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PROSPECTUS Filing pursuant to Rule 424(b)(3)
April 19, 1999
[LOGO]
FrontierVision Operating Partners, L.P. and
FrontierVision Capital Corporation
$200,000,000
11% Senior Subordinated Notes due 2006
J.P. Morgan Securities Inc. and First Union Capital Markets Corp. will use
this prospectus 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. FrontierVision
Operating Partners, L.P. will not receive any of the proceeds of such sales. J.
P. Morgan Securities Inc. and First Union Capital Markets Corp. may act as
principles or agents in such transactions. The closing of the initial sale of
the notes occurred on October 7, 1996. See "Plan of Distribution."
<TABLE>
The Company: The Notes:
<S> <C>
o We own, operate and develop cable television o Maturity Date: October 15, 2006.
systems in small and medium-sized suburban o Interest Payment: Semi-annually on each April 15
and exurban communities in the United States. and October 15.
o FrontierVision Operating Partners, L.P. and o Redemption: We can redeem the notes on or after
FrontierVision Capital Corporation October 15, 2001. We can buy back up to 35% of
1777 South Harrison Street, Suite P-200 the notes prior to October 15, 1999.
Denver, Colorado 80210 o Ranking: The notes are general, unsecured
(303) 757-1588 obligations of FrontierVision Operating
Trading Format Partners, L.P. and FrontierVision Capital
o In the over-the-counter market, negotiated Corporation and:
transactions, or through a combination of o rank subordinate in right of payment to all
such methods. existing and future senior indebtedness
o rank ratably in right of payment with
any other senior subordinated indebtedness.
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 7.
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 passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
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J.P. Morgan & Co. First Union Capital Markets Corp.
<PAGE>
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 us, 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 FrontierVision
Operating Partners and FrontierVision Capital Corporation since the date hereof.
TABLE OF CONTENTS
<TABLE>
Page Page
<S> <C> <C> <C>
Where You Can Find More Information 3 Certain Relationships and Related Transactions 49
Prospectus Summary 4 Principal Security Holders 50
Risk Factors 7 Ownership Structure 51
Use of Proceeds 13 The Partnership Agreements 52
Selected Financial Data 14 Description of the notes 55
Management's Discussion and Analysis of Plan of Distribution 89
Financial Condition and Results of Operations 17 Legal Matters 90
Business 25 Experts 90
Legislation and Regulation 36 Glossary 91
Management 45 Index to Financial Statements F-1
Financial Statement Schedule S-1
</TABLE>
2
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Where You Can Find More Information
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act covering the notes. This
prospectus does not contain all of the information included in the registration
statement. Any statement made in this prospectus concerning the contents,
agreements or other document is not necessarily complete. If we have filed any
of those contracts, agreements or other documents as an exhibit to the
registration statement, you should read the exhibit for a more complete
understanding of the document or matter involved. Each statement regarding a
contract, agreement or other document is qualified in its entirety by reference
to the actual document.
In the indenture governing the notes, we have agreed to file with the SEC
financial and other information for public availability. In addition, the
indenture governing the notes requires us to deliver to you, or to Colorado
National Bank for forwarding to you, copies of all reports that we file with the
SEC without any cost to you. We will also furnish such other reports as we may
determine or as the law requires.
You may read and copy the registration statement, including the attached
exhibits, and any reports, statements or other information that we file at the
SEC's public reference room in Washington, D.C. You can request copies of these
documents, upon payment of a duplicating fee, by writing the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings also are available to the public on the SEC
Internet site (http://www.sec.gov).
You should rely only on the information provided in this prospectus. No person
has been authorized to provide you with different information.
The information in this prospectus is accurate as of the date on the front
cover. You should not assume that the information contained in this prospectus
is accurate as of any other date.
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Prospectus Summary
The following summary highlights selected information from this prospectus and
may not contain all of the information that is important to you. This prospectus
includes specific terms of the notes, as well as information regarding our
business and detailed financial data. We wrote this prospectus using the
Securities and Exchange Commission's newly-adopted "plain English" rule. This
rule requires that we write without the "legalese" typically found in most
documents filed with the SEC in order to provide you with a more meaningful and
understandable document.
FrontierVision Operating Partners, L.P. owns, operates and develops cable
television systems in small and medium-sized suburban and exurban communities in
the United States, FrontierVision Capital Corporation, a wholly-owned subsidiary
of FrontierVision Operating Partners, L.P., has only nominal assets and does not
conduct any operations. Unless the context otherwise requires, "FVOP" refers to
FrontierVision Operating Partners, L.P., but not any of its subsidiaries unless
otherwise specified, "we," "our," "ours," "us" and "FrontierVision" refers
collectively to FrontierVision Operating Partners, L.P., FrontierVision Capital
Corporation and the consolidated subsidiaries of FrontierVision Operating
Partners, L.P. and its subsidiaries. See "Ownership Structure" in this
prospectus for a detailed organizational chart.
FrontierVision
We own, operate and develop cable television systems in small and medium-sized
suburban and exurban communities in the United States. As of December 31, 1998,
we were one of the twenty largest operators of cable television systems (a
multiple system operator) in the United States, owning systems which passed
approximately 1,007,100 homes and served approximately 702,200 basic
subscribers.
Since closing our first acquisition in November 1995, we have completed over 30
acquisitions and have established significant critical mass and subscriber
density within our targeted geographic markets. The following table illustrates
our growth and operating characteristics of our systems through December 31,
1998.
<TABLE>
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Homes Passed Basic Premium Total Revenue EBITDA
Subscribers Units (In Thousands) (In Thousands)
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
December 31, 1995 125,300 92,700 35,700 $ 4,369 $ 991
December 31, 1996 498,900 356,400 152,100 76,464 34,353
December 31, 1997 817,000 559,800 275,400 145,126 66,394
December 31, 1998 1,007,100 702,200 285,300 245,134 114,390
</TABLE>
We have established three primary operating clusters in New England, Ohio and
Kentucky, with a fourth, smaller group of cable television systems in the
Southeast. As of December 31, 1998, over 90% of our subscribers were within our
three primary operating clusters. We are currently the second largest multiple
system operator in Kentucky, the largest multiple system operator in Maine and
the third largest multiple system operator in Ohio.
Recent Events
On February 22, 1999, we entered into a definitive agreement with Adelphia
Communication Corporation in which Adelphia agreed to acquire FrontierVision
Partners, L.P., our parent company. The transaction is subject to customary
closing conditions, and we make no assurances as to when or if the transaction
will be consummated. If the transaction does occur, it would constitute a change
of control under the notes and we would be required to offer to purchase the
notes in accordance with the terms of the indenture governing the notes.
4
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Summary Operating Data
The following table presents summary operating data derived from
FrontierVision's financial statements as of and for the years ended December 31,
1998, 1997 and 1996 and as of and for the period from April 17, 1995 (inception)
through December 31, 1995 which have been audited by KPMG LLP, independent
certified public accountants, and selected unaudited operating data for such
periods.
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----------------------------------------------------------------------
FVOP
----------------------------------------------------------------------
For the Year For the Year For the Year From April 17,
Ended Ended Ended 1995 (inception)
December 31, December 31, December 31, to December 31,
1998 1997 1996 1995
---- ---- ---- ----
In thousands except ratios and
operating statistical data
Statement of Operations Data:
<S> <C> <C> <C> <C>
Revenue....................................... $ 245,134 $ 145,126 $ 76,464 $ 4,369
Operating expenses ........................... 123,779 74,314 39,181 2,311
Corporate administrative expenses............. 6,965 4,418 2,930 127
Depreciation and amortization ................ 114,155 65,502 35,724 2,308
Pre-acquisition expenses ..................... - - - 940
----------- ---------- ---------- ----------
Operating income/(loss) ...................... 235 892 (1,371) (1,317)
Interest expense, net (1) .................... (68,832) (42,652) (22,422) (1,386)
Other income/(expenses) ...................... (526) (57) (8) -
Income tax benefit............................ 2,927 - - -
Extraordinary item - Loss on early
retirement of debt......................... - (5,046) - -
----------- ---------- ---------- ----------
Net loss ..................................... $ (66,196) $ (46,863) $ (23,801) $ (2,703)
=========== ========== ========== ==========
Balance Sheet Data (End of Period):
Total assets.................................. $ 1,202,222 $ 919,708 $ 549,168 $ 143,512
Total debt.................................... 871,610 632,000 398,194 93,159
Partners' capital ............................ 269,495 263,043 130,003 46,407
Financial Ratios and Other Data:
EBITDA (2) ................................... $ 114,390 $ 66,394 $ 34,353 $ 991
EBITDA margin................................. 46.7% 45.8% 44.9% 22.7%
Total debt to EBITDA (3) ..................... 6.24 6.19 6.75
EBITDA to interest expense (4)................ 1.81 1.72 1.45
Net cash flows from operating activities ..... $ 63,013 $ 26,193 $ 18,911 $ 1,907
Net cash flows from investing activities ..... (373,399) (427,921) (418,215) (131,345)
Net cash flows from financing activities ..... 311,863 401,502 400,293 132,088
Deficiency of earnings to fixed charges (5) .. $ 69,123 $ 46,863 $ 23,801 $ 2,703
Operating Statistical Data (End of
Period Except Average):
Homes passed ................................. 1,007,100 817,000 498,900 125,300
Basic subscribers ............................ 702,200 559,800 356,400 92,700
Basic penetration ............................ 69.7% 68.5% 71.4% 74.0%
Premium units ................................ 285,300 275,400 152,100 35,700
Premium penetration .......................... 40.6% 49.2% 42.7% 38.5%
Average monthly revenue per basic
subscriber (6) ............................. $ 33.84 $ 31.53 $ 29.73 $ 27.76
</TABLE>
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5
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(1) Interest expense for the years ended December 31, 1998, 1997 and 1996 and
the period from April 17, 1995 through December 31, 1995 is net of interest
income of $875, $994, $471 and $60, respectively.
(2) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. We believe 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, our senior bank indebtedness and the
indenture governing the 11% senior subordinated notes due 2006 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 for the most recent quarter ended
is multiplied by four. This presentation is consistent with the incurrence of
indebtedness test in the indenture governing our subordinated notes. In
addition, this ratio is commonly used in the cable television industry as a
measure of leverage.
(4) For purposes of this computation, EBITDA and interest expense for the most
recent quarter ended is multiplied by four, including certain pro forma
adjustments made to include the effect of debt incurred to purchase those
systems acquired by us during the quarter. 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 an estimated component of rent expense) and (ii)
amortization of deferred financing costs.
(6) Average monthly revenue per basic subscriber equals revenue for the last
month of the period divided by the average number of basic subscribers for such
period.
6
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Risk Factors
You should consider carefully the following factors and other information in
this prospectus before purchasing the notes.
Risks Associated with the Notes
There Is No Prior Market for the Exchange Notes; If One Develops, It May Not Be
Liquid
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."
Risks Associated with FrontierVision
Since the Notes Are Not Secured, Our Assets May Be Insufficient to Pay Amounts
Due on Your Notes
The notes are unsecured senior obligations of FVOP and FrontierVision Capital
Corporation and will be equal in right of payment to all existing and future
indebtedness of FVOP, other than indebtedness that is expressly subordinated to
the notes. We are, and will continue to be, highly leveraged as a result of the
substantial indebtedness we have incurred, and intend to incur, to finance
acquisitions and expand our operations. In addition, we may incur other senior
indebtedness, which may be substantial in amount, including secured
indebtedness.
Because the notes are unsecured obligations, your right of repayment may be
compromised in the following situations:
o FVOP or some of its subsidiaries enter into bankruptcy, liquidation,
reorganization, or other winding-up;
o there is a default in payment under our amended bank credit facility
or other secured indebtedness; or
o there is an acceleration of any indebtedness under our amended bank
credit facility or other secured indebtedness.
If any of these events occur, our assets must pay all indebtedness under the
amended bank credit facility and other secured indebtedness before those assets
would be available to pay the obligations on the notes. In that event, there may
not be sufficient assets remaining to pay amounts due on any of the notes.
Subordination of the Notes
The notes are general unsecured obligations and rank subordinate in right of
payment to all existing and future senior indebtedness, including our
obligations under the amended bank credit facility. The notes rank ratably in
right of payment with any other senior subordinated indebtedness, other than
indebtedness, if any, that by its terms is expressly subordinated in right and
priority of payment to the notes. At December 31, 1998, we had approximately
$871.6 million of total senior indebtedness and Capital had no senior
indebtedness. Additional senior indebtedness may be incurred by us from time to
time subject to restrictions in the amended bank credit facility and the
indenture. The lenders under the amended bank credit facility have a security
interest in substantially all of our assets, and partnership interests and
thereby have available to them all of the remedies available to a secured
creditor under applicable law. See "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 FVOP, 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."
7
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If a Change of Control Occurs, We May Not Have Sufficient Assets to Pay Amounts
Due on the Notes
Upon the occurrence of a change of control, we are required to make an offer to
purchase all outstanding notes. If a change of control were to occur, there can
be no assurance that we would have sufficient financial resources, or would be
able to arrange financing, to pay the purchase price for the notes.
In addition, the amended bank credit facility includes "change of control"
provisions that permit the bank lenders thereunder to accelerate the repayment
of indebtedness thereunder, which is senior in right of payment to the notes, as
well as other provisions that restrict our ability to consummate an offer to
purchase outstanding notes in connection with a change of control. See
"Description of Other Indebtedness" and "Description of the Notes." Any future
credit agreements or other agreements relating to other indebtedness to which we
become a party may contain similar restrictions and provisions.
In the event a change of control occurs at a time when we are prohibited from
repurchasing the notes, we could seek the consent of our lenders to repurchase
the notes or could attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such consent or repay such borrowing, we would
remain prohibited from repurchasing the notes. In such case, our failure to
repurchase tendered notes would constitute an event of default under the
indenture. See "Description of the Notes--Change of Control."
On February 22, 1999, we entered into a definitive agreement with Adelphia
Communication Corporation in which Adelphia agreed to acquire FrontierVision
Partners, L.P. ("FVP"), our parent company. The transaction is subject to
customary closing conditions, and we make no assurances as to when or if the
transaction will be consummated. If the transaction does occur, it would
constitute a change of control under the notes and an offer to purchase the
notes in accordance with the terms of the indenture governing the notes will be
required.
Substantial Leverage
FrontierVision is, and will continue to be, highly leveraged as a result of the
substantial indebtedness we have incurred, and intend to incur, to finance
acquisitions and expand our operations. As of December 31, 1998,
FrontierVision's aggregate consolidated indebtedness outstanding was
approximately $871.6 million.
We anticipate that, in light of the amount of our existing and planned
indebtedness, we will continue to be highly leveraged for the foreseeable
future. FrontierVision's highly leveraged capital structure could adversely
affect our ability to service the exchange notes and could significantly limit
our ability to:
o finance operations;
o fund capital expenditure requirements;
o compete effectively;
o expand our business;
o comply with certain obligations under our franchise agreements; or
o operate under adverse economic conditions.
Insufficiency of Earnings to Cover Fixed Charges
Our combined historical earnings were insufficient to cover our fixed charges
for the year ended December 31, 1998 and for the year ended December 31, 1997 by
$69.1 million and $46.9 million, respectively. However, for both periods,
earnings are reduced by substantial non-cash charges, principally consisting of
depreciation and amortization. The high levels of depreciation and amortization,
together with interest expense, have caused us to report net losses. Management
believes that such net losses are common for cable television companies, and we
believe that we will continue to incur net losses in the future.
Since being founded in 1995, our cash from equity investments, bank borrowings
and other debt has been sufficient to finance our acquisitions and, together
with cash generated from operating activities, also has been
8
<PAGE>
sufficient to meet our debt service, working capital and capital expenditure
requirements. We intend to continue to finance such debt service, working
capital and capital expenditure requirements in the future through a combination
of cash from operations and indebtedness, and we believe that we will continue
to generate cash and be able to obtain financing sufficient to meet such
requirements.
Our substantial level of debt has important consequences, which include the
following:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired;
o a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our indebtedness,
thereby reducing the funds available for other operations and business
opportunities;
o certain of our borrowings bear interest at variable rates, which could
result in a higher interest expense in the event of increases in
general market interest rates;
o we may be substantially more leveraged than certain of our
competitors, which may place us at a competitive disadvantage;
o our substantial degree of leverage may limit our flexibility to adjust
to changing market conditions, reduce our ability to withstand
competitive pressures and make us more vulnerable to a downturn in
general economic conditions or in our business;
o a significant portion of our indebtedness will become due prior to the
maturity of the notes; and
our ability to refinance the notes in order to pay the principal of the notes at
maturity or upon a change of control may be adversely affected.
Our Debt Covenants Restrict Our Business in Many Ways
The indenture governing the notes and the amended bank credit facility, contain
covenants that restrict our business in a number of important ways. These
covenants limit our ability to:
o incur indebtedness;
o pay dividends on, and redeem our capital stock of, and certain of our
subsidiaries;
o enter into transactions with affiliates;
o create liens;
o sell assets; and
o consolidate, merge or enter into similar transactions.
In addition, the amended bank credit facility contains covenants that require us
to comply with specified financial ratios and satisfy certain financial tests.
Our ability to comply with those agreements in the future may be affected by
prevailing economic, financial and industry conditions, certain of which are
beyond our control. Breaching any of those covenants or restrictions could
result in a default under the indenture or the amended bank credit facility.
Moreover, the indenture and the amended bank credit facility would allow our
creditors to require acceleration of the payment of principal and interest on
the notes or loans if certain events of default occurred or if the principal and
interest on some of our other indebtedness were accelerated. If the indebtedness
under the amended bank credit facility were to be accelerated, it is not certain
whether our assets would be sufficient to repay in full that indebtedness and
our other indebtedness, including the notes.
9
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Our Business May Suffer If Any of Our Key Personnel Leaves FrontierVision
Our business is substantially dependent upon the performance of certain key
individuals, including James C. Vaughn, FrontierVision's president and chief
executive officer, and John S. Koo, FrontierVision's senior vice president and
chief financial officer. Although we maintain a strong management team, the loss
of the services of Mr. Vaughn or Mr. Koo, neither of whom has an employment
agreement with us, could have a material adverse effect on our business.
We Have a Limited Operating History Upon Which to Base an Evaluation
FrontierVision was formed in July 1995 and has grown principally through
acquisitions. You, therefore, have limited historical financial information
about us, and about the results that can be achieved by us in managing the cable
systems not previously managed by FrontierVision, upon which to base an
evaluation of our performance and an investment in the notes. In addition, as a
result of our rapid growth through acquisitions, past operating history is not
necessarily indicative of future results.
Upgrading Our Systems Requires Significant Capital Expenditures
We expect to upgrade a significant portion of our cable television distribution
systems over the next several years to, among other things, increase bandwidth
and channel capacity. Our inability to upgrade the cable television systems
could have a material adverse effect on our operations and competitive position.
Our Acquisitions Involve Risk
We completed nine acquisitions in 1998 and have two transactions currently
pending. Any past or future acquisition may have an adverse effect upon our
operating results or cash flow, particularly for acquisitions of new systems
which must be integrated with the existing operations. There can be no
assurances that we will be able to integrate successfully any acquired business
with our existing operations or realize any efficiencies therefrom. There can
also be no assurances that any such acquisition, if consummated, will be
profitable or that we will be able to obtain any required financing to acquire
additional systems in the future.
Risks Associated with the Cable Television Industry
Significant Competition in the Cable Television Industry
Our cable television systems compete with a variety of alternative sources of
news, information and entertainment, including:
o local broadcast stations that provide free off-air programming;
o program distributors that transmit satellite signals containing video
programming, data and other information to subscriber receiving dishes
of varying sizes;
o satellite master antenna television systems, commonly known as SMATV
systems, and multichannel, multipoint distribution service operators,
commonly known as MMDS or wireless cable operators;
o other cable operators, including local franchising authorities, who
build and operate cable systems in the same communities that we serve,
commonly known as overbuilders;
o newspapers, movie theaters and live sporting events; and
o interactive online computer services, including Internet-based
services, and home video products, including videotape cassette
recorders.
10
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Modifications to federal law in 1996 changed the regulatory environment in which
our cable systems operate. Federal law now allows local exchange carriers,
commonly known as LECs or local telephone companies, and other businesses to
provide directly to subscribers a wide variety of video and information services
that are competitive with our communications services. In recent years, there
has been significant national growth in the number of subscribers to direct
broadcast satellite services. Other new technologies, including Internet-based
services, may also become competitive with services that we can offer. Many of
our potential competitors have substantially greater resources than we do, and
we cannot predict the extent to which competition will materialize in our
franchise areas from other video or broadband service ventures, or from other
potential competitors, or, if such competition materializes, the extent of its
effect on us. For more information about the competitive environment in which
our cable systems operate, you should review the section of this prospectus
titled "Business -- Competition."
Risks Relating to New Lines of Business
We are selectively upgrading our cable systems to increase channel capacity and
expand addressability in part to enhance the potential for increasing revenues
through the introduction of new technologies, services and program delivery
capabilities, such as pay-per-view movies and events, digital programming
services, cable Internet access and telephony. While we are optimistic about the
prospects for these new lines of business, there are no assurances that we will
be able to enter them successfully or that we will be able to generate
additional cash flow. Moreover, many of these new lines of business are likely
to have significant competition from businesses that may have significant
financial resources and market presence such as satellite program distributors,
local telephone companies, long distance telephone companies, and online
Internet service providers.
Non-Exclusive Franchises; Non-Renewal or Termination of Franchises
We typically operate our cable television systems under non-exclusive franchises
granted by local authorities which are subject to renewal and renegotiation from
time to time. Our business is dependent upon the retention and renewal of these
local franchises. Our franchises are generally granted for a fixed term ranging
from five to 15 years, but in most cases they are terminable if we fail to
comply with the material provisions thereof. Our 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.
Federal law 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. Federal law also
provides, among other things, for an orderly franchise renewal process in which
franchise renewal will not be unreasonably withheld. If renewal is denied and
the franchising authority acquires ownership of our cable system or requires a
transfer of the cable system to another person, we generally are entitled to the
fair market value for the cable system covered by our franchise.
Although we generally have good relationships with our franchise authorities, no
assurances can be given that we will be able to retain or renew our franchises
or that the terms of any franchise renewals will be on terms as favorable to us
as our existing franchises. The non-renewal or termination of franchises
relating to a significant portion of our subscribers could have a material
adverse effect on our results of operations.
Extensive Regulation In the Cable Television Industry
Our cable systems are subject to extensive regulation by federal, local and, in
some instances, state governmental agencies. Federal law establishes a national
policy to guide the regulation, development and operation of cable
communications systems. Principal responsibility for implementing federal law
and policies has been allocated between the Federal Communications Commission,
known as the FCC, and state or local regulatory authorities. We expect changes
in the regulatory and legislative environment to occur in the future.
11
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Consequently, we are unable to predict the effect that ongoing or future
developments may have on the cable industry or on our business and operations.
Federal Law and Regulation. Federal laws and regulations covering various
aspects of our cable television business and operations 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. Federal law and regulations have established, among other
things:
o rate regulations, some of which expire in March, 1999,
o mandatory carriage and retransmission consent requirements that
require us, under certain circumstances, to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast
station,
o rules for franchise renewals and transfers,
o rules relating to the use of our cable systems by the local
franchising authorities, the public and other unrelated companies, and
o other requirements and restrictions covering a variety of operational
areas such as equal employment opportunity and technical standards,
customer service requirements and restrictions, and the sale or lease
to subscribers of set-top boxes, cable modems and other navigation
devices with integrated security functions.
The FCC and state regulatory agencies regularly conduct administrative
proceedings to adopt or amend regulations implementing federal law. At various
times interested parties to these administrative proceedings challenge the new
or amended regulations and policies in the courts with varying levels of
success. We expect that further court actions and regulatory proceedings will
occur and will refine the rights and obligations of various parties, including
the government, under federal law. The results of these judicial and
administrative proceedings may materially affect the cable industry and our
business and operations.
State and Local Regulation. Our cable systems generally operate in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local governmental entity. The terms and conditions of our
franchises vary materially from jurisdiction to jurisdiction. State and local
franchising jurisdiction is not unlimited, however; it must be exercised
consistently with federal law. A number of states subject cable systems to the
jurisdiction of centralized state governmental agencies. To date, the only
states in which we currently operate that have enacted such state level
regulation are Vermont and Massachusetts. We cannot predict whether any of the
other states in which we currently operate will engage in such regulation in the
future.
12
<PAGE>
Use of Proceeds
The amount of net proceeds received by us from the sale of the notes was
approximately $192.5 million. We used such net proceeds to partially fund the
acquisition of certain cable television systems and to repay outstanding
indebtedness under our then existing bank credit agreement.
13
<PAGE>
Selected Financial Data
The following tables present selected financial data derived from our financial
statements as of December 31, 1998, 1997, 1996 and 1995 and for the years ended
December 31, 1998, 1997, 1996 and the period from inception (April 17, 1995)
through December 31, 1995 which have been audited by KPMG LLP, independent
certified public accountants, and selected unaudited operating data for such
periods.
The following table also presents combined historical financial data as of and
for the years ended December 31, 1995 and 1994 for the United Video Cablevision
systems, the C4 Media systems, the Cox Communications systems, the American
Cable Entertainment of Kentucky-Indiana systems and the Triax Southeast systems.
The summary unaudited combined selected historical financial data are derived
from the audited and unaudited historical financial statements of these systems
and should be read in conjunction with the audited financial statements and
related notes thereto of the systems. We previously filed these audited
statements with our Form 10-K for the year ended December 31, 1997. 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 us and, accordingly, do not reflect any purchase accounting
adjustments, including acquisition debt service, or any changes in the operation
or management of the systems that we have made since the date of acquisition or
intends to make in the future. Accordingly, we do not believe that such
operating results are indicative of our future operating results.
14
<PAGE>
<TABLE>
----------------------------------------------------------------------------------------------
FrontierVision Operating Partners, L.P. Predecessor Systems
-------------------------------------------------------------- -------------------------------
For the Year For the Year For the Year From April 17, For the Year For the Year
Ended Ended Ended 1995 (inception) Ended Ended
December 31, December 31, December 31, to December 31, December 31, December 31,
1998 1997 1996 1995 1995 (1)(2) 1994 (3)(4)
------------ ------------ ------------ ---------------- ------------- ------------
In thousands, except ratios and
operating statistical data
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 245,134 $ 145,126 $ 76,464 $ 4,369 $ 109,765 $ 105,368
Operating expenses.................. 123,779 74,314 39,181 2,311 62,098 58,643
Corporate administrative expenses... 6,965 4,418 2,930 127 - -
Depreciation and amortization....... 114,155 65,502 35,724 2,308 42,354 46,345
Preacquisition expenses............. - - - 940 - -
----------- --------- -------- -------- --------- ----------
Operating income (loss)............. 235 892 (1,371) (1,317) 5,313 380
Interest expense, net(5)............ (68,832) (42,652) (22,422) (1,386) (37,898) (34,506)
Other income (expense).............. (526) (57) (8) - (4,409) (2,570)
Income tax benefit.................. 2,927 - - - - -
Extraordinary item - Loss on early
retirement of debt............... - (5,046) - - - -
----------- --------- -------- -------- --------- ----------
Net income (loss)................... $ (66,196) $ (46,863) $(23,801) $ (2,703) $ (36,994) $ (36,696)
=========== ========= ======== ======== ========= ==========
Balance Sheet Data
(End of Period):
Total assets........................ $ 1,201,222 $ 919,708 $549,168 $143,512 $ 288,253 $ 228,820
Total debt.......................... 871,610 632,000 398,194 93,159 285,144 263,660
Partners' capital................... 269,495 263,043 130,003 46,407
Financial Ratios and Other Data:
EBITDA(6)........................... $ 114,390 $ 66,394 $ 34,353 $ 991 $ 47,667 $ 46,725
EBITDA margin(6).................... 46.7% 45.8% 44.9% 22.7% 43.4% 44.3%
Total debt to EBITDA(7)............. 6.24 6.19 6.75
EBITDA to interest expense(8)....... 1.81 1.72 1.45
Net cash flows from operating
activities.......................... $ 63,013 $ 26,193 $ 18,911 $ 1,907
Net cash flows from investing
activities.......................... (373,399) (427,921) (418,215) (131,345)
Net cash flows from financing
activities.......................... 311,863 401,502 400,293 132,088
Deficiency of earnings to fixed
charges(9).......................... $ 69,123 $ 46,863 $ 23,801 $ 2,703
Operating Statistical Data (End of
Period Except Average):
Homes passed........................ 1,007,100 817,000 498,900 125,300
Basic subscribers................... 702,200 559,800 356,400 92,700
Basic penetration................... 69.7% 68.5% 71.4% 74.0%
Premium units....................... 285,300 275,400 152,100 35,700
Premium penetration................. 40.6% 49.2% 42.7% 38.5%
Average monthly revenue per
basic subscriber(10)................ $ 33.84 $ 31.53 $ 29.73 $ 27.76
- -------------
</TABLE>
(1) Includes the combined results of operations of the systems we acquired from
United Video Cablevision, C4 Media Cable Southeast, Cox Communications, American
Cable Entertainment and Triax Associates for the year ended December 31, 1995
(except for the United Video systems, which is for the period ended November 8,
1995). As the results of operations of the United Video systems are included in
the our historical results of operations subsequent to the date of our
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.
(2) Includes combined balance sheet data for the United Video systems as of
November 9, 1995, the date of our acquisition, and combined balance sheet data
for the C4 systems, the Cox systems, the American Cable Entertainment 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 United Video systems, the
C4 systems, the Cox systems, the American Cable Entertainment systems and the
Triax systems for the years ended December 31, 1994.
(4) Includes combined balance sheet data for the UVC systems, the C4 systems,
the Cox systems, the American Cable Entertainment systems and the Triax systems
as of December 31, 1994.
(5) Interest expense for December 31, 1998, 1997, 1996 and 1995 was net of
interest income of $875, $994, $471 and $60, respectively.
(6) EBITDA is net income before interest, taxes, depreciation and amortization.
We believe 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, our senior bank indebtedness and our Subordinated Notes
Indenture contain certain covenants, compliance with which is measured by
computations substantially similar to those used in determining EBITDA.
15
<PAGE>
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.
EBITDA margin represents the percentage of EBITDA to revenue.
(7) For purposes of this computation, EBITDA for the most recent quarter ended
is multiplied by four. This presentation is consistent with the incurrence of
indebtedness tests in the indenture governing our subordinated notes. In
addition, this ratio is commonly used in the cable television industry as a
measure of leverage.
(8) For purposes of this computation, EBITDA and interest expense for the most
recent quarter ended is multiplied by four, including certain pro forma
adjustments made to include the effect of debt we incurred to purchase those
systems acquired during the quarter. This ratio is commonly used in the cable
television industry as a measure of 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 an estimated interest component of rental expense)
and (ii) amortization of deferred financing costs.
(10) Average monthly revenue per basic subscriber equals revenue for the last
month of the period divided by the number of basic subscribers as of the end of
such period.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of our financial condition and results of operations as
well as other sections of this prospectus contain certain forward-looking
statements. Our actual results could differ materially from those discussed
herein and our current business plans may be altered in response to market
conditions and other factors beyond our control. Additionally, our investors'
decision to sell their ownership interest in our company to Adelphia
Communications Corporation may ultimately cause our business plan and results of
operations to differ materially from our current business plan and expected
future operating results. Our operations commenced on November 9, 1995 with the
acquisition of our first cable television systems. See "Business--Development of
the Systems" for a description of our cable television systems. We have operated
these systems for a limited period of time and had no operations prior to
November 9, 1995. We have accounted for all acquisitions under the purchase
method of accounting and, therefore, our historical results of operations
include the results of operations for each acquired system subsequent to its
respective acquisition date.
Introduction
In this section, we explain the general financial condition and the results of
operations for FrontierVision and its subsidiaries including what factors affect
our business, what our revenues and expenses were for 1998, 1997 and 1996, why
those revenues and expenses were different from the year before and how all of
this effects our overall financial position.
We commenced operations in November, 1995 with the acquisition of certain cable
television systems. Since that first acquisition, we have completed over 30
separate acquisitions and have grown to become one of the twenty largest
multiple system operators in the United States, serving over 702,200 subscribers
as of December 31, 1998. Our systems are located in three primary operating
clusters - New Engalnd, Ohio and Kentucky - with a fourth, smaller group of
systems in the Southeast. See "Business - Development of the Systems" for a
summary of our past acquisitions and operating clusters.
During 1998, we completed nine acquisition transactions, acquiring a total of
approximately 140,000 basic subscribers. These acquisitions increased the size
and scale of each of our three primary operating clusters and significantly
increased the size and scale of our New England operating cluster. Our October
1998 acquisition of eight cable systems from State Cable TV Corporation added
approximately 75,000 basic subscribers to our New England cluster in attractive
communities directly contiguous to systems which we already owned in southern
Maine and central New Hampshire. With the State Cable systems, we have grown to
serve over 248,000 subscribers in our New England cluster and over 168,000
subscribers and four of the five largest cities in the state of Maine. See Note
5 to the financial statements for more detailed descriptions of these
transactions.
Results of Operations
In this section, we discuss our 1998, 1997 and 1996 earnings and the factors
affecting them.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 AND YEAR
ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The following table summarizes certain of our operating and financial data for
the years ended December 31, 1998, 1997 and 1996. As a result of our limited
operating history, and the fact that acquired systems are only included from the
date of acquisition, we believe that the results of operations for the periods
presented in this table are not indicative of our future results.
17
<PAGE>
<TABLE>
--------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
------------------------ ----------------------- ------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
------ ------- ------ ------- ------ -------
In thousands
<S> <C> <C> <C> <C> <C> <C>
Revenue............................ $ 245,134 100.0 % $ 145,126 100.0 % $ 76,464 100.0 %
Expenses
Operating expenses............. 123,257 50.3 74,314 51.2 39,181 51.2
Corporate expenses............. 6,965 2.8 4,418 3.0 2,930 3.9
Depreciation and amortization.. 114,155 46.6 65,502 45.1 35,724 46.7
Storm related costs............ 522 0.2 - - - -
----------- ------ ----------- ------ ---------- -------
Total expenses.......... 244,899 99.9 144,234 99.3 77,835 101.8
----------- ------ ----------- ------ ---------- -------
Operating income/(loss)............ 235 0.1 892 0.7 (1,371) (1.8)
Interest expense, net.............. (68,832) (28.1) (42,652) (29.4) (22,422) (29.3)
Other expense...................... (526) (0.2) (57) 0.0 (8) 0.0
Income tax benefit................. 2,927 1.2 - - - -
Extraordinary item - Loss on early
retirement of debt............. - - (5,046) (3.6) - -
----------- ------ ------------ ------ ---------- -------
Net loss........................... $ (66,196) (27.0)% $ (46,863) (32.3)% $ (23,801) (31.1)%
=========== ====== =========== ====== ========== =======
EBITDA $ 114,390 46.7% $ 66,394 45.8 % $ 34,353 44.9 %
=========== ====== =========== ====== ========== =======
Basic subscribers.................. 702,200 559,800 356,400
Premium units...................... 285,300 275,400 152,100
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Significant increases in the amounts of revenue, operating expense and EBITDA
are primarily attributable to acquisition activity during 1998 and 1997, which
increased our size from 559,800 basic subscribers at December 31, 1997 to over
702,000 at December 31, 1998. Revenue increased 68.9%, or approximately $100.0
million, to approximately $245.1 million for the year ended December 31, 1998
from approximately $145.1 million for the year ended December 31, 1997.
Operating expenses, including storm related costs attributable to ice storms in
Maine described below, and corporate expenses increased approximately 66.6% and
57.7%, respectively, for the year ended December 31, 1998 from the year ended
December 31, 1997. The decrease in the percentage of operating expenses to
revenue was primarily attributable to cost efficiencies achieved through the
integration of cable systems and increased revenue per subscriber per month. The
EBITDA margin, when adjusted to exclude the storm related costs, improved from
45.8% for the twelve months ended December 31, 1997 to 46.9% in 1998.
During mid-January 1998, certain of the communities we service in Maine
experienced devastating ice storms. For the twelve months ended December 31,
1998 we recognized a loss due to service outages and increased labor costs of
approximately $522,000 due these storms, net of $183,000 related to a claim on
our business
interruption insurance for the storm damage. Additionally, we spent
approximately $540,000 of capital expenditures to replace subscriber drops
damaged in the storms.
Depreciation and amortization expense increased 74.3% as a result of acquisition
activity that occurred in 1997 and 1998. Net interest expense increased to $68.8
million from $42.7 million primarily as a result of the higher weighted average
drawings on our senior bank indebtedness.
During the year ended December 31, 1998, (i) our annualized subscriber churn
rate, which represents the annualized number of subscriber terminations divided
by the weighted average number of subscribers during the period, was
approximately 31.5%, and (ii) the average subscriber life implied by such
subscriber churn rate was approximately 3.2 years. Churn rates are computed
without adjustment for the effects of seasonal subscriber activity and
acquisitions and are within our expectations.
18
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Significant increases in the amounts of revenue, operating expense and EBITDA
are primarily attributable to acquisition activity during 1997 and 1996, which
increased our size from 356,400 basic subscribers at December 31, 1996 to
559,800 at December 31, 1997. Revenue increased to $145.1 million in the twelve
months ended December 31, 1997 from $76.5 million in the year ended December 31,
1996. Operating and corporate expenses were reduced to 54.2% of revenue in the
twelve months ended December 31, 1997 from 55.1% of revenues in the year ended
December 31, 1996 due primarily to the achievement of efficiencies in the
corporate office through the elimination of duplicative expenses, such as
customer billing, accounting, accounts payable and payroll administration. As a
result of cost efficiencies and the aforementioned acquisitions, EBITDA
increased to 45.8% of revenues in the twelve months ended December 31, 1997 from
44.9% of revenues in the year ended December 31, 1996.
The increase in depreciation and amortization expense of $29.8 million from the
year ended December 31, 1996 to the year ended December 31, 1997 was a result of
the inclusion of a full year of expense for acquisitions completed in 1996 and
new acquisitions completed in 1997. Net interest expense increased by $20.2
million due to the higher weighted average debt balance outstanding over the
year ended December 31, 1997.
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the
construction, maintenance and expansion of cable plant and distribution
equipment. In addition, we have pursued selective acquisitions. Since our
founding in 1995, our cash received from equity investments, bank borrowings and
other debt issued by FrontierVision Operating Partners, L.P. has been sufficient
to finance our acquisitions and, together with cash generated from operating
activities, also has been sufficient to service our debt, provide sufficient
working capital and fund required capital expenditures. We intend to continue to
finance such debt service, working capital and capital expenditure requirements
through a combination of cash from operations, indebtedness and equity capital
sources. We believe that we will continue to generate cash and be able to obtain
financing sufficient to meet such requirements. Our ability to meet our debt
service and other obligations will depend upon our future performance which, in
turn, is subject to general economic conditions and to financial, political,
competitive, regulatory and other factors, many of which are beyond our control.
Amended Bank Credit Facility
Drawings on our amended bank credit facility, along with cash flow generated
from operations and high yield debt financing, have been sufficient to finance
capital improvement projects as well as acquisitions. We have adequately
serviced our debt in accordance with the provisions of the amended bank credit
facility from EBITDA of approximately $114.4 million generated by FrontierVision
Operating Partners, L.P. for the year ended December 31, 1998.
On December 19, 1997, we amended our existing senior bank indebtedness and
entered into an $800.0 million amended bank credit facility with The Chase
Manhattan Bank, as administrative agent, J.P. Morgan Securities Inc., as
syndication agent, CIBC Inc., as documentation agent, and the other lenders
signatory thereto. The amended bank credit facility includes a $300.0 million,
7.75-year reducing revolving credit facility, a $250.0 million, 7.75-year term
loan and a $250.0 million, 8.25-year term loan.
At December 31, 1998, we had $172.0 million outstanding under the revolving
credit facility, $248.1 million outstanding under the 7.75 year term loan and
$250.0 million outstanding under the 8.25 year term loan. The weighted average
interest rates at December 31, 1998 on the outstanding borrowings under the
revolving credit facility were approximately 7.25%, and under the 7.75 year term
loan and the 8.25 year term loan were approximately 7.29% and 7.63%,
respectively. We have entered into interest rate protection agreements to hedge
the underlying LIBOR rate exposure for $437.5 million of borrowings through
November 1999 and October 2001. For the year ended December 31, 1998, we
recognized an increase to interest expense of approximately $0.6 million as a
result of these interest rate swap agreements.
19
<PAGE>
In general, the amended bank credit facility requires us to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the amended bank credit facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting us to use such proceeds to fund certain permitted acquisitions,
provided that we are otherwise in compliance with the terms of the amended bank
credit facility.
The amended bank credit facility is secured by a pledge of all limited and
general partnership interests in FrontierVision Operating Partners, L.P. and in
any of our restricted subsidiaries and a first priority lien on all the tangible
and intangible assets of FrontierVision Operating Partners, L.P. and each of its
restricted subsidiaries. In addition, in the event of the occurrence and
continuance of an event of default under the amended bank credit facility, the
administrative agent is entitled to replace our general partner with its
designee.
FrontierVision Holdings, L.P., (which we refer to as "Holdings"), as the general
partner of FrontierVision Operating Partners, L.P., guarantees the indebtedness
under the amended bank credit facility on a limited recourse basis. The amended
bank credit facility is also secured by a pledge of all limited and general
partnership interests in FrontierVision Operating Partners, L.P. and a first
priority lien on all the assets of FrontierVision Operating Partners, L.P and
its subsidiaries.
Senior Subordinated Notes
On October 7, 1996, FVOP and Capital issued the notes. The notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The notes are general unsecured
obligations of FrontierVision and rank subordinate in right of payment to all
existing and any future senior indebtedness. In anticipation of the issuance of
the notes, FrontierVision 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 FrontierVision incurs over the life of the notes.
Senior Discount Notes, Series A
Holdings and FrontierVision Holdings Capital Corporation were formed for the
purpose of acting as co-issuers of $237.7 million aggregate principal amount at
maturity of 11 7/8% senior discount notes due 2007. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests of
FrontierVision Operating Partners, L.P. prior to the issuance of the discount
notes on September 19, 1997 and as a result, FrontierVision Operating Partners,
L.P. and FrontierVision Capital Corporation are wholly-owned consolidated
subsidiaries of Holdings. Holdings contributed the majority of the net proceeds
of the discount notes totaling approximately $142.3 million to FrontierVision
Operating Partners, L.P. as a capital contribution.
Senior Discount Notes, Series B
Holdings and FrontierVision Holdings Capital Corporation II acted as co-issuers
of $91.3 million aggregate principal amount at maturity of 11 7/8% senior
discount notes due 2007. Holdings II Capital was formed for the purpose of
acting as co-issuer on these discount notes. The discount notes were issued on
December 9, 1998. Holdings contributed the majority of the net proceeds of
approximately $72.8 million from the issuance of the discount notes to
FrontierVision Operating Partners, L.P. as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the year ended December 31, 1998 were
$63.0 million compared to $26.2 million for the year ended December 31, 1997 and
$18.9 million for the year ended December 31, 1996. The increase was primarily a
result of cable television system operations acquired during 1996, 1997 and
1998.
20
<PAGE>
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the year ended
December 31, 1998 were approximately $65.6 million compared to approximately
$32.7 million for the year ended December 31, 1997 and $9.3 million for the year
ended December 31, 1996. Capital expenditures primarily consisted of
expenditures for the construction and expansion of cable plant and distribution
equipment, and additional costs were incurred related to the expansion of
customer service facilities. We invested approximately $307.6 million in
acquisitions during the year ended December 31, 1998 compared with approximately
$392.6 million for the year ended December 31, 1997 and $421.5 million for the
year ended December 31, 1996.
Cash Flows From Financing Activities
We financed acquisitions during the year ended December 31, 1998 with borrowings
under our senior bank indebtedness. We financed acquisitions during the year
ended December 31, 1997 with equity contributions from our partners and
borrowings under our senior bank indebtedness. During the year ended December
31, 1996, we financed acquisitions with equity contributions from our partners,
borrowings under our senior bank indebtedness and the issuance of $200.0 million
aggregate principal amount of senior subordinated notes.
During the year ended December 31, 1998, we received approximately $72.6 million
of equity contributions from our partners. During the year ended December 31,
1997, we received approximately $179.9 million of equity contributions from our
partners compared with $107.4 million for the year ended December 31, 1996. The
contributions for the years ended December 31, 1997 and 1998 include net proceed
of approximately $142.3 million and $72.6 million, respectively, received from
the issuance of the discount notes.
From inception through December 31, 1998, FVP received a total of $199.4 million
of debt and equity contributions from its partners, all of which has been
invested in Holdings and down streamed to us. Such amount represents the
contractual maximum amount committed by FVP's partners.
Year 2000
Many existing hardware and software elements of computer systems and other
technologies represent the year as a two-digit number. Such representation may
cause software and hardware malfunctions to occur as a system date or
application date crosses the Year 2000 boundary. This might happen when the
actual century turns, the date of some input data exceeds January 1, 2000 and/or
the system or application must internally refer to a date that occurs on,
before, or after January 1, 2000.
During 1998, we continued a review of the Year 2000 issue with the objective of
formulating a plan to identify and correct any system malfunctions which might
occur due to Year 2000 issues. An informal task force, comprised solely of
FrontierVision employees, was established in the fourth quarter of 1997 to
determine which of our mission critical business processes could be impacted by
Year 2000 issues. Those mission critical business processes that were identified
as subject to Year 2000 issues are as follows: signal delivery, franchise
services, service delivery and revenue collection.
The following table illustrates the primary components of each of the Year 2000
effected mission critical business processes:
21
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------
Mission Critical
Business Process Description Significant Components
------------------------------------------------------------------------------------------------
<S> <C> <C>
Signal Delivery Process of receiving a video signal from Headend equipment
satellite or broadcast sources and Plant infrastructure
transmitting that signal via fiber-optic Programming suppliers
and co-axial cable to a customer's
residence or place of business.
Franchise Services The performance of tasks specifically Local origination
required by local or national Emergency broadcast
regulatory agencies.
Service Delivery The ongoing process of responding timely Customer call center infrastructure
to customer service requests. Dispatch equipment
Revenue Collection The process of collecting customer Subscriber management systems
billings and utilizing those cash Cash management
receipts for necessary corporate
purposes.
</TABLE>
Since the task force was established, FrontierVision management has committed
additional internal and external resources to address Year 2000 issues. During
the third quarter of 1998, we engaged an external third-party Year 2000
consultant to review our informal task force's Year 2000 efforts to date and to
produce a formal, written Year 2000 project plan. This plan provides a work
schedule for us to address our Year 2000 issues by December 31, 1999. Since that
date, we have formally adopted a Year 2000 compliance plan, discussed in more
detail below. Additionally, we have joined an industry initiative whereby along
with other similar companies, we will achieve efficiencies in their individual
Year 2000 plans through the sharing of information and joint testing. We have
also entered into cooperative agreements with other multiple system operators to
share pertinent assessment information.
We have established a Year 2000 team which consists of a full-time project
manager, one full-time project administrator and two full-time equivalent
consultants. The Year 2000 team also involves certain individuals in
FrontierVision who are subject matter experts, for example, engineering and
information technology. The project manager is accountable directly to our
senior management team, who in turn is accountable to FrontierVision's general
partner.
The Year 2000 Compliance Plan, consists of an awareness program, a prevention
program and a find and fix program. The awareness program is designed to educate
employees and customers on the implications of Year 2000 Issues. Employees have
been trained on our Year 2000 compliance plan and their role in the success of
the plan has been communicated. The prevention program is designed to prevent
new problems from arising while we resolve existing problems. For example, since
October 30, 1998, we have required a Year 2000 compliance warranty on all
purchase orders to ensure that vendors ship to FrontierVision only equipment
that they have warranted is Year 2000 compliant. The find and fix program
includes three phases: inventory, assessment and remediation, and is initially
focused on mission critical business processes.
The inventory phase consists of a physical inventory of all susceptible business
components within each mission critical business process. A physical inventory
of the components used in certain of our mission critical business processes was
initiated during 1998. We substantially completed the inventory phase of the
mission critical items on January 31, 1999. We plan to initiate random inventory
verification audits during the second quarter of 1999. The inventory consisted
of specifically identifying each component/system (both internal and external
systems) of a mission critical business process. Internal systems include
computer systems and related software (information technology systems) as well
as systems and devices that manage the distribution of cable television service
to customers (non information technology systems). External systems include our
third party billing service provider and subscriber management system, banking
partners (including cash management, lockbox providers and lenders) and
programming providers.
An end product of the inventory phase is a comprehensive database which allows
us to review any of our business components by, among other attributes,
manufacturer/supplier, geographic location, compliance status or asset class.
This database allows us to electronically track the assessments for each item.
Once an assessment is made on a given item, the assessment is automatically
linked to the individual inventory piece. Furthermore,
22
<PAGE>
the database allows for the tracking of remediation efforts at the inventory
level, including the date the item was ordered, the expected and actual cost,
who the repair is made by, when it is made and who tests the repair. This method
of item management ensures normalization of the descriptions of like items,
enhancing the overall efficiency of the project.
We are also in the process of communicating with our significant suppliers and
service providers to determine their position with regard to Year 2000 issues
and evaluating the potential impact on FrontierVision if those third parties
fail to remediate their own Year 2000 issues. We have received responses from
approximately 50% of such significant suppliers and service providers; the
majority of which are currently in their own assessment and remediation phases.
Material relationships with third parties include utility companies (providing
power to the cable plant), telephone companies (providing communication lines
for use in customer contact, employee communications and in data transfer
related to subscriber and billing management information systems) and
programming and equipment vendors (providing the product distributed by
FrontierVision as well as maintenance and construction materials).
Since the inventory phase was completed, the Year 2000 team has focused on
assessing each business component's vulnerability to Year 2000 issues. The
assessment phase requires management to attain a high degree of confidence that
FrontierVision prevents Year 2000 problems with respect to components of mission
critical business processes and minimize such problems in other non-critical
areas, while controlling replacement costs. To ensure that the most at-risk
components/systems are assessed first, the initial task in the assessment stage
was the prioritization of each equipment/system in the project database. Items
of inventory have been reviewed for Year 2000 compatibility first by
cross-referencing the project database to materials received from vendors,
industry groups and other multiple systems operations, second by contacting
vendors as necessary and finally, by making an "in-house" determination of
compatibility where no other information is available. The end product of the
assessment phase for each item is the determination of whether a given
component/system is to be replaced or upgraded or whether specific contingency
plans are needed.
Approximately 95% of the total inventory components in our headends, plant
infrastructure and customer service infrastructure have proven to have no date
sensitive components. Of the remaining 5% subject to future investigation, we
have completed assessments on approximately 70% of the components and have
determined that less than 1% of these to be non-compliant with respect to Year
2000 issues.
After the assessment phase is completed for a given component and the component
is found to have a Year 2000 issue, the remediation phase begins. The
remediation phase includes the following activities:
o A decision is made as to the optimal remedy of the Year 2000 issue.
o A purchase order is placed for the new component or upgrade.
o Based upon the expected delivery date, the appropriate resources are
scheduled to complete the implementation.
o After the new component is implemented, dependent testing occurs to
verify that remediations do not introduce new Year 2000 problems.
If remediation is determined to be impossible with respect to a business
component, the Year 2000 team will create an appropriate contingency plan.
As of March 20, 1999, our overall progress in the find and fix program for our
mission critical systems as follows:
<TABLE>
----------------------------- ------------------------ ----------------------------
Percentage Complete Completion Date or
Phase of Phase Expected Completion Date
----------------------------- ------------------------ ----------------------------
<S> <C> <C>
Inventory 99% January 31, 1999
Assessment 70% April 30, 1999
Remediation 30% November 30, 1999
</TABLE>
23
<PAGE>
The expected completion dates set forth above are based on our current
expectations. The assessment phase is expected to be completed by April 30, 1999
which is two months behind our original estimate for completion. We are also
dependent on our suppliers for timely fulfillment of purchase orders that will
be made to replace non-compliant equipment and assistance in installations. In
addition, the current remediation timetable does not allow for a significant
amount of time for testing. Further delays in the assessment phase and/or delays
in the purchasing and receipt of replacement equipment further reduces the time
available for testing and places additional risk on the successful completion of
the remediation phase. As a result, no assurances can be given as to whether
each of the phases will be completed on schedule due to uncertainties which are
inherent in the remediation of Year 2000 issues.
As we have not yet completed the assessment of each of our mission critical
systems (either internal or external), the total costs to address the Year 2000
issue are uncertain. To date, we have expended approximately $2,200,000 to fix
components with Year 2000 issues. Based on the assessment results to date, we
plan to spend an additional $600,000 in replacing equipment with known Year 2000
issues. Furthermore, as of March 20, 1999, we have expended approximately
$270,000 in third-party consulting fees and expect to spend an additional
$200,000 in external fees in conjunction with the Year 2000 project team through
December 31, 1999.
We have budgeted in excess of $1,000,000 in incremental capital expenditures for
fiscal year 1999 to complete the Year 2000 compliance plan. It is not known, at
this point in time, if these budgeted amounts will be sufficient to identify and
correct our Year 2000 Issues.
While management believes that the Year 2000 compliance plan will significantly
reduce the risks associated with the transition to the year 2000 through a
process of inventory, assessment and remediation, we have yet to develop or
implement any significant contingency plans. There can be no assurance that we
will identify all Year 2000 issues or that we will be able to remedy each Year
2000 issue. A failure to sufficiently correct a material Year 2000 problem could
cause us to suffer an interruption or a failure of certain important business
operations. Additionally, the failure of a material external (third-party)
system may cause us to experience an interruption or a failure of certain
important business operations. The interruption or failure by FrontierVision in
an important business operation may cause a material, adverse impact on our
financial position. It is not management's intention that certain information
technology and technical enhancement projects planned will be deferred as a
result of the cost to address Year 2000 issues. Additionally, although
management believes that a combination of cash from operations and indebtedness
will fund the costs associated with correcting Year 2000 issues, no assurances
can be given that costs ultimately required to be paid to ensure the our Year
2000 readiness will not have an adverse effect on our financial position and
results of operations.
24
<PAGE>
Business
We own, operate and develop cable television systems in small and medium-sized
suburban and exurban communities in the United States. As of December 31, 1998,
we were one of the twenty largest operators of cable television systems (a
multiple system operator) in the United States, owning systems which passed
approximately 1,007,100 homes and served approximately 702,200 basic
subscribers.
On February 22, 1999, the owners of our general partner, FrontierVision
Partners, L.P., entered into a definitive agreement to sell their ownership
interests in our company to Adelphia Communications Corporation. This change in
our ownership is likely to have a significant effect on our continued
operations. We expect to continue the execution of our business plan through the
closing of this transaction, which is currently expected to occur during the
third-quarter of 1999.
We were organized in 1995 under the laws of the State of Delaware and our
headquarters are located at 1777 South Harrison Street, Suite P-200, Denver,
Colorado, 80210. Our telephone number is (303) 757-1588 and we may be reached by
e-mail at [email protected].
FrontierVision
Since closing our first acquisition in November 1995, we have completed over 30
acquisitions and have established significant critical mass and subscriber
density within our targeted geographic markets. The following table illustrates
our growth and operating characteristics of our systems through December 31,
1998.
<TABLE>
--------------------------------------------------------------------------------------
Basic Premium Total Revenue
Homes Passed Subscribers Units (In Thousands)
---------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
December 31, 1995 125,300 92,700 35,700 4,369
December 31, 1996 498,900 356,400 152,100 76,464
December 31, 1997 817,000 559,800 275,400 145,126
December 31, 1998 1,007,100 702,200 285,300 245,134
</TABLE>
We have established three primary operating clusters in New England, Ohio and
Kentucky, with a fourth, smaller group of cable television systems in the
Southeast. As of December 31, 1998, over 90% of our subscribers were within our
three primary operating clusters. We are currently the second largest multiple
system operator in Kentucky, the largest multiple system operator in Maine and
the third largest multiple system operator in Ohio.
Development of the Systems
We were organized in 1995 to exploit 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 and have recently begun to face
the threat of competition from new market entrants, including DBS services and
telephone company video programming services. Many smaller multiple system
operators, particularly those that were acquisitive during the late 1980's and
purchased systems at prices significantly higher than those paid by us, sought
liquidity for their investors or were constrained from accessing additional
capital to upgrade or rebuild aging plant to remain competitive with other video
programming providers. More recently, larger multiple system operators have
embarked on their own program of divesting or trading less strategic systems to
redirect their resources to major urban and suburban markets.
As a result of this supply and demand anomaly, we have been able to selectively
acquire cable television properties from both small and large multiple system
operators, thereby establishing core geographic clusters and subscriber mass.
The following table summarizes our acquisitions through December 31, 1998:
25
<PAGE>
<TABLE>
-----------------------------------------------
Purchase Basic
Price(1) Subscribers
Predecessor Owner Date Acquired (in millions) Acquired(2)
- ----------------- ----------------- ------------ -----------
<S> <C> <C> <C>
United Video Cablevision, Inc. ............................ November 9, 1995 $ 120.8 87,400
Longfellow Cable Company, Inc. ............................ November 21, 1995 6.1 5,100
C4 Media Cable Southeast, Limited Partnership.............. February 1, 1996 47.6 40,400
Americable International Maine, Inc........................ March 29, 1996 4.8 3,350
Cox Communications......................................... April 9, 1996 136.0 77,200
Phoenix Grassroots Cable Systems, LLC...................... August 29, 1996 9.3 7,400
Triax Southeast Associates, L.P............................ October 7, 1996 84.7 53,200
American Cable Entertainment of Kentucky-Indiana, Inc...... October 9, 1996 146.0 83,250
SRW, Inc.'s Penn/Ohio Cablevision, L.P..................... October 31, 1996 3.8 3,225
SRW, Inc.'s Deep Creek Cable TV, L.P. ..................... December 23, 1996 3.0 2,175
Bluegrass Cable Partners, L.P.............................. March 20, 1997 9.9 7,225
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc..................................................... March 31, 1997 1.7 1,450
Milestone Communications of New York, L.P. ................ March 31, 1997 2.8 2,125
Triax Associates I, L.P.................................... May 30, 1997 34.5 20,700
Phoenix Front Row Cablevision ............................. May 30, 1997 6.8 5,250
PCI Incorporated........................................... August 29, 1997 13.5 7,750
SRW, Inc.'s Blue Ridge Cable Systems, L.P.................. September 3, 1997 4.1 4,550
Harold's Home Furnishings, Inc............................. October 31, 1997 1.5 1,480
A-R Cable Services - ME, Inc............................... October 31, 1997 78.2 54,300
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture.......................................... December 2, 1997 34.5 22,100
Cox Communications, Inc.................................... December 19, 1997 203.0 85,400
TVC-Sumpter Linked Partnership and North Oakland
Cablevision March 6, 1998 14.2 8,100
Partners Limited Partnership ........................
TCI Cablevision of Ohio, Inc............................... April 1, 1998 10.0 6,000
New England Cablevision of Massachusetts, Inc. ............ April 3, 1998 44.7 26,500
Ohio Cablevision Network, Inc.............................. July 31, 1998 38.0 19,700
Appalachian Cablevision of Ohio............................ September 1, 1998 0.3 280
Unity Cable Television, Inc................................ September 30, 1998 0.8 590
State Cable TV Corporation ................................ October 23, 1998 188.2 75,000
Paint Valley Cable Company, Inc............................ October 30, 1998 1.7 1,300
Casco Cable Television, Inc................................ November 30, 1998 3.2 2,185
____________
</TABLE>
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that were sold by FrontierVision in
1996.
On January 7, 1999, we sold nine cable systems located in eastern Tennessee and
western North Carolina to Helicon Partners I, LP. The systems served a total of
approximately 4,400 basic subscribers in smaller, rural communities in western
Tennessee and eastern North Carolina. The systems were part of our Southeast
operating region. In addition, on February 17, 1999 we entered into an asset
exchange agreement to obtain one Kentucky system serving approximately 6,200
subscribers outside of Lexington, Kentucky in exchange for one of our existing
Kentucky systems serving approximately 4,800 subscribers south of Cincinnati,
Ohio and approximately $3.1 million of cash. There can be no assurance that the
system trade will be consummated or that we can successfully integrate any
acquired business with our existing operations.
System Descriptions
Our cable television systems consist of three primary clusters--New England,
Ohio and Kentucky--with a fourth, smaller group of systems in the Southeast. The
following chart provides certain operating and technical profile statistics as
of December 31, 1998 for our cable systems.
26
<PAGE>
<TABLE>
-----------------------------------------------------------------
New England Ohio Kentucky Southeast Total
Cluster Cluster Cluster Region Systems
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Homes passed................................... 351,300 383,200 172,600 100,000 1,007,100
Basic subscribers.............................. 248,000 268,800 123,700 61,700 702,200
Basic penetration.............................. 70.6% 70.1% 71.7% 61.7% 69.7%
Premium units.................................. 107,400 119,700 37,800 20,400 285,300
Premium penetration............................ 43.3% 44.5% 30.6% 33.1% 40.6%
Digital cable television subscribers........... 744 2,929 None 1,358 5,031
Average monthly revenue per basic subscriber $33.20 $35.85 $34.20 $26.95 $33.84
(1)............................................
Number of headends............................. 87 87 38 46 258
Percentage of subscribers with at least
54-channel 63.7% 76.8% 57.6% 32.1% 65.6%
capacity....................................
</TABLE>
___________
(1) Average monthly revenue per basic subscriber equals revenue for the month
ended December 31, 1998 divided by the number of basic subscribers as of
the end of such period.
New England Cluster. The systems in our New England cluster passed approximately
351,300 homes and served approximately 248,000 basic subscribers and 107,400
premium units as of December 31, 1998. The New England cluster is comprised
primarily of systems located in communities in southern, middle and coastal
Maine, central New Hampshire, northeastern Massachusetts and northern Vermont.
Of the Maine systems' approximately 168,400 total subscribers, approximately
155,000 subscribers are located in Augusta, Bangor and Lewiston and contiguous
communities or in nearby coastal communities. Most of the approximately 45,300
subscribers in New Hampshire are located in Lebanon and surrounding communities,
the 27,100 Massachusetts subscribers are located within 30 miles of suburban
Boston and most of the 7,200 Vermont subscribers are located within 20 miles of
Burlington, the state's largest city. Approximately 63.7% of our subscribers in
the New England cluster are offered at least 54 channels, including 750 MHz
design systems in Amesbury and Glouchester, Massachusetts and Augusta, Maine and
550 MHz design systems in Waterville and Rockland, Maine.
Ohio Cluster. Systems in the Ohio cluster passed approximately 383,200 homes and
served approximately 268,800 basic subscribers and 119,700 premium units as of
December 31, 1998. The majority of the subscribers in the Ohio cluster are
located in northwest Ohio, extending from the northern suburbs of Toledo south
along the Indiana state border, and central Ohio, south and east of suburban
Columbus to the Ohio River. Approximately 76.8% of the our subscribers in the
Ohio cluster are offered at least 54 channels, including 550 MHz design systems
in Ashland, Kentucky and Newark and New Philadelphia, Ohio.
Kentucky Cluster. The systems in the Kentucky cluster passed approximately
172,600 homes and served approximately 123,700 basic subscribers and 37,800
premium units as of December 31, 1998. A single regional customer service center
in Richmond, Kentucky serves all Kentucky subscribers, the majority of which
reside in outlying communities of Lexington, Kentucky and Cincinnati, Ohio.
Approximately 57.6% of our subscribers in the Kentucky cluster are offered at
least 54 channels, including 550 MHz design systems in Nicholasville, Kentucky
and Delhi, Ohio and 750 MHz design systems in Madison, Indiana and Winchester,
Kentucky.
Southeast Systems. The Southeast systems passed approximately 100,000 homes and
served approximately 61,700 basic subscribers and 20,400 premium units as of
December 31, 1998. The Southeast systems at December 31, 1998 were comprised of
groups of systems located in the following states:
o Tennessee, serving approximately 23,000 basic subscribers
o North Carolina, serving approximately 13,400 basic subscribers
o Virginia, serving approximately 17,300 basic subscribers, and
o Maryland/Pennsylvania, serving approximately 8,000 basic subscribers
The Tennessee systems are located primarily in Greeneville, Tennessee and
surrounding communities; the North Carolina systems are located near Rocky
Mount, North Carolina; and the Virginia systems are located 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
27
<PAGE>
miles west of Washington, D.C. Approximately 32.1% of the current plant design
in the Southeast region is at least 54 channels.
Technological Developments
The following tables set forth certain information regarding the channel
capacities and miles of plant and the average number of subscribers per headend
for our cable systems as of December 31, 1998.
<TABLE>
----------------------------------------------------------------
<220 MHz: 221-399 MHz:400-549 MHz:550-750 MHz:
Up to 32 33 to 53 54 to 77 78 to 110
Channels Channels Channels Channels Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Miles of plant....................... 362 11,033 10,819 3,594 25,808
% miles of plant..................... 1.4% 42.8% 41.9% 13.9% 100.0%
% of basic subscribers............... 1.3% 33.1% 44.1% 21.5% 100.0%
----------------------------------------------------------------------
Number of Subscribers Per Headend
----------------------------------------------------------------------
1,001- 5,001- 10,001-
<1,000 5,000 10,000 20,000 >20,001 Total
--------------------------------------------------------------------------------------------------------
# of subscribers.............. 58,300 191,620 126,010 130,930 195,340 702,200
% of subscribers.............. 8.3% 27.3% 18.0% 18.6% 27.8% 100.0%
</TABLE>
Our cable systems have an average capacity of approximately 59 analog channels
and delivered an average of 50 analog channels of programming to our subscribers
as of December 31, 1998. Approximately 64% of our subscribers are served by
systems with more than 5,000 subscribers and approximately 46% are served by
systems serving more than 10,000 subscribers. We believe that our current excess
channel capacity and significant number of larger systems will allow us to cost
effectively introduce new service offerings.
Recently, digital cable television has become commercially viable with
technological cost reductions. We believe that this development will allow us to
increase services to our subscribers. As of December 31, 1998, we had
successfully launched digital cable television services in 12 of our systems and
were in the process of installing necessary headend equipment for launches in
additional systems. As of March 15, 1999, we had introduced digital cable
television to approximately one-third of our basic cable subscribers.
The Cable Television Industry
Our cable television systems receive television, radio and data signals that are
transmitted to the system's headend site by means of off-air antennas, microwave
relay systems and/or 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. In some cases,
we may also originate our own television programming and other information
services for distribution through the system. Our 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.
28
<PAGE>
Our cable television systems offer customers various levels, commonly known as
"tiers," of cable services consisting of:
o off-air television signals of local network, independent and
educational stations;
o a limited number of television signals from so-called "superstations"
originating from distant cities (such as WGN-TV);
o various satellite-delivered, non-broadcast channels (such as Cable
News Network, MTV: Music Television, the USA Network, Entertainment
and Sports Programming Network and Turner Network Television);
o certain programming originated locally by the cable television system
(such as public, governmental and educational access programs); and
o informational displays featuring news, weather, stock market and
financial reports and public service announcements.
For an extra monthly charge, our cable television systems also offer premium
television services to their customers. These services (such as Home Box Office
(R), Showtime (R) 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.
Customers generally pay 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 our primary source of revenue. In addition to customer revenue from
these services, we also 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 networks, such
as MTV: Music Television, the USA Network, and Entertainment and Sports
Programming Network. We also offer to our customers home shopping services,
which pay our systems a share of revenue from sales of products in the systems'
service areas.
Programming, Services and Rates
We have various contracts to obtain basic and premium programming for our
systems from program suppliers whose compensation is typically based on a fixed
fee per customer. Our 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 us. In
particular, we have negotiated programming agreements with premium service
suppliers that offer cost incentives to us under which premium service unit
prices decline as certain premium service growth thresholds are met. Our
successful marketing of multiple premium service packages emphasizing customer
value has enabled us to take advantage of such cost incentives.
We are a member of a programming consortium consisting of small to medium-sized
cable companies serving, in the aggregate, over eight 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. We
also have 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, we have
entered into agreements with certain stations to carry satellite-delivered cable
programming which is affiliated with the network carried by such stations.
Although services vary from system to system due to differences in channel
capacity, viewer interests and community demographics, the majority of our
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 our
systems offer, for a monthly fee, an expanded basic
29
<PAGE>
tier of "superstations" originating from distant cities (such as WGN-TV),
various satellite-delivered, non-broadcast channels (such as Cable News Network,
MTV: Music Television, the USA Network, Entertainment and Sports Programming
Network) 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, our systems typically provide one or more premium services purchased
from independent suppliers and combined in different formats to appeal to the
various segments of the viewing audience, such as Home Box Office (R), Showtime
(R), Cinemax (R) The Movie Channel(TM), and Starz!. 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 our systems both on an a la carte basis and
as part of premium service packages designed to enhance customer value and to
enable us systems to take advantage of programming agreements offering cost
incentives based on premium unit growth. Subscribers may subscribe for one or
more premium units.
Subscriber rates vary from market to market and in accordance with the type of
service selected. As of December 31, 1998, the combined average monthly service
rate in our cable systems was $26.15 for the basic and expanded basic service
tiers. Our subscriber service rates reflect reductions required in response to
federal rate regulation. A one-time installation fee, which may be waived in
whole or 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. For additional
information on rate regulation of our services, see "Legislation and Regulation
- -- Rate Regulation."
Marketing, Customer Service and Community Relations
We market and promote cable television services with the objective of adding and
retaining customers and increasing subscriber revenue. We actively market basic
and premium program packages through a number of coordinated marketing
techniques, which include:
o direct consumer sales and subscriber audit programs;
o direct mail for basic and upgrade acquisition campaigns;
o monthly subscriber statement inserts;
o local newspaper and broadcast/radio advertising where population
densities are sufficient to provide a reasonable cost per sale; and
o cross-channel promotion of new services and pay-per-view.
We have a single centralized telemarketing center to provide the outbound
telemarketing support for all operating regions. Using a predictive dialing
system platform, the operation is focused on:
o basic and pay unit acquisition;
o delinquent account collection activities;
o customer satisfaction surveys; and
o targeted marketing campaigns.
We are dedicated to providing superior customer service. To meet this objective,
we provide our customers with a full line-up of programming, a wide variety of
programming options and packages, timely and reliable service and improved
technical quality. Our 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 our consolidation efforts, we have established centralized customer
service facilities, increased hours of operation, and installed state-of-the-art
telephone, information and billing systems to
30
<PAGE>
improve responsiveness to customer needs. In addition, we have retained local
payment and technical offices to maintain a local presence and visibility within
the communities we serve.
Recognizing that strong governmental, franchise and public relations are crucial
to our overall success, we maintain and improve the working relationships with
all governmental entities within the franchise areas. Regional management meets
regularly with local officials for the purposes of keeping them advised on our
activities within the communities, to receive information and feedback on our
standing with officials and customers alike and to ensure that we can maximize
our 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, we have hired experienced
community relations personnel in its New England, Ohio and Kentucky clusters to
enhance local visibility and long-term relationships.
Franchises
Our cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. Our
franchises typically contain many conditions, such as:
o time limitations on commencement and completion of construction; and
o conditions of service, including number of channels, types of
programming and the provision of free service to schools and certain
other public institutions.
The provisions of local franchises are subject to regulation under state and
federal law, including the Communications Act of 1934, as amended, the Cable
Communications Policy Act of 1984, the Cable Television Consumer Protection and
Competition Act of 1992, and the Telecommunications Act of 1996, as well as the
rules, regulations and policies of the FCC and applicable state agencies. For
additional information on the federal and state regulation of our cable services
and operations, see " Legislation and Regulation."
As of December 31, 1998, we held 744 franchises. These franchises, most of which
are non-exclusive, provide for the payment of fees to the issuing authority.
Generally, such franchise fees are passed through directly to the customers.
Federal law prohibits franchising authorities from imposing franchise fees in
excess of 5% of gross revenue and also permits us to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
Approximately 94% of our basic subscribers are in service areas that require a
franchise. The table below groups the our franchises by date of expiration and
presents the approximate number and percentage of basic subscribers for each
group of franchises as of December 31, 1998.
<TABLE>
-----------------------------------------------------
Percentage of Percentage of
Number of Total Number of Franchised
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
-----------------------------------------------------
<S> <C> <C> <C> <C>
1997 through 2001................... 348 47% 288,400 44%
2002 and thereafter................. 396 53% 368,500 56%
-------- -------- --------- ----------
Total.............................. 744 100% 656,900 100%
</TABLE>
Federal law provides, among other things, for an orderly franchise renewal
process in which franchise renewal will not be unreasonably withheld. If a
franchise renewal is denied and the franchising authority acquires ownership of
our system or effects a transfer of our system to another person, we generally
are entitled to the "fair market value" for the system covered by such
franchise. In addition, federal law established
comprehensive renewal procedures which requires that our renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
31
<PAGE>
We believe that we generally have very good relationships with our franchising
communities. We have never had a franchise revoked or failed to have a franchise
renewed. In addition, all of our franchises eligible for renewal have been
renewed or extended at or prior to their stated expirations.
Competition
Our cable systems compete with a number of different sources of news,
information and entertainment, including:
o local television broadcast stations that provide free off-air
programming which can be received in many communities by using a
roof-top antenna and television set;
o program distributors that transmit satellite signals containing video
programming, data and other information to receiving dishes of varying
sizes located on the subscriber's premises;
o satellite master antenna television systems, commonly known as SMATV
systems, which generally serve condominiums, apartment and office
complexes and private residential developments, but do not use or
cross public rights-of-way;
o multichannel, multipoint distribution service operators, commonly
known as MMDS or wireless cable operators, which use low-power
microwave frequencies to transmit video programming and other
information over-the-air to subscribers;
o other cable operators who build and operate cable systems in the same
communities that we serve, commonly known as overbuilders;
o interactive online computer services;
o newspapers, magazines and book stores;
o movie theaters;
o live concerts and sporting events; and
o home video products, including videotape cassette recorders.
Our cable systems will be competitive with other businesses providing similar
communications services if we provide, at a reasonable price to our subscribers,
superior technical performance, superior customer service and a greater variety
of video programming and other communications services than are available
off-air or through other alternative delivery sources.
Modifications to federal law in 1996 changed the regulatory environment in which
our cable systems operate. Federal law now allows local exchange carriers,
commonly known as LECs or local telephone companies, and other businesses to
provide directly to subscribers a wide variety of video services that are
competitive with our communications services. Some local telephone companies:
o provide video services within and outside their telephone service
areas through a variety of distribution methods, including broadband
cable networks and wireless transmission facilities; and
o have announced plans to construct and operate cable communications
systems in various states.
Local telephone companies and other businesses with significant financial
resources construct and operate communications facilities that provide access to
the Internet; such facilities also transmit and distribute to homes and
businesses interactive computer-based services, data and other non-video
services. Our cable systems may be at a competitive disadvantage if the delivery
of video and interactive online computer services by local telephone companies
becomes widespread because local telephone companies are not required in certain
circumstances to obtain local franchises to deliver these communications
services or to comply with the variety of obligations that are imposed upon our
cable systems under our franchises. We cannot predict the likelihood of success
of competing video or broadband service ventures by local telephone companies or
other well-financed businesses. Nor can we predict the impact of these
competitive ventures on our cable systems
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and other businesses. For more information about the federal and state laws and
regulations governing our businesses, see "Legislation and Regulation".
We operate our cable systems in the communities we serve generally pursuant to
non-exclusive franchises that are negotiated with and issued by a community's
governing body such as a city council, a county board of supervisors or a state
regulatory agency. Federal law prohibits local franchising authorities from
unreasonably denying requests for additional franchises, and it permits local
franchising authorities to operate cable systems. Companies that traditionally
have not provided cable services and that have substantial financial resources
(such as public utilities that own certain of the poles to which our cables are
attached) may also obtain cable franchises and may provide competing
communications services.
In the past few years Congress has enacted legislation and the FCC has adopted
regulatory policies intended to provide a more favorable operating environment
for existing and new technologies that provide, or have the potential to
provide, substantial competition to cable systems. These technologies include,
among others, direct broadcast satellite service, commonly known as DBS service,
whereby signals are transmitted by satellite directly to small receiving dishes
located on the customer's property. According to recent government and industry
reports, conventional, medium and high-power satellites currently provide video
programming to over 7.2 million individual households, condominiums, apartment
and office complexes in the United States. DBS providers typically offer to
their subscribers more than 150 channels of programming including:
o news channels;
o movies;
o broadcast stations;
o live concerts and sporting events; and
o other program services similar to those program services provided by
cable systems.
DBS systems use video compression technology to increase significantly the
channel capacity of their systems, and digital technology to improve
significantly the technical quality of the signals transmitted to subscribers.
DBS service currently has certain competitive advantages and disadvantages
compared to cable service. The advantages of DBS service include more
programming, greater channel capacity, and the digital quality of the signals
delivered to subscribers. The disadvantages of DBS service compared to cable
service include high up-front customer equipment and installation costs and a
lack of local programming and local service. The FCC and Congress are presently
considering proposals that will enhance the ability of DBS providers and other
video program distributors to gain access to additional programming and to
transmit local broadcast signals to local markets. These proposals, if adopted,
will likely increase competition to our cable systems.
Two major companies, DirecTV and EchoStar Communications Corporation, are
currently offering nationwide high-power DBS services. Additionally, Primestar,
Inc. currently offers video programming to subscribers from a medium-power DBS
satellite system. DirecTV and Primestar recently reported that DirecTV and its
parent company are acquiring Primestar's medium-power DBS business and the
high-power DBS business of Tempo, a subsidiary of Primestar. EchoStar recently
announced that it is acquiring a high-power DBS license from MCI
Telecommunications Corporation and two satellites currently under construction
from News Corp. Various agencies of the federal government must still approve
these transactions; however, if they are completed, DirecTV and EchoStar will
significantly enhance the number of channels on which they can provide
programming to subscribers and may improve significantly their competitive
positions against cable operators. We are unable predict the impact these
transactions may have on our business and operations.
Our cable systems also compete for subscribers with satellite master antenna
systems, commonly known as SMATV or satellite TV systems. Satellite TV systems
serve condominiums, apartment and office complexes and private residential
developments and, because they do not use public rights-of-way, they typically
are not subject to regulation like local franchised cable operators. Satellite
TV systems offer subscribers both improved reception of local television
stations and many of the same satellite-delivered programming services offered
by franchised cable systems. In addition, some satellite TV operators are
developing and/or offering packages of telephony, data and video services to
private residential and commercial developments. Satellite TV operators often
enter into exclusive service agreements with building owners or homeowners'
associations,
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although some states have enacted laws to provide franchised cable systems
access to these private complexes. Courts have reviewed challenges to these laws
and have reached varying results. Our ability to compete for subscribers in
residential and commercial developments served by satellite TV operators is
uncertain. However, we are developing competitive packages of services (video
and data) to offer to these residential and commercial developments.
Cable systems also compete with wireless program distribution services such as
multichannel, multipoint distribution services, commonly known as MMDS or
wireless cable systems, which use low-power microwave frequencies to transmit
video programming and other information over-the-air to subscribers. The FCC,
which licenses wireless cable systems, has authorized wireless cable systems to
operate in areas served by our cable systems. Individual households also receive
many of the satellite-delivered program services formerly available only to
cable subscribers through the use of reasonably priced home satellite dishes.
Federal law enhances the ability of cable competitors to purchase certain
satellite-delivered cable programming at competitive costs. Federal law also
significantly limits certain local restrictions on the use of roof-top,
satellite and microwave antennae to receive satellite programming and
over-the-air broadcasting services. We are unable to predict whether wireless
video services, satellite TV operations or home satellite dish use will have a
material impact on our business and operations.
Some of our cable systems are currently offering or plan to offer interactive
online computer services to subscribers. These cable systems will compete with a
number of other companies, many of whom have substantial resources, such as:
o existing Internet service providers, commonly known as ISPs;
o local telephone companies; and
o long distance telephone companies.
Recently a number of companies, including local telephone companies and ISPs,
have requested local authorities and the FCC to require cable operators to
provide open access to cable operators' broadband infrastructure so that these
companies may deliver Internet and other communications services directly to
customers over the operators' broadband facilities. In a recent report to
Congress, the FCC declined to institute an administrative proceeding to examine
this issue because, in part, it believes that multiple methods of increasing
bandwidth are or soon will be made available to a broad range ISPs and the
public. At the present time, several local jurisdictions are attempting to
impose open access obligations on other cable operators as a condition for
obtaining municipal consent for franchise transfers; however, such conditions
are currently being challenged in court. Although the FCC currently is
refraining from imposing conditions on the availability of cable operators'
broadband facilities to other competing companies, the FCC, Congress, and state
and local regulatory authorities will continue to monitor and consider further
actions in this area.
The deployment by certain local telephone companies of Asymmetric Digital
Subscriber Line technology, known as ADSL, will allow Internet access to
subscribers at data transmission speeds equal to or greater than that of modems
over conventional telephone lines. A number of large companies in the
telecommunications and technology industries, including the Regional Bell
Operating Companies, GTE Corporation, Microsoft, Compaq Computer Corporation and
Intel Corporation, have formed a working group to accelerate the deployment of
ADSL service. Several telephone companies have initiated ADSL service and have
requested the FCC to fully deregulate packet-switched networks to allow them to
provide high-speed broadband services, including interactive online services,
without regard to present service boundaries and other regulatory restrictions.
We are unable to predict the likelihood of success of the online services
offered by our competitors or the impact on our business and operations of these
competitive ventures.
We expect advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, to occur in the
future. For a detailed discussion of the legislative and regulatory factors
effecting our business and operations, see "Legislation and Regulation". Other
new technologies and services may develop in the future and may compete with
services that our cable systems offer. Consequently, we are unable to predict
the effect that ongoing or future developments might have on the cable industry
or on our business and operations.
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Employees
At December 31, 1998, we had approximately 1,206 equivalent full-time employees,
fourteen of whom belonged to a collective bargaining unit. We consider our
relations with our employees to be good.
Properties
Our 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. Our 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 our systems
utilize converters that can be addressed by sending coded signals from the
headend over the cable network. See "Business--Technological Developments."
We own or lease parcels of real property for signal reception sites (antenna
towers and headends), microwave facilities and business offices. We own most of
our service vehicles. We believe that our properties, both owned and leased, are
in good condition and are suitable and adequate for our business operations.
Our 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 our
systems require maintenance and periodic upgrading to keep pace with
technological advances.
Legal Proceedings
There are no material pending legal proceedings to which we are a party or to
which any of our properties are subject.
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Legislation and Regulation
A federal law known as the Communications Act of 1934, as amended, establishes a
national policy to guide the regulation, development and operation of cable
communications systems. In 1996, a comprehensive amendment to the Communications
Act became effective and is expected to promote competition and decrease
governmental regulation of various communications industries, including the
cable television industry. However, until the desired competition develops,
various federal, state and local governmental units will have broad regulatory
authority and responsibilities over telecommunications and cable television
matters. The courts, especially the federal courts, will continue to play an
important oversight role as the statutory and regulatory provisions are
interpreted and enforced by the various federal, state and local governmental
units.
The Communications Act allocates principal responsibility for enforcing the
federal policies between the FCC, state and local governmental authorities. The
FCC and state regulatory agencies regularly conduct administrative proceedings
to adopt or amend regulations implementing the statutory mandate of the
Communications Act. At various times interested parties to these administrative
proceedings challenge the new or amended regulations and policies in the courts
with varying levels of success. We expect that further court actions and
regulatory proceedings will occur and will refine the rights and obligations of
various parties, including the government, under the Communications Act. The
results of these judicial and administrative proceedings may materially affect
the cable industry and our business and operations. In the following paragraphs,
we summarize the federal laws and regulations materially affecting the growth
and operation of the cable industry. We also provide a brief description of
certain state and local laws.
THE COMMUNICATIONS ACT AND FCC REGULATIONS
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
o subscriber rates;
o the content of the programming we offer to subscribers, as well as the
way we sell our program packages to subscribers;
o the use of our cable systems by the local franchising authorities, the
public and other unrelated companies;
o our franchise agreements with local governmental authorities;
o cable system ownership limitations and prohibitions; and
o our use of utility poles and conduit.
Rate Regulation
The Communications Act and the FCC's regulations and policies limit the ability
of cable systems to raise rates for basic services and equipment, as well as for
certain non-basic cable programming services. Federal law prohibits rate
regulation of cable services and customer equipment only in communities that are
subject to "effective competition," as defined by federal law. Federal law also
prohibits the regulation of cable operators' rates 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.
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the responsibility to regulate
the rates charged by the operator for:
o the lowest level of programming service offered by the cable operator,
typically called basic service, which includes the local broadcast
channels and any public access or governmental channels that are
required by the operator's franchise; and
o the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
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Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the operator's rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines and
rate forms that we and the local franchising authority must use in connection
with the regulation of our basic service and equipment rates. The FCC adopted a
benchmark methodology as the principal method of regulating rates. However, if
this methodology produces unacceptable rates, we may also justify our rates
using a detailed and complicated cost-of-service methodology. The FCC's rules
also require franchising authorities to regulate equipment rates on the basis of
our actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that our rates are too high under
the FCC's rate rules, the local franchising authority may require us to reduce
our rates and to refund overcharges to subscribers with interest. We may appeal
adverse local rate decisions to the FCC. Approximately 125 of the communities
served by our cable systems, representing approximately 12% of the communities
we serve, currently regulate our basic service and equipment rates. The
Communications Act and the FCC's regulations also permit franchising authorities
to file complaints with the FCC concerning rates we charged up through March 31,
1999 for certain non-basic cable programming services tiers. Only one of the
communities we serve, representing approximately 1% of our subscribers, has a
complaint pending with the FCC challenging the rates we charge for the non-basic
cable programming service tier.
The FCC also adopted several years ago comprehensive and restrictive regulations
that allow us to modify our regulated rates on a quarterly or annual basis using
various methodologies that account for changes in:
o the number of regulated channels;
o inflation; and
o certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations.
The Communications Act prohibits regulation of certain non-basic rates, and in
some cases basic rates, of qualified small cable operators, as defined by
federal law. For certain other small cable operators who continue to be subject
to rate regulation, the FCC has adopted regulations designed to reduce the
substantive and procedural burdens of rate regulation on qualified small cable
systems, as defined by federal law. The regulatory benefits accruing to
qualified small cable systems under certain circumstances remain effective even
if such systems are subsequently acquired by a larger cable operator. Many of
our cable systems currently satisfy the FCC's small system eligibility criteria
and are eligible to use the FCC's simplified rate methodology and procedures to
justify cable service and equipment rates.
The Communications Act and the FCC's regulations also:
o prohibit the regulation of the rates charged by cable operators for
programming offered on a per channel or per program basis, and for
certain multi-channel groups of new non-basic programming;
o eliminate the regulation of non-basic cable programming service tiers
after March 31, 1999, although Congress may consider legislation to
extend the period during which non-basic rates remain subject to
regulation;
o require operators to charge uniform rates throughout each franchise
area that is not subject to effective competition; o prohibit
regulation of non-predatory bulk discount rates offered by operators
to subscribers in commercial and residential developments; and
o permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional or
company level.
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Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
o to elect once every three years to require a cable system to carry the
station, subject to certain exceptions, or
o to negotiate with us on the terms by which we carry the station on our
cable system, commonly called "retransmission consent."
The Communications Act requires a cable operator to devote up to one-third of
its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations 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 must obtain retransmission
consent for:
o all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WGN);
o commercial radio stations; and
o certain low-power television stations.
The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for mandatory carriage of digital television signals
offered by local television broadcasters. We are unable to predict the ultimate
outcome of this proceeding or the impact of new carriage requirements on the
operation of our cable systems.
The Communications Act requires our cable systems to permit subscribers to
purchase video programming we offer on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic cable service tier. However, we are not required to comply with this
requirement until December 2002 for any of our cable systems that do not have
addressable converter boxes or that have other substantial technological
limitations. Many of our cable systems do not have the technological capability
to offer programming in the manner required by the statute and thus currently
are exempt from complying with the requirement. We anticipate having significant
capital expenditures over the next two to three years in order for us to meet
this requirement. We are unable to predict whether the full implementation of
this statutory provision in December 2002 will have a material impact on the
operation of our cable systems.
To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
o preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors;
o require such programmers to sell their programming to other video
program distributors; and
o limit the ability of such programmers to offer exclusive programming
arrangements to their affiliates.
The Communications Act and FCC regulations contain restrictions on the
transmission by cable operators of obscene or indecent programming. It requires
cable operators to block fully both the video and audio portion of sexually
explicit or indecent programming on channels that are primarily dedicated to
sexually oriented programming or alternatively to carry such programming only at
"safe harbor" time periods currently defined by the FCC as the hours between 10
p.m. to 6 a.m. A three-judge federal district recently determined that this
provision was unconstitutional; however, the federal government announced that
it will appeal the lower court's ruling.
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The FCC actively regulates other aspects of our programming, involving such
areas as:
o our use of syndicated and network programs and local sports broadcast
programming;
o advertising in children's programming;
o political advertising;
o origination cablecasting;
o sponsorship identification; and
o closed captioning of video programming.
Use of Our Cable Systems by The Government and Unrelated Third Parties
The Communications Act allows local franchising authorities and unrelated third
parties to have access to our cable systems' channel capacity for their own use.
For example, it:
o permits franchising authorities to require cable operators to set
aside certain channels for public, educational and governmental access
programming; and
o requires a cable system with 36 or more activated channels to
designate a significant 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.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
o the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
o the terms and conditions for commercial use of such channels; and
o the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
The FCC is also considering proposals by various companies, including Internet
service providers, to gain access to our cable systems on a common carrier
basis. We cannot predict if these or other similar proposals will be adopted,
or, if adopted, whether they will have an adverse impact on our business and
operations.
Franchise Matters
We have franchises that authorize us to construct, operate and maintain our
cable systems in approximately 744 communities. Although franchising matters are
normally regulated at the local level through a franchise agreement and/or a
local ordinance, the Communications Act provides oversight and guidelines to
govern our relationship with local franchising authorities. For example, the
Communications Act:
o 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;
o generally prohibits us from operating in communities without a
franchise;
o encourages competition with existing cable systems by:
o allowing municipalitie to operate their own cable
systems without franchises; and
o preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing
cable system's service area.
o permits local authorities, when granting or renewing our franchises,
to establish requirements for cable-related facilities and equipment,
but prohibits franchising authorities from
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establishing requirements for specific video programming or
information services other than in broad categories;
o permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by changed
circumstances;
o generally prohibits franchising authorities from:
o imposing requirements during the initial cable
franchising process or during franchise renewal that
require, prohibit or restrict us from providing
telecommunications services,
o imposing franchise fees on revenues we derived from
providing telecommunications services over our cable
systems, or
o restricting our use of any type of subscriber
equipment or transmission technology.
o limits our payment of franchise fees to the local franchising
authority to 5% of our gross revenues derived from providing cable
services over our cable system.
Franchise fees may be passed on to subscribers and separately itemized on
subscribers' bills. In 1997, a federal appellate court overturned an FCC order
that had concluded a cable operator's gross revenue did not include money
collected from subscribers that is allocated by the operator to pay local
franchise fees. Instead, the court concluded that a cable operator's gross
revenue includes all revenue received from subscribers, without deduction. The
FCC subsequently determined that cable operators may "pass through" on
subscribers' monthly bills any additional payments of franchise fees that
franchising authorities require cable operators to make for past periods when
they had relied upon the FCC's earlier decision. Various municipal groups have
requested the FCC to reconsider its decision. We are unable to predict the
ultimate resolution of this matter, but we do not expect that any additional
franchise fees we may be required to pay to our franchising authorities will be
material to our business and operations.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises, although under certain
circumstances the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us 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 our cable system or franchise, the franchising authority may
attempt to impose more burdensome or onerous franchise requirements on us in
connection with a request for such consent. Historically, cable operators
providing satisfactory services to their subscribers and complying with the
terms of their franchises have typically obtained franchise renewals. We believe
that we have generally met the terms of our franchises and have provided quality
levels of service. We anticipates that our future franchise renewal prospects
generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain substantive franchise requirements (e.g. access channels, universal
service and other technical requirements). These decisions have been
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
The Communications Act generally prohibits us from owning or operating a
satellite TV or wireless cable system in any area where we provide franchised
cable service and do not have effective competition, as defined by federal law.
We may, however, acquire and operate satellite TV systems in our existing
franchise service areas if the programming and other services provided to the
satellite TV subscribers are offered according to the terms and conditions of
our local franchise agreement.
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The Communications Act also authorizes the FCC to adopt nationwide limits on the
number of subscribers under the control of a cable operator. A federal district
court has concluded that this subscriber limitation is unconstitutional and has
delayed its enforcement; an appeal of this decision is pending in a federal
appellate court. Pending further action by the federal courts, the FCC recently
reconsidered it cable ownership regulations and:
o reaffirmed its 30% nationwide subscriber ownership limit, but
maintained its voluntary stay on enforcement of that limitation
pending further action;
o reaffirmed its subscriber ownership information reporting rules that
require any person holding an attributable interest (as defined by FCC
rules) in cable systems reaching 20% or more of homes passed by cable
plant nationwide to notify the FCC of any incremental change in that
person's cable ownership interests; and
o opened an administrative proceeding to reevaluate its cable television
ownership attribution rules.
The Communications Act and FCC regulations also impose limits on the number of
channels that can be occupied on a cable system by a video programmer in which a
cable operator has an attributable interest. This statutory provision has also
been declared unconstitutional by a federal district court. An appeal of the
district court's decision has been consolidated with appeals challenging the
FCC's regulatory cable ownership restrictions. Both appeals are pending.
In 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. Although the FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks, it has not yet completed its review of other
regulations that prohibit common ownership of other broadcast interests and
cable systems in the same geographical area.
The 1996 amendments to the Communications Act also made far-reaching changes in
the relationship between local telephone companies and cable service providers.
These amendments:
o eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
o preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
o set basic standards for relationships between telecommunications
providers; and
o generally limited acquisitions and prohibited certain joint ventures
between local telephone companies and cable operators in the same
market.
Local telephone companies 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 non-discriminatory basis. A federal
appellate court recently overturned various parts of the FCC's open video rules,
including the FCC's preemption of local franchising requirements for open video
operators. We expect the FCC to modify its open video rules to comply with the
federal court's decision, but we are unable to predict the impact any rule
modifications may have on our business and operations.
Pole Attachment Regulation
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 have demonstrate to the FCC that they
adequately regulate pole attachment rates, as is the case in certain states in
which we operate. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. The FCC's current rate formula, which is
being reevaluated by the FCC, governs the maximum rate certain utilities may
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charge for attachments to their poles and conduit by cable operators providing
only cable services and, until 2001, by certain companies providing
telecommunications services. The FCC also adopted a second rate formula that
will be effective in 2001 and will govern the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
Any resulting increase in attachment rates due to the FCC's new rate formula
will be phased in over a five-year period in equal annual increments, beginning
in February 2001. Several parties have requested the FCC to reconsider its new
regulations and several parties have challenged the new rules in court. A
federal district court recently upheld the constitutionality of the new
statutory provision which requires that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility; the utilities involved in that
litigation have appealed the lower court's decision. We are unable to predict
the outcome of this litigation or the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on our business and
operations.
Other Regulatory Requirements of the Communications Act and The FCC
The Communications Act also includes provisions, among others, regulating:
o customer service;
o subscriber privacy;
o marketing practices;
o equal employment opportunity; and
o regulation of technical standards and equipment compatibility.
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units. The FCC is also considering additional rules relating to inside
wiring that, if adopted, may disadvantage incumbent cable operators.
The FCC actively regulates other parts of our cable operations, involving such
areas as:
o hiring and promotion of employees and use of outside vendors;
o consumer protection and customer service;
o technical standards and testing of cable facilities;
o consumer electronics equipment compatibility;
o registration of cable systems;
o maintenance of various records and public inspection files;
o microwave frequency usage; and
o antenna structure notification, marking and lighting.
The FCC may 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 FCC has ongoing rulemaking proceedings that may change its
existing rules or lead to new regulations. We are unable to predict the impact
that any further FCC rule changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable communications have
previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that further attempts will be
made by Congress and other governmental bodies relating to the regulation of
cable communications services.
42
<PAGE>
COPYRIGHT
Our cable systems typically include in their channel line-ups local and distant
television and radio broadcast signals which are protected by the copyright
laws. We generally do not obtain a license to use this programming directly from
the owners of the programming, but instead comply with an alternative federal
compulsory copyright licensing process. In exchange for filing certain reports
and contributing a percentage of our revenues to a federal copyright royalty
pool, we obtain blanket permission to retransmit the copyrighted material
carried on these broadcast signals. The nature and amount of future copyright
payments for broadcast signal carriage cannot be predicted at this time.
In a report to Congress, the U.S. Copyright Office recommended that Congress
make major revisions to both the cable television and satellite compulsory
licenses. 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 our ability to obtain suitable programming and could
substantially increase the cost of programming that remains available for
distribution to our subscribers. We cannot predict the outcome of this
legislative activity.
Our cable systems also utilize music in certain programming and advertising that
we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations which negotiate on behalf of their
copyright owners for license fees covering each performance. The cable industry
and one of the major music performing rights organizations have negotiated a
standard licensing agreement covering the performance of 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.
Negotiations on a similar standard licensing agreement are occurring between the
cable industry and another major music performing rights organization covering
the use of music in local origination and access channels and pay-per-view
programming. Rate courts established by a New York federal court exist to
determine appropriate copyright coverage and royalty fees in the event the
parties fail to reach a settlement or to negotiate renewals of licensing
agreements. Although we cannot predict the ultimate outcome of these industry
negotiations or the amount of any license fees we may be required to pay for
past and future use of music, we do not believe such license fees will be
significant to our financial position, results of operations or liquidity.
STATE AND LOCAL REGULATION
Our cable systems use local streets and rights-of-way. Consequently, we must
comply with state and local regulation which is typically imposed through the
franchising process. Our cable systems generally are operated pursuant to
non-exclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Our franchises generally are granted for fixed
terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
o cable service rates;
o franchise fees;
o franchise term;
o system construction and maintenance obligations;
o system channel capacity;
o design and technical performance;
o customer service standards;
o franchise renewal;
o sale or transfer of the franchise;
o territory of the franchisee;
o indemnification of the franchising authority;
o use and occupancy of public streets; and
o types of cable services provided.
43
<PAGE>
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, those states in
which we operate that have enacted such state level regulation are Vermont and
Massachusetts. State and local franchising jurisdiction is not unlimited,
however; it must be exercised consistently with federal law. The Communications
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 summary of certain federal and state regulatory requirements in the
preceding pages does not 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 proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of these
proceedings nor their impact upon the cable industry or our cable operations can
be predicted at this time.
44
<PAGE>
Management
FrontierVision Operating Partners, L.P.'s sole general partner is Holdings.
Holdings' sole general partner is FrontierVision Partners. FVP's sole general
partner is FVP GP, L.P. FVP GP's sole general partner is FrontierVision Inc.
Information with respect to the directors and executive officers of
FrontierVision Inc. and FrontierVision Capital Corporation, respectively, is set
forth below:
FrontierVision Inc.
Name Age Position
- ---- --- --------
James C. Vaughn 53 President, Chief Executive Officer and Director
John S. Koo 37 Executive Vice President, Chief Financial
Officer, Secretary and Director
William J. Mahon Jr. 58 Senior Vice President - Operations
David M. Heyrend 48 Vice President of Engineering
Albert D. Fosbenner 44 Vice President - Treasurer
William P. Brovsky 42 Vice President of Marketing and Sales
James W. McHose 35 Vice President - Finance
Richard G. Halle 35 Vice President of New Business Development
FrontierVision Capital Corporation
Name Age Position
- ---- --- --------
James C. Vaughn 53 President, Chief Executive Officer and Director
John S. Koo 37 Executive Vice President, Chief Financial
Officer, Secretary and Director
Albert D. Fosbenner 44 Vice President - Treasurer
James C. Vaughn, President, Chief Executive Officer and a Director of
FrontierVision Inc. and FrontierVision Capital and a founder of FrontierVision,
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
multiple system operator, 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, Executive Vice President, Chief Financial Officer, Secretary and a
Director of FrontierVision Inc. and FrontierVision Capital and a founder of
FrontierVision, 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, where he co-founded its
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., Senior Vice President - 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 United Video Cablevision, a top 50 MSO, from 1990 to
1995, where he was responsible for the day-to-day operations of approximately
130 cable systems located in twelve states. From 1983 to 1989, Mr. Mahon served
as President and General Manager of Heritage Cable Vision, a 90,000 subscriber
MSO. Mr. Mahon is a member of the Society of Cable Engineers and serves on the
Board of Directors of the New England Cable Television Association.
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<PAGE>
David M. Heyrend, Vice President of Engineering of FrontierVision Inc., has 24
years of cable television engineering management and operations experience.
Prior to joining FrontierVision in 1996, Mr. Heyrend served from 1988 to 1995 as
Director of Engineering for United Video Cablevision, 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 local area
network 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.
Albert D. Fosbenner, Vice President - Treasurer of FrontierVision Inc. and
FrontierVision Capital, has fourteen years of domestic, international and new
business cable television experience and is responsible for FrontierVision's
accounting, reporting, treasury and information technology activities. Prior to
joining FrontierVision in early 1998, Mr. Fosbenner served as the Chief
Financial Officer of a Denver-based interactive television network startup
company from 1994 to 1997, where he was responsible for all finance, treasury,
accounting and administrative functions. From 1991 to 1994 Mr. Fosbenner served
(in Norway) as the Chief Financial Officer of Norkabel A/S, a Norwegian cable
television multiple system operator (owned by United International Holdings,
Inc.) serving 142,000 subscribers. While at Norkabel, Mr. Fosbenner was
responsible for finance, accounting, treasury, investor relations and management
information systems. From 1985 to 1991 Mr. Fosbenner worked for both United
Cable Television and United Artists Entertainment in a number of financial and
operations management positions, including Director of Finance & Administration
and Division Business Manager. Mr. Fosbenner is a Certified Public Accountant
and a Certified Management Accountant.
William P. Brovsky, Vice President of Marketing and Sales of FrontierVision
Inc., has fifteen years of cable television experience and is responsible for
programming and contract negotiations in addition to overseeing the sales and
marketing activities of FrontierVision's operating divisions. Before joining
FrontierVision 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 telemarketing operations for Denver and its
suburban markets.
James W. McHose, Vice President - Finance of FrontierVision Inc. 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. Through early 1998, Mr. McHose served FrontierVision as the Vice
President - Treasurer. Prior to joining FrontierVision in 1996, 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 multiple system
operators 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 New 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
FrontierVision, 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 multiple system operator, 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.
46
<PAGE>
Advisory Committee
The partnership agreement of FVP provides for the establishment of an advisory
committee to consult with and advise FVP GP, 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 FrontierVision 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
listed in "Principal Security Holders" is entitled to designate (directly or
indirectly) one of the four attributable Class A limited partner representatives
on the advisory committee. The designees of J.P. Morgan Investment Corporation,
1818 II Cable Corp. (whose designee is selected by two affiliated individuals
specified in the FVP partnership agreement), Olympus Cable Corp. and First Union
Capital Partners Inc. are John W. Watkins, Richard H. Witmer, Jr., James A.
Conroy and L. Watts Hamrick, III, respectively. FVP GP's designee is Mr. Vaughn.
Executive Compensation
The following table summarizes the compensation paid to FrontierVision Inc.'s
Chief Executive Officer and to each of the four remaining most highly
compensated officers receiving compensation in excess of $100,000 for services
rendered during the fiscal years ended December 31, 1998, 1997 and 1996.
Summary Compensation Table
<TABLE>
----------------------------------------------------
Annual Compensation All Other
-------------------
Name and Principal Position Year Salary Bonus Compensation (1)
- --------------------------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C>
James C. Vaughn 1998 $ 361,158 $ - $ 12,877
President and Chief Executive Officer 1997 305,030 90,000 11,465
1996 283,986 120,000 7,882
John S. Koo 1998 196,250 - 6,349
Executive Vice President, Chief Financial Officer and Secretary 1997 179,745 150,000 5,241
1996 170,192 111,618 4,760
William J. Mahon, Jr. 1998 123,600 - 2,451
Senior Vice President - Operations 1997 121,175 25,000 3,761
1996 13,900 53,350 -
David M. Heyrend 1998 114,586 - 2,245
Vice President of Engineering 1997 110,000 22,000 3,597
1996 45,034 5,000 1,351
Richard G. Halle' 1998 112,665 - 3,447
Vice President of New Business Development 1997 91,109 40,000 2,733
1996 - - -
</TABLE>
________________
(1) Consists of contributions to the 401(k) Plan and to a key man life insurance
plan.
Deferred Compensation Plan
FVP established the FrontierVision Partners, L.P. executive 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 FrontierVision'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.
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
47
<PAGE>
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 (1) 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 (2) 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 20
employees currently participating in the deferred dompensation plan, including
Messrs. Vaughn and Koo.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the advisory committee, 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 FrontierVision. See "Certain Relationships and Related
Transactions."
48
<PAGE>
Certain Relationships and Related Transactions
Our Company's sole general partner (owning 99.9% of the partnership interests
therein) is Holdings. Holdings' sole general partner (owning 99.9% of the
partnership interests therein) is FVP. Holdings' sole limited partner (owning
0.1% of the partnership interests therein) is FrontierVision Holdings, LLC,
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., 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, 1998, J.P. Morgan Investment Corporation and First Union
Capital Partners, Inc. had committed approximately $44.9 million and $30.0
million, respectively, to FVP, all of which has been contributed to FVP. As of
December 31, 1998, FrontierVision Inc. had committed and contributed
approximately $19,935 to FVP, representing contributions of approximately
$13,290 and $6,645 by James C. Vaughn and John S. Koo, respectively, who are
directors of FrontierVision Inc. Such capital commitments were contributed as
equity to FVOP in connection with 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.
J.P. Morgan Securities Inc., The Chase Manhattan Bank, an affiliate of Chase
Securities Inc. and CIBC Inc., an affiliate of CIBC Wood Gundy Security
Corporation, are agents and lenders under the amended bank credit facility and
have received customary fees for acting in such capacities. In addition, J.P.
Morgan Securities Inc. and Chase Securities Inc. received:
(1) compensation in the aggregate of approximately $6.0 million in
connection with the issuance of the notes;
(2) received compensation in the aggregate of approximately $5.3 million
in connection with the issuance of the Senior Discount Notes, Series
A;
(3) received compensation in the aggregate of approximately $1.5 million
in connection with the issuance of the Senior Discount Notes, Series
B.
There are no other arrangements between FVOP, J.P. Morgan Securities Inc. and
Chase Securities Inc. and their affiliates and Holdings or any of its affiliates
in which J.P. Morgan Securities Inc. and Chase Securities Inc. or their
affiliates will receive any additional compensation from Holdings or any of its
affiliates.
49
<PAGE>
Principal Security Holders
The following table sets forth, as of December 31, 1998:
(1) the percentage of the total partnership interests of FVP beneficially
owned by the directors and executive officers of FrontierVision Inc.
and each person who is known to FrontierVision to own beneficially more
than 5.0% of any class of FVP's partnership interests; and
(2) the percentage of the equity securities of FrontierVision Inc., FVP GP,
FVP and Holdings owned by each director or executive officer of
FrontierVision Inc. named in the Summary Compensation Table and by all
executive officers of FrontierVision Inc.
as a group.
Holdings was formed as a Delaware limited partnership in August 1997. FVP has
contributed its 99.9% general partner interest in FrontierVision Operating
Partners, L.P. to Holdings. FVP has contributed its 100% interest in FVOP Inc.
to Holdings, with the result that FrontierVision Operating Partners, L.P. is
wholly owned, directly or indirectly, by Holdings. Holdings Capital II was
incorporated in December, 1998 and is a wholly-owned subsidiary of Holdings. It
has nominal assets and does not conduct any operations. For a more detailed
discussion of the ownership of FrontierVision, see "Certain Relationships and
Related Transactions."
<TABLE>
Name and Address of Beneficial Owners Type of Interest % of Class
- ------------------------------------- ---------------- ----------
<S> <C> <C>
FrontierVision Partners, L.P. ("FVP")(1) General Partner Interest in Holdings (2) 99.90%
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
FVP GP, L.P. (3) 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 6.57%
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 6.57%
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 6.57%
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 3.94%
James C. Vaughn Stockholder of FrontierVision Inc. 66.67%
1777 South Harrison Street, Suite P-200 Limited Partnership Interest in FVP GP 50.24%
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 25.12%
Denver, Colorado 80210
All other executive officers and directors as a group 0.00%
</TABLE>
- ----------------
(1) FVP's limited partners (owning 99% of the partnership interests
therein) are various institutional investors and accredited investors.
(2) Holdings' sole limited partner (owning 0.1% of the partnership
interests therein) is FrontierVision Holdings, LLC.
(3) 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.
50
<PAGE>
Ownership Structure
FrontierVision Holdings, L.P. wholly-owns directly and indirectly (1)
FrontierVision Holdings Capital Corporation , (2) FrontierVision Holdings
Capital II Corporation, a Delaware corporation and co-issuer with Holdings of
the notes issued in 1998, (3) FrontierVision Operating Partners, L.P., a
Delaware limited partnership, which directly owns and operates cable television
systems, and (4) FrontierVision Operating Partners, Inc., a Delaware
corporation. FVOP, in turn, wholly-owns FrontierVision Capital Corporation , a
Delaware corporation and co-issuer with FVOP of the notes FVOP issued in 1996.
FrontierVision Partners, L.P., a Delaware limited partnership, owns directly and
indirectly all of the partnership interests of Holdings. FVP GP, L.P., a
Delaware limited partnership, is the general partner of FVP and FrontierVision
Inc., a Delaware corporation, is the general partner of FVP GP. The following
chart illustrates the ownership structure of FrontierVision. Shaded portions
indicate the issuers of the notes offered by this prospectus.
<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") |
----------------------------------------
| General Partner
------------------------------------- | (1.0% interest)
| Institutional Investors | |
| Other Limited Partners | |
------------------------------------- |
| Limited Partners |
| (99.0% interest) ---------------------------------------
--------------------------------------------| FrontierVision Partners, L.P. |
----------------------------------------------| ("FVP") |
| ---------------------------------------
| (100% Interest) | General Partner
------------------------------------ | (99.9% Interest)
| FrontierVision | |
| Holdings, LLC | |
| ("FV Holdings") | |
------------------------------------ |
| Limited Partner (0.1% Interest) |
---------------------------- -----------
| |
--------------------------------------------------
| FrontierVision Holdings, L.P. |
--------------| ("Holdings") |---------------------------
| -------------------------------------------------- |
| | General Partner | |
(100% Interest) | | (99.9% Interest) | (100% Interest) | (100% Interest)
- -------------------------- ----------------------------------- ---------------------------- -----------------------------
|FrontierVision Operating| | FrontierVision Operating | | FrontierVision Holdings | | FrontierVision Holdings |
| Partners, Inc. | | Partners, L.P. | | Capital II Corporation | | Capital Corporation |
| ("FVOP Inc.") |--------| ("FVOP") | | ("Holdings Capital II") | | ("Holdings Capital") |
- -------------------------- Limited----------------------------------- ---------------------------- -----------------------------
Partner | | |
(0.1%interest) | | |--------------------------
--------------------------------- | |
| (100 % interest) |(100% interest) | (100% interest)
- ------------------------------ ------------------------------------- ----------------------------------------
| FrontierVision New England | | FrontierVision Capital Corporation| | ForntierVision Access Partners, L.P. |
| Cable, Inc. ("New England")| | ("Capital") | | ("Access") |
- ------------------------------ ------------------------------------- ----------------------------------------
</TABLE>
51
<PAGE>
The Partnership Agreements
The following is a summary of certain material terms of the Agreement of Limited
Partnership of FVOP, as amended, the Agreement of Limited Partnership of
Holdings, the First Amended and Restated Agreement of Limited Partnership of
FVP, as amended and the First Amended and Restated Agreement of Limited
Partnership of FVP GP, as amended.
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 as exhibits to Holdings and
Holdings Capital's registration statement on Form S-4 (File No. 333-36519) and
are available in the manner described in "Where You Can Find More Information."
All capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the respective partnership agreement.
FVOP's Partnership Agreement
ORGANIZATION AND DURATION. FVOP was formed on July 14, 1995 as a Delaware
limited partnership to acquire, own and operate cable systems and to engage in
all activities necessary, desirable or incidental for such purpose. Unless
otherwise terminated in accordance with the terms of the FVOP partnership
agreement, FVOP may exist until June 30, 2008.
CONTROL OF OPERATIONS. The partnership agreement provides that its general
partner shall have the right and power to manage and control the business and
affairs of FVOP. Upon the occurrence and continuance of any event of default
under and as defined in the amended bank credit facility, The Chase Manhattan
Bank, as the administrative agent, shall be entitled to be substituted (or to
have a designee of its choice substituted) as a new general partner of FVOP.
CAPITAL CONTRIBUTIONS. Under the FVOP partnership agreement, the partners of
FVOP have made certain capital contributions to FVOP. Each partner of FVOP may,
but is not required to, make additional capital contributions to FVOP. The FVOP
partnership agreement provides that, upon the admission of any additional
limited partners or substituted limited partners to FVOP, FVOP's limited partner
shall withdraw from FVOP and shall be entitled to receive the return of its
capital contribution, without interest or deduction.
WITHDRAWAL OR REMOVAL OF PARTNERS. In general, no right is given to any partner
of FVOP to withdraw from FVOP. The general partner of FVOP may admit:
(1) additional limited partners;
(2) an assignee of the limited partner's partnership interest in FVOP as a
substituted limited partner of FVOP; and
(3) one or more additional general partners to FVOP. In addition, upon the
occurrence and continuance of any event of default under and as defined in
the amended bank credit facility, the administrative agent shall be
entitled to be substituted (or to have a designee of its choice
substituted) as a new general partner.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the FVOP partnership agreement, the
limited partner may assign all or any part of its partnership interest in FVOP
only with the consent of the general partner of FVOP. The limited partner has no
right to grant an assignee of its partnership interest in FVOP the right to
become a substituted limited partner of FVOP. Following the admission of a new
general partner to FVOP, neither the general partner of FVOP nor the limited
partner may transfer its partnership interest in FVOP without the prior written
consent of the new general partner of FVOP.
52
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Holdings Partnership Agreement
ORGANIZATION AND DURATION. Holdings was formed on August 29, 1997 as a Delaware
limited partnership to acquire, own and operate cable systems and to engage in
all activities necessary, desirable or incidental for such purpose. Unless
otherwise terminated in accordance with the terms of the Holdings partnership
agreement, Holdings may exist until June 30, 2008.
CONTROL OF OPERATIONS. The Holdings partnership agreement provides that its
general partner shall have the right and power to manage and control the
business and affairs of Holdings.
CAPITAL CONTRIBUTIONS. Under the Holdings partnership agreement, the partners of
Holdings have made certain capital contributions to Holdings. Each partner of
Holdings may, but is not required to, make additional capital contributions to
Holdings. The Holdings partnership agreement provides that, upon the admission
of any additional limited partners or substituted limited partners to Holdings,
Holdings' limited partner shall withdraw from Holdings and shall be entitled to
receive the return of its capital contribution, without interest or deduction.
WITHDRAWAL OR REMOVAL OF PARTNERS. In general, no right is given to any partner
of Holdings to withdraw from Holdings. The general partner of Holdings may
admit:
(1) additional limited partners;
(2) an assignee of the limited partner's partnership interest in Holdings
as a substituted limited partner of Holdings; and
(3) one or more additional general partners to Holdings.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the Holdings partnership agreement,
the limited partner may assign all or any part of its partnership interest in
Holdings only with the consent of the general partner. The limited partner has
no right to grant an assignee of its partnership interest in Holdings the right
to become a substituted limited partner of Holdings. Following the admission of
a new general partner to Holdings, neither the general partner nor the limited
partner may transfer its partnership interest in Holdings without the prior
written consent of the new general partner.
FVP Partnership Agreement
ORGANIZATION AND DURATION. FVP was formed on April 17, 1995 as a Delaware
limited partnership to:
(1) acquire, invest in, own, finance, operate, improve, develop, maintain,
promote, sell, dispose of and otherwise exploit cable television
systems and properties and interests therein;
(2) 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
(3) do any and all acts necessary, desirable or incidental to the
accomplishment of such purpose. Unless otherwise terminated in
accordance with the terms of the FVP partnership agreement, FVP may
exist until June 30, 2008.
CONTROL OF OPERATIONS. The FVP partnership agreement provides that its general
partner has the 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, subject to the terms and provisions of the FVP partnership
agreement.
ADVISORY COMMITTEE. The FVP partnership agreement provides for the establishment
of an advisory committee to consult with and advise FVP GP 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. 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
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agreement whereby FVP GP 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 FVOP to effect any cable television system acquisition. The advisory
committee consists of four representatives of the attributable Class A limited
partners of FVP and one representative of FVP GP. Subject to certain conditions,
each of the four attributable Class A limited partners of FVP listed in
"Principal Security Holders" is entitled to designate (directly or indirectly)
one of the four attributable Class A limited partner representatives on the
advisory committee.
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.
AMENDMENTS AND MODIFICATIONS. In general, the FVP partnership agreement is
subject to modification or amendment only with the written consent of the
general partner of FVP and a majority in interest of the Class A and Class B
limited partners of FVP.
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 2008 and 14%
junior subordinated notes due 2008. In accordance with 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
of FVP 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 of FVP 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.
FVP GP Partnership Agreement
ORGANIZATION AND DURATION. FVP GP was formed on April 17, 1995 as a Delaware
limited partnership to:
(1) serve as general partner of FVP; and
(2) do all other lawful things necessary, desirable or incidental to the
accomplishment of such purposes. Unless otherwise terminated in
accordance with the terms of the FVP GP partnership agreement, FVP GP
shall exist until the partners of FVP GP may unanimously elect to
carry on the business of FVP GP.
CONTROL OF OPERATIONS. The FVP GP partnership agreement provides that its
general partner has the 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.
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 of FVP GP 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.
CAPITAL CONTRIBUTIONS. Under the FVP GP partnership agreement, the partners of
FVP GP 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 of FVP GP are not required to make additional
capital contributions to FVP GP. Except for provisions allowing for the return
of capital to partners of FVP GP 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.
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Description of the Notes
The notes were issued on October 7, 1996 under an indenture, dated that date,
among FVOP, Capital and Colorado National Bank, as 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 SEC as an exhibit
to the registration statement of which this prospectus is a part. Certain
definitions of terms used in the following summary are set forth under
"--Certain Definitions" below. Certain terms contained in this summary but not
capitalized in this summary or defined under the subheading "--Certain
Definitions" are defined in the indenture. You should carefully read the
indenture before purchasing the notes.
References to "Senior Credit Facility" are applicable to the amended bank credit
facility.
General
The notes are joint and several obligations of FVOP and Capital. The notes are
general unsecured senior subordinated obligations of FVOP and Capital, 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
ratably in right of payment with all other senior subordinated indebtedness of
FVOP. At December 31, 1998, FVOP had approximately $871.6 million of total
Senior Indebtedness (excluding unused commitments of approximately $129.9
million under the amended bank credit facility). Secured creditors of FVOP 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 or entity in whose name a
note is registered at the close of business on the preceding April 1 or October
1, 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. FVOP and Capital 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 FVOP and
Capital 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 FVOP and Capital,
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, FVOP and Capital may redeem up to 35% of
the principal amount of the notes with the net cash proceeds received by FVOP
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 FVOP, Capital or any of their
affiliates). Notice of redemption under 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 FVOP or
Capital 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 FVOP or Capital, 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 FVOP and Capital 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, FVOP and Capital 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
FVOP or Capital 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 FVOP and Capital or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other entity
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 according 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.
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
FVOP and Capital of principal of, premium, if any, or interest on the notes,
whether under the terms of the notes, upon acceleration or otherwise, will be
made if, at the time of such
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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
according 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 FVOP and Capital 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, in accordance with 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 FVOP or Capital, 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 FVOP
and Capital 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
FVOP and Capital may issue additional Senior Indebtedness.
Covenants
The indenture contains, among others, the following covenants:
Limitation on Indebtedness. The indenture provides that FVOP 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 FVOP or any
Restricted Subsidiary may incur Indebtedness and FVOP 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 be less than or equal to:
(1) 7.0 to 1.0 if the date of such incurrence is on or before December 31,
1998 and
(2) 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:
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(a) Indebtedness under the notes and the indenture;
(b) Indebtedness and Disqualified Equity Interests of FVOP and the
Restricted Subsidiaries outstanding on the Issue Date;
(c) Indebtedness under the amended bank 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
amended bank credit facility that utilizes subparagraph (i)
below;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by
FVOP or any wholly owned Restricted Subsidiary and (y)
Indebtedness of FVOP 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 FVOP's and
Capital's 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:
(1) any sale or other disposition of any Indebtedness of FVOP or
a wholly owned Restricted Subsidiary referred to in this
clause (d) to an entity (other than FVOP or a wholly owned
Restricted Subsidiary);
(2) any sale or other disposition of equity interests of a
wholly owned Restricted Subsidiary which holds Indebtedness
of FVOP or another wholly owned Restricted Subsidiary such
that such wholly owned Restricted Subsidiary ceases to be a
wholly owned Restricted Subsidiary; or
(3) designation of a wholly owned Restricted Subsidiary which
holds Indebtedness of FVOP as an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Indebtedness of FVOP;
(f) interest rate protection obligations of FVOP or any Restricted
Subsidiary relating to Indebtedness of FVOP or such Restricted
Subsidiary, as the case may be, which Indebtedness (1) bears
interest at fluctuating interest rates and (2) 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
FVOP 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 FVOP 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
FVOP 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:
(1) Indebtedness or Disqualified Equity Interests of FVOP may
not be refinanced under this clause (h) with Indebtedness or
Disqualified Equity Interests of any Restricted Subsidiary;
(2) 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
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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 prepayment premium
necessary to accomplish such refinancing and such reasonable
fees and expenses incurred in connection therewith;
(3) 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
(4) Indebtedness that is equal in right with the notes may only
be refinanced with Indebtedness that is made ratable 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 FVOP (including any Indebtedness under the
amended bank 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:
(1) FVOP and Capital 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;
(2) FVOP 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 FVOP will not,
and will not permit any Restricted Subsidiary to, directly or indirectly:
(1) declare or pay any dividend or any other distribution on any equity
interests of FVOP 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 FVOP or any Restricted Subsidiary (other
than payments or distributions made to FVOP or a wholly owned
Restricted Subsidiary and dividends or distributions payable solely in
qualified equity interests of FVOP or in options, warrants or other
rights to purchase qualified equity interests of FVOP);
(2) purchase, redeem or otherwise acquire or retire for value any equity
interests of FVOP or any Restricted Subsidiary (other than any such
equity interests owned by FVOP or a wholly owned Restricted
Subsidiary);
(3) 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
(4) make any investment (other than Permitted Investments) in any entity
(other than in FVOP, a wholly owned Restricted Subsidiary or an entity
that becomes a wholly owned Restricted Subsidiary, or is merged with
or into or consolidated with FVOP or a wholly owned Restricted
Subsidiary, provided FVOP 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 (1), (2), (3) and (4) collectively, "Restricted Payments", unless
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(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, FVOP
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
(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 FVOP
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 FVOP 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 FVOP
either:
(a) as capital contributions to FVOP after the Issue Date;
or
(b) 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 FVOP 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 FVOP or any Restricted
Subsidiary incurred after the Issue Date which has been
converted into or exchanged for qualified equity interests
of FVOP; 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:
(a) the return of capital with respect to such investment;
and
(b) 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) FVOP'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
FVOP 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:
(1) 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
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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;
(2) so long as no default or event of default shall have
occurred and be continuing, the retirement of any equity
interests of FVOP 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 FVOP; 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;
(3) 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 FVOP; 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;
(4) the payment of any dividend or distribution on equity
interests of FVOP 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 FVOP or such Restricted
Subsidiary and attributable to them solely as a result of
FVOP 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;
(5) 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 FVOP; 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
(6) 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 FVOP or any
Restricted Subsidiary, or similar securities, held by
officers or employees or former officers or employees of
FVOP 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 under the terms of clauses (1) and (6) of the
immediately preceding paragraph shall be included as Restricted Payments and
amounts expended under the terms of clauses (2) through (5) 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
FVOP other than the notes (the "Other Indebtedness") FVOP shall cause such
Restricted Subsidiary to concurrently guarantee FVOP's obligations under the
indenture and the notes to the same extent that such Restricted Subsidiary
guaranteed FVOP's obligations under the Other Indebtedness, including waiver of
subrogation, if any; provided, however, that if such Other Indebtedness is:
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(1) 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, under the subordination provisions of
the indenture, which subordination shall be substantially
identical to the subordination provisions of the indenture
applicable to the notes;
(2) Senior Subordinated Indebtedness, the subsidiary guarantee
shall be ratable in right of payment with the guarantee of
the Other Indebtedness; or
(3) 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. FVOP shall
cause each Restricted Subsidiary issuing a subsidiary
guarantee to:
(a) execute and deliver to the trustee a supplemental
indenture in form reasonably satisfactory to the
trustee according to which such Restricted Subsidiary
shall unconditionally guarantee all of FVOP's
obligations under the notes and the indenture on the
terms set forth in the indenture; and
(b) 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 FVOP 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 FVOP 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
FVOP or any other Restricted Subsidiary;
(b) make loans or advances to, or guarantee any Indebtedness or
other obligations of, FVOP or any other Restricted
Subsidiary; or
(c) transfer any of its properties or assets to FVOP or any
other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of:
(1) the amended bank credit facility or other agreements of
FVOP 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 amended bank credit facility on
the Issue Date or in the indenture;
(2) applicable law;
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(3) any instrument governing Indebtedness or equity
interests of an acquired entity acquired by FVOP or any
Restricted Subsidiary as in effect at the time of such
acquisition (except to the extent such Indebtedness was
incurred by such acquired entity in connection with, as
a result of or in contemplation of such acquisition);
provided, however, that such encumbrances and
restrictions are not applicable to FVOP or any
Restricted Subsidiary, or the properties or assets of
FVOP or any Restricted Subsidiary, other than the
acquired entity;
(4) customary non-assignment provisions in leases or cable
television franchises entered into in the ordinary
course of business and consistent with past practices;
(5) purchase money indebtedness for property acquired in
the ordinary course of business that only imposes
encumbrances and restrictions on the property so
acquired;
(6) 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 (6) 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;
(7) 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;
(8) the indenture; or
(9) 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
amended bank credit facility as in effect on the Issue
Date.
LIMITATION ON LIENS. The indenture provides that FVOP 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:
(1) liens securing Senior Indebtedness or any guarantee of
Senior Indebtedness by any Restricted Subsidiary; and
(2) Permitted liens.
DISPOSITION OF PROCEEDS OF ASSET SALES. The indenture provides that FVOP will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
make any Asset Sale, unless (a) FVOP 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:
(1) at least 75% of such consideration consists of cash or Cash
Equivalents; or
(2) 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 FVOP
or any Restricted Subsidiary at such time or (y) equity
interests in one or more entities which thereby become
wholly owned Restricted Subsidiaries whose assets consist
primarily of such properties and capital assets.
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The amount of any:
(1) liabilities of FVOP or any Restricted Subsidiary that are
actually assumed by the transferee in such Asset Sale and
from which FVOP and the Restricted Subsidiaries are fully
released shall be deemed to be cash for purposes of
determining the percentage of cash consideration received by
FVOP or the Restricted Subsidiaries and;
(2) notes or other similar obligations received by FVOP or the
Restricted Subsidiaries from such transferee that are
immediately converted (or are converted within thirty days
of the related Asset Sale) by FVOP 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 FVOP or the Restricted
Subsidiaries.
FVOP or such Restricted Subsidiary, as the case may be, may:
(1) 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 amended bank credit facility is repaid, FVOP
need not reduce the commitments for such revolving credit
portion; or
(2) 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 FVOP or any Restricted Subsidiary at such time
and so apply such Net Cash Proceeds within 365 days of the
receipt thereof.
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"), FVOP 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
in accordance with this paragraph. In the event that any other Indebtedness of
FVOP which ranks ratably 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, FVOP 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 in accordance with 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 in accordance with the Offer to Purchase,
FVOP 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 FVOP makes an Offer to Purchase the notes, FVOP 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 ENTITIES. The indenture
provides that FVOP 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
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any beneficial holder of 10% or more of the equity interests of FVOP or any
officer, director or employee of FVOP or any Restricted Subsidiary (each an
"affiliate transaction"), unless:
(a) such affiliate transaction is on terms which are no less
favorable to FVOP 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, FVOP has obtained a written opinion from an
independent financial advisor stating that the terms of such
affiliate transaction are fair to FVOP 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:
(1) transactions with or among FVOP and the wholly owned
Restricted Subsidiaries;
(2) 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 FVOP entered into in the ordinary
course of business, including customary benefits thereunder,
and payments under any indemnification arrangements
permitted by applicable law;
(3) the Agreement of Limited Partnership of FVOP 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 according
to any other contractual obligations in existence on the
Issue Date, as in effect on the Issue Date;
(4) the issue and sale by FVOP to its partners or stockholders
of qualified equity interests;
(5) 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 (1) through (6) of the penultimate paragraph of
"--Limitation on Restricted Payments");
(6) loans and advances to officers, directors and employees of
FVOP 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;
(7) customary commercial banking, investment banking,
underwriting, placement agent or financial advisory fees
paid in connection with services rendered to FVOP and its
subsidiaries in the ordinary course;
(8) the incurrence of intercompany Indebtedness permitted
according to the terms of clause (d) under the definition of
"Permitted Indebtedness" set forth under "--Limitation on
Indebtedness;"
(9) the pledge of equity interests of Unrestricted Subsidiaries
to support the Indebtedness thereof; and
(10) the amended bank credit facility.
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DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The indenture provides that FVOP may
designate any subsidiary of FVOP as an "Unrestricted Subsidiary" under the
indenture 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,
FVOP 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) FVOP would be permitted to make an investment (other than a
Permitted Investment) at the time of designation, assuming
the effectiveness of such designation, under the first
paragraph of "--Limitation on Restricted Payments" above in
an amount (the "Designation Amount") equal to FVOP's
proportionate interest in the fair market value of such
subsidiary on such date.
Neither FVOP 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, under "--Limitation on
Restricted Payments" and "--Limitation on Indebtedness"
above.
FVOP may revoke any designation of a subsidiary as an Unrestricted Subsidiary
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 FVOP
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.
Change of Control
The indenture provides that within 30 days following the date of consummation of
a transaction resulting in a Change of Control, FVOP 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 in accordance with 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.
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In the event that FVOP makes an Offer to Purchase the notes, FVOP 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 FVOP 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 FVOP or the General Partner has occurred. In
addition, no assurances can be given that FVOP will be able to acquire notes
tendered upon the occurrence of a Change of Control. The ability of FVOP to pay
cash to the holders of notes upon a Change of Control may be limited by its then
existing financial resources. The amended bank 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 FVOP may provide the same. If FVOP does not obtain such waiver or
consent or repay such Indebtedness, FVOP will remain prohibited from
repurchasing the notes. In such event, FVOP's failure to purchase tendered notes
would constitute an event of default under the indenture which would in turn
constitute a default under the amended bank 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 FVOP and Capital 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 FVOP and Capital 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 FVOP and Capital are subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto,
FVOP and Capital shall file with the Commission the annual reports, quarterly
reports and other documents which FVOP and Capital would have been required to
file with the Commission according to such Section 13(a) or 15(d) or any
successor provision thereto if FVOP and Capital were so required, such documents
to be filed with the Commission on or prior to the respective dates (the
"Required Filing Dates") by which FVOP and Capital would have been required so
to file such documents if FVOP and Capital were so required. FVOP and Capital
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;
(1) transmit by mail to all holders of notes, as their
names and addresses appear in the note register,
without cost to such holders; and
(2) file with the trustee, copies of the annual reports,
quarterly reports and other documents which FVOP and
Capital are required to file with the Commission under
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 FVOP and Capital 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. FVOP and Capital 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 FVOP
and Capital.
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Merger, Sale of Assets, etc.
The indenture provides that FVOP and Capital will not consolidate with or merge
with or into, whether or not FVOP or Capital is the surviving entity, any other
entity and FVOP and Capital 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 either of FVOP's or Capital's properties
and assets, determined, in the case of FVOP, on a consolidated basis for FVOP
and the Restricted Subsidiaries, to any entity in a single transaction or series
of related transactions, unless:
(a) either:
(1) FVOP or Capital shall be the surviving entity; or
(2) the surviving entity, if other than FVOP or Capital,
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
FVOP and Capital;
(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 FVOP or any Restricted
Subsidiary, directly or indirectly, of additional
Indebtedness, and treating any Indebtedness not previously
an obligation of FVOP 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
entity 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 FVOP 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 entity shall have a
consolidated net worth equal to or greater than the
consolidated net worth of either FVOP or Capital, as
appropriate, 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 entity 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:
(1) the entity surviving such merger or consolidation or
acquiring the equity interests of such subsidiary
guarantor is not a Restricted Subsidiary; and
(2) 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
entity, whether or not such entity is affiliated with such subsidiary guarantor
and whether or not such subsidiary guarantor is the surviving entity, unless:
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(1) the surviving entity 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;
(2) the surviving entity, if other than such subsidiary
guarantor, assumes all the obligations of such
subsidiary guarantor under the notes and the indenture
in accordance with a supplemental indenture in a form
reasonably satisfactory to the trustee;
(3) at the time of and immediately after such disposition,
no default or event of default shall have occurred and
be continuing; and
(4) the surviving entity 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 (4) of this paragraph shall not be a condition
to a merger or consolidation of a subsidiary guarantor
if such merger or consolidation only involves FVOP
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 entity and the surviving
entity is to assume all the obligations of such issuer or any such subsidiary
guarantor under the notes and the indenture in accordance with a supplemental
indenture, such surviving entity 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 FVOP and Capital or any subsidiary guarantor
under the indenture or the notes continued for 30 days after
written notice to FVOP and Capital 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 FVOP 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 FVOP 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;
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(g) any holder or holders of at least $10 million in aggregate
principal amount of Indebtedness of FVOP or any Restricted
Subsidiary, after a default under such Indebtedness, shall
notify the trustee of the intended sale or disposition of
any assets of FVOP 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 FVOP or any Restricted
Subsidiary, including funds on deposit or held in accordance
with lock-box and other similar arrangements, which
continues for five business days after notice has been given
to FVOP and the representative of such Indebtedness and
Indebtedness under the amended bank credit facility;
(h) certain events of bankruptcy, insolvency or reorganization
affecting either of FVOP, Capital or any Significant
Restricted Subsidiary; and
(i) other than as provided in or in accordance with 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).
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default, 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
FVOP or Capital 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 FVOP and Capital, 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 amended bank 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:
o five business days following delivery of a written notice of such
acceleration of the notes to the agent under the amended bank credit
facility; and
o the acceleration of any Indebtedness under the amended bank credit
facility.
If an event of default specified in clause (h) above with respect to either of
FVOP or Capital occurs, all unpaid principal of and accrued and unpaid interest
on the outstanding notes will 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.
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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.
FVOP and Capital 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 FVOP and Capital or any of their subsidiaries
shall have any liability for any obligation of FVOP and Capital 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 such obligation or the creation of any such
obligation. Each holder by accepting a note waives and releases such entity from
all such liability.
Satisfaction and Discharge of Indenture; Defeasance
FVOP and Capital 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, FVOP and Capital 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:
(1) 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;
(2) 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,
(3) delivering to the trustee an opinion of counsel to the effect that
FVOP's and Capital's exercise of their option under this paragraph
will not result in any of FVOP, Capital, the trustee or the trust
created by FVOP's and Capital's deposit of funds in accordance with
this provision becoming or being deemed to be an "investment company"
under the Investment Company Act of 1940, as amended; and
(4) complying with certain other requirements set forth in the indenture.
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In addition, FVOP and Capital 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:
(1) 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,
(2) 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;
(3) delivering to the trustee an opinion of counsel to the effect that
FVOP's and Capital's exercise of their option under this paragraph
will not result in any of FVOP, Capital, the trustee or the trust
created by FVOP's and Capital's deposit of funds in accordance with
this provision becoming or being deemed to be an "investment company"
under the Investment Company Act of 1940, as amended; and
(4) complying with certain other requirements set forth in the indenture.
FVOP and Capital may make an irrevocable deposit in accordance with 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 FVOP and Capital 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.
Modification and Waiver
FVOP and Capital 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:
(1) 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;
(2) to effect the assumption by a successor entity of all obligations of
FVOP and Capital under the notes and the indenture in connection with
any transaction complying with "--Merger, Sale of Assets, Etc." above;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes;
(4) to comply with any requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust
Indenture Act;
(5) to make any change that would provide any additional benefit or rights
to the holders;
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(6) to make any other change that does not materially and adversely affect
the rights of any holder under the indenture;
(7) to evidence the succession of another entity 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;
(8) to add to the covenants of FVOP and Capital or the subsidiary
guarantors for the benefit of the holders, or to surrender any right
or power conferred upon FVOP and Capital or any subsidiary guarantor
under the indenture;
(9) to secure the notes in accordance with the requirements of
"--Covenants--Limitation on Liens" above or otherwise; or
(10) 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 in
accordance with the requirements of the indenture; provided, however,
that FVOP and Capital 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 FVOP
and Capital 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
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(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 FVOP and
Capital 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 in accordance with an Offer to Purchase, or a
default in respect of a 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 FVOP, Capital, 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 FVOP and Capital or an
affiliate of either of FVOP or Capital; 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
was deposited on October 7, 1996 with, or on behalf of, The Depository Trust
Company 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 or persons that may hold interests through DTC
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 DTC participants, and the records of DTC
participants, with respect to interests of persons holding through DTC
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 FVOP, Capital, 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.
FVOP and Capital 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
DTC 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. FVOP and Capital also expect that
payments by DTC participants to owners of beneficial interests in any such
global note held through such DTC participants will be governed by standing
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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 DTC 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 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 FVOP and Capital that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more DTC 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 DTC
participant or DTC 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 FVOP and Capital 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 in accordance with
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.
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 FVOP, Capital 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 FVOP and Capital
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 an entity:
(a) assumed in connection with an Asset Acquisition from such entity; or
(b) existing at the time such entity becomes a Restricted Subsidiary.
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"ADVISORY COMMITTEE" means the Advisory Committee of the General Partner
established in accordance with 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.
"ASSET ACQUISITION" means:
(1) 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 FVOP or any Restricted
Subsidiary in any other entity, or any acquisition or purchase of
equity interests of any other entity by FVOP or any Restricted
Subsidiary, in either case according to which such entity shall become
a Restricted Subsidiary or shall be consolidated, merged with or into
FVOP or any Restricted Subsidiary; or
(2) any acquisition by FVOP or any Restricted Subsidiary of the assets of
any entity which constitute substantially all of an operating unit or
line of business of such entity 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
entity other than FVOP or a wholly owned Restricted Subsidiary, in one
transaction or a series of related transactions of:
(1) any Equity Interest of any Restricted Subsidiary;
(2) any material license, franchise or other authorization of FVOP or any
Restricted Subsidiary;
(3) any assets of FVOP or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of FVOP or
any Restricted Subsidiary; or
(4) any other property or asset of FVOP or any Restricted Subsidiary
outside of the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not
include:
(1) 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;
(2) sales of property or equipment that have become worn out, obsolete or
damaged or otherwise unsuitable for use in connection with the
business of FVOP or any Restricted Subsidiary, as the case may be; and
(3) 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.
"BOARD OF DIRECTORS" means:
(1) in the case of an entity that is a partnership, the board of directors
of such entity'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;
(2) in the case of an entity that is a corporation, the board of directors
of such entity; and
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(3) in the case of any other entity, 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 entity. By way of illustration, as of the date of the indenture,
any reference herein to the Board of Directors of any of FVOP, FVP or
FVP GP means the board of directors of FV Inc.
"CASH EQUIVALENTS" means:
(1) 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;
(2) 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 & Poor's Rating Services, a division of the McGraw-Hill
Companies, Inc. or any successor rating agency; and
(3) commercial paper maturing not more than three months after the date of
acquisition issued by any corporation (other than an affiliate of
FVOP) 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 FVOP, the General Partner, FVP GP or FV Inc., as the case may be;
(b) FVOP, the General Partner, FVP GP or FV Inc., as the case may be,
consolidates with, or merges with or into, another entity or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any entity, or any entity
consolidates with, or merges with or into, FVOP, the General Partner,
FVP GP or FV Inc., as the case may be, in any such event in accordance
with a transaction in which the outstanding voting equity interests of
FVOP, 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 FVOP, 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 entity and, immediately after such transaction, the
Permitted Holders or the holders of the voting equity interests of
FVOP, 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 entity;
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of FVOP,
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
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of the Board of Directors of FVOP, 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 entity or entities 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 or entity as a general partner of FVOP,
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 FVOP, 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:
(1) 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 entity;
(2) 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
(3) 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 INTEREST EXPENSE" means, with respect to FVOP for any period,
without duplication, the sum of:
(1) the interest expense of FVOP and the Restricted Subsidiaries for such
period as 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;
(2) the interest component of capitalized lease obligations paid, accrued
and/or scheduled to be paid or accrued by FVOP and the Restricted
Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP; and
(3) dividends and distributions in respect of Disqualified Equity
Interests actually paid in cash by FVOP 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
FVOP 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:
(1) 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;
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(2) that portion of such net income derived from or in respect of
investments in entities other than Restricted Subsidiaries, except to
the extent actually received in cash by FVOP or any Restricted
Subsidiary, subject, in the case of any Restricted Subsidiary, to the
provisions of clause (5) of this definition;
(3) the portion of such net income, or loss, allocable to minority
interests in unconsolidated entities for such period, except to the
extent actually received in cash by FVOP or any Restricted Subsidiary,
subject, in the case of any Restricted Subsidiary, to the provisions
of clause (5) of this definition;
(4) net income, or loss, of any other entity combined with FVOP or any
Restricted Subsidiary on a "pooling of interests" basis attributable
to any period prior to the date of combination; and
(5) 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 OPERATING CASH FLOW" means, with respect to any period,
Consolidated Net Income for such period increased, without duplication, by the
sum of:
(1) consolidated income tax expense accrued according to GAAP for such
period to the extent deducted in determining Consolidated Net Income
for such period;
(2) 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
(3) 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
FVOP 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 FVOP 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:
(1) the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date"); to
(2) four times the Consolidated Operating Cash Flow for the latest fiscal
quarter for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination
Date:
(a) any entity 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;
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(b) any entity 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
(c) if FVOP or any Restricted Subsidiary shall have in any manner:
(a) acquired, including through an Asset Acquisition or the
commencement of activities constituting such operating
business; or
(b) 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 entity to the extent that
such entity's net income would be excluded in accordance with
clause (5) of the definition of Consolidated Net Income.
"DESIGNATED SENIOR INDEBTEDNESS" means:
(1) any Indebtedness outstanding under the amended bank credit facility;
and
(2) 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.
"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, in accordance with 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 MARKET CAPITALIZATION" of any entity, 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 entity) of such
entity 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 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 entity commits to make an investment in the equity interests of FVOP.
"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.
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"GUARANTOR SENIOR INDEBTEDNESS" means, with respect to any subsidiary guarantor,
at any date:
(1) all obligations of such subsidiary guarantor under the amended bank
credit facility;
(2) all interest rate protection obligations of such subsidiary guarantor;
(3) all obligations of such subsidiary guarantor under stand-by letters of
credit; and
(4) 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:
(1) to the extent that it may constitute Indebtedness, any obligation for
federal, state, local or other taxes;
(2) any Indebtedness among or between such subsidiary guarantor and FVOP
or any subsidiary of such subsidiary guarantor or FVOP;
(3) 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;
(4) 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 (4) if:
(a) 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 indenture; or
(b) in the case of any obligations under the amended bank 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;
(5) Indebtedness evidenced by the subsidiary guarantee;
(6) Indebtedness of such subsidiary guarantor that is expressly
subordinate or junior in right of payment to any other Indebtedness of
such subsidiary guarantor;
(7) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than capitalized lease obligations) or
management agreements; and
(8) any obligation that by operation of law is subordinate to any general
unsecured obligations of such subsidiary guarantor.
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"INDEBTEDNESS" means, without duplication, with respect to any entity, whether
recourse is to all or a portion of the assets of such entity and whether or not
contingent:
(1) every obligation of such entity for money borrowed;
(2) every obligation of such entity evidenced by bonds, debentures, notes
or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses;
(3) very reimbursement obligation of such entity with respect to letters
of credit, bankers' acceptances or similar facilities issued for the
account of such entity;
(4) every obligation of such entity 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);
(5) every capitalized lease obligation of such entity;
(6) every net obligation under interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements of such entity;
(7) every obligation of the type referred to in clauses (1) through (6) of
another entity and all dividends of another entity the payment of
which, in either case, such entity has guaranteed or is responsible or
liable for, directly or indirectly, as obligor, guarantor or
otherwise; and
(8) 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 (1) through (7) above.
Indebtedness:
(1) shall never be calculated taking into account any cash and cash
equivalents held by such entity;
(2) shall not include obligations of any entity:
(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;
(3) 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;
(4) shall include the liquidation preference and any mandatory redemption
payment obligations in respect of any Disqualified Equity Interests of
FVOP or any Restricted Subsidiary; and
(5) 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.
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"ISSUE DATE" means October 7, 1996, the date of original issuance of the notes
under the indenture.
"NET CASH PROCEEDS" means the aggregate proceeds in the form of cash or Cash
Equivalents received by FVOP 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:
(1) 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;
(2) taxes paid or payable as a result thereof, after taking into account
any available tax credits or deductions and any tax sharing
arrangements;
(3) 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;
(4) 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
(5) with respect to Asset Sales by subsidiaries, the portion of such cash
payments attributable to entities holding a minority interest in such
subsidiary.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by or on behalf of
FVOP 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 in accordance with 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. FVOP 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 FVOP's obligation to make
an Offer to Purchase, and the Offer shall be mailed by FVOP or, at FVOP's
request, by the trustee in the name and at the expense of FVOP. 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 in accordance with the Offer to Purchase. The Offer
shall also state:
(1) the Section of the indenture according 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 FVOP in accordance with the Offer to Purchase, including,
if less than 100%, the manner by which such amount has been determined
according to the Section of the indenture requiring the Offer to
Purchase (the "Purchase Amount");
(4) the purchase price to be paid by FVOP for each $1,000 aggregate
principal amount of notes accepted for payment, as specified in 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 in
accordance with the Offer to Purchase;
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(7) that interest on any note not tendered or tendered but not purchased
by FVOP in accordance with 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 in accordance with
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 in
accordance with 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 FVOP or
the trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to FVOP 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 FVOP, 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 in
accordance with the Offer to Purchase, FVOP 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 in accordance with
the Offer to Purchase, FVOP 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,
FVOP 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.
"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 entity is
beneficially owned by any of the persons or entities 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 or entity controlling, controlled by or under common
control with any other person or entity described in clauses (a) - (d)
of this definition; and
(f) (1) 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
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(2) 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 FVOP, 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 FVOP 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 FVOP; 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 FVOP or any other entity
that are:
(1) equity securities without special covenants; or
(2) 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 in accordance with 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 according to which such securities
are issued.
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"PERMITTED LIENS" means:
(a) liens on property of an entity existing at the time such entity is
merged into or consolidated with FVOP 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 FVOP 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 FVOP 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 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 FVOP 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 FVOP or the Restricted Subsidiaries, or repairs,
additions or improvements to such assets, provided, however, that:
(1) 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;
(2) such liens do not extend to any other assets of FVOP 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;
(3) the incurrence of such Indebtedness is permitted by
"--Covenants--Limitation on Indebtedness" above; and
(4) 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
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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.
"PUBLIC EQUITY OFFERING" means, with respect to any entity, a public offering by
such entity 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.
"RESTRICTED SUBSIDIARY" means any subsidiary of FVOP 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 Unrestricted Subsidiary in
accordance with "--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 INDEBTEDNESS" means, at any date:
(1) all obligations of FVOP under the amended bank credit facility;
(2) all interest rate protection obligations of FVOP;
(3) all obligations of FVOP under stand-by letters of credit; and
(4) all other Indebtedness of FVOP 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 FVOP 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:
(a) to the extent that it may constitute Indebtedness, any obligation
for federal, state, local or other taxes;
(b) any Indebtedness among or between FVOP and any subsidiary of
FVOP;
(c) 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;
(d) 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 (d) if:
(1) the holder(s) of such Indebtedness or their representative
or FVOP 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
FVOP, to the effect that the incurrence of such Indebtedness
does not violate the provisions of the indenture; or
(2) in the case of any obligations under the amended bank credit
facility, the holder(s) of such obligations or their agent
or representative shall have received a representation from
FVOP to the effect that the incurrence of such Indebtedness
does not violate the provisions of the indenture;
(5) Indebtedness evidenced by the notes;
87
<PAGE>
(6) Indebtedness of FVOP that is expressly subordinate or junior in right
of payment to any other Indebtedness of FVOP;
(7) to the extent that it may constitute Indebtedness, any obligation
owing under leases, other than capitalized lease obligations, or
management agreements; and
(8) any obligation that by operation of law is subordinate to any general
unsecured obligations of FVOP.
"SIGNIFICANT RESTRICTED SUBSIDIARY" means, at any date of determination:
(a) any Restricted Subsidiary that, together with its subsidiaries that
constitute Restricted Subsidiaries:
(1) for the most recent fiscal year of FVOP accounted for more than
10.0% of the consolidated revenues of FVOP and the Restricted
Subsidiaries; or
(2) as of the end of such fiscal year, owned more than 10.0% of the
consolidated assets of FVOP and the Restricted Subsidiaries, all
as set forth on the consolidated financial statements of FVOP 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.
"STRATEGIC EQUITY INVESTMENT" means the issuance and sale of qualified equity
interests of FVOP for net proceeds to FVOP of at least $25.0 million to an
entity engaged primarily in the cable television, wireless cable television,
telephone, or interactive television business.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of FVOP which is expressly
subordinated in right of payment to the notes.
"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 FVOP 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 FVOP designated as such in
accordance with the provisions of "--Covenants--Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of FVOP delivered to the trustee, subject to the provisions
of such covenant.
88
<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.
We 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 22.8% of FVOP's partnership interests. 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 us 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 amended bank 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 FVOP's partnership interests.
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.
89
<PAGE>
Legal Matters
The validity of the notes was passed upon for us 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 consolidated financial statements and schedule of FrontierVision Operating
Partners, L.P. and subsidiaries, as of December 31, 1998 and 1997, and for each
of the years in the three-year period ended December 31, 1998, have been
included herein in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The balance sheets of FrontierVision Capital Corporation as of December 31, 1998
and 1997, have been included herein in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The balance sheets of FrontierVision Holdings, L.P. as of December 31, 1998 and
1997, have been included herein in reliance upon the report of KPMG 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 the Central Ohio Cluster as of and for the year
ended December 31, 1996 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to the sale of the assets and certain
liabilities of the Central Ohio Cluster), and has been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of State Cable TV Corporation and subsidiary as of and
for the year ended December 31, 1997, included elsewhere in this prospectus,
have been audited by Arthur Andersen LLP, independent auditors, as stated in
their report appearing herein.
The financial statements of New England Cablevision of Massachusetts, Inc. as of
and for the years ended December 31, 1997 and 1996, included elsewhere in this
prospectus, have been audited by Baker Newman and & Noyes, LLC, independent
auditors, as stated in their report appearing herein.
90
<PAGE>
Glossary
The following is a description of certain terms used in this Prospectus.
Acquisition Cash Flow--Forecasted net income of an acquired system, for a period
believed to be appropriate based on the facts and circumstances of a specific
acquisition, calculated as of the date of acquisition of such system, before
interest, taxes, depreciation, amortization and corporate administrative
expenses. The Company believes that Acquisition Cash Flow is a measure commonly
used in the cable television industry to analyze and compare the purchase price
of cable television systems. However, Acquisition Cash Flow is not intended to
be an indicator of actual operating performance and is not determined in
accordance with generally accepted accounting principles.
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.
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.
91
<PAGE>
Digital Programming System--A programming distribution system under which
multiple channels of programming are digitally transmitted via satellite to a
cable television system's headend and then retransmitted, using the cable
system's existing distribution platform, to subscribers equipped with special
digital converters. One such example is the Headend-in-the-Sky digital
programming system ("HITS"). The use of the HITS system enables a cable operator
to transmit from 6 to 14 digital channels using the same bandwidth as used by a
single analog channel and, thus, has the potential to dramatically expand a
system's channel capacity.
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.
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.
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.
HFC--Hybrid fiber optic/coaxial cable design, used in a cable television
system's distribution plant.
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.
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.
92
<PAGE>
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.
Rebuild--The replacement or upgrade of an existing cable system, usually
undertaken to improve either its technological performance or to expand the
system's channel or 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.
Tiers--Varying levels of cable services consisting of differing combinations of
several over-the-air broadcast and satellite-delivered cable television
programming services.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
FrontierVision Operating Partners, L.P. and Subsidiaries
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Partners' Capital for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
FrontierVision Capital Corporation
Independent Auditors' Report F-18
Balance Sheets as of December 31, 1998 and 1997 F-19
Statement of Operations for the year ended December 31, 1998, 1997 and for the period from July 26,
1996 (inception) through December 31, 1996 F-20
Statement of Owner's Equity for the year ended December 31, 1998, 1997 and for the period from July
26, 1996 (inception) through December 31, 1996 F-21
Statement of Cash Flows for the year ended December 31, 1998, 1997 and for the period from July 26,
1996 (inception) through December 31, 1996 F-22
Note to the Financial Statements F-23
FrontierVision Holdings, L.P.
Independent Auditors' Report F-24
Balance Sheets as of December 31, 1998 and 1997 F-25
Note to the Balance Sheets F-26
Central Ohio Cluster (Selected Assets Acquired From Cox Communications, Inc. by FVOP)
Independent Auditor's Report F-37
Combined Statements of Net Assets as of
September 30, 1997 (unaudited) and December 31, 1996 F-38
Combined Statements of Income for the nine-month periods ended September 30, 1997 (unaudited) and
September 30, 1996 (unaudited) and for the year ended December 31, 1996 F-39
Combined Statements of Changes in Net Assets for the nine-month period ended September 30, 1997
(unaudited) and for the year ended December 31, 1996 F-40
Combined Statements of Cash Flows for the nine-month periods ended September 30, 1997(unaudited)
and September 30, 1996 (unaudited) and for the year ended December 31, 1996 F-41
Notes to Combined Financial Statements F-42
State Cable TV Corporation and Subsidiary
Independent Auditor's Report F-49
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 F-50
Consolidated Statements of Operations and Deficit for the nine months ended September 30, 1997 and 1998
(unaudited) and the year ended December 31, 1997 F-51
Consolidated Statements of Cash Flow for the nine months ended September 30, 1997 and
1998(unaudited) and the year ended December 31, 1997 F-52
Notes to Consolidated Financial Statements F-53
New England Cablevision of Massachusetts, Inc.
Independent Auditors' Report F-61
Balance Sheets as of March 31, 1998(unaudited), December 31, 1997 and 1996 F-62
Statements of Earnings for the three months ended March 31, 1998 and 1997 (unaudited) and the years
ended December 31, 1997 and 1996 F-64
Statements of Changes in Stockholders' Equity for the three months ended March 31, 1998 (unaudited)
and the years ended December 31, 1997 and 1996 F-65
Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) and the
years ended December 31, 1997 and 1996 F-67
Notes to Financial Statements F-69
</TABLE>
F-1
<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 subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, partners' capital and cash
flows for each of the three years in the three year period ended December 31,
1998. 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 subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
March 19, 1999
F-2
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
-------------------------------------
December 31, December 31,
1998 1997
---------------- --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,890 $ 3,413
Accounts receivable, net of allowance for doubtful accounts
of $666 and $640 12,678 8,071
Other receivables 174 -
Prepaid expenses and other 4,046 2,785
Investment in cable television systems, net:
Property and equipment 342,754 247,724
Franchise cost and other intangible assets 820,524 637,725
------------ ------------
Total investment in cable television systems, net 1,163,278 885,449
------------ ------------
Deferred financing costs, net 16,006 17,990
Earnest money deposits 150 2,000
------------ ------------
Total assets $ 1,201,222 $ 919,708
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 18,233 $ 2,647
Accrued liabilities 17,169 15,126
Subscriber prepayments and deposits 3,312 1,828
Accrued interest payable 9,547 5,064
Deferred income taxes 11,856 -
Debt 871,610 632,000
------------ ------------
Total liabilities 931,727 656,665
------------ ------------
Partners' capital:
FrontierVision Holdings, L.P. 269,226 262,780
FrontierVision Operating Partners, Inc. 269 263
------------ ------------
Total partners' capital 269,495 263,043
Commitments
------------ ------------
Total liabilities and partners' capital $ 1,201,222 $ 919,708
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In Thousands
<TABLE>
-------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, December 31, December 31,
1998 1997 1996
---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Revenue $ 245,134 $ 145,126 $ 76,464
Expenses:
Operating expenses 123,257 74,314 39,181
Corporate administrative expenses 6,965 4,418 2,930
Depreciation and amortization 114,155 65,502 35,724
Storm related costs 522 - -
------------- ------------- -------------
Total expenses 244,899 144,234 77,835
------------- ------------- -------------
Operating income/(loss) 235 892 (1,371)
Interest expense, net (68,832) (42,652) (22,422)
Other expense (526) (57) (8)
------------- ------------- -------------
Loss before income tax benefit and
extraordinary item (69,123) (41,817) (23,801)
Income tax benefit 2,927 - -
------------- ------------- -------------
Loss before extraordinary item (66,196) (41,817) (23,801)
Extraordinary item - Loss on early
retirement of debt - (5,046) -
------------- ------------- -------------
Net loss $ (66,196) $ (46,863) $ (23,801)
============= ============= =============
Net loss allocated to:
FrontierVision Holdings, L.P.
(General Partner) $ (66,130) $ (46,816) $ (23,776)
FrontierVision Operating Partners, Inc.
(Limited Partner) (66) (47) (25)
------------- ------------- -------------
$ (66,196) $ (46,863) $ (23,801)
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
---------------------------------------------------------
FrontierVision
FrontierVision Operating
Holdings, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
------------------ ------------------- ----------------
<S> <C> <C> <C>
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
Capital contributions 179,722 181 179,903
Net loss (46,816) (47) (46,863)
------------- ------------ -------------
Balance, December 31, 1997 262,780 263 263,043
Capital contributions 72,576 72 72,648
Net loss (66,130) (66) (66,196)
------------- ------------ -------------
Balance, December 31, 1998 $ 269,226 $ 269 $ 269,495
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Thousands
<TABLE>
--------------------------------------------------------
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------- ------------ -------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net loss $ (66,196) $ (46,863) $ (23,801)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Extraordinary item - Loss on early retirement of debt - 5,046 -
Depreciation and amortization 114,155 65,502 35,724
Income tax benefit (2,927) - -
Gain on swap of assets (2,362) - -
Amortization of deferred debt issuance costs 2,379 1,492 999
Interest expense deferred and included in
long-term debt - 721 924
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (2,556) (582) (1,946)
Receivable from seller - 846 1,377
Prepaid expenses and other (870) (249) (1,266)
Accounts payable and accrued liabilities 15,821 3,029 3,423
Subscriber prepayments and deposits 1,086 (1,523) (2,393)
Accrued interest payable 4,483 (1,226) 5,870
------------- ------------ -------------
Total adjustments 129,209 73,056 42,712
------------- ------------ -------------
Net cash flows from operating activities 63,013 26,193 18,911
------------- ------------ -------------
Cash Flows From Investing Activities:
Capital expenditures (65,570) (32,738) (9,304)
Pending acquisition costs (22) (146) -
Cash paid for franchise costs (12) (406) (2,009)
Earnest money deposits (200) (2,000) (500)
Proceeds from disposition of cable television systems - - 15,065
Cash paid in acquisitions of cable television systems (307,595) (392,631) (421,467)
------------- ------------ -------------
Net cash flows from investing activities (373,399) (427,921) (418,215)
------------- ------------ -------------
Cash Flows From Financing Activities:
Debt borrowings 316,485 523,000 137,700
Payments on debt borrowings (76,875) (289,845) (33,600)
Proceeds of issuance of Senior Subordinated Notes - - 200,000
Principal payments on capital lease obligations - (70) (16)
Increase in deferred financing fees (395) (11,357) (3,771)
Offering costs related to Senior Subordinated Notes - (129) (7,417)
Partner capital contributions 72,648 179,903 107,397
------------- ------------ -------------
Net cash flows from financing activities 311,863 401,502 400,293
------------- ------------ -------------
Net Increase in Cash and Cash Equivalents 1,477 (226) 989
Cash and Cash Equivalents, at beginning of period 3,413 3,639 2,650
------------- ------------ -------------
Cash and Cash Equivalents, end of period $ 4,890 $ 3,413 $ 3,639
============= ============ =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 62,789 $ 42,226 $ 15,195
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(1) THE COMPANY
Organization and Capitalization
FrontierVision Operating Partners, L.P. (the "Company" or "FVOP") is a Delaware
limited partnership formed on July 14, 1995 for the purpose of acquiring and
operating cable television systems. The Company owns and operates cable
television systems in three primary operating clusters - New England, Ohio and
Kentucky - 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, at the time, sole general partner, FrontierVision Partners, L.P.
("FVP"), a Delaware limited partnership.
On September 19, 1997, FrontierVision Holdings, L.P. ("Holdings"), a Delaware
limited partnership, and FrontierVision Holdings Capital Corporation ("Holdings
Capital") co-issued $237,650 aggregate principal amount at maturity of 11 7/8%
Senior Discount Notes due 2007 (the "Discount Notes"). Holdings, a
newly-organized holding company, was formed to be the co-issuer of the Discount
Notes and to be the new general partner of FVOP. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests in
FVOP immediately prior to the issuance of the Discount Notes (the "Formation
Transaction"), and therefore, FVOP and FrontierVision Capital Corporation
("Capital") became wholly owned-consolidated subsidiaries of Holdings. In
addition, FVOP Inc., previously a wholly-owned subsidiary of FVP, is now a
wholly-owned subsidiary of Holdings.
On December 2, 1998, Holdings and FrontierVision Holdings Capital II Corporation
co-issued $91,298 aggregate principal amount at maturity of Discount Notes,
Series B. During the year ended December 31, 1998, the Company received
additional capital contributions of approximately $72,648 from its partners.
This represents net proceeds received from the issuance of the Discount Notes,
Series B, which were contributed by Holdings to FVOP as a capital contribution.
The capital contribution from Holdings was used by FVOP to repay certain bank
indebtedness. Prior to the Formation Transaction, FVP allocated certain
administrative expenses to FVOP, which are included as capital contributions
from its partners. Such expense allocations were approximately $231 and $735 for
the years ended December 31, 1997 and 1996, respectively.
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 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.
(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-7
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of FVOP
and those of its wholly- owned subsidiaries, Capital, FrontierVision New England
Cable, Inc. ("New England"), New England Cable Television of Massachusetts, Inc.
("NECMA") and FrontierVision Access Partners, LLC ("Access"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 and construction activities.
Depreciation is computed on a straight-line basis using an average estimated
useful life of 8 years.
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. Such amounts are amortized on a straight-line basis over the
following periods: 15 years for franchise costs (which reflects the Company's
ability to renew existing franchise agreements), 5 years for covenants not to
compete, 7 years for subscriber lists and 15 years for goodwill.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amount of its property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
Deferred Financing Costs and Deferred Bond Issue Costs
Deferred financing costs and deferred bond issue costs are being amortized using
the straight line method over the life of the loans and the bonds. Accumulated
amortization at December 31, 1998 and 1997 is $3,291 and $912, respectively.
Revenue Recognition
Revenue is recognized in the period in which the related services are provided
to the subscribers. Installation revenue is recognized in the period that
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable television system.
F-8
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative Financial Instruments
The Company manages risk arising from fluctuations in interest rates by using
interest rate swap agreements, as required by its credit agreements. These
agreements are treated as off-balance sheet financial instruments. The interest
rate swap agreements are being accounted for as a hedge of the debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 will not be material.
Reclassification
Certain amounts have been reclassified for comparability.
(3) STORM RELATED COSTS
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the year ended December 31, 1998,
the Company has recognized a loss due to service outages and increased labor
costs of approximately $522 due to the ice storms. Additionally, the Company has
incurred approximately $540 of capital expenditures to replace damaged
subscriber drops. The Company received $183 subsequent to December 31, 1998
related to a claim on its business interruption insurance for the storm damage.
F-9
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(4) INVESTMENT IN CABLE TELEVISION SYSTEMS
The Company's investment in cable television systems is comprised of the
following:
<TABLE>
--------------------------------------
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Property and equipment $ 435,531 $ 297,229
Less--accumulated depreciation (92,777) (49,505)
----------- -----------
Property and equipment, net 342,754 247,724
----------- -----------
Franchise costs 717,614 523,096
Covenants not to compete 16,856 14,983
Subscriber lists 146,411 106,270
Goodwill 53,937 44,702
----------- -----------
934,818 689,051
Less--accumulated amortization (114,294) (51,326)
----------- -----------
Franchise costs and other intangible assets, net 820,524 637,725
----------- -----------
Total investment in cable television systems, net $ 1,163,278 $ 885,449
=========== ===========
</TABLE>
(5) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since its inception through
December 31, 1998. 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 the
estimated fair values at the respective dates of acquisition. Such allocations
are subject to adjustments as final appraisal information is received by the
Company. Amounts allocated to property and equipment and to intangible assets
will be respectively depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
following table lists the acquisitions and the purchase price for transactions
occurring in the most recent two years.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost (a)
----------------- --------------------------- ------------- --------------------
<S> <C> <C> <C>
Bluegrass Cable Partners, L.P. Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,800
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,800
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,600
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,800
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $204,100
TVC-Sumpter Limited Partnership and North Oakland Cablevision
Partners Limited Partnership Michigan March 6, 1998 $14,400
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $10,000
New England Cablevision of Massachusetts, Inc. ("NECMA") Massachusetts April 3, 1998 $44,900
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $37,400
Unity Cable Television, Inc. Maine September 30, 1998 $800*
Appalachian Cablevision of Ohio Ohio September 1, 1998 $300
State Cable TV Corporation ("State") Maine, New Hampshire October 23, 1998 $190,200*
Paint Valley Cable Ohio October 30, 1998 $1,900*
CASCO Maine November 30, 1998 $3,200*
</TABLE>
- ---------------
F-10
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(5) ACQUISITIONS AND DISPOSITIONS (continued)
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
December 31, 1998.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
-----------------------------------------------------
1998 1997 1996
Acquisitions(a) Acquisitions(a) Acquisitions(a)
---------- ----------- ----------
<S> <C> <C> <C>
Property and equipment $ 79,526 $ 48,805 $ 169,240
Franchise costs and other intangible assets 244,492 344,490 268,836
---------- ----------- ----------
Subtotal 324,018 393,295 438,076
---------- ----------- ----------
Net working capital (deficit) 410 (164) (7,107)
Deferred income taxes (14,783) - -
Less - Earnest money deposits applied (2,050) (500) (9,502)
---------- ----------- ----------
Total cash paid for acquisitions $ 307,595 $ 392,631 $ 421,467
========== =========== ==========
</TABLE>
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
The Company has reported the operating results of its acquired cable systems
from the dates of their respective acquisition. Unaudited pro forma summarized
operating results of the Company, assuming the Triax I, Cablevision, TCI-VT/NH,
Cox-Central Ohio, NECMA, TCI-Bryan and State Cable acquisitions (the
"Acquisitions") had been consummated on January 1, 1997, are as follows:
<TABLE>
----------------------------------------------
Year Ended December 31, 1998
----------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ----------- ---------
<S> <C> <C> <C>
Revenue $ 245,134 $ 31,842 $ 276,976
Operating, selling, general and administrative expenses (130,744) (20,245) (150,989)
Depreciation and amortization (114,155) (15,546) (129,701)
---------- ----------- ---------
Operating income (loss) 235 (3,949) (3,714)
Interest and other expenses (66,431) (7,509) (73,940)
---------- ----------- ---------
Net loss $ (66,196) $ (11,458) $ (77,654)
========== =========== =========
----------------------------------------------
Year Ended December 31, 1997
----------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ----------- ---------
Revenue $ 145,126 $ 105,533 $ 250,659
Operating, selling, general and administrative expenses (78,732) (56,312) (135,044)
Depreciation and amortization (65,502) (47,543) (113,045)
---------- ----------- ---------
Operating income 892 1,678 2,570
Interest and other expenses (47,755) (34,592) (82,347)
---------- ----------- ---------
Net loss $ (46,863) $ (32,914) $(79,777)
========== =========== =========
</TABLE>
F-11
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(5) ACQUISITIONS AND DISPOSITIONS (continued)
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregate basis.
Dispositions
The Company has completed two dispositions from its inception through December
1998.
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.
On January 7, 1999, the Company sold certain cable television system assets
located in the Southeast region to Helicon Partners I, LP, for an aggregate
sales price of approximately $5,220.
(6) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
December 31, December 31,
1998 1997
---- ----
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate options
<S> <C> <C>
(7.25% average at December 31, 1998), payable monthly $ 172,000 $ -
Term loans, interest based on various floating libor rate options
(7.46% and 8.33% weighted average at December 31, 1998 and 1997,
respectively), payable monthly 498,125 432,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
Capital leases 1,485 -
------------ ------------
Total debt $ 871,610 $ 632,000
============ ============
</TABLE>
(a) Bank Credit Facility.
On December 19, 1997, the Company entered into a Second Amended and
Restated Credit Agreement (the "Amended Credit Facility") increasing the
available senior debt by $535.0 million, for a total availability of
$800.0 million. The amount available under the Amended Credit Facility
includes two term loans of $250.0 million each ("Facility A Term Loan"
and "Facility B Term Loan") and a $300.0 million revolving credit
facility ("Revolving Credit Facility"). The Facility A Term Loan and the
Revolving Credit Facility both mature on September 30, 2005. The entire
outstanding principal amount of the Revolving Credit Facility is due on
September 30, 2005, with escalating principal payments due quarterly
beginning December 31, 1998 under the Facility A Term Loan. The Facility
B Term Loan matures March 31, 2006 with 95% of the principal being repaid
in the last two quarters of the term of the facility.
F-12
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(6) DEBT (continued)
Under the terms of the Amended Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon a change of
control of the Company and the sale of any of its operating systems. This
obligation may be waived with the consent of the majority of the lenders.
Further, beginning with the year ending December 31, 2001, the Company is
required to make prepayments equal to 50% of its excess cash flow, as
defined in the Amended Credit Facility. The Company also pays commitment
fees ranging from 1/2% - 3/8% per annum on the average unborrowed portion
of the total amount available under the Amended Credit Facility.
The Amended 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 and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
(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 in connection
with the Offering, the Company entered into deferred interest rate
setting agreements to reduce the Company's interest rate exposure in
anticipation of issuing the Notes. The cost of such agreements, amounting
to $1,390, are 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 Capital) 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 Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers, asset
sales and changes in control of the Company.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes.
(c) Interest Rate Protection Agreements
In order to convert effectively certain of the interest payable at
variable rates under the Amended Credit Facility to interest at fixed
rates, the Company has entered into interest rate swap agreements for
notional amounts totaling $187,500, and maturing between November 15,
1999 and October 7, 2001. According to these agreements, the Company
pays or receives the difference between (1) an average fixed rate of
5.84% and (2) a floating rate of the three month libor applied to the
same $187,500 notional amount every three months during the term of the
interest rate swap agreement. On April 7, 1998, the Company terminated
one of its interest rate swap agreements for a notional amount of
$82,500 and entered into a new interest rate swap agreement for
$100,000. There was no termination fee associated with this
transaction.
F-13
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(6) DEBT (continued)
On April 8, 1998, the Company entered into a collar interest rate swap
agreement ("Collar Agreement") for a notional amount of $100,000,
maturing on January 8, 2001. The Collar Agreement provides for
different exchanges between the Company and the counterparty depending
on the level of the floating three month LIBOR rate (5.32% at December
31, 1998). Such exchanges occur every three months during the term of
the Collar Agreement. The different exchanges are as follows:
(1) When LIBOR is below 5.05%, the Company pays to the counterparty the
difference between the fixed rate of 5.65% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 5.65% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.65% and
LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.65% and 5.05%, the
Collar Agreement has no financial effect.
On October 3, 1997, in order to convert certain of the interest payable
at variable rates under indebtedness, the Company entered into a
forward interest rate swap agreement. This commenced on October 15,
1998, for a notional amount totaling $150,000, maturing on October 15,
2001. According to this agreement, the Company will pay or receive the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every three months during the term of the interest rate swap agreement.
For the years ended December 31, 1998 and 1997, the Company recognized
an increase in interest expense of approximately $585 and $312,
respectively, as a result of the interest rate swap agreements.
Information concerning the Company's interest rate agreements at
December 31, 1998 is as follows:
<TABLE>
Amount to be
Interest rate Notional paid upon
Expiration date to be received amount termination (i)
--------------- -------------- ------ ---------------
<S> <C> <C> <C>
November 15, 1999 5.912% $ 65,000 $ 472.5
November 15, 1999 5.188% 22,500 12.1
January 8, 2001 5.650% 100,000 1,215.3
October 7, 2001 5.940% 100,000 2,731.9
October 15, 2001 6.115% 150,000 4,340.7
------------ -------------
$ 437,500 $ 8,772.5
============ =============
</TABLE>
(i) The estimated amount that the Company would pay to terminate
the agreements on December 31, 1998. This amount takes into
consideration current interest rates, the current
creditworthiness of the counterparties and represents the fair
value of the interest rate agreements.
The debt of the Company matures as follows:
Year Ended December 31 --
-------------------------
1999 $ 11,144
2000 24,575
2001 34,575
2002 44,575
2003 55,825
Thereafter 700,916
------------
$ 871,610
============
F-14
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(7) GUARANTOR SUBSIDIARIES
The Indenture for the Notes has been amended to add New England and NECMA as
guarantors ("Guarantor Subsidiaries") of the Notes. The guaranty is full and
unconditional. Separate financial statements of the Guarantor Subsidiaries are
not presented because management believes that they are not material to
investors.
Following is condensed consolidating financial information for the Company:
Balance Sheet as of December 31, 1998
<TABLE>
--------------------------------------------------------------------------------------
Guarantor Non-Guarantor Consolidating Consolidated
FVOP Subsidiaries Subsidiaries Entries FVOP
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash $ 4,249 $ 559 $ 82 $ - $ 4,890
Receivables 18,330 287 288 (6,053) 12,852
Prepaid expenses 3,929 115 2 - 4,046
Investment in cable
Television systems 1,137,025 56,574 4,679 (35,000) 1,163,278
Other assets 24,460 - - (8,304) 16,156
------------- ----------- ---------- ----------- ------------
Total assets $ 1,187,993 $ 57,535 $ 5,051 $ (49,357) $ 1,201,222
============= =========== ========== =========== ============
Accounts payable and
Accrued liabilities $ 34,021 $ 6,705 $ 729 $ (6,053) $ 35,402
Subscriber prepayments and
deposits 3,320 (8) - - 3,312
Accrued interest payable 9,547 - - - 9,547
Deferred income taxes - 11,859 (3) - 11,856
Debt 871,610 35,000 - (35,000) 871,610
Partners' capital/
Subsidiary equity 269,495 3,979 4,325 (8,304) 269,495
------------- ----------- ---------- ----------- ------------
Total liabilities and
partners' capital $ 1,187,993 $ 57,535 $ 5,051 $ (49,357) $ 1,201,222
============= =========== ========== =========== ============
</TABLE>
Statement of Operations for the Year Ended December 31, 1998
<TABLE>
--------------------------------------------------------------------------------------
Guarantor Non-Guarantor Consolidating Consolidated
FVOP Subsidiaries Subsidiaries Entries FVOP
---------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 236,728 $ 8,219 $ 187 $ - $ 245,134
Operating expenses 119,532 4,112 135 - 123,779
Corporate administrative
expenses 6,513 452 - - 6,965
Depreciation and
amortization 106,609 7,494 52 - 114,155
------------- ----------- ---------- ----------- ------------
Operating income 4,074 (3,839) - - 235
Interest expense, net (64,025) (4,807) - - (68,832)
Equity in losses of affiliate (6,020) - - 6,020 -
Other expense (225) (301) - - (526)
Income tax benefit - 2,927 - - 2,927
------------- ----------- ---------- ----------- ------------
Net loss $ (66,196) $ (6,020) $ - $ 6,020 $ (66,196)
============= =========== ========== =========== ============
</TABLE>
F-15
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(8) DEFERRED FINANCING COSTS
The Company refinanced its Senior Credit Facility in December, 1997.
Accordingly, the deferred financing costs related to the initial debt were
written off. The effect of this write-off was a $5,046 charge to expense and was
recorded as an extraordinary item. Additional costs related to the Amended
Credit Facility were recorded as deferred financing costs during 1997.
(9) 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 Amended Credit Facility is based on
floating market rates at December 31, 1998; therefore, there is no material
difference in the fair market value and the carrying value of such debt
instruments. The Notes have an aggregate principal amount of $200,000 with a 11%
coupon rate. The fair value of the Notes at December 31, 1998 is $222,000.
(10) 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 years ended December 31, 1998, 1997 and
1996 was $5,806, $4,065 and $2,365, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1998 are as follows:
Year Ended December 31 --
-------------------------
1999 $ 1,404
2000 1,104
2001 781
2002 646
2003 390
Thereafter 737
------------
$ 5,062
============
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. 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 at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
F-16
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(10) COMMITMENTS AND CONTINGENCIES (continued)
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 rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. 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 Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% 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 periods of up to fifteen
years.
(11) YEAR 2000 COMPLIANCE
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with third
parties having a substantial relationship to its business, including significant
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
Failure to achieve Year 2000 compliance by the Company, its principal suppliers
and certain financial institutions with which it has relationship could
negatively affect the Company's ability to conduct business for an extended
period. There can be no assurances that all Company information technology
systems and components will be fully Year 2000 compliant; in addition, other
companies on which the Company's systems and operations rely may not be fully
compliant on a timely basis, and any such failure could have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(12) SUBSEQUENT EVENT
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
Communications Corporation to sell all outstanding partnership interests of FVP
in exchange for cash, the assumption of certain liabilities and 7,000,000 shares
of Adelphia Class A common stock.
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, 1998 and 1997 and the related statements of
operations, owner's equity and cash flows for the years ended December 31, 1998
and 1997 and 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, 1998 and 1997, and the results of its operations
and its cash flows for the years ended December 31, 1998 and 1997 and for the
period from July 26 (inception) through December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 15, 1999
F-18
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
-----------------------------------
December 31, December 31,
1998 1997
--------------- -----------------
ASSETS
<S> <C> <C>
Cash $ - $ 143
---------- ----------
Total assets $ - $ 143
========== ==========
LIABILITIES AND OWNER'S EQUITY
Payable to FVOP $ 100 $ 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 (200) (57)
---------- ----------
Total owner's equity (100) 43
---------- ----------
Total liabilities and owner's equity $ - $ 143
========== ==========
</TABLE>
See accompanying note to the financial statements.
F-19
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
------------------------------------------------------------
For the Period
For the Year For the Year From July 26, 1996
Ended Ended (Inception) through
December 31, December 31, December 31,
1998 1997 1996
----------------- ---------------------
<S> <C> <C> <C>
Revenue $ - $ - $ -
General and administrative expenses 143 45 12
------------ ----------- -------------
Net loss $ (143) $ (45) $ (12)
============ =========== =============
</TABLE>
See accompanying note to financial statements.
F-20
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OWNER'S EQUITY
<TABLE>
-----------------------------------------------------------
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
Net loss - - (45) (45)
--------- --------- --------- ---------
Balance, December 31, 1997 1 99 (57) 43
Net loss - - (143) (143)
--------- --------- --------- ---------
Balance, December 31, 1998 $ 1 $ 99 $ (200) $ (100)
========= ========= ========= =========
</TABLE>
See accompanying note to financial statements.
F-21
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
-------------------------------------------------------------
For the Period
For the Year For the Year from July 26,
Ended Ended 1996 through
December 31, December 31, December 31,
1998 1997 1996
------------------ ------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (143) $ (45) $ (12)
Decrease in receivable from affiliate - - 100
-------------- -------------- --------------
Net cash flows used in operating activities (143) (45) 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 (143) (45) 188
Cash and cash equivalents, beginning of period 143 188 -
-------------- -------------- --------------
Cash and cash equivalents, end of period $ - $ 143 $ 188
============== ============== ==============
</TABLE>
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.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of FrontierVision Holdings, L.P.:
We have audited the accompanying consolidated balance sheets of FrontierVision
Holdings, L.P. and subsidiaries as of December 31, 1998 and 1997. 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
Holdings, L.P. and subsidiaries as of December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 19, 1999
F-24
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
-------------------------------------
December 31, December 31,
1998 1997
---------------- --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,091 $ 4,728
Accounts receivable, net of allowance for doubtful accounts
of $666 and $767 13,602 8,071
Other receivables 174 -
Prepaid expenses and other 4,046 2,785
Investment in cable television systems, net:
Property and equipment 342,754 247,724
Franchise cost and other intangible assets 820,524 637,725
------------ ------------
Total investment in cable television systems, net 1,163,278 885,449
------------ ------------
Deferred financing costs, net 24,080 24,242
Earnest money deposits 150 2,000
------------ ------------
Total assets $ 1,210,421 $ 927,275
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 18,233 $ 2,770
Accrued liabilities 17,169 15,126
Subscriber prepayments and deposits 3,312 1,828
Accrued interest payable 9,547 5,064
Deferred income taxes 11,856 -
Debt 1,121,142 787,047
------------ ------------
Total liabilities 1,181,259 811,835
------------ ------------
Partners' capital:
FrontierVision Partners, L.P. 29,133 115,325
FrontierVision Holdings, LLC 29 115
------------ ------------
Total partners' capital 29,162 115,440
Commitments
------------ ------------
Total liabilities and partners' capital $ 1,210,421 $ 927,275
============ ============
</TABLE>
See accompanying notes to consolidated balance sheets.
F-25
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(1) THE COMPANY
Organization and Capitalization
FrontierVision Holdings, L.P. ("Holdings" or the "Company"), wholly-owned by
FrontierVision Partners, L.P., a Delaware limited partnership ("FVP"), is a
Delaware limited partnership formed on September 3, 1997 for the purpose of
acting as co-issuer with its wholly-owned subsidiary, FrontierVision Holdings
Capital Corporation ("Holdings Capital"), of $237,650 aggregate principal amount
at maturity of 11 7/8% Senior Discount Notes due 2007 (the "Discount Notes").
FVP contributed to Holdings, both directly and indirectly, all of the
outstanding partnership interests of FrontierVision Operating Partners, L.P.
("FVOP") prior to the issuance of the Discount Notes on September 19, 1997 (the
"Formation Transaction") and, as a result FVOP and its wholly-owned subsidiary,
FrontierVision Capital Corporation ("Capital"), are wholly-owned, consolidated
subsidiaries of Holdings. The Formation Transaction was accounted for at
predecessor cost. As used herein, the "Company" collectively refers to Holdings,
Holdings Capital, FrontierVision Operating Partners, Inc. ("FVOP Inc."), FVOP
and Capital.
On December 2, 1998, Holding along with FrontierVision Holdings Capital II
Corporation ("Holdings Capital II"), co-issued $91,298 aggregate principal
amount at maturity of Discount Notes, Series B. Net proceeds from the issuance
were contributed to FVOP as a capital contribution.
The Company owns and operates cable television systems in three primary
operating clusters - New England, Ohio and Kentucky - with a fourth, smaller
group of cable television systems in the Southeast.
FVOP was initially capitalized in November 1995 with approximately $38 from its
sole limited partner, FVOP Inc., a Delaware corporation, and approximately
$38,300 from at the time its sole general partner, FVP. During the year ended
December 31, 1997, the Company received additional capital contributions of
approximately $37,653 from its partners. These capital contributions and a
portion of the proceeds from the Discount Notes was used by FVOP to repay
certain bank indebtedness with the remainder placed in escrow to finance pending
acquisitions.
Allocation of Profits, Losses and Distributions
Generally, Holdings' 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.
(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.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and those
of its wholly-owned subsidiaries, Holdings Capital, FVOP Inc., FVOP, Capital,
FrontierVision New England Cable, Inc. ("New England"), New England Cable
Television of Massachusetts, Inc. ("NECMA") and FrontierVision Access Partners,
LLC ("Access"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-26
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
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 and construction activities.
Depreciation is computed on a straight-line basis using an average estimated
useful life of 8 years.
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. Such amounts are amortized on a straight-line basis over the
following periods: 15 years for franchise costs (which reflects the Company's
ability to renew existing franchise agreements), 5 years for covenants not to
compete, 7 years for subscriber lists and 15 years for goodwill.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amount of its property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
Deferred Financing Costs and Deferred Bond Issue Costs
Deferred financing costs and deferred bond issue costs are being amortized using
the straight line method over the life of the loans and the bonds. Accumulated
amortization at December 31, 1998 and 1997 is $4,236 and $1,246, respectively.
Derivative Financial Instruments
The Company manages risk arising from fluctuations in interest rates by using
interest rate swap agreements, as required by its credit agreements. These
agreements are treated as off-balance sheet financial instruments. The interest
rate swap agreements are being accounted for as a hedge of the debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
Income Taxes
The Company and its direct and indirect subsidiaries, except for New England,
NECMA, Main Security Surveillance, Inc., FVOP Inc., Capital, Holdings Capital
and Holdings Capital II, are limited partnerships or limited liability companies
and pay no income taxes as entities. All of the income, gains, losses,
deductions and credits of the Company are passed through to its partners.
Nominal taxes are assessed by certain state and local
F-27
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
jurisdictions. The basis in the Company's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1998, the book basis of
the Company's net assets exceeded its tax basis by $43.7 million.
New England, NECMA, Main Security Surveillance, FVOP, Inc., Capital, Holdings
Capital and Holdings Capital II, are corporations and are subject to federal and
state income taxes which have not been significant. Deferred taxes relate
principally to the difference between book and tax basis of the cable television
assets owned by NECMA, partially offset by the tax effect of related net
operating loss carryforwards.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 will not be material.
Reclassification
Certain amounts have been reclassified for comparability.
(3) INVESTMENT IN CABLE TELEVISION SYSTEMS
The Company's investment in cable television systems is comprised of the
following:
<TABLE>
--------------------------------------
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Property and equipment $ 435,531 $ 297,229
Less--accumulated depreciation (92,777) (49,505)
----------- -----------
Property and equipment, net 342,754 247,724
----------- -----------
Franchise costs 717,614 523,096
Covenants not to compete 16,856 14,983
Subscriber lists 146,411 106,270
Goodwill 53,937 44,702
----------- -----------
934,818 689,051
Less--accumulated amortization (114,294) (51,326)
----------- -----------
Franchise costs and other intangible assets, net 820,524 637,725
----------- -----------
Total investment in cable television systems, net $ 1,163,278 $ 885,449
=========== ===========
</TABLE>
F-28
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(4) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since its inception through
December 31, 1998. 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 the
estimated fair values at the respective dates of acquisition. Such allocations
are subject to adjustments as final appraisal information is received by the
Company. Amounts allocated to property and equipment and to intangible assets
will be respectively depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
following table lists the acquisitions and the purchase price for transactions
occurring in the most recent two years.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost (a)
----------------- --------------------------- ------------- --------------------
<S> <C> <C> <C>
Bluegrass Cable Partners, L.P. Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,800
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,800
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,600
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,800
Cox Communications, Inc.("Cox-Central Ohio") Ohio December 19, 1997 $204,100
TVC-Sumpter Limited Partnership and North Oakland Cablevision
Partners Limited Partnership Michigan March 6, 1998 $14,400
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $10,000
New England Cablevision of Massachusetts, Inc. ("NECMA") Massachusetts April 3, 1998 $44,900
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $37,400
Unity Cable Television, Inc. Maine September 30, 1998 $800*
Appalachian Cablevision of Ohio Ohio September 1, 1998 $300
State Cable TV Corporation ("State") Maine, New Hampshire October 23, 1998 $190,200*
Paint Valley Cable Ohio October 30, 1998 $1,900*
CASCO Maine November 30, 1998 $3,200*
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
December 31, 1998.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
---------------------------------------------------
1998 1997 1996
Acquisitions(a) Acquisitions(a) Acquisitions(a)
--------------- --------------- ---------------
<S> <C> <C> <C>
Property and equipment $ 79,526 $ 48,805 $ 169,240
Franchise costs and other intangible assets 244,492 344,490 268,836
--------- --------- ---------
Subtotal 324,018 393,295 438,076
--------- --------- ---------
Net working capital (deficit) 410 (164) (7,107)
Deferred income taxes (14,783) - -
Less - Earnest money deposits applied (2,050) (500) (9,502)
--------- --------- ---------
Total cash paid for acquisitions $ 307,595 $ 392,631 $ 421,467
========= ========= =========
</TABLE>
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
F-29
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(4) ACQUISITIONS AND DISPOSITIONS (continued)
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.
On January 7, 1999, the Company sold certain cable television system assets
located in the Southeast region to Helicon Partners I, LP, for an aggregate
sales price of approximately $5,220.
(5) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
December 31, December 31,
1998 1997
---- ----
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate options
<S> <C> <C>
(7.25% average at December 31, 1998), payable monthly $ 172,000 $ -
Term loans, interest based on various floating libor rate options
(7.46% and 8.33% weighted average at December 31, 1998 and 1997,
respectively), payable monthly 498,125 432,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
11 7/8% Senior Discount Notes due 2007 (c) 249,532 155,047
Capital leases 1,485 -
------------ ------------
Total debt $ 1,121,142 $ 787,047
============ ===========
</TABLE>
(a) Bank Credit Facility.
On December 19, 1997, the Company entered into a Second Amended and
Restated Credit Agreement (the "Amended Credit Facility") increasing the
available senior debt by $535.0 million, for a total availability of
$800.0 million. The amount available under the Amended Credit Facility
includes two term loans of $250.0 million each ("Facility A Term Loan"
and "Facility B Term Loan") and a $300.0 million revolving credit
facility ("Revolving Credit Facility"). The Facility A Term Loan and the
Revolving Credit Facility both mature on September 30, 2005. The entire
outstanding principal amount of the Revolving Credit Facility is due on
September 30, 2005, with escalating principal payments due quarterly
beginning December 31, 1998 under the Facility A Term Loan. The Facility
B Term Loan matures March 31, 2006 with 95% of the principal being repaid
in the last two quarters of the term of the facility.
Under the terms of the Amended Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon a change of
control of the Company and the sale of any of its operating systems. This
obligation may be waived with the consent of the majority of the lenders.
Further, beginning with the year ending December 31, 2001, the Company is
required to make prepayments equal to 50% of its excess cash flow, as
defined in the Amended Credit Facility. The
F-30
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(5) DEBT (continued)
Company also payscommitment fees ranging from 1/2% - 3/8% per annum on
the average unborrowed portion of the total amount available under the
Amended Credit Facility.
The Amended 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 and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
(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 in connection
with the Offering, the Company entered into deferred interest rate
setting agreements to reduce the Company's interest rate exposure in
anticipation of issuing the Notes. The cost of such agreements, amounting
to $1,390, are 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 Capital) 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 Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers, asset
sales and changes in control of the Company.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes.
(c) Senior Discount Notes
On September 19, 1997, Holdings issued, pursuant to a private offering,
the Discount Notes. The Discount Notes were sold at approximately 63.1%
of the stated principal amount at maturity and provided net proceeds of
$144,750, after underwriting fees of approximately $5,250.
On December 2, 1998, Holdings issued, pursuant to a private offering,
the Discount Notes, Series B. The Discount Notes were sold at at
approximately 82.149% of the stated principal amount at maturity and
provided net proceeds of $72,750, after underwriting fees of
approximately $2,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital (collectively, the "Issuers"), ranking pari passu in right of
payment to all existing and future unsecured indebtedness of the
Issuers and will mature on September 15, 2007. The discount on the
Discount Notes is being accreted using the interest method until
September 15, 2001, the date at which cash interest begins to accrue.
Cash interest will accrue at a rate of 11 7/8% per annum and will be
payable each March 15 and September 15, commencing March 15, 2002.
F-31
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(5) DEBT (continued)
The Discount Notes are redeemable at the option of the Issuers, in
whole or in part, at any time on or after September 15, 2001, at
redemption prices set forth in the Indenture for the Discount Notes
(the "Discount Notes Indenture"), plus any unpaid interest, if any, at
the date of the redemption. The Issuers may redeem, prior to September
15, 2001, up to 35% of the principal amount at maturity of the Discount
Notes with the net cash proceeds received from one or more public
equity offerings or strategic equity investments at a redemption prices
set forth in the Discount Notes Indenture, plus any unpaid interest, if
any, at the date of the redemption.
The Discount Notes Indenture has certain restrictions on incurrence of
indebtedness, distributions, mergers, asset sales and changes in
control of Holdings.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes and received compensation in the aggregate of
approximately $3.1 million in connection with the issuance of the Discount
Notes.
(d) Interest Rate Protection Agreements
In order to convert effectively certain of the interest payable at
variable rates under the Amended Credit Facility to interest at fixed
rates, the Company has entered into interest rate swap agreements for
notional amounts totaling $187,500, and maturing between November 15,
1999 and October 7, 2001. According to these agreements, the Company
pays or receives the difference between (1) an average fixed rate of
5.84% and (2) a floating rate of the three month libor applied to the
same $187,500 notional amount every three months during the term of the
interest rate swap agreement. On April 7, 1998, the Company terminated
one of its interest rate swap agreements for a notional amount of
$82,500 and entered into a new interest rate swap agreement for
$100,000.There was no termination fee associated with this transaction.
On April 8, 1998, the Company entered into a collar interest rate swap
agreement ("Collar Agreement") for a notional amount of $100,000,
maturing on January 8, 2001. The Collar Agreement provides for
different exchanges between the Company and the counterparty depending
on the level of the floating three month LIBOR rate (5.32% at December
31, 1998). Such exchanges occur every three months during the term of
the Collar Agreement. The different exchanges are as follows:
(1) When LIBOR is below 5.05%, the Company pays to the counterparty the
difference between the fixed rate of 5.65% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 5.65% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.65% and
LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.65% and 5.05%, the
Collar Agreement has no financial effect.
On October 3, 1997, in order to convert certain of the interest payable
at variable rates under indebtedness, the Company entered into a
forward interest rate swap agreement. This commenced on October 15,
1998, for a notional amount totaling $150,000, maturing on October 15,
2001. According to this agreement, the Company will pay or receive the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every three months during the term of the interest rate swap agreement.
F-32
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(5) DEBT (continued)
Information concerning the Company's interest rate agreements at
December 31, 1998 is as follows:
<TABLE>
Amount to be
Interest rate Notional paid upon
Expiration date to be received amount termination (i)
--------------- -------------- ------ ---------------
<S> <C> <C> <C>
November 15, 1999 5.912% $ 65,000 $ 472.5
November 15, 1999 5.188% 22,500 12.1
January 8, 2001 5.650% 100,000 1,215.3
October 7, 2001 5.940% 100,000 2,731.9
October 15, 2001 6.115% 150,000 4,340.7
------------ -------------
$ 437,500 $ 8,772.5
============ =============
</TABLE>
(i) The estimated amount that the Company would pay to terminate
the agreements on December 31, 1998. This amount takes into
consideration current interest rates, the current
creditworthiness of the counterparties and represents the fair
value of the interest rate agreements.
The debt of the Company, excluding future accretion, matures as follows:
Year Ended December 31 --
-------------------------
1999 $ 11,144
2000 24,575
2001 34,575
2002 44,575
2003 55,825
Thereafter 950,448
--------------
$ 1,121,142
==============
(6) GUARANTOR SUBSIDIARIES
The Indenture for the Discount Notes has been amended to add New England and
NECMA as guarantors ("Guarantor Subsidiaries") of the Discount Notes. The
guaranty is full and unconditional. Separate financial statements of the
Guarantor Subsidiaries are not presented because management believes that they
are not material to investors.
Following is condensed consolidating financial information for the Company:
F-33
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(6) GUARANTOR SUBSIDIARIES (continued)
Balance Sheet as of December 31, 1998
<TABLE>
--------------------------------------------------------------------------------------------
Non-Guarantor
Guarantor Subsidiaries Consolidating Consolidated
Holdings FVOP Subsidiaries Entries Holdings
---------------- --------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 200 $ 4,249 $ 559 $ 83 $ - $ 5,091
Receivables - 18,330 287 288 (5,129) 13,776
Prepaid expenses - 3,929 115 2 - 4,046
Investment in cable
Television systems - 1,137,025 56,574 4,679 (35,000) 1,163,278
Other assets 277,570 24,460 - 269 (278,069) 24,230
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 277,770 $1,187,993 $ 57,535 $ 5,321 $ (318,198) $1,210,421
========== ========== ========== ========== ========== ==========
Accounts payable and
Accrued liabilities $ (924) $ 34,021 $ 6,705 $ 729 $ (5,129) $ 35,402
Subscriber prepayments and deposits - 3,320 (8) - - 3,312
Accrued interest payable - 9,547 - - - 9,547
Deferred income taxes - - 11,859 (3) - 11,856
Debt 249,532 871,610 35,000 - (35,000) 1,121,142
Partners' capital/
Subsidiary equity 29,162 269,495 3,979 4,595 (278,069) 29,162
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
partners' capital $ 277,770 $1,187,993 $ 57,535 $ 5,321 $ (318,198) $1,210,421
========== ========== ========== ========== ========== ==========
</TABLE>
(7) DEFERRED FINANCING COSTS
The Company refinanced its Senior Credit Facility in December, 1997.
Accordingly, the deferred financing costs related to the initial debt were
written off. The effect of this write-off was a $5,046 charge to expense and was
recorded as an extraordinary item. Additional costs related to the Amended
Credit Facility were recorded as deferred financing costs during 1997.
(8) 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 Amended Credit Facility is based on
floating market rates at December 31, 1998; therefore, there is no material
difference in the fair market value and the carrying value of such debt
instruments. The Notes have an aggregate principal amount of $200,000 with a 11%
coupon rate. The fair value for the Notes at December 31, 1998 is $222,000. The
Discount Notes have an aggregate principal amount at maturity of $328,948 with a
11 7/8% coupon. At December 31, 1998, the approximate fair value of the
Company's Discount Notes was $273,030. The fair value of the Notes and Discount
Notes is estimated based on Portal Market quotations of the issue.
F-34
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(9) 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 years ended December 31, 1998, 1997 and
1996 was $5,806, $4,065 and $2,365, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1998 are as follows:
Year Ended December 31 --
-------------------------
1999 $ 1,404
2000 1,104
2001 781
2002 646
2003 390
Thereafter 737
------------
$ 5,062
============
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. 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 at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
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 rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. 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 Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% 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 periods of up to fifteen
years.
(10) YEAR 2000 COMPLIANCE
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with third
parties having a substantial relationship to its business, including significant
F-35
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
Amounts In Thousands
(10) YEAR 2000 COMPLIANCE (continued)
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
Failure to achieve Year 2000 compliance by the Company, its principal suppliers
and certain financial institutions with which it has relationship could
negatively affect the Company's ability to conduct business for an extended
period. There can be no assurances that all Company information technology
systems and components will be fully Year 2000 compliant; in addition, other
companies on which the Company's systems and operations rely may not be fully
compliant on a timely basis, and any such failure could have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(11) SUBSEQUENT EVENT
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
Communications Corporation to sell all outstanding partnership interests of FVP
in exchange for cash, the assumption of certain liabilities and 7,000,000 shares
of Adelphia Class A common stock.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Cox Communications, Inc.
We have audited the accompanying combined statement of net assets of Cox
Communications, Inc.'s ("CCI") Central Ohio Cluster as of December 31, 1996, and
the related combined statements of income, changes in net assets, and cash flows
for the year then ended. These financial statements are the responsibility of
CCI's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Cox
Communications, Inc.'s Central Ohio Cluster at December 31, 1996, and the
combined results of its operations and its cash flows for the year then ended,
in conformity with generally accepted accounting principles.
As discussed in Note 1, CCI sold the assets and certain liabilities of the
Central Ohio Cluster.
DELOITTE & TOUCHE LLP
August 29, 1997
(December 19, 1997 as to the second paragraph in Note 1)
Atlanta, Georgia
F-37
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF NET ASSETS
<TABLE>
-------------------------------------
September 30, December 31,
1997 1996
--------------------------------
(Unaudited)
(Thousands of Dollars)
ASSETS
<S> <C> <C>
Cash $ 28 $ 239
Accounts receivable, less allowance for doubtful
accounts of $87 and $66 2,511 2,310
Net plant and equipment 24,278 24,512
Intangible assets 148,284 151,263
Other assets 853 1,448
-------- --------
Total assets $175,954 $179,772
======== ========
LIABILITIES AND NET ASSETS
Accounts payable and accrued expenses $ 667 $ 1,245
Deferred income 1,416 1,430
Deferred income taxes 62,294 63,442
Other liabilities 399 191
Amounts due to Affiliates 29,571 35,107
-------- --------
Total liabilities 94,347 101,415
Net assets 81,607 78,357
-------- --------
Total liabilities and net assets $175,954 $179,772
======== ========
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF INCOME
<TABLE>
----------------------------------------------------------
Nine Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1996
---------- -------------- -------------
(Unaudited) (Unaudited)
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues $ 25,486 $ 23,389 $ 31,749
Costs and expenses:
Operating 8,387 7,371 10,132
Selling, general and administrative 3,408 3,772 5,143
Depreciation 3,735 3,579 4,846
Amortization 2,979 2,979 3,972
----- ----- -----
Operating income 6,977 5,688 7,656
Interest expense with affiliates (1,443) (1,851) (2,346)
Other, net (25) 6 5
----- ----- -----
Income before income taxes 5,509 3,843 5,315
Income taxes (2,259) (1,576) (2,176)
----- ----- -----
Net income $ 3,250 $ 2,267 $ 3,139
===== ===== =====
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
---------------------
(Thousands of Dollars)
---------------------
Balance at December 31, 1995 $ 75,218
Net income 3,139
------
Balance at December 31, 1996 78,357
Net income (Unaudited) 3,250
------
Balance at September 30, 1997 (Unaudited) $ 81,607
======
See notes to combined financial statements.
F-40
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
----------------------------------------------------
Nine Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
1997 1996 1996
--------------- -------------- -----------
(Unaudited) (Unaudited)
(Thousands of Dollars)
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 3,250 $ 2,267 $ 3,139
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation 3,735 3,579 4,846
Amortization 2,979 2,979 3,972
Deferred income taxes (1,148) (1,245) (1,849)
(Increase) decrease in accounts receivable (201) 155 (120)
Decrease in other assets 595 348 206
Increase (decrease) in accounts payable and accrued expenses (592) 289 803
Other, net 208 (20) (42)
-------- -------- --------
Net cash provided by operating activities 8,826 8,352 10,955
-------- -------- --------
Cash flows from investing activities
Capital expenditures (3,501) (2,549) (2,939)
-------- -------- --------
Net cash used in investing activities (3,501) (2,549) (2,939)
-------- -------- --------
Cash flows from financing activities
Decrease in amounts due to Affiliates (5,536) (4,933) (7,777)
-------- -------- --------
Net cash provided by financing activities (5,536) (4,933) (7,777)
-------- -------- --------
Net increase (decrease) in cash (211) 870 239
Cash at beginning of period 239 -- --
-------- -------- --------
Cash at end of period $ 28 $ 870 $ 239
======== ======== ========
Cash paid during the period for:
Interest $ 17 $ 11 $ 14
Income taxes 788 852 905
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements represent the combined operations of Cox
Communications, Inc.'s ("CCI") cable television systems serving eight
communities in Central Ohio (collectively referred to as the "Central Ohio
Cluster"). These cable television systems were acquired by CCI, an indirect
75.3% 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 historical combined
financial statements do not necessarily reflect the results of operations or
financial position that would have existed had the Central Ohio Cluster been an
independent company. All significant intercompany accounts and transactions have
been eliminated in the combined financial statements of the Central Ohio
Cluster.
On December 19, 1997, CCI sold the assets and certain liabilities of the Central
Ohio Cluster to FrontierVision Operating Partners, L.P. for approximately $204.0
million.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Central Ohio Cluster bills its 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 75 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 services are provided.
Plant and Equipment
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of five to 20 years for building and building
improvements, five to 12 years for cable television systems and three 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 Central Ohio Cluster's labor and at actual cost for
materials and outside labor. Expenditures for maintenance and repairs are
charged to operating expense as incurred. At the time of retirement, sale or
other disposition of property, the original cost and related accumulated
depreciation are written off.
Intangible Assets
Intangible assets consist of goodwill and cable television franchise rights
recorded in connection with the acquisition of the Central Ohio Cluster from
TMCT and are amortized on a straight-line basis over 40 years. The Central Ohio
Cluster assesses 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. The Central Ohio Cluster also evaluates the
amortization period of intangible assets to determine whether events or
circumstances warrant revised estimated of useful lives.
F-42
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
Effective January 1, 1996, the Central Ohio Cluster adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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 amounts
or fair value less cost to sell.
Income Taxes
The accounts of the Central Ohio Cluster are included in the consolidated
federal income tax return and certain state income tax returns of CEI. Current
federal and state income tax expenses and benefits have been allocated on a
separate return basis to the Central Ohio Cluster based on the current year tax
effects of the inclusion of its income, expenses and credits in the consolidated
income tax returns of CEI or based on separate state income tax returns.
Deferred income tax assets and liabilities arise from temporary differences in
the financial reporting and income tax basis of assets and liabilities. These
differences primarily result from property and intangible assets.
Fees and Taxes
The Central Ohio Cluster incurs various fees and taxes in connection with the
operations of its 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 State of Ohio. A portion
of these fees and taxes are passed through to the Central Ohio Cluster's
subscribers. Amounts collected from subscribers are recorded as a reduction of
operating expenses.
Pension, Postretirement and Postemployment Benefits
CCI generally provides defined pension benefits to substantially all employees
based on years of service and compensation during those years. CCI also provides
certain health care and life insurance benefits to substantially all retirees
and employees through certain CEI plans. Expense related to the CCI and CEI
plans is allocated to the Central Ohio Cluster through the intercompany account.
The amount of the allocations is generally based on actuarial determinations of
the effects of the Central Ohio Cluster employees' participation in the plans.
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.
F-43
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited combined financial statements as of and for the nine months ended
September 30, 1997 and 1996, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for this
period. Operating results for nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
(3) CASH MANAGEMENT SYSTEM
The Central Ohio Cluster participates 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.
(4) PLANT AND EQUIPMENT
----------------- -----------------
September 30, December 31,
1997 1996
-------- ---------
(In Thousands)
Land $ 313 $ 311
Buildings and building improvements 990 1,033
Transmission and distribution plant 43,531 41,329
Miscellaneous equipment 2,343 1,478
Construction in progress 531 825
-------- --------
Plant and equipment, at cost 47,708 44,976
Less accumulated depreciation (23,430) (20,464)
-------- --------
Net plant and equipment $ 24,278 $ 24,512
======== ========
(5) INTANGIBLE ASSETS
----------------------------------
September 30, December 31,
1997 1996
---------- ---------
(In Thousands)
Goodwill $ 158,876 $ 158,876
Less accumulated amortization (10,592) (7,613)
--------- ---------
Net intangible assets $ 148,284 $ 151,263
========= =========
F-44
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(6) INCOME TAXES
Current and deferred income tax expenses (benefits) are as follows:
------------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
------- -------
(In Thousands)
Current:
Federal $ 2,906 $ 3,289
State 520 736
------- -------
Total current 3,426 4,025
------- -------
Deferred:
Federal (1,119) (1,385)
State (48) (464)
------- -------
Total deferred (1,167) (1,849)
------- -------
Net income tax expense $ 2,259 $ 2,176
======= =======
Income tax expense differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to income (loss) before income taxes as
a result of the following items:
<TABLE>
-------------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
------ ------
(In Thousands)
Computed tax expense at federal statutory
<S> <C> <C>
rates on income before income taxes $1,928 $1,860
State income taxes, net of federal tax benefit 307 177
Other, net 24 139
------ ------
Net income tax expense $2,259 $2,176
====== ======
</TABLE>
Significant components of the net deferred tax liability consist of the
following:
---------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
-------- --------
(Thousands of Dollars)
Plant and equipment $ (5,618) $ (5,787)
Franchise rights (57,569) (58,638)
Other 893 983
-------- --------
Net deferred tax liability $(62,294) $(63,442)
======== ========
(7) RETIREMENT PLANS
Qualified Pension Plan
Effective January 1, 1996, CCI established the Cox Communications, Inc. Pension
Plan (the "CCI Plan"), a qualified noncontributory defined benefit pension plan
for substantially all of CCI's employees including the Central Ohio Cluster's
employees. Plan assets consist primarily of common stock, investment-
F-45
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(7) RETIREMENT PLANS (CONTINUED)
grade corporate bonds, cash and cash equivalents and U.S. government
obligations. The CCI Plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with CCI and compensation rates
near retirement. The funded status of the portion of the CCI Plan covering the
employees of the Central Ohio Cluster is not determinable. The fair value of the
CCI Plan assets was greater than the projected benefit obligation as of December
31, 1996.
Total pension expense attributable to the Central Ohio Cluster employees'
participation in the CCI Plan was $33,000 for the nine month period ended
September 30, 1997 and $158,000 for the year ended December 31, 1996.
The assumptions used in the actuarial computations at December 31, 1996 were:
Discount rate 7.75%
Rate of increase in compensation levels 5.50%
Expected long-term rate of return on plan assets 9.00%
Other Retirement Plans
CEI provides certain health care and life insurance benefits to substantially
all retirees of CEI and its subsidiaries. Postretirement expense allocated to
the Central Ohio Cluster by CEI was $13,000 for the nine month period ended
September 30, 1997 and $15,000 for the year ended December 31, 1996. CEI has
been contributing additional amounts to the Cox Pension Plan Trust to fund
health care benefits pursuant to Section 401(h) of the Internal Revenue Code.
CEI is funding benefits to the extent contributions are tax deductible. In
general, retiree health benefits are paid as covered expenses are incurred. The
funded status of the postretirement plan covering the employees of the Central
Ohio Cluster is not determinable. The accumulated postretirement benefit
obligation for the postretirement plan of CEI substantially exceeded the fair
value of assets held in the Cox Pension Plan Trust at December 31, 1996.
In addition, substantially all of Central Ohio Cluster's employees are eligible
to participate in the savings and investment plan of CEI. Under the terms of the
plan, the Central Ohio Cluster matches 50% of employee contributions up to a
maximum of 6% of the employee's base salary. The Central Ohio Cluster's expense
under the plan was $57,000 for the nine-month period ended September 30, 1997
and $83,000 for the year ended December 31, 1996.
(8) TRANSACTIONS WITH AFFILIATED COMPANIES
The Central Ohio Cluster borrows funds for working capital and other needs from
CCI. Certain management services are provided to the Central Ohio Cluster by CCI
and CEI. Such services include legal, corporate secretarial, tax, treasury,
internal audit, risk management, benefits administration and other support
services. The Central Ohio Cluster was allocated expenses for the nine months
ended September 30, 1997 and for the year ended December 31, 1996 of
approximately of $604,000 and $1,320,000, respectively, related to these
services. Allocated expenses are based on management's estimate of expenses
related to the services provided to the Central Ohio Cluster in relation to
those provided to other divisions of CCI and CEI. 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 Central Ohio Cluster contracted directly with third parties. Management
has not made a
F-46
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(8) TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)
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 Central Ohio Cluster various transactions, including
those described above. At December 31, 1996 and September 30, 1997, outstanding
amounts due to affiliates bear interest at fifty basis points above CCI's
commercial paper borrowings. This rate as of September 30, 1997 and December 31,
1996 was 6.32% and 6.6%, respectively.
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Central Ohio Cluster has estimated the fair
value of its intercompany advances and notes payable. Given the short-term
nature of these advances, the carrying amounts reported in the statements of net
assets approximate fair value.
(9) COMMITMENTS AND CONTINGENCIES
The Central Ohio Cluster leases office facilities and various items of equipment
under noncancelable operating leases. Rental expense under operating leases
amounted to $259,000 for the nine month period ended September 30, 1997 and
$331,000 for the year ended December 31, 1996. Future minimum lease payments as
of September 30, 1997 for all noncancelable operating leases are as follows:
1997 $ 18
1998 40
1999 31
2000 31
2001 31
2002 7
------
Total $ 158
======
The FCC has adopted rate regulations required by the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). Beginning in
September 1995, the FCC authorized a method of implementing rate adjustments
which allows cable operators to increase rates for programming annually on the
basis of proposed increases in external costs rather than on the basis of cost
increases incurred in the preceding quarter. Local franchising authorities have
the ability to obtain certification from the FCC to regulate rates charged by
the Central Ohio Cluster for basic cable services and associated basic cable
services equipment. In addition, the rates charged by the Central Ohio Cluster
for cable programming services ("CPS") can be regulated by the FCC should any
franchising authority of the Central Ohio Cluster file rate complaints with the
FCC. To date, the local franchising authorities for the Central Ohio Cluster
have not become certified by the FCC to regulate rates for basic cable service
and associated basic cable services equipment and no complaints have been filed
by customers with the FCC regarding rates charged for CPS. Though rates for
basic and CPS are presently not regulated, management of the Central Ohio
Cluster believes the rates charged for basic and CPS comply in all material
respects with the 1992 Cable Act and that should such rates become regulated in
the future the impact on the financial position and results of operation of the
Central Ohio Cluster would not be material.
F-47
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 1, 1996, Congress passed the Telecommunications Act of 1996 (the
"1996 Act"), which was signed into law by the President on February 8, 1996.
Among other provisions, the 1996 Act deregulates the 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.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To State Cable TV Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of State Cable TV
Corporation and Subsidiary as of December 31, 1997, and the related consolidated
statement of operations and deficit and cash flows for the year then ended.
These consolidated financial statements referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of State
Cable TV Corporation and Subsidiary as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Boston, Massachusetts
March 13, 1998
F-49
<PAGE>
STATE CABLE TV CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
Assets
December 31, September 30,
1997 1998
(Unaudited)
Current Assets:
<S> <C> <C>
Cash $ 605,832 $ 915,676
Subscriber receivables, net of allowance for doubtful accounts of $706,140 at 1,688,694 1,505,602
December, 31 1997 and $1,150,567 at September 30, 1998 (unaudited)
Other current assets 440,594 474,408
--------------- ---------------
Total current assets 2,735,120 2,895,686
--------------- ---------------
Property, Plant and Equipment, at cost:
Land and building held for sale 383,219 383,219
Land 235,674 235,674
Building and building improvements 2,317,728 2,386,357
Cable TV equipment 56,274,822 60,072,379
Office equipment 1,558,486 1,666,208
Vehicles 2,017,865 2,212,835
--------------- ---------------
62,787,794 66,956,672
Less-Accumulated depreciation (40,957,381) (44,491,861)
--------------- ---------------
21,830,413 22,464,811
Construction in process 805,422 -
--------------- ---------------
22,635,835 22,464,811
Notes Receivable from Affiliate (Note 8) 10,115,617 11,070,626
Deferred Income on Installment Sale (Note 8) (7,291,147) (7,684,897)
--------------- ---------------
Total notes receivable 2,824,470 3,385,729
--------------- ---------------
Intangible Assets, net
Franchises 2,420,280 2,221,019
Goodwill 285,409 276,877
Loan costs 1,200,807 1,011,805
--------------- ---------------
3,906,496 3,509,701
--------------- ---------------
Other Assets (Note 3) 93,543 -
--------------- ---------------
Total assets $ 32,195,464 $ 32,255,927
=============== ===============
Liabilities and Shareholders' Deficit
Current Liabilities:
Current maturities of long-term debt $ 5,254,068 $ 7,011,576
Accounts payable 2,845,415 2,438,018
Accrued expenses 1,856,008 1,719,585
Subscriptions received in advance 351,032 346,694
--------------- ---------------
Total current liabilities 10,306,523 11,515,873
--------------- ---------------
Long-Term Debt, net of current maturities 55,704,532 54,804,435
Deferred State Tax Payable 18,355 -
Other Long-Term Liabilities 102,579 311,829
--------------- ---------------
Total liabilities 66,131,989 66,632,137
--------------- ---------------
Commitments and Contingencies (Note 5)
Minority Interest 2,082,054 2,665,322
Shareholders' Deficit:
Common stock, par value $1.00 per share, authorized, issued and outstanding, 1,822 1,822 1,822
shares
Accumulated deficit (36,020,401) (37,043,354)
--------------- ---------------
Total shareholders' deficit (36,018,579) (37,041,532)
--------------- ---------------
Total liabilities and shareholders' deficit $ 32,195,464 $ 32,255,927
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-50
<PAGE>
STATE CABLE TV CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations and Deficit
<TABLE>
Year Ended Nine Months Ended Three Months Ended
December 31, September 30, September 30,
1997 1997 1998 1997 1998
(Unaudited) (Unaudited)
Gross Service Revenue:
<S> <C> <C> <C> <C> <C>
Subscriber revenue $ 22,327,282 $ 16,508,075 $ 18,500,996 $ 5,736,622 $ 6,380,173
Premium services and pay per view revenue 3,274,880 2,260,703 2,488,962 826,772 958,136
Advertising revenue 1,441,866 946,370 981,967 276,455 376,642
Installation revenue 594,663 469,068 371,564 136,114 123,544
Other revenue 702,014 608,805 655,733 215,741 350,609
------------- ------------- ------------ ------------- ------------
28,340,705 20,793,021 23,126,355 7,191,704 8,089,104
Programming Costs 5,434,797 3,905,225 4,689,751 1,391,621 1,648,373
------------- ------------- ------------ ------------- ------------
Net revenue (after programming costs) 22,905,908 16,887,796 18,436,604 5,800,083 6,440,731
------------- ------------- ------------ ------------- ------------
Operating Expenses:
General and adminstrative 6,009,795 4,652,460 5,248,940 1,569,971 1,824,686
Production and advertising 3,848,847 2,869,849 2,930,704 912,574 984,781
Depreciation 4,259,092 3,653,200 3,534,480 1,238,400 1,178,160
Ice storm damage - - 1,595,567 - 71,465
------------- ------------- ------------ ------------- ------------
14,117,734 11,175,509 13,309,691 3,720,945 4,059,092
------------- ------------- ------------ ------------- ------------
Income from Operations Before Other Expenses 8,788,174 5,712,287 5,126,913 2,079,138 2,381,639
(Income)
Other Expenses (Income):
Interest expense 4,875,201 3,556,976 3,954,002 1,249,541 1,464,951
Management fees to affiliated company 687,177 506,039 566,316 174,000 188,772
Amortization of intangible assets 626,813 368,014 396,917 126,792 132,306
Gain on sale of equipment (31,051) (6,737) - - -
Interest income (71,117) (24,517) (31,693) (7,453) (12,114)
Minority interest in income of Better Cable 768,594 588,255 583,268 207,994 245,251
------------- ------------- ------------ ------------- ------------
TV Company
6,855,617 4,988,030 5,126,913 1,750,874 2,019,166
------------- ------------- ------------ ------------- ------------
Income (Loss) Before State Income Taxes 1,932,557 724,257 (341,897) 328,264 362,473
Provision for State Income Taxes 18,000 - - - -
------------- ------------- ------------ ------------- ------------
Net income (Loss) 1,914,557 640,714 (341,897) 328,264 362,473
------------- ------------- ------------ ------------- ------------
Accumulated Deficit, beginning of period (36,780,806) (36,780,806) (36,020,401) (36,384,813) (36,724,771)
Distribution to Shareholders (Note 2(g)) (1,154,152) (1,536,000) (681,056) (1,536,000) (681,056)
------------- ------------- ------------ ------------- ------------
Accumulated Deficit, end of period $ (36,020,401) $ (37,592,549) $ (37,043,354)$(37,592,549)$(37,043,354)
============= ============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-51
<PAGE>
STATE CABLE TV CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Year Ended Nine Months Ended
December 31, September 30,
1997 1997 1998
(Unaudited)
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income (loss) $ 1,914,557 $ 640,714 $ (341,897)
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 4,885,905 3,866,493 3,931,397
Provision for bad debts 284,565 855,381 444,427
Gain on sale of equipment (31,051) (6,737) -
Minority interest 386,746 588,255 583,268
Deferred taxes (1,645) (20,000) (18,355)
Changes in operating assets and liabilities, net of effects
from purchase of Pegasus-
Increase in subscriber receivables (305,301) (618,571) (261,335)
Increase in other current assets (536,180) (446,422) (33,814)
Increase in notes receivable (2,024,992) (340,836) (561,259)
Decrease in other assets 377,242 440,785 93,543
Increase (decrease) in accounts payable 551,984 828,584 (407,397)
Increase (decrease) in accrued expenses 223,702 215,148 (136,423)
Increase in subscriptions received in advance 36,526 118,021 204,912
--------------- --------------- ---------------
Net cash provided by operating activities 5,762,058 6,120,815 3,497,067
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (7,463,502) (11,481,424) (3,363,456)
Payment for purchase of Pegasus, net of cash acquired (6,838,183) - -
Acquisition of intangible assets, exclusive of effects from (261,374) (2,354,232) (122)
--------------- --------------- ---------------
purchase of Pegasus
Net cash used in investing activities (14,563,059) (13,835,656) (3,363,578)
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Repayment of long-term debt (3,132,621) (2,224,971) (3,942,589)
Proceeds from long-term debt 13,200,000 11,500,000 4,800,000
Distributions to shareholders (1,154,152) (1,536,000) (681,056)
--------------- --------------- ---------------
Net cash provided by financing activities 8,913,227 7,739,029 176,355
--------------- --------------- ---------------
Net Increase in Cash 112,226 24,188 309,844
Cash, beginning of year 493,606 493,606 605,832
--------------- --------------- ---------------
Cash, end of year $ 605,832 $ 517,794 $ 915,676
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for-
Interest $ 4,681,103 $ 3,423,872 $ 3,904,574
=============== =============== ===============
Income taxes 23,634 - -
=============== =============== ===============
Supplemental Disclosures of Noncash Investing Activities:
Increase in promissory note receivable and deferred income on 525,000 393,750 393,750
=============== =============== ===============
installment sale due to accrued interest
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-52
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(1) Organization
State Cable TV Corporation and Subsidiary (the Company) is engaged
primarily in providing cable television and related services to the Maine
and New Hampshire areas.
On January 31, 1997, the Company purchased substantially all of the
assets and assumed current liabilities of Pegasus, a cable television
company that provides service to areas in the State of New Hampshire. The
total purchase price was $7,135,000, of which $300,000 was paid in 1996
and is included in deposits and other assets at December 31, 1996. The
balance due was paid utilizing the Company's credit facility in 1997. The
transaction was treated as a purchase. The fair market value of the
assets approximated the purchase price. The value of the acquired
franchises was approximately $2,000,000 which is being amortized over 10
years, which represents the lives of the franchise agreements.
(2) Summary of Significant Accounting Policies
The accompanying financial statements reflect the application of
accounting policies described in this note and elsewhere in the
accompanying notes to consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and Better Cable TV Company, its 60%-owned subsidiary (see
Note 9). Material intercompany transactions and accounts have been
eliminated in consolidation. The shareholders of the Company are
the partners of a partnership (the Affiliate) that owns the
minority interest of $2,082,054 as of December 31, 1997,
representing a 40% interest in the subsidiary. Changes in minority
interest reflect Better Cable TV Company's capital adjusted by its
portion of the net gain or loss.
(b) 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 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.
(c) Property, Plant and Equipment
Property, plant and equipment is carried at cost and is being
depreciated under the straight-line method over the estimated
useful lives of the assets which range from 5 to 33 years as
described below. Repair and maintenance costs are charged to
expense as incurred.
Building and building improvements....................20-33 years
Cable TV equipment......................................5-7 years
Office equipment..........................................5 years
Vehicles..................................................5 years
F-53
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
Property and equipment include the following amounts held under
capital leases:
December 31, September 30,
1997 1998
Land $ 169,000 $ 169,000
Building and building improvements 1,606,422 1,644,230
Less--Accumulated depreciation (160,403) (240,544)
---------- ----------
$1,615,019 $1,572,686
========== ==========
(d) Intangible Assets
Intangible assets are carried at cost and are being amortized
under the straight-line method over the periods indicated in Note
3.
(e) Investment in an Affiliate
Investment in a 33-1/3%-owned affiliate, Pinetree Microwave
Corporation, is carried under the equity method and classified in
other assets in the accompanying balance sheet. The assets,
liabilities and results of operations of Pinetree are not
significant to the Company. During 1998, the Company reevaluated
the value of the asset and wrote it down to zero.
(f) Revenue Recognition
Operating revenues for cable services are recognized as services
are rendered. Revenues from services contracts are recognized in
earnings over the terms of the contract.
(g) Income Taxes
The Company has elected subchapter S Corporation status for
federal and the State of Maine income tax purposes. Provisions for
federal and Maine income taxes have not been made as the Company's
operations are included pro rata in the individual income tax
returns of its shareholders. A provision for New Hampshire income
taxes has been made in the accompanying consolidated financial
statements due to the fact New Hampshire does not recognize the
Company's S corporation status. During 1997, the Company made
distributions to shareholders of $1,154,152 to pay their estimated
tax payments.
The Company provides for New Hampshire income taxes under the
liability method in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets
and liabilities, as measured by the enacted tax rates expected to
be in effect when these differences reverse. Temporary differences
relate mainly to depreciation and deferred interest.
F-54
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
The components of the provision for income taxes for December 31,
1997 is as follows:
December 31,
1997
Current-
State $ 20,500
Deferred-
State (2,500)
-----------
Total provision (benefit) $ 18,000
===========
(h) Cash
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, requires disclosure of any
significant off-balance-sheet and credit risk concentrations. The
Company has no significant off-balance-sheet concentration of
credit risks such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. Financial instruments that
subject the Company to credit risk consist primarily of cash and
accounts receivable.
(j) Long-Lived Assets
The Company has assessed the realizability of its long-lived
assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of. As of December 31, 1997 and September 30, 1998,
management believes there has been no impairment of long-lived
assets.
(k) Interim Financial Statements (Unaudited)
The accompan ying consolidated balance sheet as of September 30,
1998, is unaudited, but in the opinion of management, includes all
adjustments consisting of normal recurring adjustments necessary
for fair presentation of results for the interim period. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been omitted with respect to
the nine months ended, September, 30, 1998, although the Company
believes that the disclosures included are adequate to make the
information presented not misleading. Results for the nine months
ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1998.
F-55
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
(3) Intangible Assets
Intangible assets consist of the following:
<TABLE>
December 31, September 30, Amortization
1997 1998 Period
in Years
<S> <C> <C> <C>
Customer lists $ 2,858,218 $ 2,858,218 7
Franchises 4,348,947 4,349,069 10-15
Restrictive covenants 317,921 317,921 2-10
Goodwill 454,013 454,013 40
Loan costs 1,770,629 1,770,629 5-8
Other 253,476 253,476 5-10
-------------- --------------
10,003,204 10,003,326
Less--Accumulated amortization 6,096,708 6,493,625
-------------- --------------
$ 3,906,496 $ 3,509,701
============== ==============
</TABLE>
(4) Long-Term Debt
Long-term debt consists of the following:
December 31, September 30,
1997 1998
Term loan $ 42,276,500 $ 38,363,675
Revolving line of credit 17,200,000 22,000,000
Capital lease 1,482,100 1,452,336
---------------- ----------------
60,958,600 61,816,011
Less--Current maturities 5,254,068 7,011,576
---------------- ----------------
$ 55,704,532 $ 54,804,435
================ ================
The Company has a $67,000,000 credit facility (the Facility) with The
First National Bank of Chicago (First Chicago) as agent for the lending
institutions (the Lenders) under a credit agreement (Credit Agreement).
The Facility consists of a $47,000,000 amortizing term loan maturing on
December 31, 2002 and a $20,000,000 revolving credit facility terminating
on March 31, 2004. The revolving line of credit is for capital
expenditures, system acquisitions and other general corporate purposes
subject to limitations as defined in the agreement. The Facility is
collateralized by all of the Company's assets. In addition, the
shareholders pledge the stock of the Company and the partnership interest
in Better Cable TV Company as collateral. The 40% minority interest in
Better Cable TV Company has also been pledged as collateral. The Credit
Agreement requires the Company to meet various financial covenants and as
of December 31, 1997 the Company was in compliance with these covenants.
The Credit Agreement limits the payments for capital expenditures,
management fees and dividends. The Credit Agreement requires that the
term loan be repaid by quarterly installments. The repayments are based
upon a percentage of the amount outstanding as of June 30, 1997 and these
percentages increase annually until 2002 when it decreases. Advances
under the revolving credit facility are payable quarterly beginning March
31, 2003. In addition, mandatory prepayments of an amount equal to 50% of
the excess cash flows, if positive, for the most recently ended fiscal
year are required under the revolving credit facility.
F-56
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
The Credit Agreement requires the Company to pay a commitment fee of .30%
and .40% for Facilities B and C, respectively, per annum on the average
daily unborrowed portion of the revolving credit facility. Fees paid
under this arrangement amounted to $20,466 in 1997. In addition, the
Company paid management fees associated with the agreement of $30,000 in
1997.
The Credit Agreement requires interest based on the type of advance
requested by the Company, either floating rate or Eurodollar, plus the
applicable margin, as defined in the Credit Agreement. The interest rates
at December 31, 1997 for the Facility ranged from 7.99% to 8.23% with a
weighted average rate of 8.05%.
Maturities of long-term debt are as follows:
Year Ending December 31, Amount
1998 $ 5,254,068
1999 7,602,643
2000 9,320,371
2001 10,410,565
2002 9,972,788
Thereafter 18,398,165
--------------
$ 60,958,600
==============
(5) Commitments and Contingencies
(a) Leases
The Company leases telephone and utility poles at a current annual
rental of approximately $914,000. The leases are one year
self-renewing agreements.
The Company is also obligated under leases with an affiliate and
others for microwave relay services and tower sites, the latest
expiring in 2079. The Company entered into a capital lease for its
current office location expiring in 2011, with aggregate monthly
payments of approximately $14,000. The minimum annual payments
under the leases are approximately as follows:
F-57
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
Operating Capital Lease
Leases
1998 $ 103,678 $ 168,861
1999 26,638 174,642
2000 27,143 178,954
2001 27,672 184,323
2002 28,228 189,852
Thereafter 288,658 1,697,798
---------- -----------
$ 502,017
==========
Total minimum future payments 2,594,430
Less--Amounts representing interest 1,112,330
-----------
Present value of net minimum lease 1,482,100
payments
Less--Current maturity 37,147
-----------
$ 1,444,953
===========
Rent expense, including pole attachments, charged to operations
amounted to $974,521 for the year ended, December 31, 1997 and
$763,427 for the nine months ended, September 30, 1998.
(b) Litigation
In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has
meritorious defenses to all claims, and, in its opinion, all
litigation currently pending or threatened will not have a
material adverse effect on the Company's financial position or
results of operations.
(6) Due to Affiliate and Other Related Party Transactions
(a) Affiliate
Fees for management services provided by its Affiliate amounted to
$687,177 in 1997.
Included in accounts payable and accrued expenses at December 31,
1997 was approximately $753,000 due to the Company's Affiliates.
(b) Aurora
The Company's shareholders are majority shareholders in Aurora
Telecommunications, LLC (Aurora). The Company leases fiber lines
to Aurora under seven-year operating leases. Lease income amounted
to $471 in 1997.
F-58
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
The Company issued a revolving credit line to Aurora with maximum
borrowings of $3,000,000 at an applicable federal mid-term rate
(6.02% at December 31, 1997). The credit line expires and is due
September 1, 2003. At December 31, 1997, the outstanding principle
balance due from Aurora was $1,991,002 with accrued interest of
$28,903.
Under a separate note to obtain a 5% owned investment, Aurora
issued a $5,000 note payable at an annual compounded interest rate
of 7% to the Company. The note is due and payable April 30, 1998.
Accrued interest on this note was $87 at December 31, 1997.
(7) Pension
The Company adopted a defined contribution plan, which covers
substantially all employees. Participants are fully vested after five
years. Annual contributions are based upon 5% of the participants'
compensation earned during the plan year.
The Company also has a 401(k) plan, which substantially all employees are
eligible to participate in. Participants are fully vested as to all
contributions made to the plan. The Company matches 50% of employee
contributions up to the first 4%. Expenses related to the plans charged
to operations amounted to $202,951 in 1997.
(8) Sale of Partnership Interest
On November 15, 1996, the Company sold 20% of their partnership interest
in Better Cable TV to an affiliate for a $7,500,000 promissory note
maturing on March 31, 2004 bearing interest at 7% per annum. This sale is
being treated as an installment sale for both financial reporting and
income tax purposes resulting in a deferred gain of $6,700,522. No gain
was recognized during 1997. For financial reporting purposes, accrued
interest of $590,625 for the year ended, December 31, 1997 and $984,375
for the nine months ended, September 30, 1998, is being deferred.
(9) Disclosure of Fair Market Value of Financial Instruments
The carrying amounts of cash approximate fair value because of the short
maturity of these investments. The carrying amounts of the revolving
notes receivable and long-term debt approximates fair value due to the
variable rates of these instruments. The fair value of the 7% note
receivable is estimated based on currently quoted market prices for
similar types of borrowing arrangements.
The estimated fair value of the Company's financial instruments as of
December 31, 1997 are as follows (dollars in thousands):
Carrying Value Fair
Value
Cash $ 605,832 $ 605,832
Revolving note receivable 2,019,905 2,019,905
7% note receivable 8,095,712 9,413,619
Long-term debt 60,958,600 60,958,600
F-59
<PAGE>
State Cable TV Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Period)
(Continued)
(10) Other Events
(a) Subsequent Event
In January 1998, an ice storm severely damaged cable lines of the
Company in the Maine systems. The resulting loss of $1,595,567
reflects damages incurred.
(b) Other Developments
On February 6, 1998, the Company signed a nonbinding letter of
intent with Heathrow Land Company, L.P. (HLC) whereby the Company
and HLC agreed in principle to form a limited liability company
(LLC) to own and operate the cable television system currently
operated by Heathrow Cable in and around the private community of
Heathrow, Florida. The terms of the letter of intent provide that
the Company will pay $1,350,000 for its 80% interest in the LLC.
Upon HLC's contribution or sale of the system and the assets to
the LLC, HLC will receive that portion of the purchase price
available after payment for the Bell South assets and any
necessary working capital requirements of the LLC while becoming a
20% owner of the LLC.
(c) Sale to FrontierVision Operating Partners, L.P.
On June 24, 1998, the Company signed an asset purchase agreement
with FrontierVision Operating Partners, L.P. whereby the Company
agreed to sell the majority of its State Cable TV and Better Cable
TV assets to FrontierVision Operating Partners, L.P. for a base
price of $188,750,000. The Company closed on this sale, subject to
certain purchase price adjustments, on October 22, 1998.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New England Cablevision of Massachusetts, Inc.
We have audited the accompanying balance sheets of New England Cablevision of
Massachusetts, Inc. for the years ended December 31, 1997 and 1996, and the
related statements of earnings, changes in stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New England Cablevision of
Massachusetts, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
February 11, 1998 /s/ Baker Newman & Noyes
Portland, Maine Limited Liability Company
F-61
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
March 31, December 31,
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
Cash $ 98,861 $ 389,703 $ 345,126
Investments available for sale (note 3) 3,812,685 6,242,464 5,899,258
Investments held to maturity (note 3) 4,100,000 9,600,000 12,838,779
Accounts receivable, less allowance for
doubtful accounts of $60,112 in 1998,
$76,450 in 1997 and $51,400 in 1996 58,087 120,529 154,626
Accrued interest receivable 62,177 100,958 97,870
Prepaid expenses 149,190 79,055 109,665
Property, plant and equipment, net:
Property and equipment 43,069 43,069 43,069
Distribution equipment 18,755,678 15,835,849 14,704,528
Support equipment, including construction
in progress 2,097,744 3,573,833 644,679
-------------- -------------- --------------
20,896,491 19,452,751 15,392,276
Less accumulated depreciation 12,004,363 11,692,462 10,532,180
-------------- -------------- --------------
Property, plant and equipment, net 8,892,128 7,760,289 4,860,096
-------------- -------------- --------------
$ 17,173,128 $ 24,292,998 $ 24,305,420
============== ============== ==============
</TABLE>
F-62
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
March 31, December 31,
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
Accounts payable $ 357,213 $ 716,957 $ 445,932
Accrued expenses 49,318 355,311 263,363
Unearned revenue 141,855 131,740 147,733
Deferred income taxes (note 5) 859,000 855,000 864,000
-------------- -------------- --------------
Total liabilities 1,407,386 2,059,008 1,721,028
Commitments (notes 4, 5, 7 and 8)
Stockholders' equity:
Common stock, par value $1.00 per share.
Authorized 500,000 shares; issued and
outstanding 464,212 shares 464,212 464,212 464,212
Additional paid-in capital 11,269,195 17,819,736 17,819,736
Retained earnings 4,032,335 3,950,042 4,300,444
-------------- -------------- --------------
Total stockholders' equity 15,765,742 22,233,990 22,584,392
-------------- -------------- --------------
$ 17,173,128 $ 24,292,998 $ 24,305,420
============== ============== ==============
</TABLE>
See accompanying notes.
F-63
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
STATEMENTS OF EARNINGS
<TABLE>
Three Months
Ended Year Ended
-------------------------- ---------------------
March 31, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues, net of discounts and allowances $ 2,575,428 $ 2,360,711 $ 9,927,773 $ 9,093,028
Expenses:
Operating expenses 916,960 857,368 3,537,001 3,386,515
Local production 152,958 120,686 433,493 370,913
General and administrative (notes 2, 4 and 6) 827,785 507,425 2,391,882 2,064,929
Depreciation and amortization 311,901 370,054 1,226,449 928,427
------------ ------------ ------------ ------------
2,209,604 1,855,533 7,588,825 6,750,784
------------ ------------ ------------ ------------
Operating earnings 365,824 505,178 2,338,948 2,342,244
Other income (expense):
Interest income 162,957 251,613 1,017,564 1,203,608
Massachusetts franchise tax (10,000) (12,500) (50,000) (50,000)
Loss on disposition of property, plant
and equipment - (140) (6,398) (108,645)
------------ ------------ ------------ ------------
152,957 238,973 961,166 1,044,963
------------ ------------ ------------ ------------
Earnings before income taxes 518,781 744,151 3,300,114 3,387,207
Income tax expense (note 5) 24,000 36,900 149,000 150,000
------------ ------------ ------------ ------------
Net earnings $ 494,781 $ 707,251 $ 3,151,114 $ 3,237,207
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-64
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Net Unrealized
Gain on
Common stock Additional Investments
---------------------
Number of Paid-in Retained Available
Shares Amount Capital Earnings for Sale Total
------ ------ ------- -------- -------- -----
Balance,
December 31,
<S> <C> <C> <C> <C> <C> <C>
1995 464,212 $ 464,212 $ 17,819,736 $ 5,852,204 $ 2,514 $ 24,138,666
Net earnings - - - 3,237,207 - 3,237,207
Net change in
unrealized gain
on investments
available for sale
- - - - (2,514) (2,514)
Dividends - - - (4,788,967) - (4,788,967)
--------- ---------- -------------- ------------- --------- --------------
Balance,
December 31,
1996 464,212 464,212 17,819,736 4,300,444 - 22,584,392
Net earnings - - - 3,151,114 - 3,151,114
Dividends - - - (3,501,516) - (3,501,516)
--------- ---------- -------------- ------------- --------- --------------
Balance,
December 31,
1997 464,212 $ 464,212 $ 17,819,736 $ 3,950,042 $ - $ 22,233,990
========= ========== ============== ============= ========= ==============
</TABLE>
F-65
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
Net Unrealized
Gain on
Common stock Additional Investments
---------------------
Number of Paid-in Retained Available
Shares Amount Capital Earnings for Sale Total
------ ------ ------- -------- -------- -----
Balance,
December 31,
<S> <C> <C> <C> <C> <C> <C>
1997 464,212 $ 464,212 $ 17,819,736 $ 3,950,042 $ - $ 22,233,990
Net earnings
(unaudited) - - - 494,781 - 494,781
Dividends
(unaudited) - - - (412,488) - (412,488)
Return of capital
(unaudited)
(note 7) - - (6,550,541) - - (6,550,541)
------- ---------- -------------- ------------- ----------- --------------
Balance,
March 31, 1998
(unaudited) 464,212 $ 464,212 $ 11,269,195 $ 4,032,335 $ - $ 15,765,742
======= ========== ============== ============= =========== ==============
</TABLE>
See accompanying notes.
F-66
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Three Months
Ended Year Ended
March 31, December 31,
-------------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net earnings $ 494,781 $ 707,251 $ 3,151,114 $ 3,237,207
Adjustments to reconcile net earnings to net
cash flows from operating activities:
Depreciation and amortization 311,901 370,054 1,226,449 928,427
Accretion of discounts on investments (38,607) (57,210) (100,828) (267,861)
Deferred income tax expense (benefit) 4,000 - (9,000) 1,000
Loss on disposition of property, plant
and equipment - 140 6,398 108,645
Changes in:
Accounts receivable 62,442 72,740 34,097 (46,361)
Accrued interest receivable 38,781 (57,909) (3,088) (56,270)
Prepaid expenses (70,135) 4,052 30,610 (44,867)
Accounts payable (359,744) (132,773) 271,025 157,267
Accrued expenses (305,993) (53,758) 91,948 41,698
Unearned revenue 10,115 (75,126) (15,993) 91,647
------------- ------------- ------------- -------------
Net cash flows from operating activities 147,541 777,461 4,682,732 4,150,532
Cash flows from investing activities:
Purchases of investments available for sale - (501,250) (5,544,804) (7,699,807)
Proceeds from maturities of investments
available for sale 2,750,000 500,000 6,100,000 6,585,000
Net change in investments available for sale -
money market mutual funds (2,784,793) (44,951) (874,795) 928,862
Purchases of investments held to maturity (8,100,000) (9,900,000) (48,500,000) (14,998,185)
Proceeds from maturities of investments held
to maturity 13,600,000 10,491,000 51,816,000 7,759,000
Collection of note receivable - - - 9,200,000
Additions to property, plant and equipment (1,443,740) (600,681) (4,133,040) (1,306,867)
------------- ------------- ------------- --------------
Net cash flows from investing activities 4,021,467 (55,882) (1,136,639) 468,003
Cash flows from financing activities:
Dividends paid (412,488) (734,169) (3,501,516) (4,788,967)
Return of capital (4,047,362) - - -
------------- ------------- ------------- --------------
Net cash flows from financing activities (4,459,850) (734,169) (3,501,516) (4,788,967)
------------- ------------- ------------- --------------
Net change in cash (290,842) (12,590) 44,577 (170,432)
Cash at beginning of period 389,703 345,126 345,126 515,558
------------- ------------- ------------- --------------
Cash at end of period $ 98,861 $ 332,536 $ 389,703 $ 345,126
============= ============= ============= ==============
</TABLE>
F-67
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
Three Months
Ended Year Ended
March 31, December 31,
-------------------------- ---------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
Cash paid for:
<S> <C> <C> <C> <C>
Income taxes $ 69,614 $ 45,752 $ 213,674 $ 179,330
============ ========= ========= ==========
Noncash transactions:
Investments available for sale
distributed to stockholders as
a return of capital $ 2,503,179 $ - $ - $ -
Effect of changes in market value of
investments available for sale:
Investments - - - (2,614)
Deferred income taxes - - - (100)
Net unrealized gain on
investments available for sale - - - (2,514)
</TABLE>
See accompanying notes.
F-68
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
New England Cablevision of Massachusetts, Inc. (the Company) operates
cable television franchises in Massachusetts and New Hampshire.
On April 3, 1998, the Company's stock was acquired by FrontierVision
Holdings, L.P. (FrontierVision) for approximately $43,600,000.
Interim Financial Information
The accompanying interim financial statements as of March 31, 1998 and for
the three-month periods ended March 31, 1998 and 1997 are unaudited but,
in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim period
are not necessarily indicative of results for the full year.
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; however management does not anticipate significant changes in
estimates in the near term.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash to
consist of only cash on hand and on deposit.
Investments
Debt securities for which the Company has the ability and positive intent
to hold to maturity are classified as held to maturity and reported at
amortized cost. Debt securities which may be sold prior to maturity are
classified as available for sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of estimated income taxes.
Gains and losses on the sales of investments are based on the specific
identification of the investments sold.
If a decline in the fair value below the adjusted cost basis of an
investment is judged to be other than temporary, the cost basis of the
investment is written down to fair value as the new cost basis and the
amount of the write down is included as a charge in the statement of
earnings.
F-69
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation is provided
over the estimated useful lives of the various assets by using the
straight-line method.
Construction in Progress
The Company capitalizes certain operating costs incurred during the
construction period of cable television systems. These costs are amortized
on a straight-line basis over the estimated useful lives of the systems
once transferred to their appropriate property, plant and equipment
classification.
Unearned Revenue
Advance payments for cable services are credited to unearned revenue and
recorded as sales when earned.
Income Taxes
Effective January 1, 1995, the Company elected to be taxed as a small
business corporation (Subchapter S) under Section 1362 of the Internal
Revenue Code. Accordingly, beginning in 1995, the Company does not provide
for federal income taxes since such taxes are paid directly by the
shareholders on their individual tax returns. The Company provides for
state income taxes in its financial statements because New Hampshire does
not recognize Subchapter S status, and Massachusetts imposes a corporate
income tax on S Corporations with over $6,000,000 of total receipts.
The Company accounts for income taxes under the asset and liability
method. Deferred taxes are recognized for the future tax consequences
attributable to the differences between the financial statement and tax
basis of assets and liabilities, measured at the tax rates expected to
apply to taxable income when the temporary differences are expected to be
recovered or settled. Beginning in 1995, deferred tax expense consists
only of state taxes.
In accordance with the Internal Revenue Code, the Company may be subject
to a corporate level tax on the net built-in gains at the date of
conversion to Subchapter S status that are realized during the ten-year
period after the conversion. Consequently, the Company has retained its
net deferred tax liability existing at the date of conversion. As such,
the deferred tax liability related to the built in gains is not meant to
approximate the deferred tax liability that would be required if the
Company was taxed as a regular corporation. Any corporate level built-in
gains tax realized in excess of the amount recorded as a deferred tax
liability will be charged to earnings when and if realized.
The Company's tax status will change to a C Corporation as a result of its
acquisition by FrontierVision.
F-70
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
NOTES TO FINANCIAL STATEMENTS
2. Management Agreement
The Company has a Management Agreement with Diversified Communications
under which Diversified Communications provides the Company with general
services consisting of consulting, recordkeeping, budgeting, financial
reporting, and other miscellaneous services. Diversified Communications is
also providing the Company with cable management services consisting of
marketing, customer service training and support, engineering, programming
administration, franchise relations, general management, and
refranchising, rebuild and rate regulations. The Company incurred $376,428
in 1997 and $350,352 in 1996 in management fee expenses. The Company is
allowed, under the Management Agreement, to develop the internal capacity
to provide some or all of the above services.
3. Investments
Investments held to maturity at December 31, 1997 consist of high-grade
commercial paper maturing in one year or less. Investments held to
maturity at December 31, 1996 consist of high-grade commercial paper and
U.S. Treasury obligations. At December 31, 1997 and 1996, the market value
of these investments approximates their cost.
Investments available for sale at December 31, 1997 consist of $5,214,572
of U.S. Treasury and Agency obligations (of which $4,714,752 matures in
1998 and $499,820 matures in 1999) and $1,027,892 of money market mutual
funds. At December 31, 1997 the market value of the investments
approximates their cost.
Investments available for sale at December 31, 1996 consist of $5,746,161
of U.S. Treasury and A gencyobligations substantially all maturing in
1997 and $153,097 of money market mutual funds. At December 31, 1996 the
market value of these investments approximates their cost.
4. Rental Expense
The Company leases property under operating leases. Rental expense related
to these leases was approximately $163,000 for 1997 and $132,000 in 1996.
At December 31, 1997, minimum rental payments due for the next five years
under remaining lease terms in excess of one year are approximately as
follows:
1998 $163,000
1999 149,000
2000 109,000
2001 102,000
2002 106,000
F-71
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes
Income tax expense (benefit) for the periods ended December 31, 1997 and
1996 consists of the following components:
1997 1996
---- ----
Current $ 158,000 $ 149,000
Deferred (9,000) 1,000
--------- ----------
$ 149,000 $ 150,000
========= ==========
The state corporate tax rate applicable to the Company in 1997 and 1996 is
approximately 4.5%.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 2,000 $ 1,000
Property, plant and equipment 4,000 -
---------- ----------
6,000 1,000
Deferred tax liabilities:
Property, plant and equipment - 4,000
Built-in gains 861,000 861,000
---------- ----------
Total gross deferred tax liabilities 861,000 865,000
---------- ----------
Net deferred tax liability $ 855,000 $ 864,000
========== ==========
6. 401(k) Plan
The Company has a 401(k) Plan that covers all employees over the age of 21
and who have completed one year of service. Participants may defer up to
14% of their compensation. The Company may make a matching contribution as
well as a discretionary contribution as determined by its Board of
Directors. Participants become fully vested in the employer's
discretionary contributions upon seven years of participation. The expense
incurred for this Plan was approximately $70,000 for 1997 and $71,000 in
1996.
F-72
<PAGE>
NEW ENGLAND CABLEVISION OF MASSACHUSETTS, INC.
NOTES TO FINANCIAL STATEMENTS
7. Sale of the Company
On December 12, 1997, the Company's stockholders entered into a purchase
and sale agreement to sell 100% of the Company's stock to an unrelated
party. The Company was permitted to distribute cash and investments to its
stockholders prior to the consummation of the sale. These distributions
are shown as a return of capital and charged to additional paid-in
capital.
The transaction was consummated on April 3, 1998. Substantially all of the
remaining cash and investments was distributed to stockholders immediately
prior to the sale.
8. Commitments
The Company has committed to rebuild the Cape Ann and Amesbury regional
cable systems to comply with its franchise agreements. At December 31,
1997, the estimated costs to complete the rebuild were approximately $5.6
million.
F-73
<PAGE>
FINANCIAL STATEMENT SCHEDULES
FrontierVision Operating Partners, L.P. Page
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Under date of March 19, 1999, we reported on the consolidated balance sheets of
FrontierVision Operating Partners, L.P. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, partners' capital and cash flows for each of the years in the three
year period ended December 31, 1998, as contained in this annual report on Form
10-K for the year 1998. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedule
on Page S-3. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
March 19, 1999
S-2
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Amounts in Thousands
<TABLE>
-----------------------------------------------------------------------
Charge to
Beginning Costs and Deductions/ Balance at
of Period Expenses Writeoffs End of Period
------ ----- ------ ---
Allowance for uncollectible
trade receivables:
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $ 40 1,072 (345) 767
Year ended December 31, 1997 $ 767 1,761 (1,888) 640
Year ended December 31, 1998 $ 640 3,076 (3,050) 666
</TABLE>
See accompanying independent auditors' report.
S-3
<PAGE>
[LOGO OF FRONTIERVISION OPERATING PARTNERS, L.P. APPEARS HERE]
FRONTIERVISION OPERATING PARTNERS, L.P.
