor and expressly rank subordinate in right of payment to any
Guarantor Senior Indebtedness of such Subsidiary Guarantor.
Limitation on Restricted Payments. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any Restricted
Subsidiary (other than payments or distributions made to the Company or
a Wholly Owned Restricted Subsidiary and dividends or distributions
payable solely in Qualified Equity Interests of the Company or in
options, warrants or other rights to purchase Qualified Equity Interests
of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any Restricted Subsidiary (other than any
such Equity Interests owned by the Company or a Wholly Owned Restricted
Subsidiary);
(iii)purchase, redeem, defease or retire for value more than one year prior
to the stated maturity thereof any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by a Wholly Owned Restricted
Subsidiary); or
(iv) make any Investment (other than Permitted Investments) in any Person
(other than in the Company, a Wholly Owned Restricted Subsidiary or a
Person that becomes a Wholly Owned Restricted Subsidiary, or is merged
with or into or consolidated with the Company or a Wholly Owned
Restricted Subsidiary (provided the Company or a Wholly Owned
Restricted Subsidiary is the survivor), as a result of or in connection
with such Investment)
(such payments or any other actions (other than Permitted Investments) described
in (i), (ii), (iii) and (iv) collectively, "Restricted Payments"), unless
(a) no Default or Event of Default shall have occurred and be continuing at
the time or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the Company
would be able to Incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" above; and
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(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of (1) the
difference between (x) the Cumulative Available Cash Flow determined at
the time of such Restricted Payment and (y) 140% of cumulative
Consolidated Interest Expense of the Company determined for the period
commencing on the Issue Date and ending on the last day of the latest
fiscal quarter for which consolidated financial statements of the
Company are available preceding the date of such Restricted Payment,
plus (2) the aggregate net proceeds (with the value of any non-cash
proceeds to be the Fair Market Value thereof as determined by an
Independent Financial Advisor) received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from
the issue and sale (other than to a Restricted Subsidiary) of its
Qualified Equity Interests after the Issue Date (excluding the net
proceeds from any issuance and sale of Qualified Equity Interests
financed, directly or indirectly, using funds borrowed from the Company
or any Restricted Subsidiary until and to the extent such borrowing is
repaid), plus (3) the principal amount (or accrued or accreted amount,
if less) of any Indebtedness of the Company or any Restricted Subsidiary
Incurred after the Issue Date which has been converted into or exchanged
for Qualified Equity Interests of the Company, plus (4) in the case of
the disposition or repayment of any Investment constituting a Restricted
Payment made after the Issue Date, an amount (to the extent not included
in the computation of Cumulative Available Cash Flow) equal to the
lesser of: (i) the return of capital with respect to such Investment and
(ii) the amount of such Investment which was treated as a Restricted
Payment, in either case, less the cost of the disposition of such
Investment, plus (5) the Company's proportionate interest in the lesser
of the Fair Market Value or the net worth of any Unrestricted Subsidiary
that has been redesignated as a Restricted Subsidiary after the Issue
Date in accordance with "--Designation of Unrestricted Subsidiaries"
below not to exceed in any case the Designation Amount with respect to
such Restricted Subsidiary upon its Designation, minus (6) the
Designation Amount with respect to any Subsidiary of the Company which
has been designated as an Unrestricted Subsidiary after the Issue Date
in accordance with "--Designation of Unrestricted Subsidiaries" below.
The foregoing provisions do not prevent (i) the payment of any dividend or
distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of the
Indenture, (ii) so long as no Default or Event of Default shall have occurred
and be continuing, the retirement of any Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
issue and sale (other than to a Restricted Subsidiary) of, Qualified Equity
Interests of the Company; provided, however, that any such net cash proceeds and
the value of any Equity Interests issued in exchange for such retired Equity
Interests are excluded from clause (c)(2) of the preceding paragraph (and were
not included therein at any time), (iii) so long as no Default or Event of
Default shall have occurred and be continuing, the purchase, redemption,
retirement or other acquisition of Subordinated Indebtedness made in exchange
for, or out of the net cash proceeds of, a substantially concurrent issue and
sale (other than to a Restricted Subsidiary) of (x) Qualified Equity Interests
of the Company; provided, however, that any such net cash proceeds and the value
of any Equity Interests issued in exchange for Subordinated Indebtedness are
excluded from clauses (c)(2) and (c)(3) of the preceding paragraph (and were not
included therein at any time) or (y) other Subordinated Indebtedness having no
stated maturity for the payment of principal thereof prior to the final stated
maturity of the Notes, (iv) the payment of any dividend or distribution on
Equity Interests of the Company or any Restricted Subsidiary to the extent
necessary to permit the direct or indirect beneficial owners of such Equity
Interests to pay federal and state income tax liabilities arising from income of
the Company or such Restricted Subsidiary and attributable to them solely as a
result of the Company or such Restricted Subsidiary (and any intermediate entity
through which such holder owns such Equity Interests) being a partnership or
similar pass-through entity for federal income tax purposes, (v) so long as no
Default or Event of Default has occurred and is continuing, any Investment made
out of the net cash proceeds of the substantially concurrent issue and sale
(other than to a Restricted Subsidiary) of Qualified Equity Interests of the
Company; provided, however, that any such net cash proceeds are excluded from
clause (c)(2) of the preceding paragraph (and were not included therein at any
time) or (vi) the purchase, redemption or other acquisition, cancellation or
retirement for value of Equity Interests, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Equity Interests, of
the
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Company or any Restricted Subsidiary, or similar securities, held by officers or
employees or former officers or employees of the Company or any Restricted
Subsidiary (or their estates or beneficiaries under their estates), upon death,
disability, retirement or termination of employment not to exceed $1.0 million
in any calendar year.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i) and (vi) of the immediately
preceding paragraph shall be included as Restricted Payments and amounts
expended pursuant to clauses (ii) through (v) shall be excluded. The amount of
any non-cash Restricted Payment shall be deemed to be equal to the Fair Market
Value thereof at the date of the making of such Restricted Payment.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The
Indenture provides that in the event that any Restricted Subsidiary (other than
a Subsidiary Guarantor), directly or indirectly, guarantees any Indebtedness of
the Company other than the Notes (the "Other Indebtedness") the Company shall
cause such Restricted Subsidiary to concurrently guarantee (a "Subsidiary
Guarantee") the Company's Obligations under the Indenture and the Notes to the
same extent that such Restricted Subsidiary guaranteed the Company's Obligations
under the Other Indebtedness (including waiver of subrogation, if any);
provided, however, that if such Other Indebtedness is (i) Senior Indebtedness,
the Subsidiary Guarantee shall be subordinated in right of payment to all
Guarantor Senior Indebtedness (which shall include such guarantee of such Other
Indebtedness) pursuant to the subordination provisions of the Indenture (which
subordination shall be substantially identical to the subordination provisions
of the Indenture applicable to the Notes), (ii) Senior Subordinated
Indebtedness, the Subsidiary Guarantee shall be pari passu in right of payment
with the guarantee of the Other Indebtedness, or (iii) Subordinated
Indebtedness, the Subsidiary Guarantee shall be senior in right of payment to
the guarantee of the Other Indebtedness (which guarantee of such Subordinated
Indebtedness shall provide that such guarantee is subordinated to the Subsidiary
Guarantees to the same extent and in the same manner as the Notes are
subordinated to Senior Indebtedness); provided, further, however, that each
Subsidiary issuing a Subsidiary Guarantee will be automatically and
unconditionally released and discharged from its obligations under such
Subsidiary Guarantee upon the release or discharge of the guarantee of the Other
Indebtedness that resulted in the creation of such Subsidiary Guarantee, except
a discharge or release by, or as a result of, any payment under the guarantee of
such Other Indebtedness by such Subsidiary Guarantor. The Company shall cause
each Restricted Subsidiary issuing a Subsidiary Guarantee to (i) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted Subsidiary
(which opinion may be subject to customary assumptions and qualifications).
Thereafter, such Restricted Subsidiary shall (unless released in accordance with
the terms of the Indenture) be a Subsidiary Guarantor for all purposes of the
Indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (b) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (c) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) the Senior Credit Facility or other
agreements of the Company or the Restricted Subsidiaries outstanding on the
Issue Date, in each case as in effect on the Issue Date, and any amendments,
restatements, renewals, replacements or refinancings (collectively, a
"refinancing") thereof; provided, however, that such refinancings are no more
restrictive in the aggregate with respect to such encumbrances or restrictions
than those contained in the Senior Credit Facility on the Issue Date or in the
Indenture, (ii) applicable law, (iii) any instrument governing Indebtedness or
Equity Interests of an Acquired Person
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acquired by the Company or any Restricted Subsidiary as in effect at the time of
such acquisition (except to the extent such Indebtedness was Incurred by such
Acquired Person in connection with, as a result of or in contemplation of such
acquisition); provided, however, that such encumbrances and restrictions are not
applicable to the Company or any Restricted Subsidiary, or the properties or
assets of the Company or any Restricted Subsidiary, other than the Acquired
Person, (iv) customary non-assignment provisions in leases or cable television
franchises entered into in the ordinary course of business and consistent with
past practices, (v) Purchase Money Indebtedness for property acquired in the
ordinary course of business that only imposes encumbrances and restrictions on
the property so acquired, (vi) any agreement for the sale or disposition of the
Equity Interests or assets of any Restricted Subsidiary; provided, however, that
such encumbrances and restrictions described in this clause (vi) are only
applicable to such Restricted Subsidiary or assets, as applicable, and any such
sale or disposition is made in compliance with "--Disposition of Proceeds of
Asset Sales" below to the extent applicable thereto, (vii) refinancing
Indebtedness permitted under clause (h) of "--Limitation on Indebtedness" above;
provided, however, that the encumbrances and restrictions contained in the
agreements governing such Indebtedness are no more restrictive in the aggregate
than those contained in the agreements governing the Indebtedness being
refinanced immediately prior to such refinancing, (viii) the Indenture or (ix)
any such encumbrance or restriction existing under any other agreement,
instrument or document hereafter in effect; provided, however, that the terms
and conditions of any such encumbrance or restriction are not more restrictive
than those contained in the Senior Credit Facility as in effect on the Issue
Date.
LIMITATION ON LIENS. The Indenture provides that the Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, Incur any Liens
of any kind against or upon any of their respective properties or assets now
owned or hereafter acquired, or any proceeds therefrom or any income or profits
therefrom, to secure any Indebtedness unless contemporaneously therewith
effective provision is made to secure the Notes equally and ratably with such
Indebtedness with a Lien on the same properties and assets securing such
Indebtedness for so long as such Indebtedness is secured by such Lien, except
for (i) Liens securing Senior Indebtedness or any guarantee of Senior
Indebtedness by any Restricted Subsidiary and (ii) Permitted Liens.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Asset Sale, unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the assets sold or otherwise
disposed of and (b) either (i) at least 75% of such consideration consists of
cash or Cash Equivalents or (ii) at least 75% of such consideration consists of
(x) properties and capital assets (including franchises and licenses required to
own or operate such properties) to be used in the same lines of business being
conducted by the Company or any Restricted Subsidiary at such time or (y) Equity
Interests in one or more Persons which thereby become Wholly Owned Restricted
Subsidiaries whose assets consist primarily of such properties and capital
assets. The amount of any (i) liabilities of the Company or any Restricted
Subsidiary that are actually assumed by the transferee in such Asset Sale and
from which the Company and the Restricted Subsidiaries are fully released shall
be deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or the Restricted Subsidiaries and (ii)
notes or other similar obligations received by the Company or the Restricted
Subsidiaries from such transferee that are immediately converted (or are
converted within thirty days of the related Asset Sale) by the Company or the
Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal
to the net cash proceeds realized upon such conversion, for purposes of
determining the percentage of cash consideration received by the Company or the
Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i) apply the
Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to repay
Senior Indebtedness and permanently reduce any related commitment; provided,
however, that if Indebtedness under the revolving credit portion of the Senior
Credit Facility is repaid, the Company need not reduce the commitments for such
revolving credit portion, or (ii) commit in writing to acquire, construct or
improve properties and capital assets (including franchises and licenses
required to own or operate any such assets or properties) to be used in the same
line of business being conducted by the Company or any Restricted Subsidiary at
such time and so apply such Net Cash Proceeds within 365 days of the receipt
thereof.
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To the extent all or part of the Net Cash Proceeds of any Asset Sale are not so
applied within 365 days of such Asset Sale (such Net Cash Proceeds, the
"Unutilized Net Cash Proceeds"), the Company shall, within 30 days of such 365th
day, make an Offer to Purchase from all holders of Notes up to a maximum
principal amount (expressed as a multiple of $1,000) of Notes equal to such
Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of purchase; provided, however, that the Offer to Purchase may be
deferred until there are aggregate Unutilized Net Cash Proceeds equal to or in
excess of $5.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds, and not just the amount in excess of $5.0 million, shall be
applied as required pursuant to this paragraph. In the event that any other
Indebtedness of the Company which ranks pari passu with the Notes requires the
repayment or prepayment thereof, or an offer to purchase to be made to
repurchase such Indebtedness, upon the consummation of any Asset Sale, the
Company may apply the Unutilized Net Cash Proceeds otherwise required to be
applied to an Offer to Purchase to repay, prepay or offer to purchase such other
Indebtedness and to an Offer to Purchase pro rata based upon the aggregate
principal amount of the Notes then outstanding and the aggregate principal
amount (or accreted amount, if less) of such other Indebtedness then
outstanding. The Offer to Purchase shall remain open for a period of 20 Business
Days or such longer period as may be required by law. To the extent the
aggregate amount of Notes tendered pursuant to the Offer to Purchase exceeds the
Unutilized Net Cash Proceeds, Notes shall be purchased among holders on a
proportionate basis (based on the relative aggregate principal amounts validly
tendered for purchase by holders thereof). To the extent the Unutilized Net Cash
Proceeds exceed the aggregate amount of Notes tendered by the holders of the
Notes pursuant to the Offer to Purchase, the Company may retain and utilize any
portion of the Unutilized Net Cash Proceeds not applied to repurchase the Notes
for any purpose consistent with the other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS. The Indenture
provides that the Company will not, and will not permit, cause or suffer any
Restricted Subsidiary to, directly or indirectly, conduct any business or enter
into any transaction (or series of related transactions) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Equity Interests of the Company or any officer, director or employee of the
Company or any Restricted Subsidiary (each an "Affiliate Transaction"), unless
(a) such Affiliate Transaction is on terms which are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party, (b) if
such Affiliate Transaction (or series of related Affiliate Transactions)
involves aggregate payments or other consideration having a Fair Market Value in
excess of $5.0 million, a majority of the disinterested members of the Board of
Directors of FV Inc. shall have approved such transaction and determined that
such transaction complies with the foregoing provisions and (c) if such
Affiliate Transaction (or series of related Affiliate Transactions) involves
aggregate payments or other consideration having a Fair Market Value of $25.0
million or more, the Company has obtained a written opinion from an Independent
Financial Advisor stating that the terms of such Affiliate Transaction are fair
to the Company or the Restricted Subsidiary, as the case may be, from a
financial point of view.
Notwithstanding the foregoing, the restrictions set forth in this covenant shall
not apply to (i) transactions with or among the Company and the Wholly Owned
Restricted Subsidiaries, (ii) customary directors' fees, indemnification and
similar arrangements, consulting fees, employee salaries, bonuses, or employment
agreements, compensation or employee benefit arrangements, and incentive
arrangements with any officer, director or employee of the Company entered into
in the ordinary course of business (including customary benefits thereunder) and
payments under any indemnification arrangements permitted by applicable law,
(iii) the Agreement of Limited Partnership of the Company as in effect on the
Issue Date, including any amendment or extension thereof that does not otherwise
violate any other covenant set forth in the Indenture, and any transactions
undertaken pursuant to any other contractual obligations in existence on the
Issue Date (as in effect on the Issue Date), (iv) the issue and sale by the
Company to its partners or
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stockholders of Qualified Equity Interests, (v) any Restricted Payments made in
compliance with "--Limitation on Restricted Payments" above (including without
limitation the making of any payments or distributions permitted to be made in
accordance with clauses (i) through (vi) of the penultimate paragraph of
"--Limitation on Restricted Payments"), (vi) loans and advances to officers,
directors and employees of the Company and the Restricted Subsidiaries for
travel, entertainment, moving and other relocation expenses, in each case made
in the ordinary course of business and consistent with past business practices,
(vii) customary commercial banking, investment banking, underwriting, placement
agent or financial advisory fees paid in connection with services rendered to
the Company and its Subsidiaries in the ordinary course, (viii) the Incurrence
of intercompany Indebtedness permitted pursuant to clause (d) under the
definition of "Permitted Indebtedness" set forth under "--Limitation on
Indebtedness," (ix) the pledge of Equity Interests of Unrestricted Subsidiaries
to support the Indebtedness thereof and (x) the Senior Credit Facility.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The Indenture provides that the
Company may designate any Subsidiary of the Company as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such Designation;
(b) at the time of and after giving effect to such Designation, the Company
could incur $1.00 of additional Indebtedness under the Debt to Operating
Cash Flow Ratio of the first paragraph of "--Limitation on Indebtedness"
above; and
(c) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"--Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to the Company's proportionate interest in
the Fair Market Value of such Subsidiary on such date.
Neither the Company nor any Restricted Subsidiary shall at any time (x) provide
credit support for, subject any of its property or assets (other than the Equity
Interests of any Unrestricted Subsidiary) to the satisfaction of, or guarantee,
any Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary, except, in the case of clause (x)
or (y), to the extent otherwise permitted under the terms of the Indenture,
including, without limitation, pursuant to "--Limitation on Restricted Payments"
and "--Limitation on Indebtedness" above.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default or Event of Default shall have occurred and be continuing at
the time of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time,
have been permitted to be Incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by resolutions of the Company
delivered to the Trustee certifying compliance with the foregoing provisions.
LIMITATION ON CONDUCT OF BUSINESS OF CAPITAL. The Indenture provides that
Capital will not own any operating assets or other properties or conduct any
business other than to serve as an Issuer and an obligor on the Notes.
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CHANGE OF CONTROL
The Indenture provides that within 30 days following the date of consummation of
a transaction resulting in a Change of Control, the Company will commence an
Offer to Purchase all outstanding Notes at a purchase price in cash equal to
101% of their principal amount plus accrued and unpaid interest to the Purchase
Date. Each holder shall be entitled to tender all or any portion of the Notes
owned by such holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must bear an integral multiple
of $1,000 principal amount.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
With respect to the sale of assets referred to in the definition of "Change of
Control," the phrase "all or substantially all" of the assets of the Company or
the General Partner will likely be interpreted under applicable state law and
will be dependent upon particular facts and circumstances. As a result, there
may be a degree of uncertainty in ascertaining whether a sale or transfer of
"all or substantially all" of the assets of the Company or the General Partner
has occurred. In addition, no assurances can be given that the Company will be
able to acquire Notes tendered upon the occurrence of a Change of Control. The
ability of the Company to pay cash to the holders of Notes upon a Change of
Control may be limited by its then existing financial resources. The Senior
Credit Facility contains certain covenants prohibiting, or requiring waiver or
consent of the lenders thereunder prior to, the repurchase of the Notes upon a
Change of Control, and future debt agreements of the Company may provide the
same. If the Company does not obtain such waiver or consent or repay such
Indebtedness, the Company will remain prohibited from repurchasing the Notes. In
such event, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would in turn constitute a default
under the Senior Credit Facility and possibly other Senior Indebtedness. In such
circumstances, the subordination provisions of the Indenture would likely
restrict payments to the holders of the Notes. None of the provisions relating
to a repurchase upon a Change of Control are waivable by the Board of Directors
of FV Inc. or the Trustee.
The foregoing provisions do not prevent the Issuers from entering into a
transaction of the types described under the definition of "Change of Control"
with management or their affiliates. In addition, such provisions may not
necessarily afford the holders of the Notes protection in the event of a highly
leveraged transaction, including a reorganization, restructuring, merger or
similar transaction involving the Issuers that may adversely affect the holders
of the Notes because such transactions may not involve a shift in voting power
or beneficial ownership, or, even if they do, may not involve a shift of the
magnitude required under the definition of Change of Control to trigger the
provisions.
PROVISION OF FINANCIAL INFORMATION
The Indenture provides that whether or not the Issuers are subject to Section
13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the
Issuers shall file with the Commission the annual reports, quarterly reports and
other documents which the Issuers would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) or any successor provision
thereto if the Issuers were so required, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which the Issuers would have been required so to file such documents if the
Issuers were so required. The Issuers shall also in any event (a) within 15 days
of each Required Filing Date (whether or not permitted or required to file with
the Commission) (i) transmit by mail to all holders of Notes, as their names and
addresses appear in the note register, without cost to such holders, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents which the Issuers are required to file with the Commission pursuant to
the preceding sentence, or, if such filing is not so permitted, information and
data of a similar nature, and (b) if, notwithstanding the preceding sentence,
filing such documents by the Issuers with the Commission is not permitted under
the Exchange Act, promptly upon written request supply copies of such documents
to any prospective holder of Notes. The
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Issuers shall not be obligated to file any such reports with the Commission if
the Commission does not permit such filings for all companies similarly situated
other than due to any action or inaction by the Issuers.
MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Issuers will not consolidate with or merge with
or into (whether or not such Issuer is the Surviving Person) any other entity
and the Issuers will not and will not permit any of their respective Restricted
Subsidiaries to sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of such Issuer's properties and assets (determined, in
the case of the Company, on a consolidated basis for the Company and the
Restricted Subsidiaries) to any entity in a single transaction or series of
related transactions, unless: (a) either (i) such Issuer shall be the Surviving
Person or (ii) the Surviving Person (if other than such Issuer) shall be, in the
case of Capital, a corporation or, in any other case, a corporation,
partnership, limited liability company, limited liability limited partnership or
trust organized and validly existing under the laws of the United States of
America or any State thereof or the District of Columbia, and shall, in any such
case, expressly assume by a supplemental indenture the due and punctual payment
of the principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indenture to be performed or
observed on the part of the Issuers; (b) immediately thereafter, no Default or
Event of Default shall have occurred and be continuing; (c) immediately after
giving effect to any such transaction involving the Incurrence by the Company or
any Restricted Subsidiary, directly or indirectly, of additional Indebtedness
(and treating any Indebtedness not previously an obligation of the Company or
any Restricted Subsidiary in connection with or as a result of such transaction
as having been Incurred at the time of such transaction), the Surviving Person
could Incur, on a pro forma basis after giving effect to such transaction as if
it had occurred at the beginning of the latest fiscal quarter for which
consolidated financial statements of the Company are available, at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the Debt to
Operating Cash Flow Ratio of the first paragraph of "-- Limitation on
Indebtedness" above; and (d) immediately thereafter the Surviving Person shall
have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of such Issuer immediately prior to such transaction.
The Indenture provides that, subject to the requirements of the immediately
preceding paragraph, in the event of a sale of all or substantially all of the
assets of any Subsidiary Guarantor or all of the Equity Interests of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, then the
Surviving Person of any such merger or consolidation, or such Subsidiary
Guarantor, if all of its Equity Interests are sold, shall be released and
relieved of any and all obligations under the Subsidiary Guarantee of such
Subsidiary Guarantor if (i) the Person or entity surviving such merger or
consolidation or acquiring the Equity Interests of such Subsidiary Guarantor is
not a Restricted Subsidiary, and (ii) the Net Cash Proceeds from such sale are
used after such sale in a manner that complies with the provisions of
"--Covenants--Disposition of Proceeds of Asset Sales" above. Except as provided
in the preceding sentence, the Indenture provides that no Subsidiary Guarantor
shall consolidate with or merge with or into another Person, whether or not such
Person is affiliated with such Subsidiary Guarantor and whether or not such
Subsidiary Guarantor is the Surviving Person, unless (i) the Surviving Person is
a corporation, partnership, limited liability company, limited liability limited
partnership or trust organized or existing under the laws of the United States,
any State thereof or the District of Columbia, (ii) the Surviving Person (if
other than such Subsidiary Guarantor) assumes all the Obligations of such
Subsidiary Guarantor under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, (iii)
at the time of and immediately after such Disposition, no Default or Event of
Default shall have occurred and be continuing, and (iv) the Surviving Person
will have Consolidated Net Worth (immediately after giving pro forma effect to
the Disposition) equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately preceding the transaction; provided, however,
that clause (iv) of this paragraph shall not be a condition to a merger or
consolidation of a Subsidiary Guarantor if such merger or consolidation only
involves the Company and/or one or more Wholly Owned Restricted Subsidiaries.
In the event of any transaction (other than a lease) described in and complying
with the conditions listed in the immediately preceding paragraphs in which an
Issuer or any Subsidiary Guarantor is not the Surviving Person and the Surviving
Person is to assume all the Obligations of such Issuer or any such Subsidiary
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Guarantor under the Notes and the Indenture pursuant to a supplemental
indenture, such Surviving Person shall succeed to, and be substituted for, and
may exercise every right and power of, such Issuer or such Subsidiary Guarantor,
as the case may be, and such Issuer or such Subsidiary Guarantor, as the case
may be, shall be discharged from its Obligations under the Indenture, the Notes
or its Subsidiary Guarantee, as the case may be.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(a) failure to pay interest on any Note when due and payable, continued for
30 days (whether or not prohibited by the provisions of the Indenture
described under "--Subordination" above);
(b) failure to pay principal of (or premium, if any, on) any Note when due
and payable at maturity, upon redemption or otherwise (whether or not
prohibited by the provisions of the Indenture described under
"--Subordination" above);
(c) failure to perform or comply with any of the provisions described under
"--Merger, Sale of Assets, etc.," "--Change of Control" and
"--Covenants--Disposition of Proceeds of Asset Sales" above;
(d) failure to observe or perform any other covenant, warranty or agreement
of the Issuers or any Subsidiary Guarantor under the Indenture or the
Notes continued for 30 days after written notice to the Issuers by the
Trustee or holders of at least 25% in aggregate principal amount of
outstanding Notes;
(e) default under the terms of one or more instruments evidencing or
securing Indebtedness of the Company or any Restricted Subsidiary
having an outstanding principal amount of $10 million or more
individually or in the aggregate that has resulted in the acceleration
of the payment of such Indebtedness or failure to pay principal when
due at the stated maturity of any such Indebtedness;
(f) the rendering of a final judgment or judgments (not subject to appeal)
against the Company or any Restricted Subsidiary in an amount of $10
million or more (net of any amounts covered by reputable and
creditworthy insurance companies) which remains undischarged or unstayed
for a period of 60 days after the date on which the right to appeal has
expired;
(g) any holder or holders of at least $10 million in aggregate principal
amount of Indebtedness of the Company or any Restricted Subsidiary,
after a default under such Indebtedness, shall notify the Trustee of the
intended sale or disposition of any assets of the Company or any
Restricted Subsidiary with an aggregate Fair Market Value (as determined
in good faith by the Board of Directors of FV Inc.) of at least $2
million that have been pledged to or for the benefit of such holder or
holders to secure such Indebtedness or shall commence proceedings, or
take any action (including by way of setoff), to retain in satisfaction
of such Indebtedness or to collect on, seize, dispose of or apply in
satisfaction of such Indebtedness, such assets of the Company or any
Restricted Subsidiary (including funds on deposit or held pursuant to
lock-box and other similar arrangements) which continues for five
Business Days after notice has been given to the Company and the
representative of such Indebtedness and Indebtedness under the Senior
Credit Facility;
(h) certain events of bankruptcy, insolvency or reorganization affecting
either of the Issuers or any Significant Restricted Subsidiary; and
(i) other than as provided in or pursuant to any Subsidiary Guarantee or the
Indenture, such Subsidiary Guarantee ceases to be in full force and
effect or is declared null and void and unenforceable or found to be
invalid or any Subsidiary Guarantor denies its liability under its
Subsidiary Guarantee (other than by reason of a release of such
Subsidiary Guarantor from its Subsidiary Guarantee in accordance with
the terms of the Indenture and such Subsidiary Guarantee).
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Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default (as defined) shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders, unless
such holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
If an Event of Default (other than an Event of Default with respect to either of
the Issuers described in clause (h) above) shall occur and be continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the
outstanding Notes by notice in writing to the Issuers (and to the Trustee if
given by the holders) may declare the unpaid principal of and accrued and unpaid
interest to the date of acceleration on all the outstanding Notes to be due and
payable immediately and, upon any such declaration, such principal amount and
accrued and unpaid interest shall become immediately due and payable; provided,
however, that so long as the Senior Credit Facility shall be in full force and
effect, if an Event of Default shall have occurred and be continuing (other than
as specified in clause (h) above), the Notes shall not become due and payable
until the earlier to occur of (x) five business days following delivery of a
written notice of such acceleration of the Notes to the agent under the Senior
Credit Facility and (y) the acceleration of any Indebtedness under the Senior
Credit Facility. If an Event of Default specified in clause (h) above with
respect to either of the Issuers occurs, all unpaid principal of and accrued and
unpaid interest on the outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder.
After such acceleration, but before a judgment or decree based on acceleration
has been obtained, the holders of not less than a majority in aggregate
principal amount of then outstanding Notes may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal and interest, have been cured or waived as
provided in the Indenture. For information as to waiver of defaults, see
"--Modification and Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the holders thereof notice of all uncured Defaults or Events of Default known to
it; provided, however, that, except in the case of an Event of Default or a
Default in payment with respect to the Notes or a Default or Event of Default in
complying with "--Covenants--Merger, Sale of Assets, Etc." above, the Trustee
shall be protected in withholding such notice if and so long as the Board of
Directors or responsible officers of the Trustee in good faith determine that
the withholding of such notice is in the interest of the holders of the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as Trustee, and the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of a
Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Issuers are required to furnish to the Trustee annually a statement as to
the performance by them of certain of their obligations under the Indenture and
as to any default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND PARTNERS
The Indenture provides that no director, officer, employee, incorporator, or
limited or general partner of the Issuers or any of their Subsidiaries shall
have any liability for any obligation of the Issuers or any of their
Subsidiaries under the Indenture or the Notes or for any claim based on, in
respect of, or by reason of, any
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such obligation or the creation of any such obligation. Each holder by accepting
a Note waives and releases such Persons from all such liability.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Issuers may terminate their and the Subsidiary Guarantors' substantive
obligations in respect of the Notes by delivering all outstanding Notes to the
Trustee for cancellation and paying all sums payable by them on account of
principal of, premium, if any, and interest on all Notes or otherwise. In
addition to the foregoing, the Issuers may, provided that no Default or Event of
Default has occurred and is continuing or would arise therefrom (or, with
respect to a Default or Event of Default specified in clause (h) of "--Events of
Default" above, any time on or prior to the 91st calendar day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day)) and provided that no default under any
Senior Indebtedness would result therefrom, terminate their and the Subsidiary
Guarantors' substantive obligations in respect of the Notes (except for their
obligations to pay the principal of (and premium, if any, on) and the interest
on the Notes and the Subsidiary Guarantors' guarantee thereof) by (i) depositing
with the Trustee, under the terms of an irrevocable trust agreement, money or
United States Government Obligations sufficient (without reinvestment) to pay
all remaining Indebtedness on the Notes, (ii) delivering to the Trustee either
an Opinion of Counsel or a ruling directed to the Trustee from the Internal
Revenue Service to the effect that the holders of the Notes will not recognize
income, gain or loss for federal income tax purposes solely as a result of such
deposit and termination of obligations, (iii) delivering to the Trustee an
Opinion of Counsel to the effect that the Issuers' exercise of their option
under this paragraph will not result in any of the Issuers, the Trustee or the
trust created by the Issuers' deposit of funds pursuant to this provision
becoming or being deemed to be an "investment company" under the Investment
Company Act of 1940, as amended, and (iv) complying with certain other
requirements set forth in the Indenture. In addition, the Issuers may, provided
that no Default or Event of Default has occurred and is continuing or would
arise therefrom (or, with respect to a Default or Event of Default specified in
clause (h) of "--Events of Default" above, any time on or prior to the 91st
calendar day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 91st day)) and provided
that no default under any Senior Indebtedness would result therefrom, terminate
all of their and the Subsidiary Guarantors' substantive obligations in respect
of the Notes (including their obligations to pay the principal of (and premium,
if any, on) and interest on the Notes and the Subsidiary Guarantors' guarantee
thereof) by (i) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or United States Government Obligations sufficient
(without reinvestment) to pay all remaining Indebtedness on the Notes, (ii)
delivering to the Trustee either a ruling directed to the Trustee from the
Internal Revenue Service to the effect that the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes solely as a
result of such deposit and termination of obligations or an Opinion of Counsel
based upon such a ruling addressed to the Trustee or a change in the applicable
Federal tax law since the date of the Indenture to such effect, (iii) delivering
to the Trustee an Opinion of Counsel to the effect that the Issuers' exercise of
their option under this paragraph will not result in any of the Issuers, the
Trustee or the trust created by the Issuers' deposit of funds pursuant to this
provision becoming or being deemed to be an "investment company" under the
Investment Company Act of 1940, as amended, and (iv) complying with certain
other requirements set forth in the Indenture.
The Issuers may make an irrevocable deposit pursuant to this provision only if
at such time they are not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the Senior Indebtedness and
the Issuers have delivered to the Trustee and any Paying Agent an Officers'
Certificate to that effect.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New York
without regard to principles of conflicts of laws.
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MODIFICATION AND WAIVER
The Issuers and the Subsidiary Guarantors, when authorized by a resolution of
their respective Boards of Directors, and the Trustee may amend or supplement
the Indenture or the Notes without notice to or consent of any holder: (i) to
cure any ambiguity, defect or inconsistency; provided, however, that such
amendment or supplement does not materially and adversely affect the rights of
any holder; (ii) to effect the assumption by a successor Person of all
obligations of the Issuers under the Notes and the Indenture in connection with
any transaction complying with "--Merger, Sale of Assets, Etc." above; (iii) to
provide for uncertificated Notes in addition to or in place of certificated
Notes; (iv) to comply with any requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act;
(v) to make any change that would provide any additional benefit or rights to
the holders; (vi) to make any other change that does not materially and
adversely affect the rights of any holder under the Indenture; (vii) to evidence
the succession of another Person to any Subsidiary Guarantor and the assumption
by any such successor of the covenants of such Subsidiary Guarantor in the
Indenture and in the Subsidiary Guarantee; (viii) to add to the covenants of the
Issuers or the Subsidiary Guarantors for the benefit of the holders, or to
surrender any right or power conferred upon the Issuers or any Subsidiary
Guarantor under the Indenture; (ix) to secure the Notes pursuant to the
requirements of "--Covenants--Limitation on Liens" above or otherwise; or (x) to
reflect the release of a Subsidiary Guarantor from its obligations with respect
to its Subsidiary Guarantee in accordance with the provisions of the Indenture
and to add a Subsidiary Guarantor pursuant to the requirements of the Indenture;
provided, however, that the Issuers have delivered to the Trustee an opinion of
counsel stating that such amendment or supplement complies with the provisions
of the Indenture.
Modifications and amendments of the Indenture and the Notes may be made by the
Issuers and the Subsidiary Guarantors when authorized by a resolution of their
respective Boards of Directors and the Trustee with the consent of the holders
of a majority in aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each Note affected thereby, (a) change the Stated Maturity of the
principal of or any installment of interest on any Note or alter the optional
redemption or repurchase provisions of any Note or the Indenture in a manner
adverse to the holders of the Notes, (b) reduce the principal amount (or the
premium) of any Note, (c) reduce the rate of or extend the time for payment of
interest on any Note, (d) change the place or currency of payment of principal
of (or premium) or interest on any Note, (e) modify any provisions of the
Indenture relating to the waiver of past defaults (other than to add sections of
the Indenture subject thereto) or the right of the holders to institute suit for
the enforcement of any payment on or with respect to any Note or the
modification and amendment of the Indenture and the Notes (other than to add
sections of the Indenture or the Notes which may not be amended, supplemented or
waived without the consent of each holder affected), (f) reduce the percentage
of the principal amount of outstanding Notes necessary for amendment to or
waiver of compliance with any provision of the Indenture or the Notes or for
waiver of any Default, (g) waive a default in the payment of principal of,
interest on, or redemption payment with respect to, any Note (except a recision
of acceleration of the Notes by the holders as provided in the Indenture and a
waiver of the payment default that resulted from such acceleration), (h) modify
the ranking or priority of the Notes or the Subsidiary Guarantee of any
Subsidiary Guarantor or modify the definition of Senior Indebtedness or
Guarantor Senior Indebtedness or amend or modify the subordination provisions of
the Indenture in any manner adverse to the holders, (i) release any Subsidiary
Guarantor from any of its obligations under its Subsidiary Guarantee or the
Indenture otherwise than in accordance with the Indenture, or (j) modify the
provisions relating to any Offer to Purchase required under the covenants
described under "--Covenants--Disposition of Proceeds of Asset Sales" or
"--Change of Control" above in a manner materially adverse to the holders.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Issuers
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the holders of a majority in
aggregate principal amount of the outstanding Notes, on behalf of all holders of
Notes, may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Note tendered pursuant to an Offer to Purchase, or a default in
respect of a
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provision that under the Indenture cannot be modified or amended without the
consent of the holder of each outstanding Note affected.
THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a creditor of either
of the Issuers, any Subsidiary Guarantor or any other obligor upon the Notes, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claim as security or otherwise. The
Trustee is permitted to engage in other transactions with the Issuers or an
Affiliate of either of the Issuers; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The Notes are represented by one fully registered global note (the "Global
Note"). The Global Note was deposited on October 7, 1996 with, or on behalf of,
The Depository Trust Company ("DTC") and registered in the name of a nominee of
DTC.
THE GLOBAL NOTE
Ownership of beneficial interests in a Global Note is limited to persons that
have accounts with DTC ("participants") or persons that may hold interests
through participants. Ownership of the Notes is shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons holding through
participants).
So long as DTC, or its nominee, is the registered owner or holder of the Notes,
DTC or such nominee will be considered the sole owner or holder of the Notes
represented by the Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium, if any, and interest on the Global Note
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of the Issuers, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Issuers expect that DTC or its nominee, upon receipt of any payment of the
principal of, premium, if any, and interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Issuers also expect that
payments by participants to owners of beneficial interests in any such Global
Note held through such participants will be governed by standing instructions
and customary practice, as is now the case with securities held for the accounts
of customers registered to the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same day funds. The laws of
some states may require that certain purchases of securities take physical
delivery of such securities in certificated form. Such laws may impair the
ability to own, transfer or pledge beneficial interests in a Global Note. If a
holder requires physical delivery of a
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certificated note for any reason, including to sell Notes to persons in states
which require physical delivery of such securities or to pledge such securities,
such holder must transfer its interest in the applicable Global Note in
accordance with the normal procedures of DTC and, with respect to the Notes,
with the procedures set forth in the Indenture.
DTC has advised the Issuers that it will take any action permitted to be taken
by a holder of Notes only at the direction of one or more participants to whose
account interests in the Global Note are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Note for
certificated notes representing the Notes, which it will distribute to its
participants.
DTC has advised the Issuers as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("Indirect Participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuers nor the Trustee have any
responsibility for the performance by DTC or its participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for the
Global Note and a successor depositary is not appointed by the Issuers within 30
days, certificated notes will be issued in exchange for the Global Note.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in connection
with an Asset Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other Person
which merges with or into or becomes a Subsidiary of such specified Person.
"Advisory Committee" means the Advisory Committee of the General Partner
established pursuant to the provisions of Article VI of the First Amended and
Restated Agreement of Limited Partnership of the General Partner, as amended to
the date of issuance of the Notes.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by
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contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary in any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated, merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of (i) any Equity Interest of
any Restricted Subsidiary, (ii) any material license, franchise or other
authorization of the Company or any Restricted Subsidiary, (iii) any assets of
the Company or any Restricted Subsidiary which constitute substantially all of
an operating unit or line of business of the Company or any Restricted
Subsidiary or (iv) any other property or asset of the Company or any Restricted
Subsidiary outside of the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" shall not include (i) any transaction
consummated in compliance with "--Merger, Sale of Assets, etc." above and the
creation of any Lien not prohibited by the provisions described under
"--Covenants--Limitation on Liens" above, (ii) sales of property or equipment
that have become worn out, obsolete or damaged or otherwise unsuitable for use
in connection with the business of the Company or any Restricted Subsidiary, as
the case may be, and (iii) any transaction consummated in compliance with
"--Covenants--Limitation on Restricted Payments" above. In addition, solely for
purposes of "--Covenants--Disposition of Proceeds of Asset Sales" above, any
sale, conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions involving assets
with a Fair Market Value not in excess of $500,000 individually or $1.0 million
in any fiscal year shall be deemed not to be an Asset Sale.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"Board of Directors" means (i) in the case of a Person that is a partnership,
the board of directors of such Person's corporate general partner (or if such
general partner is itself a partnership, the board of directors of such general
partner's corporate general partner), (ii) in the case of a Person that is a
corporation, the board of directors of such Person and (iii) in the case of any
other Person, the board of directors, management committee or similar governing
body or any authorized committee thereof responsible for the management of the
business and affairs of such Person. By way of illustration, as of the date of
the Indenture, any reference herein to the Board of Directors of any of the
Company, FVP or FVP GP means the board of directors of FV Inc.
"Capitalized Lease Obligation" means, with respect to any Person for any period,
an obligation of such Person to pay rent or other amounts under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of such obligation shall be the capitalized amount shown on
the balance sheet of such Person as determined in accordance with GAAP.
"Cash Equivalents" means (i) any security, maturing not more than six months
after the date of acquisition, issued by the United States of America or an
instrumentality or agency thereof and guaranteed fully as to principal, premium,
if any, and interest by the United States of America, (ii) any certificate of
deposit, time deposit, money market account or bankers' acceptance maturing not
more than six months after the date of acquisition issued by any commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $500.0
million, whose debt has a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "A-1" (or higher) according to Standard
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& Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. or any
successor rating agency and (iii) commercial paper maturing not more than three
months after the date of acquisition issued by any corporation (other than an
Affiliate of the Company) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "A-1" (or higher) according to Standard & Poor's
Rating Services, a division of the McGraw-Hill Companies, Inc., or any successor
rating agency.
"Change of Control" means the occurrence of any of the following events: (a) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of 50%
or more of the total voting power of the outstanding Voting Equity Interests of
the Company, the General Partner, FVP GP or FV Inc., as the case may be; (b) the
Company, the General Partner, FVP GP or FV Inc., as the case may be,
consolidates with, or merges with or into, another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into, the Company, the General Partner, FVP GP or FV Inc., as the case may be,
in any such event pursuant to a transaction in which the outstanding Voting
Equity Interests of the Company, the General Partner, FVP GP or FV Inc., as the
case may be, are converted into or exchanged for cash, securities or other
property, other than any such transaction where the outstanding Voting Equity
Interests of the Company, the General Partner, FVP GP or FV Inc., as the case
may be, are converted into or exchanged for Voting Equity Interests (other than
Disqualified Equity Interests) of the surviving or transferee Person and,
immediately after such transaction, the Permitted Holders or the holders of the
Voting Equity Interests of the Company, the General Partner, FVP GP or FV Inc.,
as the case may be, immediately prior thereto own, directly or indirectly, more
than 50% of the total voting power of the outstanding Voting Equity Interests of
the surviving or transferee Person; (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company, the General Partner, FVP GP or FV Inc., as the case
may be (together with any new directors whose election to such Board of
Directors was approved by the Permitted Holders or by a vote of at least a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved), cease for any reason (other than by action of the
Permitted Holders) to constitute a majority of the Board of Directors of the
Company, the General Partner, FVP GP or FV Inc., as the case may be, then in
office in any such case in connection with any actual or threatened solicitation
to which Rule 14a-11 of Regulation 14A promulgated under the Exchange Act
applies or other actual or threatened solicitation of proxies or consents; (d)
any Person or Persons other than Permitted Holders is or becomes entitled to
appoint or designate more than 25% of the members of the Advisory Committee; or
(e) the admission of any Person as a general partner of the Company, the General
Partner or FVP GP, as the case may be, after which the General Partner, FVP GP
or FV Inc., as the case may be, does not have the sole power to take all of the
actions it is entitled or required to take under the limited partnership
agreement of the Company, the General Partner or FVP GP, as the case may be, as
in effect on the Issue Date; provided, however, that a Change of Control will be
deemed not to have occurred in any of the foregoing circumstances (i) with
respect to FV Inc. (either in its own capacity or in its capacity as a direct or
indirect corporate general partner of any other Person), (ii) with respect to or
as a result of the conversion of the general partnership interest of FVP GP in
the General Partner into a limited partnership interest, or (iii) with respect
to the events in clause (e) if the change, event or condition giving rise
thereto has been approved by the Permitted Holders holding a majority in
interest of the total outstanding Equity Interests of the General Partner held
by the Permitted Holders.
"Consolidated Income Tax Expense" means, with respect to the Company for any
period, the provision for federal, state, local and foreign income taxes payable
by the Company and the Restricted Subsidiaries for such period as determined on
a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as
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determined on a consolidated basis in accordance with GAAP, including, without
limitation, (a) any amortization of debt discount, (b) the net cost under
Interest Rate Protection Obligations (including any amortization of discounts),
(c) the interest portion of any deferred payment obligation, (d) all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and (e) all capitalized interest and
all accrued interest, (ii) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the Company
and the Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP and (iii) dividends and distributions
in respect of Disqualified Equity Interests actually paid in cash by the Company
during such period as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any period, the net income of
the Company and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (i) all
extraordinary gains or losses and all gains and losses from the sales or other
dispositions of assets out of the ordinary course of business (net of taxes,
fees and expenses relating to the transaction giving rise thereto) for such
period, (ii) that portion of such net income derived from or in respect of
investments in Persons other than Restricted Subsidiaries, except to the extent
actually received in cash by the Company or any Restricted Subsidiary (subject,
in the case of any Restricted Subsidiary, to the provisions of clause (v) of
this definition), (iii) the portion of such net income (or loss) allocable to
minority interests in unconsolidated Persons for such period, except to the
extent actually received in cash by the Company or any Restricted Subsidiary
(subject, in the case of any Restricted Subsidiary, to the provisions of clause
(v) of this definition), (iv) net income (or loss) of any other Person combined
with the Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination and (v) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is not at the time (regardless of any waiver) permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its Equity Interest holders.
"Consolidated Net Worth" with respect to any Person means the equity of the
holders of Qualified Equity Interests of such Person and its Restricted
Subsidiaries, as reflected in a balance sheet of such Person determined on a
consolidated basis and in accordance with GAAP.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication) by the
sum of (i) Consolidated Income Tax Expense accrued according to GAAP for such
period to the extent deducted in determining Consolidated Net Income for such
period, (ii) Consolidated Interest Expense (other than dividends on Preferred
Equity Interests) for such period to the extent deducted in determining
Consolidated Net Income for such period, and (iii) depreciation, amortization
and any other non-cash items for such period to the extent deducted in
determining Consolidated Net Income for such period (other than any non-cash
item which requires the accrual of, or a reserve for, cash charges for any
future period) of the Company and the Restricted Subsidiaries, including,
without limitation, amortization of capitalized debt issuance costs for such
period, all of the foregoing determined on a consolidated basis in accordance
with GAAP minus non-cash items to the extent they increase Consolidated Net
Income (including the partial or entire reversal of reserves taken in prior
periods) for such period.
"Cumulative Available Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the period
commencing on the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Debt to Operating Cash Flow Ratio" means the ratio of (i) the Total
Consolidated Indebtedness as of the date of calculation (the "Determination
Date") to (ii) four times the Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding such
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Determination Date (the "Measurement Period"). For purposes of calculating
Consolidated Operating Cash Flow for the Measurement Period immediately prior to
the relevant Determination Date, (I) any Person that is a Restricted Subsidiary
on the Determination Date (or would become a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed to have
been a Restricted Subsidiary at all times during such Measurement Period, (II)
any Person that is not a Restricted Subsidiary on such Determination Date (or
would cease to be a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Consolidated Operating Cash Flow) will be deemed not to have been a Restricted
Subsidiary at any time during such Measurement Period, and (III) if the Company
or any Restricted Subsidiary shall have in any manner (x) acquired (including
through an Asset Acquisition or the commencement of activities constituting such
operating business) or (y) disposed of (including by way of an Asset Sale or the
termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the end
of such period and on or prior to such Determination Date, such calculation will
be made on a pro forma basis in accordance with GAAP as if, in the case of an
Asset Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated on the first day of such
Measurement Period and, in the case of an Asset Sale or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period; provided, however, that such pro forma adjustment shall not give effect
to the Operating Cash Flow of any Acquired Person to the extent that such
Person's net income would be excluded pursuant to clause (v) of the definition
of Consolidated Net Income.
"Default" means any event that is or with the passing of time or giving of
notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding under
the Senior Credit Facility and (ii) any other Senior Indebtedness which, at the
time of determination, has an aggregate principal amount outstanding, together
with any commitments to lend additional amounts, of at least $25.0 million.
"Designation" has the meaning set forth under "--Covenants--Designation of
Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth under "--Covenants--Designation
of Unrestricted Subsidiaries" above.
"Disposition" means, with respect to any Person, any merger, consolidation or
other business combination involving such Person (whether or not such Person is
the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the earlier
of the maturity date of the Notes or the date on which no Notes remain
outstanding.
"Equity Interest" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock or other equity participations,
including partnership interests, whether general or limited, in such Person,
including any Preferred Equity Interests.
"Equity Market Capitalization" of any Person, means the aggregate market value
of the outstanding Equity Interests (other than Preferred Equity Interests and
excluding any such Equity Interests held in treasury by such Person) of such
Person of a class that is listed or admitted to unlisted trading privileges on a
United States national securities exchange or included for trading on the Nasdaq
National Market System. For purposes of this definition the "market value" of
any such Equity Interest shall be the average of the high
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and low sale prices, or if no sales are reported, the average of the closing bid
and ask prices, as reported in the composite transactions of the principal
national securities exchange on which such Equity Interests are listed or
admitted to trading or, if such Equity Interests are not listed or admitted to
trading on a national securities exchange, as reported by Nasdaq, for each
trading day in a 20 consecutive trading day period ending not more than 45 days
prior to the date such Person commits to make an investment in the Equity
Interests of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission thereunder.
"Fair Market Value" means, with respect to any asset, the price (after taking
into account any liabilities relating to such assets) which could be negotiated
in an arm's-length free market transaction, for cash, between a willing seller
and a willing and able buyer, neither of which is under pressure or compulsion
to complete the transaction; provided, however, that the Fair Market Value of
any such asset or assets shall be determined by the Board of Directors of FV
Inc., acting in good faith and shall be evidenced by resolutions of the Board of
Directors of FV Inc. delivered to the Trustee.
"FV Inc." means FrontierVision Inc., a Delaware corporation.
"FVP GP" means FVP GP, L.P., a Delaware limited partnership.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"General Partner" means FrontierVision Partners, L.P., a Delaware limited
partnership.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guarantee shall include, without
limitation, any agreement to maintain or preserve any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"Guarantor Senior Indebtedness" means, with respect to any Subsidiary Guarantor,
at any date, (i) all Obligations of such Subsidiary Guarantor under the Senior
Credit Facility, (ii) all Interest Rate Protection Obligations of such
Subsidiary Guarantor, (iii) all Obligations of such Subsidiary Guarantor under
stand-by letters of credit and (iv) all other Indebtedness of such Subsidiary
Guarantor for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness, unless the instrument
under which such Indebtedness of such Subsidiary Guarantor for money borrowed is
Incurred expressly provides that such Indebtedness for money borrowed is not
senior or superior in right of payment to such Subsidiary Guarantor's Subsidiary
Guarantee, and all renewals, extensions, modifications, amendments or
refinancings thereof. Notwithstanding the foregoing, Guarantor Senior
Indebtedness shall not include (i) to the extent that it may constitute
Indebtedness, any Obligation for federal, state, local or other taxes, (ii) any
Indebtedness among or between such Subsidiary Guarantor and the Company or any
Subsidiary of such Subsidiary Guarantor or the Company, (iii) to the extent that
it may constitute Indebtedness, any Obligation in respect of any trade payable
Incurred for the purchase of goods or materials, or for services obtained, in
the ordinary course of business, (iv) that portion of any Indebtedness that is
Incurred in violation of the Indenture; provided, however, that such
Indebtedness shall be deemed not to have been Incurred in violation of the
Indenture for purposes of this clause (iv) if (I) the holder(s) of such
Indebtedness or their representative or such Subsidiary Guarantor shall have
furnished to the Trustee an opinion of independent legal counsel, unqualified in
all material respects, addressed to the Trustee (which legal counsel may, as to
matters of fact, rely upon an officers' certificate of such Subsidiary
Guarantor) to the effect that the Incurrence of such Indebtedness does not
violate the provisions of the
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Indenture or (II) in the case of any Obligations under the Senior Credit
Facility, the holder(s) of such Obligations or their agent or representative
shall have received a representation from such Subsidiary Guarantor to the
effect that the Incurrence of such Indebtedness does not violate the provisions
of the Indenture, (v) Indebtedness evidenced by the Subsidiary Guarantee, (vi)
Indebtedness of such Subsidiary Guarantor that is expressly subordinate or
junior in right of payment to any other Indebtedness of such Subsidiary
Guarantor, (vii) to the extent that it may constitute Indebtedness, any
obligation owing under leases (other than Capitalized Lease Obligations) or
management agreements and (viii) any obligation that by operation of law is
subordinate to any general unsecured obligations of such Subsidiary Guarantor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
(or is merged into or consolidates with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was incurred in connection with,
or in contemplation of, such Person becoming a Restricted Subsidiary (or being
merged into or consolidated with the Company or any Restricted Subsidiary),
shall be deemed Incurred at the time any such Person becomes a Restricted
Subsidiary or merges into or consolidates with the Company or any Restricted
Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable incurred in the ordinary course of
business and payable in accordance with industry practices, or other accrued
liabilities arising in the ordinary course of business which are not overdue or
which are being contested in good faith), (v) every Capitalized Lease Obligation
of such Person, (vi) every net obligation under interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements of such
Person, (vii) every obligation of the type referred to in clauses (i) through
(vi) of another Person and all dividends of another Person the payment of which,
in either case, such Person has guaranteed or is responsible or liable for,
directly or indirectly, as obligor, guarantor or otherwise, and (viii) any and
all deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any liability of the kind described in any of
the preceding clauses (i) through (vii) above. Indebtedness (i) shall never be
calculated taking into account any cash and cash equivalents held by such
Person, (ii) shall not include obligations of any Person (x) arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds in the ordinary course
of business, provided that such obligations are extinguished within two Business
Days of their incurrence unless covered by an overdraft line, (y) resulting from
the endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices and (z) under stand-by
letters of credit to the extent collateralized by cash or Cash Equivalents,
(iii) which provides that an amount less than the principal amount thereof shall
be due upon any declaration of acceleration thereof shall be deemed to be
Incurred or outstanding in an amount equal to the accreted value thereof at the
date of determination, (iv) shall include the liquidation preference and any
mandatory redemption payment obligations in respect of any Disqualified Equity
Interests of the Company or any Restricted Subsidiary and (v) shall not include
obligations under performance bonds, performance guarantees, surety bonds and
appeal bonds, letters of credit or similar obligations, incurred in the ordinary
course of business, including in connection with the requirements of cable
television franchising authorities, and otherwise consistent with industry
practice.
"Independent Financial Advisor" means a nationally recognized investment banking
firm (i) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest
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in the Company and (ii) which, in the judgment of the Board of Directors of FV
Inc., is otherwise independent and qualified to perform the task for which it is
to be engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person, any
liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Interest Rate Protection Obligations" means, with respect to any Person, the
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise) or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other Person.
"Issue Date" means October 7, 1996, the date of original issuance of the Notes
under the Indenture.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrances of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash
Equivalents received by the Company or any Restricted Subsidiary in respect of
any Asset Sale, including all cash or Cash Equivalents received upon any sale,
liquidation or other exchange of proceeds of Asset Sales received in a form
other than cash or Cash Equivalents, net of (i) the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses Incurred as a
result thereof, (ii) taxes paid or payable as a result thereof (after taking
into account any available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale, (iv) amounts deemed, in good faith, appropriate by the Board of
Directors of FV Inc. to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve) and (v) with
respect to Asset Sales by Subsidiaries, the portion of such cash payments
attributable to Persons holding a minority interest in such Subsidiary.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer to Purchase" means a written offer (the "Offer") sent by or on behalf of
the Company by first class mail, postage prepaid, to each holder at his address
appearing in the register for the Notes on the date of the Offer offering to
purchase up to the principal amount of Notes specified in such Offer at the
purchase price specified in such Offer (as determined pursuant to the
Indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 20 Business Days nor more than 60 days after the date of such
Offer and a settlement date (the "Purchase Date") for purchase of Notes to occur
no later than five Business Days after the Expiration Date. The Company shall
notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain all the information required by
applicable law to be included therein. The Offer shall contain all instructions
and materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
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(1) the Section of the Indenture pursuant to which the Offer to Purchase is
being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to
Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant
to the Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered must
be tendered in an integral multiple of $1,000 principal amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased by
the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer
to Purchase and that interest thereon shall cease to accrue on and
after the Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such
Note at the place or places specified in the Offer prior to the close
of business on the Expiration Date (such Note being, if the Company or
the Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the holder thereof or his attorney duly
authorized in writing);
(10) that holders will be entitled to withdraw all or any portion of Notes
tendered if the Company (or its Paying Agent) receives, not later than
the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of the Note
the holder tendered, the certificate number of the Note the holder
tendered and a statement that such holder is withdrawing all or a
portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or equal
to the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such Notes and
(b) if Notes in an aggregate principal amount in excess of the Purchase
Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, the Company shall purchase Notes having an aggregate
principal amount equal to the Purchase Amount on a pro rata basis (with
such adjustments as may be deemed appropriate so that only Notes in
denominations of $1,000 or integral multiples thereof shall be
purchased); and
(12) that in the case of any holder whose Note is purchased only in part,
the Company shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note
or Notes, of any authorized denomination as requested by such holder,
in an aggregate principal amount equal to and in exchange for the
unpurchased portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with the
provisions above pertaining to any Offer.
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"Permitted Holders" means any of (a) the General Partner, FVP GP or FV Inc. for
so long as a majority of the voting power of the Voting Equity Interests of such
Person is beneficially owned by any of the Persons listed in the other clauses
of this definition, (b) James C. Vaughn, the President and Chief Executive
Officer of FV Inc. on the Issue Date, (c) John S. Koo, the Senior Vice President
and Chief Financial Officer of FV Inc. on the Issue Date, (d) any of J.P. Morgan
Investment Corporation, a Delaware corporation, Olympus Cable Corp., a Delaware
corporation, First Union Capital Partners, Inc., a Virginia corporation, and
1818 II Cable Corp., a Delaware corporation, (e) any Person controlling,
controlled by or under common control with any other Person described in clauses
(a) - (d) of this definition and (f) (i) the spouse or children of any Person
named in clause (b) or (c) of this definition and any trust for the benefit of
any such Persons or their respective spouses or children; provided, however,
that with respect to any such trust, such Persons have the sole right to direct
and control such trust and any Voting Equity Interest owned by such trust, and
(ii) any such Person's estate, executor, administrator and heirs.
"Permitted Investments" means (a) Cash Equivalents, (b) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits, (c) loans and
advances to employees made in the ordinary course of business not to exceed $1
million in the aggregate at any one time outstanding, (d) Interest Rate
Protection Obligations, (e) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under "--Covenants--Disposition of
Proceeds of Asset Sales" above not to exceed 25% of the total consideration for
such Asset Sales, (f) transactions with officers, directors and employees of the
Company, the General Partner, FVP GP, FV Inc. or any Restricted Subsidiary
entered into in ordinary course of business (including compensation or employee
benefit arrangements with any such director or employee) and consistent with
past business practices, (g) Investments existing as of the Issue Date and any
amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the Company
or any Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith, (h) any Investment for
which the sole consideration provided is Qualified Equity Interests of the
Company and (i) any Investment consisting of a guarantee by a Restricted
Subsidiary of Senior Indebtedness or any guarantee permitted under clause (e) of
"Covenants--Limitation on Indebtedness" above.
"Permitted Junior Securities" means any securities of the Company or any other
Person that are (i) equity securities without special covenants or (ii)
subordinated in right of payment to all Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, that may at the time be outstanding, to
substantially the same extent as, or to a greater extent than, the Notes are
subordinated as provided in the Indenture, in any event pursuant to a court
order so providing and as to which (a) the rate of interest on such securities
shall not exceed the effective rate of interest on the Notes on the date of the
Indenture, (b) such securities shall not be entitled to the benefits of
covenants or defaults materially more beneficial to the holders of such
securities than those in effect with respect to the Notes on the date of the
Indenture and (c) such securities shall not provide for amortization (including
sinking fund and mandatory prepayment provisions) commencing prior to the date
six months following the final scheduled maturity date of the Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, (as modified
by the plan of reorganization or readjustment pursuant to which such securities
are issued).
"Permitted Liens" means (a) Liens on property of a Person existing at the time
such Person is merged into or consolidated with the Company or any Restricted
Subsidiary; provided, however, that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not secure any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets subject to the Liens prior to such merger or consolidation, (b) Liens
imposed by law such as carriers', warehousemen's and mechanics' Liens and other
similar Liens arising in the ordinary course of business which secure payment of
obligations not more than sixty (60) days past due or which are being contested
in good faith and by appropriate proceedings, (c) Liens existing on the Issue
Date, (d) Liens securing only the Notes, (e) Liens in favor of the Company or
any Restricted Subsidiary, (f) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded; provided, however, that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made therefor, (g)
easements, reservation of rights-of-way, restrictions and other similar
easements, licenses, restrictions on
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the use of properties, or minor imperfections of title that in the aggregate are
not material in amount and do not in any case materially detract from the
properties subject thereto or interfere with the ordinary conduct of the
business of the Company and the Restricted Subsidiaries, (h) Liens resulting
from the deposit of cash or securities in connection with contracts, tenders or
expropriation proceedings, or to secure workers' compensation, surety or appeal
bonds, costs of litigation when required by law and public and statutory
obligations or obligations under franchise arrangements entered into in the
ordinary course of business, (i) Liens securing Indebtedness consisting of
Capitalized Lease Obligations, Purchase Money Indebtedness, mortgage financings,
industrial revenue bonds or other monetary obligations, in each case Incurred
solely for the purpose of financing all or any part of the purchase price or
cost of construction or installation of assets used in the business of the
Company or the Restricted Subsidiaries, or repairs, additions or improvements to
such assets, provided, however, that (I) such Liens secure Indebtedness in an
amount not in excess of the original purchase price or the original cost of any
such assets or repair, addition or improvement thereto (plus an amount equal to
the reasonable fees and expenses in connection with the incurrence of such
Indebtedness), (II) such Liens do not extend to any other assets of the Company
or the Restricted Subsidiaries (and, in the case of repair, addition or
improvements to any such assets, such Lien extends only to the assets (and
improvements thereto or thereon) repaired, added to or improved), (III) the
Incurrence of such Indebtedness is permitted by "--Covenants--Limitation on
Indebtedness" above and (IV) such Liens attach within 90 days of such purchase,
construction, installation, repair, addition or improvement, (j) Liens to secure
any refinancings, renewals, extensions, modifications or replacements
(collectively, "refinancing") (or successive refinancings), in whole or in part,
of any Indebtedness secured by Liens referred to in the clauses above so long as
such Lien does not extend to any other property (other than improvements
thereto), and (k) Liens securing letters of credit entered into in the ordinary
course of business and consistent with past business practice.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any Person,
all interest accrued or accruing on such Indebtedness after the commencement of
any Insolvency or Liquidation Proceeding against such Person in accordance with
and at the contract rate (including, without limitation, any rate applicable
upon default) specified in the agreement or instrument creating, evidencing or
governing such Indebtedness, whether or not, pursuant to applicable law or
otherwise, the claim for such interest is allowed as a claim in such Insolvency
or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"Public Equity Offering" means, with respect to any Person, a public offering by
such Person of some or all of its Qualified Equity Interests, the net proceeds
of which (after deducting any underwriting discounts and commissions) exceed
$25.0 million.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Restricted Investment" means any Investment other than a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company that has not been
designated by the Board of Directors of FV Inc. by a resolution of the Board of
Directors of FV Inc. delivered to the Trustee, as an
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Unrestricted Subsidiary pursuant to "--Covenants--Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of FV Inc. delivered to the Trustee, subject to the
provisions of such covenant.
"Senior Credit Facility" means the Amended and Restated Credit Agreement, dated
as of April 9, 1996, between the Company, the lenders named therein, The Chase
Manhattan Bank, as Administrative Agent, J.P. Morgan Securities Inc., as
Syndication Agent, and CIBC Inc., as Managing Agent, including any deferrals,
renewals, extensions, replacements, refinancings or refundings thereof, or
amendments, modifications or supplements thereto and any agreement providing
therefor, whether by or with the same or any other lender, creditor, group of
lenders or group of creditors, and including related notes, guarantee and
security agreements and other instruments and agreements executed in connection
therewith.
"Senior Indebtedness" means, at any date, (i) all Obligations of the Company
under the Senior Credit Facility, (ii) all Interest Rate Protection Obligations
of the Company, (iii) all obligations of the Company under stand-by letters of
credit and (iv) all other Indebtedness of the Company for borrowed money,
including principal, premium, if any, and interest (including Post-Petition
Interest) on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is Incurred expressly provides
that such Indebtedness for money borrowed is not senior or superior in right of
payment to the Notes, and all renewals, extensions, modifications, amendments or
refinancings thereof. Notwithstanding the foregoing, Senior Indebtedness shall
not include (i) to the extent that it may constitute Indebtedness, any
Obligation for federal, state, local or other taxes, (ii) any Indebtedness among
or between the Company and any Subsidiary of the Company, (iii) to the extent
that it may constitute Indebtedness, any Obligation in respect of any trade
payable Incurred for the purchase of goods or materials, or for services
obtained, in the ordinary course of business, (iv) that portion of any
Indebtedness that is Incurred in violation of the Indenture; provided, however,
that such Indebtedness shall be deemed not to have been Incurred in violation of
the Indenture for purposes of this clause (iv) if (I) the holder(s) of such
Indebtedness or their representative or the Company shall have furnished to the
Trustee an opinion of independent legal counsel, unqualified in all material
respects, addressed to the Trustee (which legal counsel may, as to matters of
fact, rely upon an officers' certificate of the Company) to the effect that the
Incurrence of such Indebtedness does not violate the provisions of the Indenture
or (II) in the case of any Obligations under the Senior Credit Facility, the
holder(s) of such Obligations or their agent or representative shall have
received a representation from the Company to the effect that the Incurrence of
such Indebtedness does not violate the provisions of the Indenture, (v)
Indebtedness evidenced by the Notes, (vi) Indebtedness of the Company that is
expressly subordinate or junior in right of payment to any other Indebtedness of
the Company, (vii) to the extent that it may constitute Indebtedness, any
obligation owing under leases (other than Capitalized Lease Obligations) or
management agreements and (viii) any obligation that by operation of law is
subordinate to any general unsecured obligations of the Company.
"Significant Restricted Subsidiary" means, at any date of determination, (a) any
Restricted Subsidiary that, together with its Subsidiaries that constitute
Restricted Subsidiaries (i) for the most recent fiscal year of the Company
accounted for more than 10.0% of the consolidated revenues of the Company and
the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 10.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary which, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (h) of "--Events of
Default" above has occurred, would constitute a Significant Restricted
Subsidiary under clause (a) of this definition.
"Stated Maturity," when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investment" means the issuance and sale of Qualified Equity
Interests of the Company for net proceeds to the Company of at least $25.0
million to a Person engaged primarily in the cable television, wireless cable
television, telephone, or interactive television business.
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"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation of which the
outstanding Voting Equity Interests having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (ii) any other Person of which at
least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Subsidiary Guarantee" means any guarantee of the Issuers' obligations under the
Indenture and the Notes issued after the Issue Date pursuant to
"--Covenants--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries" above.
"Subsidiary Guarantor" means any Subsidiary of the Company that guarantees the
Issuers' obligations under the Indenture and the Notes issued after the Issue
Date pursuant to "--Covenants--Limitation on Guarantees of Indebtedness by
Restricted Subsidiaries" above.
"Surviving Person" means, with respect to any Person involved in or that makes
any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness and Disqualified Equity
Interests of the Company and the Restricted Subsidiaries outstanding as of such
date of determination.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as such
pursuant to the provisions of "--Covenants--Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required scheduled payment of principal,
including payment of final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding aggregate principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of the
outstanding Voting Equity Interests (other than directors' qualifying shares) of
which are owned, directly or indirectly, by the Company.
91
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus is to be used by J.P. Morgan Securities Inc. and First Union
Capital Markets Corp. in connection with offers and sales of the Notes in
market-making transactions in the over-the-counter market at negociated prices
related to prevailing market prices at the time of sale. J.P. Morgan Securities
Inc. and First Union Capital Markets Corp. may act as principals or agents in
such transactions and have no obligation to make a market in the Notes and may
discontinue their market-making activities at any time without notice, at their
sole discretion. There is currently no trading market for the Notes. No
assurances can be given as to the development or liquidity of any trading market
for the Notes.
The Issuers have agreed to indemnify jointly and severally J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that J.P. Morgan Securities Inc. and First Union Capital Markets Corp.
may be required to make in respect thereof.
J.P. Morgan Investment Corporation, an affiliate of J.P. Morgan Securities Inc.,
beneficially owns approximately 22.9% of the partnership interests of the
Company. Subject to certain conditions, J.P. Morgan Investment Corporation is
entitled to designate one member of the Advisory Committee of FVP. See "Certain
Relationships and Related Transactions," "Management--The Advisory Committee,"
"Principal Security Holders" and "The Partnership Agreements." Its current
designee is John W. Watkins. Mr. Watkins is Manager and a director of each of
J.P. Morgan Investment Corporation and J.P. Morgan Capital Corporation, which
are affiliates of J.P. Morgan Securities Inc.
J.P. Morgan Securities Inc. or its affiliates have provided investment banking
and other financial services to the Company in the past and may do so in the
future. In addition, an affiliate of J.P. Morgan Securities Inc. serves as a
lender and an agent under the Senior Credit Facility and has received customary
fees for acting in such capacities. See "Certain Relationships and Related
Transactions."
First Union Capital Partners, Inc., an affiliate of First Union Capital Markets
Corp., beneficially owns approximately 15.1% of the partnership interests of
the Company. Subject to certain conditions, First Union Capital Partners, Inc.
is entitled to designate one member of the Advisory Committee of FVP. See
"Certain Relationships and Related Transactions," "Management--The Advisory
Committee," "Principal Security Holders" and "The Partnership Agreements." Its
current designee is L. Watts Hamrick, III. Mr. Hamrick is Senior Vice President
of First Union Capital Corporation and First Union Capital Partners, Inc., each
an affiliate of First Union Capital Markets Corp.
92
<PAGE>
LEGAL MATTERS
The validity of the Notes was passed upon for the Issuers by Dow, Lohnes &
Albertson, PLLC, Washington, D.C. Certain legal matters in connection with the
Notes offered hereby were passed upon for J.P. Morgan Securities Inc. and First
Union Capital Markets Corp. by Cahill Gordon & Reindel (a partnership including
a professional corporation), New York, New York.
EXPERTS
The financial statements of FrontierVision Operating Partners, L.P., as of
December 31, 1996 and 1995 and for the year ended December 31, 1996 and the
period from April 17, 1995 (inception) through December 31, 1995, have been
included herein and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of FrontierVision Capital Corporation as of December
31, 1996 and July 26, 1996 and for the period from July 26, 1996 (inception)
through December 31, 1996 have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated balance sheets of FrontierVision Partners, L.P. as of December
31, 1996 and 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements for United Video Cablevision, Inc. included elsewhere
in this Prospectus have been audited by Piaker & Lyons, P.C., independent public
accountants, as indicated in their report with respect thereto. The financial
statements referred to above are included in the Prospectus in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements for Ashland and Defiance Clusters included elsewhere in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements for C4 Media Cable Southeast, Limited
Partnership included elsewhere in this Prospectus have been audited by Williams,
Rogers, Lewis & Co., P.C., independent public accountants, as indicated in their
report with respect thereto. The consolidated financial statements referred to
above are included in the Prospectus in reliance upon the authority of said firm
as experts in giving said reports.
The financial statements of Triax Southeast Associates, L.P. included elsewhere
in this Prospectus have been audited by Arthur Andersen LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of American Cable Entertainment of Kentucky-Indiana,
Inc. included elsewhere in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
93
<PAGE>
GLOSSARY
The following is a description of certain terms used in this Prospectus.
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.
94
<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.
95
<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.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FrontierVision Operating Partners, L.P. and Subsidiary
Independent Auditors' Report F-3
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 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 the Financial Statements F-23
FrontierVision Partners, L.P. and Subsidiaries
Independent Auditors' Report F-24
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-25
Notes to Consolidated Balance Sheets F-26
United Video Cablevision, Inc. (Selected Assets Acquired by FVOP)
Independent Auditors' Report F-36
Divisional Balance Sheets as November 8, 1995 and December 31, 1994 F-37
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-38
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-39
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-40
Notes to Divisional Financial Statements F-41
Ashland and Defiance Clusters (Selected Assets Acquired From Cox Communications, Inc. by FVOP)
Independent Auditors' Report F-44
Combined Statements of Net Assets as of December 31, 1995 and December 31, 1994 F-45
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-46
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-47
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
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-48
Notes to Combined Financial Statements F-49
C4 Media Cable Southeast, Limited Partnership
Independent Auditors' Report F-57
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-58
Consolidated Statements of Loss for the years ended December 31, 1995 and 1994 F-59
Consolidated Statements of Partners' Deficit for the years ended December 31, 1995 and 1994 F-60
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-61
Notes to Consolidated Financial Statements F-62
American Cable Entertainment of Kentucky-Indiana, Inc.
Independent Auditors' Report F-67
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and 1994 F-68
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-69
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-70
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-71
Notes to Financial Statements F-72
Triax Southeast Associates, L.P.
Report of Independent Public Accountants F-80
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and 1994 F-81
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-82
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-83
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-84
Notes to Financial Statements F-85
</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 Partners of FrontierVision Partners, L.P.:
We have audited the accompanying consolidated balance sheets of FrontierVision
Partners, L.P. and subsidiaries as of December 31, 1996 and 1995. These
consolidated balance sheets are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
balance sheets 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 balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated balance sheets referred to above present
fairly, in all material respects, the financial position of FrontierVision
Partners, L.P. and subsidiaries as of December 31, 1996 and 1995 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 19, 1997
F-24
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
<CAPTION>
--------------------------
December 31, December 31,
1996 1995
--------- -------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,560 5,906
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
Covenant not to compete 12,650 --
Subscriber lists 36,321 29,000
Goodwill 27,879 4,094
--------- -------
Total investment in cable television systems, net 524,366 126,195
--------- -------
Deferred financing costs, net 15,391 3,787
Organization costs, net 479 604
Earnest money deposits 500 9,502
--------- -------
Total assets $ 555,917 148,306
========= =======
LIABILITIES
Accounts payable $ 2,096 1,606
Accrued liabilities 10,969 1,563
Subscriber prepayments and deposits 1,862 362
Accrued interest payable 6,290 420
Senior Notes due to partners 105,632 4,972
Junior Notes due to partners 48,908 33,330
Other debt 398,194 93,159
--------- -------
Total liabilities 573,951 135,412
--------- -------
Partners' capital
General partner (182) 128
Limited partners --
Special Class A (13,063) 9,361
Class A (4,789) 3,405
--------- -------
Total partners' capital (18,034) 12,894
--------- -------
Commitments
Total liabilities and partners' capital $ 555,917 148,306
========= =======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(1) THE PARTNERSHIP
ORGANIZATION AND CAPITALIZATION:
FrontierVision Partners, L.P. ("FVP" or the "Partnership") is a Delaware limited
partnership formed April 17, 1995, for the purpose of acquiring and operating
cable television systems. The Partnership was capitalized in August 1995 with
approximately $16,600 of limited partner contributions, and approximately $168
from its sole general partner, FVP GP, L.P., a Delaware partnership. FVP's
limited partners include individuals, corporations and partnerships. FVP
allocates certain administrative expenses to FrontierVision Operating Partners,
L.P. ("FVOP") which are included as capital contributions to FVOP from its
partners. Such expense allocations were approximately $735 and $1,228 for the
periods ended December 31, 1996 and 1995, respectively.
FVP's partners have committed to provide debt and equity capital commitments
totaling approximately $199,400 through two limited partnership and note
purchase agreements. As of December 31, 1996, FVP had received approximately
$163,400 of these commitments. Of the total capital contributed to FVP by
December 31, 1996, approximately $22,200 is in the form of general and limited
partner capital contributions, approximately $43,200 in the form of 14% junior
subordinated notes (the "Junior Notes") and approximately $98,000 in the form of
12% senior subordinated notes (the "Senior Notes"). On March 11, 1997, FVP
called an additional $15,000 in capital contributions from its partners,
approximately $2,040 in the form of general and limited partner capital
contributions, approximately $3,960 in the form of Junior Notes and
approximately $9,000 in the form of Senior Notes. Substantially all of the $15.0
million had been collected as of March 26, 1997.
Under the terms of the FVP partnership agreement and the limited and partnership
interest note purchase agreement of $123,500, the Partnership agreed to issue
partnership interests, Senior Notes and Junior Notes to a limited partner, in an
amount equal to 3% of total limited partner debt and equity commitments (less
that limited partner's debt and equity commitments) as a syndication fee. As of
December 31, 1996, the Partnership has credited the capital account of the
limited partner with $428 related to limited partner capital contributions
received, and issued Senior Notes and Junior Notes totaling $2,604 related to
this arrangement. The amount issued related to the Senior Notes and the Junior
Notes is reflected as a deferred financing cost in the accompanying consolidated
financial statements and the amount issued related to limited partnership
interests is reflected as a partners' capital syndication fee.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS:
The Partnership may issue Class A, Special Class A, Class B, Special Class B and
Class C limited partnership interests. As of December 31, 1996, the Partnership
had only issued Class A, Special Class A and Class C limited partnership
interests.
Net losses are allocated to the partners in proportion to their capital
commitments until the limited partners have been allocated amounts equal to
their capital contributions, 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).
Thereafter, losses are allocated to the general partner.
Profits are allocated first to the general and limited partners to the extent of
their negative capital accounts; then to the general and limited partners to the
extent of their capital contributions; then to the general and limited partners
until the Class A and Class B limited partners receive a 12% preferred return on
their capital contributions; thereafter, 85% to the Class A and Class B limited
partners and the general partner in proportion to their capital
F-26
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(1) THE PARTNERSHIP (continued)
contributions, 7% to the general partner and Class C limited partners (the
"General Partner Special Allocation"), and 8% to the Special Class A and Special
Class B limited partners.
Distributions are made first, 99% to the Class A and Class B limited partners
and 1% to the general partner until the Class A and Class B limited partners
have received a return of their contributed capital; second, 99% to the Class A
and Class B limited partners and 1% to the general partner until the Class A and
Class B limited partners receive a 12% preferred annual rate of return on their
capital contributions; thereafter, 85% to the Class A and Class B limited
partners and the general partner in proportion to their capital contributions,
7% to the general partner and Class C limited partners (the "general partner
special allocation") and 8% to the Special Class A and Special Class B limited
partners. Under the terms of the FVP partnership agreement, the general partner
may issue Class C limited partnership interests to employees of the Partnership
which entitle the holder to receive distributions from the Partnership. However,
in no event shall the Class C limited partners be entitled to receive more than
1% of the aggregate distributions made. The percentage of the aggregate
distributions made to the Class C limited partners shall result in a reduction
to the General Partner's Special Allocation percentage. As of December 31, 1996,
the Partnership had received total commitments of approximately $32,900 and
$166,500 from its Class A limited partners and from its Special Class A limited
partners, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Partnership
and its direct and indirect wholly owned subsidiaries, FrontierVision Operating
Partners, L.P. ("FVOP") and FrontierVision Operating Partners, Inc. ("FVOP
Inc.") and FrontierVision Capital Corporation ("FCC"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
FVOP Inc. holds a 0.01% limited partnership interest in FVOP as its only asset.
FVOP owns and operates cable television properties, primarily in Maine and Ohio.
FCC is a wholly owned subsidiary of FVOP.
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.
CASH AND CASH EQUIVALENTS
For purposes of the financial statements, the Partnership 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 Partnership
capitalized a portion of salaries related to installation activities of
approximately $1,577 and $39 for the periods ended December 31, 1996 and 1995,
F-27
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
respectively. 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 Partnership'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
========= =====
Covenant 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
========= =====
DEFERRED FINANCING COSTS AND ORGANIZATION COSTS:
Deferred financing costs are being amortized using the straight-line method over
the life of the loans. Organization costs are being amortized using the
straight-line method over 5 years:
F-28
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------
December 31, December 31,
1996 1995 Life
-------- -----
Deferred financing costs $ 16,714 3,874 1-9 years
Less -- Accumulated amortization (1,323) (87)
-------- -----
$ 15,391 3,787
======== =====
Organization costs $ 625 625 5 years
Less -- Accumulated amortization (146) (21)
-------- -----
$ 479 604
======== =====
INCOME TAXES
No provision has been made for federal, state or local income taxes related to
the Partnership 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 Partnership be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Partnership adopted the
principles of this statement on January 1, 1996. The provisions of SFAS 121 did
not have an effect on the Partnership's results of operations or financial
condition through December 31, 1996.
(3) ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
The Partnership 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 purchased and liabilities assumed based upon fair values
at the respective dates of acquisition.
On November 9, 1995, the Partnership 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 Partnership 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.
F-29
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(3) ACQUISITIONS AND DISPOSITIONS (continued)
On February 1, 1996, the Partnership 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 Partnership had advanced $2,502 as
an earnest money deposit related to this transaction.
On April 9, 1996, the Partnership 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 Partnership had advanced $7,000 as an earnest money
deposit related to this transaction.
On October 7, 1996, the Partnership 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 Partnership 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 Partnership
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
========= =========
The Partnership 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 Partnership, assuming the UVC, C4, Cox, Triax and ACE acquisitions had been
consummated on January 1, 1995, are as follows:
F-30
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(3) ACQUISITIONS AND DISPOSITIONS (continued)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
-----------------------------------------
Historical Pro Forma
Results Acquisitions (a) Results
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 76,464 44,627 121,091
Operating, selling, general and administrative expenses (42,111) (23,412) (65,523)
Depreciation and amortization (35,461) (22,207) (57,668)
-------- -------- --------
Operating income (loss) (1,108) (992) (2,100)
Interest and other expenses (35,260) (20,769) (56,029)
-------- -------- --------
Net loss $(36,368) (21,761) (58,129)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1995
------------------------------------------
Historical Pro Forma
Results Acquisitions (a) Results
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 4,369 106,204 110,573
Operating, selling, general and administrative expenses (2,443) (60,100) (62,543)
Depreciation and amortization (2,329) (55,213)
(57,542)
Pre-acquisition expenses (940) -- (940)
--------- --------- ---------
Operating income (loss) (1,343) (9,109) (10,452)
Interest and other expenses (2,112) (39,001) (41,113)
--------- --------- ---------
Net loss $ (3,455) (48,110) $ (51,565)
========= ========= =========
</TABLE>
(a) Represents acquisitions 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 Partnership has completed two dispositions from it's inception through
December 1996.
On July 24, 1996, the Partnership 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 Partnership 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-31
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(4) DEBT
The Partnership's debt was comprised of the following:
<TABLE>
<CAPTION>
-----------------------
December 31, December 31,
1996 1995
-------- -------
<S> <C> <C>
Bank Credit Facility (a) --
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 averages at
December 31, 1996 and 1995, respectively), payable monthly 190,000 30,000
11% Senior Subordinated Notes due 2006 (b) 200,000
12% Senior Notes, due June 30, 2004 and 2007 (c) 105,632 4,972
14% Junior Notes, due June 30, 2004 and 2007 (c) 48,908 33,330
Subordinated promissory notes to UVC, due December 31,
2004, with interest as described below (d) 8,124 7,200
Capital lease obligations, monthly payments of $3, including
interest at 9.1%, due November 1998 and May 1999 70 59
-------- -------
Total debt $552,734 131,461
======== =======
(a) Bank Credit Facility.
As of December 31, 1995, the Partnership 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 Partnership had drawn
$30,000 in term loans and $55,900 under the revolver as of December 31,
1995. On April 9, 1996, the Partnership 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 Partnership 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 Partnership 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, the
Partnership 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
Partnership is required to make prepayments equal to 50% of its excess
cash flow, as defined in the credit agreement. The Partnership 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.
The Amended and Restated Credit Facility also requires the Partnership
to maintain compliance with various financial covenants including, but
not limited to, covenants relating to total indebtedness, debt
</TABLE>
F-32
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(4) DEBT (continued)
ratios, interest coverage ratio, fixed charges ratio, and capital
expenditures. In addition, the Senior CreditFacility has restrictions
on certain Partnership distributions. As of December 31, 1996, the
Partnership 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 subsidiary 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 Partnership 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
Partnership 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 Partnership 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 Partnership issued, pursuant to a public
offering (the "Offering"), $200,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2006 (the "Notes"). Net proceeds from the
Offering of $192,500 after costs of approximately $7,500, were
available to the Partnership 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 Partnership
(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
Partnership 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 Partnership was in compliance
with the financial covenants of the Indenture.
(c) Senior and Junior Notes
The Senior Notes bear interest at a rate of 12% per annum, compounded
annually, and are payable June 30, 2004 and 2007. The Junior Notes bear
interest at a rate of 14% per annum, compounded annually, and are
payable June 30, 2004 and 2007. Under the terms of the Senior Notes and
the Junior Notes, no cash interest payments are required.
F-33
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(4) DEBT (continued)
(d) 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 Partnership 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 years and 3% for each of the subsequent
years. Further, in the event the Partnership's leverage ratio exceeds
certain specified amounts, the interest rate also increases by 2%.
Under the terms of the subordinated promissory note, the Partnership
can prepay the balance at any time.
The debt of the Partnership matures as follows:
Year ended December 31 --
1997 $ 33
1998 3,709
1999 9,353
2000 13,350
2001 17,350
Thereafter 508,939
--------
$552,734
========
(5) 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 Partnership'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.
(6) COMMITMENTS AND CONTINGENCIES
The Partnership 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.
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
=========
F-34
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in Thousands)
(6) COMMITMENTS AND CONTINGENCIES (continued)
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 per subscriber no higher than $1.24 per channel, the
rates are deemed to be reasonable.
As a result of such actions, The Partnership'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 Partnership
believes that it has complied in all material respects with the provisions of
the 1992 Cable Act. However, the Partnership'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.
The Partnership'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.
(10) SUBSEQUENT EVENTS (unaudited)
On December 18, 1996 , the Partnership 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 Partnership had advanced $500 as an earnest
money deposit related to this transaction. The Partnership consummated the
purchase of the systems on March 20, 1997.
Subsequent to December 31, 1996, the Partnership entered into letters of intent
or asset purchase agreements to acquire certain cable television systems,
located primarily 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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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.
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.
F-73
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES AND ISSUANCE AND DISTRIBUTION.
Set forth below is the fees and expenses, other than underwriting discounts and
commissions, paid by the Registrants in connection with the Offering. All
amounts are actual except for the Directors and Officers indemnification
policies which are estimates:
Securities and Exchange Commission Registration Fee $ 68,966
NASD Filing Fee 20,500
Printing and Engraving Fees 356,820
Blue Sky Fees and Expenses 6,378
Rating Agency Fees 145,000
Fees of Trustee 9,250
Legal Fees and Expenses 621,333
Accounting Fees and Expenses 190,608
Directors and Officers Indemnification Policies 60,000
Miscellaneous 35,553
----------
Total $1,514,408
==========
Item 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 5.6 of the First Amended and Restated Agreement of Limited Partnership
of FVP, dated as of August 11, 1995 (the "FVP Partnership Agreement"), provides
that in the absence of fraud, breach of fiduciary duty, willful misconduct or
gross negligence, FVP GP, its partners, their respective officers, directors,
employees, agents or stockholders (including when any of the foregoing is
serving at the request of FVP GP on behalf of FVP as a partner, officer,
director, employee or agent of any other Person) (as such term is defined in the
FVP Partnership Agreement) (in each case, the "Indemnitee") shall not be liable
to any other partner of FVP or FVP (i) for any mistake in judgment, (ii) for any
action taken or omitted to be taken in good faith and in a manner reasonably
believed by such Person to be in the best interests of FVP and to be within the
scope of its authority under the FVP Partnership Agreement, or (iii) for any
loss due to the mistake, action, inaction, negligence, dishonesty, fraud or bad
faith or any broker or other agent, provided that such broker or other agent
shall have been selected and supervised by FVP GP or other Indemnitee with
reasonable care. In addition, Indemnitees will be indemnified and held harmless
by FVP against losses, damages and expenses for which such Person has not
otherwise been reimbursed actually and pending or completed action, suit or
proceeding (other than any action by or in the name of FVP), by reason of any
action taken or omitted to be taken in connection with or arising out of such
Person's activities on behalf of FVP or in furtherance of FVP, if such actions
were taken or omitted to be taken in good faith and in a manner reasonably
believed by such Person to be in the best interests of FVP and within the scope
of the FVP Partnership Agreement, provided, that any Person entitled to
indemnification shall obtain the written consent of FVP GP (which consent will
not be given without the approval of the Advisory Committee) prior to entering
into any compromise or settlement which would result in an obligation of FVP to
indemnify such Person.
Section 5.6 of the First Amended and Restated Agreement of Limited Partnership
of FVP GP, dated as of August 11, 1995 (the "FVP GP Partnership Agreement"),
provides that in the absence of fraud, breach of fiduciary duty, willful
misconduct or gross negligence, Frontier Vision Inc., its officers, directors,
employees, agents or stockholders (including when any of the foregoing is
serving at the request of FrontierVision Inc. on behalf of FVP GP or FVP as a
partner, officer, director, employee or agent of any other Person) (as such term
is defined in the FVP GP Partnership Agreement) (in each case, the "Indemnitee")
shall not be liable to any other partner of FVP GP or FVP GP (i) for any mistake
in judgment, (ii) for any action taken or omitted to be taken in good faith an
din a manner reasonably believed by such Person to be in the best interests of
FVP GP and to be within the scope of its authority under the FVP GP Partnership
Agreement, or (iii) for any loss due to the mistake, action, inaction,
negligence dishonesty, fraud or bad faith of any broker or other agent, provided
that such broker or other agent shall
II-1
<PAGE>
have been selected and supervised by FrontierVision Inc. or other Indemnitee
with reasonable care. In addition, Indemnitees will be indemnified and held
harmless by FVP GP against losses, damages and expenses for which such person
has not otherwise been reimbursed actually and reasonably incurred by such
Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than any
action by or in the name of FVP GP), by reason of any action taken or omitted to
be taken in connection with or arising out of such Person's activities on behalf
of FVP GP or in furtherance of FVP GP, if such actions were taken or omitted to
be taken in good faith and in a manner reasonably believed by such person to be
in the best interests of FVP GP and within the scope of the FVP GP Partnership
Agreement, provided, that any Person entitled to indemnification shall obtain
the written consent of FrontierVision Inc. (which consent will not be given
without the consent of a majority in interests of the Class X Limited Partners
(as such term is defined in the FVP GP Partnership Agreement)) prior to entering
into any compromise or settlement which would result in an obligation of FVP GP
to indemnify such person.
Section 102(b)(7) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation (in its original certificate of
incorporation or amendment thereto) may eliminate or limit the personal
liability of a director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise of perform duties conferred or
imposed upon directors by the DGCL) to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provisions shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
the director derived an improper personal benefit. Article Tenth of
FrontierVision Inc.'s Certificate of Incorporation and Article Eleventh of
Capital's Certificate of Incorporation each limit the liability of directors
thereof to the extent permitted by Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties to which they may be made parties by reason of their being or
having been directors, officers, employees or agents and shall so indemnify such
persons if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
Item 15 RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of securities sold by the Registrants during the past
three years without registration under the Securities Act:
1. On July 15, 1995, in connection with the formation of the
Company, the Company issued to FVP a 99.9% general partner interest in
the Company for cash consideration of $99.90. Simultaneously, the
Company issued to FrontierVision Operating Partners, Inc. a 0.1%
limited partnership interest for cash consideration of $.10.
2. On July 26, 1996, in connection with the formation of Capital,
Capital issued to the Company 100 shares of the voting common stock of
Capital, one cent ($.01) par value per share, for cash consideration of
$100.00.
In the foregoing instances, the issuance of the general partner interest in the
Company and the initial limited partnership interest in the Company and the
issuance of the voting common stock of Capital were deemed to be exempt from the
registration requirements of the Securities Act as a transaction not involving
any public offering, pursuant to Section 4(2) of the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only an not with a view to
II-2
<PAGE>
or for sale in connection with any distribution thereof. All recipients had
adequate access, through their relationships with the Company and Capital, to
information about the Company and Capital.
Item 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement (1)
3.1 The Company's Agreement of Limited Partnership. (1)
3.2 Certificate of Limited Partnership of the Company. (1)
3.3 First Amended and Restated Agreement of Limited Partnership of FVP. (1)
3.4 Certificate of Limited Partnership of FVP. (1)
3.5 First Amended and Restated Agreement of Limited Partnership of FVP GP. (1)
3.6 Certificate of Limited Partnership of FVP GP. (1)
3.7 Certificate of Incorporation of FrontierVision Inc. (1)
3.8 Bylaws of FrontierVision, Inc. (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, 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)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
12.1 Statement of Computation of Ratios.
16.1 Report of change in accountants. (2)
23.10 Consent of KPMG Peat Marwick LLP (FrontierVision Operating Partners, L.P.).
23.11 Consent of KPMG Peat Marwick LLP (FrontierVision Capital Corporation).
23.12 Consent of KPMG Peat Marwick LLP (FrontierVision Partners, L.P.).
23.13 Consent of Piaker & Lyons, P.C. (United Video Cablevision, Inc.).
23.14 Consent of Williams, Rogers, Lewis & Co., I.C. (C4 Media Cable Southeast,
Limited Partnership).
23.15 Consent of Arthur Andersen LLP (Triax Southeast Associates, L.P.).
23.16 Consent of Deloitte & Touche LLP (American Cable Entertainment of Kentucky-
Indiana, Inc.).
23.17 Consent of Deloitte & Touche LLP (Ashand and Defiance Clusters).
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 29, 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>
Item 17 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company, FVP,
FVP GP, FrontierVision Inc. and Capital pursuant to the provisions described
under Item 14 above or otherwise, the Registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore,
unenforeceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrants of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisidiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities
II-4
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities which remain unsold at the termination of the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
FrontierVision Operating Partners, L.P. has duly caused this Registration
Statement to be signed on its 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 Act of 1933, as amended, this
Registration Statement has been signed below by the following persons on behalf
of the Registrants and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ JAMES C. VAUGHN President, Chief Executive Officer, March 27, 1997
- --------------------- and Director of FrontierVision Inc.
James C. Vaughn (Principal Executive Officer)
/s/ JOHN S. KOO Senior Vice President, Chief March 27, 1997
- --------------------- Financial Officer, Secretary and
John S. Koo Director of FrontierVision Inc.
(Principal Financial Officer)
/s/ JAMES W. MCHOSE Vice President and Treasurer of March 27, 1997
- --------------------- FrontierVision Inc. (Principal
James W. McHose Accounting Officer)
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
FrontierVision Capital Corporation has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, on
March 27, 1997.
FRONTIERVISION CAPITAL CORPORPORATION
By: /s/ JAMES C. VAUGHN
-----------------------
James C. Vaughn
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons on behalf
of the Registrants and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JAMES C. VAUGHN President and Director March 27, 1997
- ---------------------- (Principal Executive Officer)
James C. Vaughn
/s/ JOHN S. KOO Senior Vice President, Chief March 27, 1997
- ---------------------- Financial Officer, Secretary and
John S. Koo Director (Principal
Financial Officer)
/s/ JAMES W. MCHOSE Vice President and Treasurer March 27, 1997
- ---------------------- (Principal Accounting Officer)
James W. McHose
II-7
<PAGE>
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
======== ========
EXHIBIT 23.10
To the Partners of FrontierVision Operating Partners, L.P.
We consent to the use of our reports dated March 12, 1997, relating to the
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) through
December 31, 1995, included herein and to the reference to our firm under the
heading "Experts" in the post-effective amendment to the Form S-1.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1997
EXHIBIT 23.11
To the Shareholder of FrontierVision
Capital Corporation:
We consent to the use of our reports dated March 12, 1997, relating to the
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 owners' equity for the period from inception (July 26, 1996) through
December 31, 1996, included herein and to the reference to our firm under the
heading "Experts" in the post-effective amendment to the Form S-1.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1997
EXHIBIT 23.12
To the Partners of FrontierVision Partners, L.P.
We consent to the use of our reports dated March 19, 1997, relating to the
consolidated balance sheets of FrontierVision Partners, L.P. and subsidiaries as
of December 31, 1996 and 1995, included herein and to the reference to our firm
under the heading "Experts" in the post-effective amendment to the Form S-1.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1997
EXHIBIT 23.13
[PIAKER & LYONS, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 7, 1996, on the financial statements of United Video
Cablevision, Inc. - Maine and Ohio Divisions included in or made part of
FrontierVision Operating Partners, L.P.'s Form S-1 registration statement.
/s/ Piaker & Lyons, P.C.
PIAKER & LYONS, P.C.
Vestal, New York
March 25, 1997
EXHIBIT 23.14
[WILLIAMS, ROGERS, LEWIS LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 11, 1996 on the consolidated financial statements of C4 Media Cable
Southeast, Limited Partnership included in or made part of FrontierVision
Operating Partners, L.P.'s Post-Effective Amendment No. 1 to Form S-1
Registration Statement.
/s/ WILLIAMS, ROGERS, LEWIS & CO., P.C.
Williams, Rogers, Lewis & Co., P.C.
Plainview, Texas
March 25, 1997
EXHIBIT 23.15
[AURTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1996 on the financial statements of Triax Southeast
Associates, L.P. included in or made part of FrontierVision Operating Partners,
L.P.'s Post Effective Amendment No. 1 to Form S-1 registration statement.
AURTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Denver, Colorado,
March 25, 1997
EXHIBIT 23.16
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No.'s 333-9535 and 333-9535-01 of FrontierVision Operating Partners,
L.P. and FrontierVision Capital Corporation on Form S-1 of our report dated
March 15, 1996 (except as to Note 1, which is dated August 1, 1996), relating to
the financial statements of American Cable Entertaiment of Kentucky-Indiana,
Inc. appearing in the Prospectus which is part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitee & Touche LLP
Deloitte & Touche LLP
Stamford, Connecticut
March 25, 1997
EXHIBIT 23.17
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No.'s 333-9535 and 333-9535-01 of FrontierVision Operating Partners,
L.P. and FrontierVision Capital Corporation on Form S-1 of our report dated
April 10, 1996 (relating to the combined financial statement of the Ashland and
Defiance Clusters), appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 25, 1997
<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>
