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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
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Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction of (IRS Employer
incorporation or organization) Identification Numbers)
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One North Main Street
Coudersport, PA 16915-1141
(Address of principal executive (Zip Code)
offices)
(814) 274-9830
(Registrants' telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of March 30, 2000: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction I(1)(a) and (b) to the Form 10-K and is therefore
filing with the reduced disclosure format.
Document Incorporated by Reference: None.
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FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORP.
TABLE OF CONTENTS
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PART I
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Item 1. BUSINESS....................................................... 3
Item 2. PROPERTIES..................................................... 18
Item 3. LEGAL PROCEEDINGS.............................................. 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 20
Item 6. SELECTED FINANCIAL DATA........................................ 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 22
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 56
Item 11. EXECUTIVE COMPENSATION......................................... 57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K.............................................................. 59
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PART I
ITEM 1. BUSINESS
(Dollars in thousands, except subscriber rates)
Introduction
FrontierVision Operating Partners, L.P. ("FVOP" or the "Company"), wholly-
owned by FrontierVision Holdings, L.P., a Delaware limited partnership
("Holdings"), is a Delaware limited partnership formed on July 14, 1995 for
the purpose of acquiring and operating cable television systems.
FrontierVision Partners, L.P. ("FVP") contributed to Holdings, both directly
and indirectly, all of the outstanding partnership interests of 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. 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. The
Formation Transaction was accounted for at predecessor cost.
On October 1, 1999, FVP completed its sale of all outstanding partnership
interests of FVP to Adelphia Communications Corporation ("Adelphia") in
exchange for approximately $543,000 in cash (subject to post closing
adjustments), 7.0 million shares of Adelphia Class A common stock and the
assumption of certain liabilities (the "Acquisition"). Adelphia is a leader in
the telecommunications industry with cable television and local telephone
operations. As of December 31, 1999, Adelphia owned and managed cable
television systems with broadband networks that passed in front of 7,902,707
homes and served 5,124,594 basic subscribers.
Selected financial and other data and consolidated financial statements
presented for periods prior to October 1, 1999 are referred to herein as "Old
FVOP". Selected financial and other data and consolidated financial statements
presented for periods subsequent to October 1, 1999 are referred to herein as
"New FVOP". As a result of the application of purchase accounting resulting
from Adelphia's October 1, 1999 acquisition of FVP, the assets and liabilities
of New FVOP have been recorded at their fair values on October 1, 1999. The
final allocation of Adelphia's purchase price to acquire FVP is pending the
completion of third party valuations.
FVOP operates cable television systems ("Systems") in small and medium-sized
suburban and exurban communities in the United States in three primary
operating clusters--New England, Ohio and Kentucky--with a fourth smaller
group of cable television systems in the southeast. As of December 31, 1999,
the Company owned systems with broadband networks that passed in front of
approximately 1,000,000 homes and served approximately 700,000 basic
subscribers. In addition to traditional analog cable television, the Company
offers or intends to offer a wide range of telecommunication services
including digital cable television, high speed data and Internet access,
paging and telephony.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, is forward-looking, such as
information relating to the effects of future regulation, future capital
commitments and the effects of competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
expected results in the future from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These "forward looking
statements" can be identified by the use of forward-looking terminology such
as "believes", "expects", "may", "will," "should," "intends" or "anticipates"
or the negative thereof or other variations thereon or comparable terminology
or by discussions of strategy that involve risks and uncertainties. These
risks and uncertainties include, but are not limited to, uncertainties
relating to economic conditions, acquisitions and divestitures, government and
regulatory policies, the availability and cost of capital, the pricing and
availability of equipment, materials, inventories and programming, product
acceptance,
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technological developments and changes in the competitive environment in which
the Company operates. Persons reading this Annual Report on Form 10-K are
cautioned that forward-looking statements herein are only predictions, that no
assurance can be given that the future results will be achieved, and that
actual events or results may differ materially as a result of the risks and
uncertainties facing the Company. For further information regarding those
risks and uncertainties and their potential impact on the Company, see the
prospectus and most recent prospectus supplement filed under Registration
Statement No. 333-78027 of Adelphia Communications Corporation, under the
heading "Risk Factors", or under Registration Statement Nos. 333-75567 and
333-36519 of holdings, under the heading "Risk Factors".
Business
Video Services
Cable television systems receive a variety of television, radio and data
signals transmitted to receiving sites ("headends") by way of off-air
antennas, microwave relay systems and satellite earth stations. Signals are
then modulated, amplified and distributed primarily through fiber optic and
coaxial cable to subscribers, who pay fees for the service. Cable television
systems are generally constructed and operated pursuant to non-exclusive
franchises awarded by state or local government authorities for specified
periods of time.
Cable television systems typically offer subscribers a package of basic
video services consisting of local and distant television broadcast signals,
satellite-delivered non-broadcast channels (which offer programming such as
news, sports, family entertainment, music, weather, shopping, etc.) and
public, governmental and educational access channels.
In addition, premium service channels, which provide movies, live and taped
concerts, sports events and other programming, are offered for an extra
monthly charge. Many of the Systems subscribers were also offered pay-per-view
programming, which allows the subscriber to order special events or movies and
to pay on a per event basis. Local, regional and national advertising time is
sold in the majority of the Systems, with commercial advertisements inserted
on certain satellite-delivered non-broadcast channels.
Digital video services are now available to certain of the Company's
subscribers who lease or purchase a digital converter. Digital TV is a
computerized method of defining, transmitting and storing information that
makes up a television signal. Since digital signals can be "compressed," the
Company can transmit up to 12 channels in the space currently used to transmit
just one analog channel.
FVOP's' digital TV subscribers may also receive "multichannel" premium
services, such as HBO 1, 2, 3 and 4 from East and West Coast satellite feeds,
enhanced pay-per-view options with eighteen movie channels, up to 40 channels
of CD-quality music from Music Choice and an interactive on-screen program
guide to help them navigate the new digital choices.
High Speed Data and Internet Access
Beginning in 2000, the Company will begin to deploy Power Link, Adelphia's
high-speed data service. Power Link, which includes residential, institutional
and business applications, constitutes an alternative to the traditional
slower speed data offerings available through Internet Service Providers
("ISPs"). Power Link offers customers speeds comparable to those available
through a T1 line, at costs that compare to a typical ISP plus a second
telephone line.
The Company's fiber design allows the use of the expanded bandwidth
potential of digital compression technology for cable data and video services.
High speed cable data services are now available at speeds far in excess of
that which is currently available via a traditional telephone modem. In
addition, using a high speed cable modem and special ethernet card allows the
user to bypass telephone lines, does not require the user to log on, and
allows for multiple sessions or connections to multiple services
simultaneously.
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In addition to the cable modems, the Company will also sell traditional dial
up Internet access for those customers who initially prefer this method of
Internet access to the higher speeds of our broadband network. This
establishes the Company as a full service Internet provider and creates a
customer base that can be upgraded to the high speed service in the future.
Other Services
In 2000, the Company expects to begin offering wireless messaging services
to its subscribers through an affiliate, Page Time, Inc., a wholly-owned
subsidiary of Adelphia which provides one-way messaging services to Adelphia
and its subsidiaries via resale arrangements with existing paging network
operators.
In the fourth quarter of 1999, the Company began selling long distance
telephone service on a resale basis. Services offered include state-to-state
and in-state long distance, as well as 800 service, international calling,
calling card services and debit card services. The Company's sales effort is
focused on the consumer market and emphasizes the simplicity and savings of
one low a competitive usage fee available 24 hours a day, 7 days a week, with
no monthly fee.
Operating Strategy
The Company's strategy is to construct and operate a broadband network
capable of offering a broad range of telecommunications services and providing
superior customer service while maximizing operating efficiencies. The Company
intends to continue as a cable television service provider as well as
providing bundled communications services combining cable television service
with high speed data and Internet access, paging and telephony within its
communities. The Company expects to achieve these goals through internal
growth and investment in and upgrade of its networks.
The Company considers technological innovation to be an important component
of its service offerings and customer satisfaction. The Company intends to
continue the upgrade of its network infrastructure to add channel capacity,
increase digital transmission capabilities and further improve system
reliability.
Management believes the concentration of its customer base contributes
favorably to the Company's cash flow margin.
Recent Development of the Systems
The Company has completed numerous acquisitions since its inception through
December 31, 1999. As of December 31, 1999, the Company owned cable television
systems with broad band networks that passed in front of approximately
1,000,000 homes and served approximately 700,000 basic subscribers. The
Company has focused on selectively acquiring cable television properties from
both small and large multiple system operators, thereby establishing core
geographic clusters and subscriber mass. During 1995, 1996, 1997 and 1998, the
Company purchased systems serving approximately 92,500, 270,200, 212,000 and
140,000 subscribers, respectively.
On January 7, 1999, the Company sold certain cable television system assets
serving approximately 4,400 basic subscribers to Helicon Partners I, L.P., for
an aggregate sales price of approximately $5,220.
On June 1, 1999, the Company completed the exchange of five systems located
in northern Kentucky for five Intermedia Partners, L.P. IV systems located
near Lexington, Kentucky which are contiguous to other of the Company's
Kentucky systems. The Company paid approximately $13,300 as consideration for
approximately 5,300 subscribers the Company gained in the transactions.
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Financial Information
The financial data regarding the Company's revenues, results of operations
and identifiable assets for each of the Company's last three fiscal years is
set forth in, and incorporated herein by reference to, Item 8, Financial
Statements and Supplementary Data of this Form 10-K.
Technological Developments
The Company has made a substantial commitment to the technological
development of the Systems and is currently upgrading the technical
capabilities of its cable plant in a cost efficient manner. System development
will allow the Company to increase the plant capacity, provide two-way
communication and other digital services and at the same time further increase
the reliability of the plant.
The upgraded System, on average, will include only two active pieces of
equipment between the headend and the home. Limiting the number of active
pieces of equipment combined with the small number of homes per fiber node
reduces the potential for mechanical failure and the number of customers
affected by such a failure, all of which provides increased reliability to the
customers.
Subscriber Services and Rates
The Company's revenues are derived principally from monthly subscription
fees for various services. Rates to subscribers vary in accordance with the
type of service selected. Although service offerings vary across franchise
areas because of differences in plant capabilities, each of the areas
typically offer services at monthly prices ranging as follows:
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Service Rate Range
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Basic Cable Television............................. $ 7.00--28.00
Premium Cable Television........................... $ 9.00--14.00
Digital Television................................. $10.00
Paging............................................. $ 7.00--35.00
Long Distance...................................... $ .07--.08 per minute
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An installation fee, which the Company may wholly or partially waive during
a promotional period, is usually charged to new subscribers. Subscribers are
free to terminate services at any time without charge, but often are charged a
fee for reconnection or change of service.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act," as
amended by the 1992 Cable Act), deregulated basic service rates for systems in
communities meeting the FCC's definition of effective competition. Pursuant to
the FCC's definition of effective competition adopted following enactment of
the 1984 Cable Act, substantially all of the Company's franchises were rate
deregulated. However, in June 1991, the FCC amended its effective competition
standard, which increased the number of cable systems that could be subject to
local rate regulation. The 1992 Cable Act contains a new definition of
effective competition under which nearly all cable systems in the United
States are subject to regulation of basic service rates. Additionally, the
legislation (i) eliminates the 5% annual basic rate increase allowed by the
1984 Cable Act without local approval; (ii) allows the FCC to adjudicate the
reasonableness of rates for non-basic service tiers, other than premium
services, for cable systems not subject to effective competition in response
to complaints filed by franchising authorities and/or cable subscribers; (iii)
prohibits cable systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium services if the system is
technically capable of doing so; (iv) allows the FCC to impose restrictions on
the retiering and rearrangement of cable services under certain circumstances;
and (v) permits the FCC and franchising authorities more latitude in
controlling rates and rejecting rate increase requests. The Telecommunications
Act of 1996 (the "1996 Act") ended FCC regulation on nonbasic tier rates on
March 31, 1999.
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For a discussion of FCC rate regulation and related developments, see
"Legislation and Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Regulatory and Competitive
Matters."
Franchises
The 1984 Cable Act provides that cable operators may not offer cable service
to a particular community without a franchise unless such operator was
lawfully providing service to the community on July 1, 1984 and the
franchising authority does not require a franchise. The Systems operate
pursuant to franchises or other authorizations issued by governmental
authorities, substantially all of which are nonexclusive. Such franchises or
authorizations awarded by a governmental authority generally are not
transferable without the consent of the authority. As of December 31, 1999,
the Company held 1,164 franchises. Most of these franchises can be terminated
prior to their stated expiration by the relevant governmental authority, after
due process, for breach of material provisions of the franchise.
Under the terms of most of the Company's franchises, a franchise fee
(generally ranging up to 5% of the gross revenues of the cable system) is
payable to the governmental authority. For the past three years, franchise fee
expense incurred by the Company has averaged approximately 2.7% of gross
system revenues.
The franchises issued by the governmental authorities are subject to
periodic renewal. In renewal hearings, the authorities generally consider,
among other things, whether the franchise holder has provided adequate service
and complied with the franchise terms. In connection with a renewal, the
authority may impose different and more stringent terms, the impact of which
cannot be predicted. To date, all of the Company's material franchises have
been renewed or extended, at or effective upon their stated expiration,
generally on modified terms. Such modified terms have not been materially
adverse to the Company.
The Company believes that all of its material franchises are in good
standing. From time to time, the Company notifies the franchising authorities
of the Company's intent to seek renewal of the franchise in accordance with
the procedures set forth in the 1984 Cable Act. The 1984 Cable Act process
requires that the governmental authority consider the franchise holder's
renewal proposal on its own merits in light of the franchise holder's past
performance and the community's needs and interests, without regard to the
presence of competing applications. See "Legislation and Regulation." The 1992
Cable Act alters the administrative process by which operators utilize their
1984 Cable Act franchise renewal rights. Such changes could make it easier in
some instances for a franchising authority to deny renewal of a franchise.
Competition
Although the Company and the cable television industry have historically
faced modest competition, the competitive landscape is changing and
competition has increased. The Company believes that the increase in
competition within its communities will continue to occur over the next
several years.
At the present time, cable television systems compete with other
communications and entertainment media, including off-air television broadcast
signals which a viewer is able to receive directly using the viewer's own
television set and antenna. The extent to which a cable system competes with
over-the-air broadcasting depends upon the quality and quantity of the
broadcast signals available by direct antenna reception compared to the
quality and quantity of such signals and alternative services offered by a
cable system. In many areas, television signals, which constitute a
substantial part of basic service, can be received by viewers who use their
own antennas. Local television reception for residents of apartment buildings
or other multi-unit dwelling complexes may be aided by use of private master
antenna services. Cable systems also face competition from alternative methods
of distributing and receiving television signals and from other sources of
entertainment such as live sporting events, movie theaters and home video
products, including videotape recorders and cassette players. In recent years,
the FCC has adopted policies providing for authorization of new technologies
and more favorable operating environment for certain existing technologies
that provide, or may provide, substantial additional
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competition for cable television systems. The extent to which cable television
service is competitive depends in significant part upon the cable television
system's ability to provide an even greater variety of programming than that
available off-air or through competitive alternative delivery sources. In
addition, certain provisions of the 1992 Cable Act and the 1996 Act are
expected to increase competition significantly in the cable industry. See
"Legislation and Regulation."
The 1992 Cable Act prohibits the award of exclusive franchises, prohibits
franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered program services formerly
available only to cable television subscribers. Most satellite-distributed
program signals are being electronically scrambled to permit reception only
with authorized decoding equipment, generally at a cost to the viewer. From
time to time, legislation has been introduced in Congress which, if enacted
into law, would prohibit the scrambling of certain satellite-distributed
programs or would make satellite services available to private earth stations
on terms comparable to those offered to cable systems. Broadcast television
signals are being made available to owners of earth stations under the
Satellite Home View Copyright Act of 1988, which became effective January 1,
1989 for a six-year period. This Act establishes a statutory compulsory
license for certain transmissions made by satellite owners to home satellite
dishes for which carriers are required to pay a royalty fee to the Copyright
Office. This Act was formally extended through December 31, 1999 and
deliberations relative to further extension of this Act are ongoing. The 1992
Cable Act enhances the right of cable competitors to purchase nonbroadcast
satellite-delivered programming. See "Legislation and Regulation--Federal
Regulation."
Video programming is now being delivered to individuals by high-powered
direct broadcast satellites ("DBS") utilizing video compression technology.
This technology has the capability of providing more than 100 channels of
programming over a single high-powered DBS satellite with significantly higher
capacity available if multiple satellites are placed in the same orbital
position. Video compression technology may also be used by cable operators in
the future to similarly increase their channel capacity. DBS service can be
received virtually anywhere in the United States through the installation of a
small rooftop or side-mounted antenna, and it is more accessible than cable
television service where a cable plant has not been constructed or where it is
not cost effective to construct cable television facilities. DBS is being
heavily marketed on a nationwide basis by competing service providers.
Congress passed the Satellite Home Viewer Act in late 1999. The law allows DBS
providers to begin offering local broadcast channels. DBS companies have since
added a limited number of local channels in some regions, a trend that will
continue, thus lessening the distinction between cable television and DBS
service.
Cable communications systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS"),
commonly called wireless cable systems, which use low-power microwave
frequencies to transmit video programming over-the-air to subscribers. There
are MMDS operators who are authorized to provide or are providing broadcast
and satellite programming to subscribers in areas served by the Company's
Systems. MMDS systems are less capital intensive, are not required to obtain
local franchises or to pay franchise fees and are subject to fewer regulatory
requirements than cable television systems. MMDS systems' ability to compete
with cable television systems has previously been limited by channel capacity,
the inability to obtain programming and regulatory delays. Recently, however,
MMDS systems have developed digital compression technology, which provides for
more channel capacity and better signal delivery. Although relatively few MMDS
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. A series of
actions taken by the FCC, including reallocating certain frequencies to
wireless services, are intended to facilitate the development of wireless
cable television spectrum that will be used by wireless operators to provide
additional channels of programming over longer distances. Several Regional
Bell Operating Companies acquired interests in major MMDS companies. The
Company is unable to predict whether wireless video services will have a
material impact on its operations.
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Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners'
associations which preclude franchised cable television operators from serving
residents of such private complexes. However, the 1984 Cable Act gives
franchised cable operators the right to use existing compatible easements
within their franchise areas upon nondiscriminatory terms and conditions.
Accordingly, where there are preexisting compatible easements, cable operators
may not be unfairly denied access or discriminated against with respect to the
terms and conditions of access to those easements. There have been conflicting
judicial decisions interpreting the scope of the access right granted by the
1984 Cable Act, particularly with respect to easements located entirely on
private property. Further, while a franchised cable television system
typically is obligated to extend service to all areas of a community
regardless of population density or economic risk, a SMATV system may confine
its operation to small areas that are easy to serve and more likely to be
profitable. Under the 1996 Act, SMATV systems can interconnect non-commonly
owned buildings without having to comply with local, state and federal
regulatory requirements that are imposed upon cable systems providing similar
services, as long as they do not use public rights-of-way. The U.S. Copyright
Office has concluded that SMATV systems are "cable systems" for purposes of
qualifying for the compulsory copyright license established for cable systems
by federal law.
The FCC has authorized a new interactive television service, which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC also has initiated a new rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multi-channel wireless
video service that could make 98 video channels available in a single market.
The Company cannot predict at this time whether competitors will emerge
utilizing such frequencies or whether such competition would have a material
impact on the operations of cable television systems.
The FCC has recently allocated a sizable amount of spectrum in the 31 Ghz
band for use by a new wireless service, Local Multipoint Distribution Service
("LMDS"), which among other uses, can deliver over 100 channels of digital
programming directly to consumers' homes. The FCC auctioned this spectrum to
the public during 1998, with cable operators and local telephone companies
restricted in their participation in this auction. The extent to which the
winning licenses in this service will use this spectrum in particular regions
of the country to deliver multichannel video programming to subscribers, and
therefore provide competition for franchised cable systems, is at this time
uncertain.
The 1996 Act eliminates the restriction against ownership and operation of
cable systems by local telephone companies within their local exchange service
areas. Telephone companies are now free to enter the retail video distribution
business through any means, such as DBS, MMDS, SMATV or as traditional
franchised cable system operators. Alternatively, the 1996 Act authorizes
local telephone companies to operate "open video systems" without obtaining a
local cable franchise, although telephone companies operating such systems can
be required to make payments to local governmental bodies in lieu of cable
franchise fees. Up to two-thirds of the channel capacity of an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC's video dialtone
rules. The 1996 Act also includes numerous provisions designed to make it
easier for cable operators and others to compete directly with local exchange
telephone carriers. With certain limited exceptions, neither a local exchange
carrier nor a cable operator can acquire more than 10% of the other entity
operating within its own service area.
Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring.
Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry. The ability of cable systems to
compete with present,
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emerging and future distribution media will depend to a great extent on
obtaining attractive programming. The availability and exclusive use of a
sufficient amount of quality programming may in turn be affected by
developments in regulation or copyright law. See "Legislation and Regulation."
The cable television industry competes with radio, television and print
media for advertising revenues. As the cable television industry continues to
develop programming designed specifically for distribution by cable,
advertising revenues may increase. Premium programming provided by cable
systems is subject to the same competitive factors that exist for other
programming discussed above. The continued profitability of premium services
may depend largely upon the continued availability of attractive programming
at competitive prices.
Employees
At February 26, 2000, there were 829 full-time employees of the Company, of
which 22 were covered by collective bargaining agreements. The Company
considers its relations with its employees to be good.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and most local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by Congress and
various federal agencies may materially affect the cable television industry.
The following is a summary of federal laws and regulations affecting the
growth and operation of the cable television industry and a description of
certain state and local laws.
Cable Television/Federal Laws and Regulations
Cable Communications Policy Act of 1984
The 1984 Cable Act became effective on December 29, 1984. This federal
statute, which amended the Communications Act of 1934 (the "Communications
Act"), created uniform national standards and guidelines for the regulation of
cable television systems. Violations by a cable television system operator of
provisions of the Communications Act, as well as of FCC regulations, can
subject the operator to substantial monetary penalties and other sanctions.
Among other things, the 1984 Cable Act affirmed the right of franchising
authorities (state or local, depending on the practice in individual states)
to award one or more franchises within their jurisdictions. It also prohibited
non-grandfathered cable television systems from operating without a franchise
in such jurisdictions. In connection with new franchises, the 1984 Cable Act
provides that in granting or renewing franchises, franchising authorities may
establish requirements for cable-related facilities and equipment, but may not
establish or enforce requirements for video programming or information
services other than in broad categories.
Cable Television Consumer Protection and Competition Act of 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This legislation
effected significant changes to the legislative and regulatory environment in
which the cable industry operates. It amended the 1984 Cable Act in many
respects. The 1992 Cable Act became effective on December 4, 1992, although
certain provisions, most notably those dealing with rate regulation and
retransmission consent, became effective at later dates. The legislation also
required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation on the cable industry with respect to, among other
things: (i) cable system rates for both basic and certain nonbasic services;
(ii) programming access and exclusivity arrangements; (iii) access to cable
channels by unaffiliated programming services; (iv) leased access terms and
conditions; (v) horizontal and vertical ownership of cable systems; (vi)
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage and retransmission consent; (ix) technical
standards; (x) subscriber privacy; (xi) consumer protection issues; (xii)
cable equipment compatibility;
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(xiii) obscene or indecent programming; and (xiv) requiring subscribers to
subscribe to tiers of service other than basic service as a condition of
purchasing premium services. Additionally, the legislation encourages
competition with existing cable systems by: allowing municipalities to own and
operate their own cable systems without having to obtain a franchise;
preventing franchising authorities from granting exclusive franchises or
unreasonably refusing to award additional franchises covering an existing
cable system's service area; and prohibiting the common ownership of cable
systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precludes video programmers affiliated with cable television companies from
favoring cable operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors. This
provision may limit the ability of cable program suppliers to offer exclusive
programming arrangements to cable television companies. A number of provisions
in the 1992 Cable Act relating to, among other things, rate regulation, have
had a negative impact on the cable industry and the Company's business.
Telecommunications Acts of 1996
The 1996 Act significantly revised the federal regulatory structure. As it
pertains to cable television, the 1996 Act, among other things, (i) eliminated
the regulation of certain nonbasic programming services in 1999; (ii) expands
the definition of effective competition, the existence of which displaces rate
regulation; (iii) eliminates the restriction against the ownership and
operation of cable systems by telephone companies within their local exchange
service areas; and (iv) liberalizes certain of the FCC's cross-ownership
restrictions. The FCC has been conducting a number of rulemaking proceedings
in order to implement many of the provisions of the 1996 Act.
FCC Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations covering such areas as the
registration of cable systems, cross-ownership between cable systems and other
communications businesses, carriage of television broadcast programming,
consumer education and lockbox enforcement, origination cablecasting and
sponsorship identification, children's programming, the regulation of basic
cable service rates in areas where cable systems are not subject to effective
competition, signal leakage and frequency use, technical performance,
maintenance of various records, equal employment opportunity, and antenna
structure notification, marking and lighting. The FCC has the authority to
enforce these 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. Furthermore, the 1992 Cable Act required the FCC to adopt
implementing regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The 1996 Act requires certain changes to various provisions of
these regulations. A brief summary of the most material federal regulations as
adopted to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional nonbasic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the
FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the statutory and FCC rate regulation standards. The 1992 Cable Act
replaced the FCC's old standard for determining effective competition, under
which most cable systems were not subject to local rate regulation, with a
statutory provision that has resulted in nearly all cable television systems
becoming subject to local rate regulation of basic service. The 1996 Act
expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any
means except DBS. Satisfaction of this test deregulates both basic and
nonbasic tiers. The 1996 Act ended FCC regulation of nonbasic tier rates on
March 31, 1999.
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The FCC's regulations set standards for the regulation of basic and nonbasic
cable service rates (other than per-channel or per-program services). The
FCC's original rules became effective on September 1, 1993. The rules have
been amended several times. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic service
rates, and a formula for evaluating future rate increases. Alternatively,
cable operators have the opportunity to make cost-of-service showings that, in
some cases, may justify rates above the applicable benchmarks. The rules also
require that charges for cable-related equipment (e.g., converter boxes and
remote control devices) and installation services be unbundled from the
provision of cable service and based upon actual costs plus a reasonable
profit. Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates that exceed the benchmark level for either basic
and/or non-basic cable services and associated equipment, and refunds could be
required. The retroactive refund period for basic cable service rates is
limited to one year. In general, the reductions for basic and nonbasic cable
service rates require an aggregate reduction of up to 17 percent, adjusted
forward for inflation and certain other factors, from the rates in force as of
September 30, 1992. The regulations also provide that future rate increases
may not exceed an inflation-indexed amount, plus increases in certain costs
beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes programming
channels or completes a significant system rebuild or upgrade. A significant
number of franchising authorities have become certified by the FCC to regulate
the rates charged by the Company for basic cable service and for associated
equipment. Complaints have also been filed with the FCC seeking review of the
rates charged for nonbasic cable service. The Company's ability to implement
rate increases consistent with its past practices will likely be limited by
the regulations that the FCC has adopted.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains new mandatory carriage requirements. These new
rules allow commercial television broadcast stations which are "local" to a
cable system (i.e., the system is located in the station's area of dominant
influence), to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station.
Local, noncommercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of (i) a 50 mile
radius from the station's city of license or (ii) the station's Grade B
contour (a measure of signal strength). Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable systems will have
to obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations," (i.e., commercial
satellite-delivered independent stations such as WTBS). The 1992 Cable Act
also eliminated, effective December 4, 1992, the FCC's regulations requiring
the provision of input selector switches. The statutory must-carry provisions
for noncommercial stations became effective on December 4, 1992. Must-carry
rules for both commercial and noncommercial stations and retransmission
consent rules for commercial stations were adopted by the FCC on March 11,
1993. The must-carry requirement for commercial stations went into effect on
June 2, 1993, and any stations for which retransmission consent had not been
obtained (other than must-carry stations, non-commercial stations and
superstations) had to be dropped as of October 6, 1993. The most recent
election between must-carry and retransmission consent for local commercial
television broadcast stations was on October 1, 1996. A number of stations
previously carried by the Company's cable television systems elected
retransmission consent. The Company was able to reach agreements with
broadcasters who elected retransmission consent and has therefore not been
required to pay cash compensation to broadcasters for retransmission consent
or been required by broadcasters to remove broadcast stations from the cable
television channel line-ups. The Company has, however, agreed to carry some
services (e.g., ESPN2 and a new service by FOX) in specified markets pursuant
to retransmission consent arrangements which it believes are comparable to
those entered into by most other large cable operators.
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
operators to set aside certain channels for public, educational and
governmental access programming. The Company believes that none of the
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Systems' franchises contain unusually onerous access requirements. The 1984
Cable Act further requires cable systems with 36 or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties. While the 1984 Cable Act presently allows cable
operators substantial latitude in setting leased access rates, the 1992 Cable
Act requires leased access rates to be set according to a formula determined
by the FCC. The FCC has revised the existing rate formula in a way which will
significantly lower the rates cable operators have been able to charge. It is
possible that such leased access will result in competition to services
offered by the Company on the other channels of its cable systems.
Competing Franchises
Questions concerning the ability of municipalities to award a single cable
television franchise and to impose certain franchise restrictions upon cable
television companies have been considered in several recent federal appellate
and district court decisions. These decisions have been somewhat inconsistent
and, until the U.S. Supreme Court rules definitively on the scope of cable
television's First Amendment protections, the legality of the franchising
process and of various specific franchise requirements is likely to be in a
state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable systems and permits franchising authorities to
operate their own cable systems without franchises.
Cross-Ownership
The 1996 Act repealed the 1984 Cable Act's prohibition on Local Exchange
Carriers ("LECs") providing video programming directly to customers within
their local exchange telephone service areas, except in rural areas or by
specific waiver of FCC rules. The 1996 Act also authorized LECs to operate
"open video systems" without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Where demand exceeds channel capacity,
up to two-thirds of the channels on an "open video system" must be available
to programmers unaffiliated with the LEC.
The 1996 Act eliminated the FCC rule prohibiting common ownership between a
cable system and a national broadcast television network. The 1996 Act also
eliminated the statutory ban covering certain common ownership interests,
operation or control between a television station and cable system within the
station's Grade B signal coverage area. However, the parallel FCC rules
against cable/television station cross-ownership remains in place, subject to
review by the FCC within two years. Finally, the 1992 Cable Act prohibits
common ownership, control or interest in cable television systems and MMDS
facilities or SMATV systems having overlapping service areas, except in
limited circumstances. The 1996 Act exempts cable systems facing "effective
competition" from the MMDS and SMATV cross-ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more
than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder
of more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a cable
system which can be occupied by programming in which the cable system's owner
has an attributable interest. The limit is 40% of all activated channels.
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Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after
receipt of all information required by FCC regulations and by the franchising
authority. Approval is deemed to be granted if the franchising authority fails
to act within such period.
Technical Requirements
Historically, the FCC has imposed technical standards applicable to the
cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has recently
revised such standards and made them applicable to all classes of channels
that carry downstream NTSC video programming. Local franchising authorities
are permitted to enforce the FCC's new technical standards. The FCC also has
adopted additional standards applicable to cable television systems using
frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to prevent
harmful interference with aeronautical navigation and safety radio services,
and has also established limits on cable system signal leakage. Periodic
testing by cable operators for compliance with these technical standards and
signal leakage limits is required. The Company believes that the Systems are
in compliance with these standards in all material respects. The 1992 Cable
Act requires the FCC to update periodically its technical standards to take
into account changes in technology. The FCC has adopted regulations to
implement the requirements of the 1992 Cable Act designed to improve the
compatibility of cable systems and consumer electronics equipment.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles, unless under the Federal Pole
Attachments Act state public service commissions are able to demonstrate that
they regulate rates, terms and conditions of the cable television pole
attachments. A number of states (including Massachusetts, Michigan, New
Jersey, New York, Ohio and Vermont) and the District of Columbia have
certified to the FCC that they regulate the rates, terms and conditions for
pole attachments. In the absence of state regulation, the FCC administers such
pole attachment rates through use of a formula, which it has devised and from
time to time revises. The 1996 Act directs the FCC to adopt a new rate formula
for any attaching party, including cable systems, which offers
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems that choose to offer such services.
Other Matters
FCC regulation also includes matters regarding a cable system's carriage of
local sports programming; restrictions on origination and cablecasting by
cable system operators; application of the fairness doctrine and rules
governing political broadcasts; customer service; home wiring; and limitations
on advertising contained in nonbroadcast children's programming.
Copyright
Cable television systems are subject to federal copyright licensing covering
carriage of broadcast signals. In exchange for making semi-annual payments to
a federal copyright royalty pool and meeting certain other obligations, cable
operators obtain a statutory license to retransmit broadcast signals. The
amount of this royalty payment varies, depending on the amount of system
revenues from certain sources, the number of distant signals carried, and the
location of the cable system with respect to over-the-air television stations.
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license. The
FCC has recommended to Congress that it repeal the cable industry's compulsory
copyright license. The FCC determined that the statutory compulsory copyright
license
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for local and distant broadcast signals no longer serves the public interest
and that private negotiations between the applicable parties would better
serve the public. Without the compulsory license, cable operators might need
to negotiate rights from the copyright owners for each program carried on each
broadcast station in the channel lineup. Such negotiated agreements could
increase the cost to cable operators of carrying broadcast signals. The 1992
Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television broadcast stations and
cable operators do not obviate the need for cable operators to obtain a
copyright license for the programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers ("ASCAP") and
BMI, Inc. ("BMI"), the two major performing rights organizations in the United
States. As a result of extensive litigation, ASCAP and BMI are both now
required to offer "through to the viewer" licenses to the cable networks which
would cover the retransmission of the cable networks' programming by cable
systems to their subscribers.
Copyrighted music performed by cable systems themselves on local origination
channels, PEG channels and in locally inserted advertising and cross
promotional announcements must also be licensed. A blanket license is
available from BMI. Cable industry negotiations with ASCAP are still in
progress.
Cable Television/State and Local Regulation
Because a cable television system uses local streets and rights-of-way,
cable television systems are subject to state and local regulation, typically
imposed through the franchising process. State and/or local officials are
usually involved in franchise selection, system design and construction,
safety, service rates, consumer relations, billing practices and community
related programming and services.
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and
in many cases are terminable if the franchise operator fails to comply with
material provisions. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchises against arbitrary denials of
renewal. While these formal procedures are not mandatory unless timely invoked
by either the cable operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain
free to negotiate a renewal outside the formal process. Nevertheless, renewal
is by no means assured, as the franchisee must meet certain statutory
standards. Even if a franchise is renewed, a franchising authority may impose
new and more onerous requirements such as upgrading facilities and equipment,
although the municipality must take into account the cost of meeting such
requirements. The 1992 Cable Act makes several changes to the process under
which a cable operator seeks to enforce its renewal rights which could make it
easier in some cases for a franchising authority to deny renewal.
Franchises usually call for the payment of fees, often based on a percentage
of the system's gross subscriber revenues, to the granting authority. Although
franchising authorities may impose franchise fees under the 1984 Cable Act,
such payments cannot exceed 5% of a cable system's annual gross revenues. In
those communities in which franchise fees are required, the Company currently
pays franchise fees ranging up to 5% of gross revenues. Franchising
authorities are also empowered in awarding new franchises or renewing existing
franchises to require cable operators to provide cable-related facilities and
equipment and to enforce compliance with voluntary commitments. In the case of
franchises in effect prior to the effective date of the 1984 Cable Act,
franchising authorities may enforce requirements contained in the franchise
relating to facilities, equipment and services, whether or not cable-related.
The 1984 Cable Act, under certain limited circumstances, permits a cable
operator to obtain modifications or franchise obligations.
Upon receipt of a franchise, the cable system owner usually is subject to a
broad range of obligations to the issuing authority directly affecting the
business of the system. The terms and conditions of franchises vary
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materially from jurisdiction to jurisdiction, and even from city to city
within the same state, historically ranging from reasonable to highly
restrictive or burdensome. The 1984 Cable Act places certain limitations on a
franchising authority's ability to control the operation of a cable system
operator and the courts have from time to time reviewed the constitutionality
of several general franchise requirements, including franchise fees and access
channel requirements, often with inconsistent results. On the other hand, the
1992 Cable Act prohibits exclusive franchises, and allows franchising
authorities to exercise greater control over the operation of franchised cable
systems, especially in the area of customer service and rate regulation. The
1992 Cable Act also allows franchising authorities to operate their own
multichannel video distribution system without having to obtain a franchise
and permits states or local franchising authorities to adopt certain
restrictions on the ownership of cable systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation
of cable systems or decisions made on franchise grants, renewals, transfers
and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of
the cable television system. Cable franchises generally contain provisions
governing charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of
cable services provided. The 1996 Act prohibits a franchising authority from
either requiring or limiting a cable operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television 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 television systems are continuing and can be
expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. To date, the states in which the
Company operates that have enacted such state level regulations are
Massachusetts and Vermont. The Company cannot predict whether other states in
which it currently operates, or in which it may acquire systems, will engage
in such regulation in the future.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or the Systems can be predicted at this time.
Telephony and Telecommunications/Federal Laws and Regulations
The 1996 Act also alters federal, state and local laws and regulations
regarding telecommunications providers and services, including the Company,
and creates a favorable environment in which the Company may provide telephone
and other telecommunications services and facilities. The following is a
summary of the key provisions of the 1996 Act that could materially affect the
telecommunications business of the Company.
The 1996 Act was intended to promote the provision of competitive telephone
services and facilities by cable television companies and others. The 1996 Act
declares that no state or local laws or regulations may prohibit or have the
effect of prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service. States are authorized to impose
"competitively neutral" requirements regarding universal service, public
safety and welfare, service quality, and consumer protection. The 1996 Act
further provides that cable operators and affiliates providing
telecommunications services are not required to obtain a separate franchise
from local franchising authorities ("LFAs") for such services. An LFA may not
order a cable operator or affiliate to discontinue providing
telecommunications services or discontinue operating its cable system on the
basis that it has failed to obtain a separate franchise or renewal for the
provision of telecommunications services. The 1996 Act prohibits LFAs from
requiring cable operators to provide
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telecommunications service or facilities as a condition of the grant of a
franchise, franchise renewal, or franchise transfer, except that LFAs may seek
"institutional networks" as part of such franchise negotiations.
The 1996 Act provides that, when cable operators provide telecommunications
services, LFAs may require reasonable, competitively neutral compensation for
management of the public rights-of-way. The LFA must publicly disclose such
compensation requirements.
The Company believes that it qualifies as a connecting carrier under federal
law and therefore does not need FCC certification to provide intrastate
service. In the event that it is determined that the Company must seek FCC
certification, the Company believes that such certification will be granted by
the FCC in a timely manner. The Company may be required to file certain
tariffs and reports with the FCC.
Interconnection and Other Telecommunications Carrier Obligations
To facilitate the entry of new telecommunications providers (including cable
operators), the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks
with other carriers and must not deploy network features and functions that
interfere with interoperability. LECs also have a set of separate identified
obligations beyond those that apply to new entrants: (i) good faith
negotiation with those seeking interconnection, (ii) unbundling, equal access
and non-discrimination requirements, (iii) resale of services, including
"resale at wholesale rates," (iv) notice of changes in the network that would
affect interconnection and interoperability and (v) physical collocation
unless shown that practical technical reasons, or space limitations, make
physical collocation impractical.
Under the 1996 Act, individual interconnection rates must be just and
reasonable, based on cost, and may include a reasonable profit. Traffic
termination charges shall be "mutual and reciprocal." The 1996 Act permits
carriers to agree on a "bill and keep" system, but does not require such a
system.
The 1996 Act contemplates that interconnection agreements will be negotiated
by the parties and submitted to a state public service commission ("SPSC") for
approval. A SPSC may become involved, at the request of either party, if
negotiations fail. If the state regulator refuses to act, the FCC may
determine the matter. If the SPSC acts, an aggrieved party's remedy is to file
a case in federal district court. The 1996 Act provides for a rural exemption
to interconnection requests, but also provides that the exception does not
apply where a cable operator makes an interconnection request of a rural LEC
within the operator's franchise area.
The 1996 Act requires that all telecommunications providers (including cable
operators that provide telecommunications services) must contribute equitably
to a Universal Service Fund ("USF"), and the FCC may exempt an interstate
carrier or class of carriers if their contribution would be minimal under the
USF formula. The 1996 Act allows states to determine which intrastate
telecommunications providers contribute to the USF. The 1996 Act prohibits
geographic end user rate de-averaging to protect rural subscribers' rates.
FCC Interconnection Order
The FCC released its First Report and Order to effectuate the
interconnection provisions of the 1996 Act. In general, the FCC's First Report
and Order appears favorable to the promotion of competition at the local
level. To summarize, the FCC first has asserted broad federal jurisdiction
over interconnection issues and the power to bind both state and local
governments. The FCC also has established procedures for the negotiation,
arbitration and resolution of interconnection agreements. It also has stated
that new entrants essentially always benefit from the terms of subsequent
interconnection agreements entered into by a given LEC with third parties and
cannot waive their "most favored nation" rights in this respect. The FCC also
has specified the manner in which actual physical interconnection must be made
available to new entrants and, in this connection, has specified the manner in
which rates charged to new entrants for physical interconnection must be
calculated. The FCC also has set forth the manner in which LECs must make
essential network elements available to new entrants for resale, again
including the manner in which actual rates are to be calculated.
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In July 1997, the United States Court of Appeals for the Eighth Circuit
vacated in part the FCC's local competition rules. That court concluded that
the FCC did not have the authority to establish rules to govern the pricing of
interconnection, network elements, and resale services provided by incumbent
local exchange carriers. In addition, it found certain other FCC rules to be
unlawful. On January 25, 1999, the Supreme Court issued an opinion in which it
reversed portions of the court of appeals decision. The Supreme Court held
that the FCC has authority under the Communications Act to establish rules,
including pricing rules, to implement the local competition provisions of the
Telecommunications Act of 1996, even with respect to intrastate services. The
Supreme Court did not address the merits of the FCC's 1996 pricing rules. In
addition, the Supreme Court affirmed several of the other rules which had been
promulgated by the FCC, but which had been found unlawful by the court of
appeals. These included a rule allowing requesting carriers to select
provisions from among different interconnection agreements approved by state
commissions (the so-called "pick-and-choose" rule) and a rule allowing
requesting carriers to obtain from incumbent local exchange carriers assembled
combinations of unbundled network elements (sometimes called unbundled network
element platforms). The Supreme Court vacated a FCC rule identifying specific
network elements which incumbent local exchange carriers must make available
to requesting carriers on the basis that the FCC had failed to consider 1)
whether such network elements were necessary, and 2) whether the failure to
make network elements available would impair the ability of requesting
carriers to provide the services they seek to offer. The FCC has indicated
that it will conduct further proceedings to comply with the Supreme Court's
opinion regarding the availability of network elements. Whether incumbent
local exchange carriers will be required to make available combined platforms
of network elements will depend on how the FCC implements the "necessary" and
"impair" standards governing network element availability in light of the
Supreme Court opinion.
Internet Services/Federal Laws and Regulations
Transmitting indecent material via the Internet was made criminal by the
1996 Act. However, on-line access providers are exempted from criminal
liability for simply providing interconnection service; they are also granted
an affirmative defense from criminal or other action where in "good faith"
they restrict access to indecent materials. These provisions have been
challenged in federal court. The 1996 Act further exempts on-line access
providers from civil liability for actions taken in good faith to restrict
access to obscene, excessively violent or otherwise objectionable material.
Forced Internet Access
Cable operators have begun to offer high-speed Internet access to
subscribers. These services are in direct competition with a number of other
companies, many of which have substantial resources, such as existing ISPs and
local and long distance telephone companies.
Recently, a number of ISP's have asked local franchising authorities and the
FCC to grant them rights of access to cable systems' broadband infrastructure
so that they can deliver their services directly to cable systems' customers.
Several local franchising authorities and state legislatures have been
examining the issue and a few local authorities have required cable operators
to provide such access. A U.S. District Court recently ruled that the City of
Portland, or was authorized to require such access. This decision is on
appeal. Some cable companies have initiated their own litigation challenging
municipal forced access requirements. Congress and the FCC have thus far
declined to take action on the issue of ISP's access to broadband cable
facilities. If FVOP is subject to this forced access, it could prohibit the
Company from entering into or limited existing agreements with ISPs which
could adversely impact our anticipated revenues from high-speed Internet
access services. Franchise renewals and transfers could become more difficult
depending upon the outcome of this issue.
ITEM 2. PROPERTIES
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and
decoding devices, headends and distribution systems and subscriber house drop
equipment for each of its cable television systems. The signal receiving
apparatus typically includes
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a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headends, consisting of associated electronic
equipment necessary for the reception, amplification and modulation of
signals, are located near the receiving devices. The Company's distribution
system consists primarily of coaxial and fiber optic cables and related
electronic equipment. Subscriber devices consist of decoding converters. The
physical components of cable television systems require maintenance and
periodic upgrading to keep pace with technological advances.
The Company's cables and related equipment are generally 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.
See "Legislation and Regulation-FCC Regulation."
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices
in each of its market areas, and owns most of its service vehicles.
Substantially all of the assets of FVOP's' subsidiaries are subject to
encumbrances as collateral in connection with the Company's credit
arrangements, either directly with a security interest or indirectly through a
pledge of the stock or partnership interests in the respective subsidiaries.
See Note 4 to the FrontierVision Operating Partners, L.P. consolidated
financial statements. The Company believes that its properties, both owned and
leased, are in good operating condition and are suitable and adequate for the
Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to the business, of which the Company or any of its
subsidiaries is a part or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
As described in Part I, the acquisition of the Company by Adelphia occurred
on October 1, 1999. Accordingly, the following tables present selected
consolidated financial data derived from FVOP's financial statements as of and
for the three months ended December 31, 1999 (referred to herein as "New
FVOP"), which has been audited by Deloitte & Touche, LLP, independent
auditors. Also included are consolidated selected financial data derived from
FVOP's consolidated financial statements as of December 31, 1995, 1996, 1997
and 1998 and for the period from inception (April 17, 1995) through December
31, 1995, the years ended December 31, 1996, 1997, 1998 and the nine months
ended September 30, 1999 (referred to herein as "Old FVOP") which have been
audited by KPMG LLP, independent auditors.
The following table also presents combined historical financial data as of
and for the year ended December 31, 1995 for the predecessor United Video
Cablevision systems, C4 Media systems, Cox Communications systems, American
Cable Entertainment of Kentucky-Indiana systems, and 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. FVOP previously filed
these audited financial statements on the Form 10-K for the year ended
December 31, 1998. The selected 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.
<TABLE>
<CAPTION>
Old FVOP New FVOP
---------------------------------------------------------- ------------
Predecessor From
Systems April 17, 1995 Nine Three
Year Ended (inception) to Year Ended December 31, Months Ended Months Ended
December 31, December 31, ---------------------------- September 30, December 31,
1995(a)(b) 1995 1996 1997 1998 1999 1999
------------ -------------- -------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $109,765 $ 4,369 $ 76,464 $145,126 $245,134 $221,032 $75,375
Operating expenses (c).. 62,098 2,438 42,111 78,732 130,744 130,161 37,373
Depreciation and
amortization........... 42,354 2,308 35,724 66,994 116,534 108,244 22,273
Management fees......... -- -- -- -- -- -- 1,879
Transaction costs....... -- 940 -- -- -- 17,077 269
-------- ------- -------- -------- -------- -------- -------
Operating income
(loss)................. 5,313 (1,317) (1,371) (600) (2,144) (34,450) 13,581
Interest expense--net... (37,898) (1,386) (22,422) (41,160) (66,453) (56,162) (18,622)
Other income (expense).. (4,409) -- (8) (57) (526) 8,961 --
-------- ------- -------- -------- -------- -------- -------
Loss before income taxes
and extraordinary loss
(d).................... (36,994) (2,703) (23,801) (41,817) (69,123) (81,651) (5,041)
Income tax benefit
(expense).............. -- -- -- -- 2,927 2,082 (271)
Extraordinary loss (d).. -- -- -- (5,046) -- -- --
-------- ------- -------- -------- -------- -------- -------
Net loss................ $(36,994) $(2,703) $(23,801) $(46,863) $(66,196) $(79,569) $(5,312)
======== ======= ======== ======== ======== ======== =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
New
Old FVOP FVOP
------------------------------------- ------------
Predecessor December 31,
Systems ------------------------------------- December 31,
1995(b) 1995 1996 1997 1998 1999
----------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $288,253 $143,512 $549,168 $919,708 $1,201,222 $1,945,303
Total debt (e).......... 285,144 93,159 398,194 632,000 871,610 884,695
Partners' equity........ 46,407 130,003 263,043 269,495 983,498
</TABLE>
- --------
(a) Includes the unaudited combined results of operations of the systems
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 historical results of
operations subsequent to the date of the 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.
(b) Includes combined balance sheet data for the United Video systems as of
November 9, 1995, the date of the 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.
(c) Includes direct operating and programming and selling, general and
administrative expenses.
(d) Extraordinary loss relates to loss on the early retirement of debt.
(e) Excludes affiliate debt.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands)
RESULTS OF OPERATIONS
General
FrontierVision Operating Partners, L.P. ("FVOP" or the "Company"), wholly-
owned by FrontierVision Holdings, L.P., a Delaware limited partnership
("Holdings"), is a Delaware limited partnership formed on July 14, 1995 for
the purpose of acquiring and operating cable television systems.
FrontierVision Partners, L.P. ("FVP") contributed to Holdings, both directly
and indirectly, all of the outstanding partnership interests of 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. 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. The
Formation Transaction was accounted for at predecessor cost.
On October 1, 1999, FVP completed its sale of all outstanding partnership
interests of FVP to Adelphia in exchange for approximately $543,000 (subject
to post closing adjustments) in cash, 7.0 million shares of Adelphia Class A
common stock and the assumption of certain liabilities.
FVOP operates cable television systems ("Systems") in small and medium-sized
suburban and exurban communities in the United States in three primary
operating clusters--New England, Ohio and Kentucky--with a fourth smaller
group of cable television systems in the southeast. As of December 31, 1999,
the Company owned systems with broadband networks that passed in front of
approximately 1,000,000 homes and served approximately 700,000 basic
subscribers. In addition to traditional analog cable television, the Company
offers or intends to offer a wide range of telecommunication services
including digital cable television, high speed data and Internet access,
paging and telephony.
Please refer to the discussion of the Private Securities Litigation Reform
Act of 1995 which is incorporated herein by reference to Item 1, "Business--
Introduction".
Comparison of the Years Ended December 31, 1997, 1998 and 1999
For purposes of the following table and discussion, the operating results
for the nine months ended September 30, 1999 of Old FVOP have been combined
with the operating results for the three months ended December 31, 1999 of New
FVOP in order to provide a more meaningful basis for comparing the years ended
December 31, 1998 and 1999. The combined results of Old FVOP and New FVOP will
be referred to as "Combined FVOP" in the table below and discussion that
follows. The following table sets forth the historical percentage relationship
to revenues of operating income. As a result of FVOP's 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.
Depreciation, amortization and certain other line items included in the
operating results of Combined FVOP are not necessarily comparable between
periods as the three month New FVOP period ended December 31, 1999 includes
the effect of the preliminary purchase accounting adjustments related to
Adelphia's acquisition of FVP. The combining of Old FVOP and New FVOP
accounting periods is not in accordance with generally accepted accounting
principles. See Note 1 to the accompanying consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
Percentage of Revenues
Year Ended December 31,
------------------------------
Combined
Old FVOP FVOP
----------------- ----------
1997 1998 1999
------- ------- ----------
<S> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0%
Expenses:
Operating expenses......................... 54.3 53.3 56.5
Depreciation and amortization.............. 46.2 47.5 44.0
Transaction costs.......................... -- -- 5.9
Management fees to managing affiliate...... -- -- 0.6
------- ------- -------
Operating income (loss).................... (0.5%) (0.8%) (7.0%)
======= ======= =======
</TABLE>
Revenues. Revenues increased 68.9%, or approximately $100,008, to $245,134
for the year ended December 31, 1998 from approximately $145,126 for the year
ended December 31, 1997 primarily attributable to acquisition activity during
1998 and 1997. Revenues increased 20.9%, or approximately $51,273, to $296,407
for the combined year ended December 31, 1999 primarily attributable to
acquisition activity during 1998.
Operating Expenses. These expenses, which are comprised mainly of
programming costs, technical expenses, and costs relating to system offices,
customer service representatives and sales and administrative employees,
increased 66.1%, or approximately $52,012, to $130,744 for the year ended
December 31, 1998. This increase was primarily attributable to acquisition
activity during 1998 and 1997. Operating expenses increased 28.1%, or
approximately $36,790, to $167,534 for the combined year ended December 31,
1999 primarily attributable to the acquisition activity during 1998. This
increase in operating expenses was also somewhat offset by synergies realized
from a reduction in corporate overhead and a reduction in programming costs
due to the acquisition of FVP by Adelphia.
Transaction Costs. Transaction costs amounting to approximately $17,346 were
recognized in the combined year ended December 31, 1999. These costs were
incurred in connection with the acquisition of FVP by Adelphia and are mainly
comprised of bonus, severance and deferred compensation paid to certain of the
Company's former executives.
Depreciation and Amortization. Depreciation and amortization was higher for
the year ended December 31, 1998 compared with the respective prior year,
primarily due to increased depreciation and amortization related to
acquisitions and increased capital expenditures. Depreciation and amortization
was higher for the year ended December 31, 1999 compared with the respective
prior year, primarily due to increased depreciation related to 1998
acquisitions, capital expenditures and additional depreciation and
amortization expense resulting from the acquisition of FVP by Adelphia. This
increase in depreciation and amortization in the year ended December 31, 1999
was partially offset in the fourth quarter of 1999 by a reduction in
depreciation and amortization expense caused by conforming the Company's
depreciation and amortization periods to those of Adelphia. Also, during the
nine months ended September 30, 1999, the Company disposed of certain cable
television systems which offset a portion of the increase.
Management Fees to Managing Affiliate. On October 1, the Company entered
into an agreement with Adelphia which provides for payment of management fees
by the Company of up to 5% of the Company's gross revenues. The amount of such
payment for the year ended December 31, 1999 was $1,879.
Interest Expense--net. For the years ended December 31, 1998 and 1999,
interest expense increased 61.5% and 12.5%, respectively. The increase in
interest expense was primarily attributable to an increase in the average
amount of debt outstanding due to acquisitions and capital expenditures.
Other (Expense) Income. Included in other income for the year ended December
31, 1999 is a gain of approximately $1,600 recognized on the January 7, 1999
sale of certain cable television system assets to Helicon
23
<PAGE>
Partners I, L.P. and a gain of approximately $7,324 recognized on the June 1,
1999 exchange of five cable television systems with Intermedia Partners, L.P.
IV.
Liquidity and Capital Resources
The cable television business is capital intensive and typically requires
continual financing for the construction, modernization, maintenance,
expansion and acquisition of cable systems. During the three years in the
period ended December 31, 1999, the Company committed substantial capital
resources for these purposes. These expenditures were funded through bank
borrowings, equity investments, debt issued by affiliates and advances from
affiliates and internally generated funds. The Company's aggregate outstanding
borrowings as of December 31, 1999 were $884,695. The Company's ability to
generate cash to meet its future needs will depend generally on its results of
operations and the continued availability of external financing.
Capital Expenditures
Capital expenditures for the years ended December 31, 1997, 1998 and 1999
were $32,738, $65,570 and $89,024, respectively. The increases in capital
expenditures for the years ended December 31, 1998 and 1999 compared to the
respective prior years were primarily due to the impact of acquired systems
and increased investment related to the rebuilding of the Company's cable
plant. The Company expects capital expenditures for 2000 to range from
$110,000 to $150,000.
Financing Activities
Drawings on our amended bank credit facility, along with cash flow generated
from operations and debt financing, have been sufficient to finance capital
improvement projects as well as acquisitions.
On December 19, 1997, FVOP amended its existing senior bank indebtedness and
entered into an $800,000 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 $300,000, 7.75-year
reducing revolving credit facility, a $250,000, 7.75-year term loan and a
$250,000 million, 8.25-year term loan.
At December 31, 1999, FVOP had $175,000 outstanding under the revolving
credit facility, $237,500 outstanding under the 7.75 year term loan and
$249,500 outstanding under the 8.25 year term loan. The weighted average
interest rates at December 31, 1999 on the outstanding borrowings under the
revolving credit facility were approximately 8.33%, and under the 7.75 year
term loan and the 8.25 year term loan were approximately 8.32% and 8.71%,
respectively. FVOP entered into interest rate protection agreements to hedge
the underlying LIBOR rate exposure for $240,000 of borrowings through April
2002.
In general, the amended bank credit facility requires FVOP 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 allowing FVOP to use such proceeds to fund certain
permitted acquisitions, provided that FVOP is 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 FVOP and in any of the FVOP's restricted
subsidiaries and a first priority lien on all the tangible and intangible
assets of FVOP 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
the FVOP's general partner with its designee. Holdings, as the general partner
of FVOP, guarantees the indebtedness under the amended bank credit facility on
a limited recourse basis.
Under the terms of the amended bank credit facility, with certain
exceptions, FVOP has a mandatory prepayment obligation upon a change of
control of FVOP and the sale of any of its operating systems. This obligation
was waived in connection with the acquisition of FVP by Adelphia with the
consent of the majority of the lenders.
24
<PAGE>
Notes Marked to Market
The aggregate fair value assigned in purchase accounting to New FVOP's debt
was greater than the aggregate recorded value at the date of the merger by
$13,000. The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same remaining maturities. Such excess will be
amortized over the respective remaining lives of the respective underlying
debt obligations.
Senior Subordinated Notes
On October 7, 1996, FVOP issued $200,000 aggregate principal amount of 11%
senior subordinated notes due 2006. 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 Holdings and
rank subordinate in right of payment to all existing and any future senior
indebtedness.
Holders of the Senior Subordinated Notes have the right to require FVOP to
repurchase their notes at 101% of principal upon a change of control (as
defined in the Indenture). The acquisition of FVP by Adelphia constituted a
change of control in accordance with the Indenture and, upon the closing of
the transaction, FVOP was required to offer to repurchase all of the notes.
FVOP's offer to repurchase the notes expired without any holders exercising
their option.
Resources
The Company plans to continue to explore and consider new commitments,
arrangements or transactions to refinance existing debt, increase the
Company's liquidity or decrease the Company's leverage. These could include,
among other things, the future issuance by the Company, or its subsidiaries of
public or private debt and the negotiation of new or amended credit
facilities. These could also include entering into acquisitions, joint
ventures or other investment or financing activities, although no assurance
can be given that any such transactions will be consummated. The Company's
ability to borrow under current credit facilities and to enter into
refinancings and new financings is limited by covenants contained in its and
its subsidiaries' credit agreements and indentures, including covenants under
which the ability to incur indebtedness is in part a function of applicable
ratios of total debt to cash flow.
The Company believes that cash and cash equivalents, internally generated
funds, borrowings under existing credit facilities, advances from affiliates
and future financing sources will be sufficient to meet its short-term and
long-term liquidity and capital requirements. Although in the past the Company
has been able to refinance its indebtedness or obtain new financing, there can
be no assurance that the Company will be able to do so in the future or that
the terms of such financings would be favorable.
Management believes that the telecommunications industry, including the
cable television and telephone industries, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable companies or their assets, and other partnering and
investment transactions of various structures and sizes involving cable or
other telecommunications companies. The Company continues to evaluate new
opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for
new market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore
potential transactions of various types with other cable and
telecommunications companies. However, no assurances can be given as to
whether any such transaction may be consummated or, if so, when.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments and for
25
<PAGE>
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Management of the Company has not
completed its evaluation of the impact of SFAS No. 133 on the Company's
consolidated financial statements. In July 1999, SFAS No. 137 was issued to
delay the effective date of SFAS No. 133 to fiscal quarters of fiscal years
beginning after June 15, 2000.
At its January 2000 meeting, the Emerging Issues Task Force ("EITF") reached
consensus with respect to certain issues related to EITF 98-3, "Determining
whether a transaction is an Exchange of Similar Productive Assets or a
Business Combination." As a result of this consensus, the Company will be
required to treat cable system swaps as a purchase of a business and a
disposition of a business at fair value. Management of the Company will
monitor the impact of EITF 98-3 as it relates to future transactions of the
Company.
Inflation
The Company believes that inflation did not have a significant effect on its
results of operations during the three year period ended December 31, 1999.
Periods of high inflation could have an adverse effect to the extent that
increased borrowing costs for floating-rate debt may not be offset by
increases in subscriber rates. At December 31, 1999, after giving effect to
interest rate hedging agreements, approximately $421,981 of the Company's
total debt was subject to floating interest rates.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely affected by
changes and developments in governmental regulation, competitive forces and
technology. The cable television industry and the Company are subject to
extensive regulation at the federal, state and local levels. The 1992 Cable
Act significantly expanded the scope of regulation of certain subscriber rates
and a number of other matters in the cable industry, such as mandatory
carriage of local broadcast stations and retransmission consent, and increased
the administrative costs of complying with such regulations. The FCC has
adopted rate regulations that establish, on a system-by-system basis, maximum
allowable rates for (i) basic and cable programming services (other than
programming offered on a per-channel or per-program basis), based upon a
benchmark methodology, and (ii) associated equipment and installation services
based upon cost plus a reasonable profit. Under the FCC rules, franchising
authorities are authorized to regulate rates for basic services and associated
equipment and installation services, and the FCC will regulate rates for
regulated cable programming services in response to complaints filed with the
agency. The Telecommunications Act of 1996 (the "1996 Act") ended FCC
regulation of cable programming service tier rates on March 31, 1999.
Rates for basic and cable programming services are set pursuant to a
benchmark formula. Alternatively, a cable operator may elect to use a cost-of-
service methodology to show that rates for basic and cable programming
services are reasonable. Refunds with interest will be required to be paid by
cable operators who are required to reduce regulated rates. The FCC has
reserved the right to reduce or increase the benchmarks it has established.
The rate regulations also limit increases in regulated rates to an inflation
indexed amount plus increases in certain costs such as taxes, franchise fees,
costs associated with specific franchise requirements and increased
programming costs. Cost-based adjustments to these capped rates can also be
made in the event a cable operator adds or deletes channels or completes a
significant system rebuild or upgrade. Because of the limitation on rate
increases for regulated services, future revenue growth from cable services
will rely to a much greater extent than has been true in the past on increased
revenues from unregulated services and new subscribers than from increases in
previously unregulated rates.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or
refine the rate regulations. FVOP cannot predict the effect of the 1996 Act on
future rulemaking proceedings or changes to the rate regulations.
Cable television companies operate under franchises granted by local
authorities, which are subject to renewal and renegotiation from time to time.
Because such franchises are generally non-exclusive, there is a
26
<PAGE>
potential for competition with the systems from other operators of cable
television systems, including public systems operated by municipal franchising
authorities themselves, and from other distribution systems capable of
delivering television programming to homes. The 1992 Cable Act and the 1996
Act contain provisions that encourage competition from such other sources. The
Company cannot predict the extent to which competition will materialize from
other cable television operators, local telephone companies, other
distribution systems for delivering television programming to the home, or
other potential competitors, or, if such competition materializes, the extent
of its effect on the Company.
The 1996 Act repealed the prohibition on local competitive telephone
exchange carriers ("CLECs") from providing video programming directly to
customers within their local exchange areas other than in rural areas or by
specific waiver of FCC rules. The 1996 Act also authorized CLECs to operate
"open video systems" ("OVS") without obtaining a local cable franchise,
although CLECs operating such a system can be required to make payments to
local governmental bodies in lieu of cable franchise fees. Where demand
exceeds capacity, up to two-thirds of the channels on an OVS must be available
to programmers unaffiliated with the CLEC. The statute states that the OVS
scheme supplants the FCC's "video dialtone" rules. The FCC has promulgated
rules to implement the OVS concept, and New Jersey Bell Telephone Company has
been granted permission to convert its video dialtone authorization in Dover
Township, New Jersey to an OVS authorization.
The Company believes that the provision of video programming by telephone
companies in competition with the Company's existing operations could have an
adverse effect on the Company's financial condition and results of operations.
At this time, the impact of any such effect is not known or estimable.
The Company also competes with DBS service providers. DBS has been available
to consumers since 1994. A single DBS satellite can provide more than 100
channels of programming. DBS service can be received virtually anywhere in the
United States through the installation of a small outdoor antenna. DBS service
is being heavily marketed on a nationwide basis by several service providers,
some of which are now offering local programming channels. At this time, any
impact of DBS competition on the Company's future results is not known or
estimable.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses fixed and variable rate debt to fund its working capital
requirements, capital expenditures and acquisitions. These debt arrangements
expose the Company to market risk related to changes in interest rates. The
Company has entered into interest rate swap and collar agreements to reduce
the impact of changes in interest rates. As of December 31, 1999, the Company
had interest rate swap agreements covering notional principal of $40,000 that
expires during 2000 that fix the interest rate at an average of 7.70%. As of
December 31, 1999, the Company had interest rate collar agreements covering a
notional amount of $200,000, with $100,000 expiring in 2001 and 2002. The
interest rate collar agreements have floor rates of 5.95% and 6.30% and cap
rates of 5.95% and 6.30%, respectively, for the agreements expiring in 2001
and 2002, with maximum cap rates of 6.64% and maximum floor rates of 4.65% and
4.95%, respectively. The Company does not enter into any interest rate collar
agreements for trading purposes. The Company is exposed to market risk in the
event of non-performance by the banks. No such non-performance is expected.
The table below summarizes the fair values and contract terms of the Company's
financial instruments subject to interest rate risk as of December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity
----------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------- -------- -------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate.............. $ -- $ -- $ -- $ -- $ -- $200,000 $200,000 $210,000
Average Interest Rate.. 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% -- --
Variable Rate........... $24,575 $ 34,575 $ 44,575 $55,825 $60,213 $442,218 $661,981 $661,981
Average Interest Rate.. 8.50% 9.01% 9.09% 9.10% 9.12% 9.20% -- --
Interest Rate Swaps:.... $40,000 $ -- $ -- $ -- $ -- $ -- $ 40,000 $ (111)
7.70% -- -- -- -- -- -- --
6.28% -- -- -- -- -- -- --
Interest Rate Collars:
Interest Rate Collars... $ -- $100,000 $100,000 $ -- $ -- $ -- $200,000 $ (41)
Maximum Cap Rate........ -- 6.64% 6.64% -- -- -- -- --
Cap and Floor Rate...... -- 5.95% 6.30% -- -- -- -- --
Minimum Floor Rate...... -- 4.65% 4.95% -- -- -- -- --
</TABLE>
Interest rates on variable debt are estimated by us using the average
implied forward London Interbank Offer Rate ("LIBOR") rates for the year of
maturity based on the yield curve in effect at December 31, 1999, plus the
borrowing margin in effect at December 31, 1999. Average receive rates on the
variable to fixed swaps are estimated by the Company using the average implied
forward LIBOR rates for the year of maturity based on the yield curve in
effect at December 31, 1999.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and
independent auditors' report follow.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FrontierVision Operating Partners, L.P. and Subsidiaries:
Independent Auditors' Report--KPMG LLP................................... 30
Independent Auditors' Report--Deloitte & Touche LLP...................... 31
Consolidated Balance Sheets as of December 31, 1998 and 1999............. 32
Consolidated Statements of Operations for the Years Ended December 31,
1997 and 1998, the Nine Months Ended September 30, 1999 and the Three
Months Ended December 31, 1999.......................................... 33
Consolidated Statements of Partners' Equity (Deficiency) for the Years
Ended December 31, 1997 and 1998, the Nine Months Ended September 30,
1999 and the Three Months Ended December 31, 1999....................... 34
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1998, the Nine Months Ended September 30, 1999 and the Three
Months Ended December 31, 1999.......................................... 35
Notes to Consolidated Financial Statements............................... 36
FrontierVision Capital Corporation:
Independent Auditors' Report--KPMG LLP................................... 49
Independent Auditors' Report--Deloitte & Touche LLP...................... 50
Balance Sheets as of December 31, 1998 and 1999.......................... 51
Statements of Operations for the Years Ended December 31, 1997 and 1998,
the Nine Months Ended September 30, 1999 and the Three Months Ended
December 31, 1999....................................................... 52
Statements of Owner's Equity for the Years Ended December 31, 1997 and
1998, the Nine Months Ended September 30, 1999 and the Three Months
Ended December 31, 1999................................................. 53
Statements of Cash Flows for the Years Ended December 31, 1997 and 1998,
the Nine Months Ended September 30, 1999 and the Three Months Ended
December 31, 1999....................................................... 54
Note to Financial Statements............................................. 55
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
FrontierVision Operating Partners, L.P.:
We have audited the accompanying consolidated balance sheet of
FrontierVision Operating Partners, L.P. and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, partners' equity
(deficiency) and cash flows for each of the years in the two year period ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statements schedule as of and for each of the two
years ended December 31, 1998 and the nine months ended September 30, 1999
listed in the index of Item 14. These consolidated financial statements and
the financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule 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 the results of their operations and their cash flows for each of the
years in the two year period ended December 31, 1998 and the nine months ended
September 30, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information
set therein.
KPMG LLP
Denver, Colorado
November 10, 1999
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
FrontierVision Operating Partners, L.P.:
We have audited the accompanying consolidated balance sheet of
FrontierVision Operating Partners, L.P. and subsidiaries as of December 31,
1999, and the related consolidated statements of operations, partners' equity,
and cash flows for the three months ended December 31, 1999. Our audit also
included the financial statement schedule as of and for the three months ended
December 31, 1999 listed in the Index at Item 14. These financial statements
and financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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, such consolidated financial statements present fairly, in
all material respects, the financial position of FrontierVision Operating
Partners, L.P. and subsidiaries at December 31, 1999 and the results of their
operations and their cash flows for the three months ended December 31, 1999
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 29, 2000
31
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Old FVOP New FVOP
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS:
Cable systems, at cost, net of accumulated
depreciation and amortization:
Property, plant and equipment..................... $ 342,754 $ 407,554
Intangible assets................................. 820,524 1,495,947
---------- ----------
Total........................................... 1,163,278 1,903,501
Cash and cash equivalents........................... 4,890 7,412
Subscriber receivables--net......................... 12,678 13,800
Prepaid expenses and other assets--net.............. 20,376 20,590
---------- ----------
Total assets.................................... $1,201,222 $1,945,303
========== ==========
LIABILITIES AND PARTNERS' EQUITY:
Bank and public debt................................ $ 870,125 $ 874,522
Other debt.......................................... 1,485 10,173
Accounts payable.................................... 18,233 34,871
Subscriber advance payments and deposits............ 3,312 8,404
Accrued interest and other liabilities.............. 26,716 23,790
Deferred income taxes............................... 11,856 10,045
---------- ----------
Total liabilities............................... 931,727 961,805
Commitments and contingencies (Note 9)
Partners' equity:
FrontierVision Holdings, L.P...................... 269,226 982,514
FrontierVision Operating Partners, Inc............ 269 984
---------- ----------
Total partners' equity.......................... 269,495 983,498
---------- ----------
Total liabilities and partners' equity.......... $1,201,222 $1,945,303
========== ==========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Old FVOP New FVOP
---------------------------------- ------------
Nine Months Three Months
Year Ended Ended Ended
December 31, September 30, December 31,
------------------ -------------- ------------
1997 1998 1999 1999
-------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues...................... $145,126 $245,134 $221,032 $75,375
Operating expenses:
Direct operating and
programming................ 51,623 89,429 86,813 24,461
Selling, general and
administrative............. 27,109 41,315 43,348 12,912
Depreciation and
amortization............... 66,994 116,534 108,244 22,273
Transaction costs........... -- -- 17,077 269
Management fees to managing
affiliate.................. -- -- -- 1,879
-------- -------- -------- -------
Total..................... 145,726 247,278 255,482 61,794
-------- -------- -------- -------
Operating (loss) income....... (600) (2,144) (34,450) 13,581
Other (expense) income:
Interest expense--net....... (41,160) (66,453) (56,162) (18,622)
Other....................... (57) (526) 8,961 --
-------- -------- -------- -------
Total..................... (41,217) (66,979) (47,201) (18,622)
Loss before income taxes and
extraordinary loss........... (41,817) (69,123) (81,651) (5,041)
Income tax benefit (expense).. -- 2,927 2,082 (271)
-------- -------- -------- -------
Loss before extraordinary
loss......................... (41,817) (66,196) (79,569) (5,312)
Extraordinary loss on early
retirement of debt........... (5,046) -- -- --
-------- -------- -------- -------
Net loss...................... $(46,863) $(66,196) $(79,569) $(5,312)
======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
(Dollars in thousands)
<TABLE>
<CAPTION>
FrontierVision
FrontierVision Operating
Holdings, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
------------------ ----------------- --------
<S> <C> <C> <C>
Old FVOP
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
Capital contributions........... 11,988 12 12,000
Net loss........................ (79,490) (79) (79,569)
-------- ---- --------
Balance, September 30, 1999..... $201,724 $202 $201,926
- --------------------------------------------------------------------------------
New FVOP
Excess of purchase price of
acquired assets and liabilities
over predecessor owners' net
book value..................... $737,921 $739 $738,660
-------- ---- --------
Balance, October 1, 1999........ 939,645 941 940,586
Capital Contribution............ 48,176 48 48,224
Net loss........................ (5,307) (5) (5,312)
-------- ---- --------
Balance, December 31, 1999...... $982,514 $984 $983,498
======== ==== ========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Old FVOP New FVOP
----------------------------------- ------------
Nine Months Three Months
Ended Ended
Year Ended
December 31, September 30, December 31,
-------------------- ------------- ------------
1997 1998 1999 1999
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $ (46,863) $ (66,196) $(79,569) $ (5,312)
Adjustments to reconcile net
loss to net cash provided
by (used for) operating
activities:
Depreciation and
amortization............. 66,994 116,534 108,244 22,273
Income tax (benefit)
expense.................. -- (2,927) (2,082) 271
Extraordinary loss on
early retirement of
debt..................... 5,046 -- -- --
Gain on disposal of
assets................... -- (2,362) (9,193) --
Non cash interest
expense.................. 721 -- -- (459)
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Subscriber receivables.. (582) (2,556) (407) (429)
Prepaid expenses and
other assets........... (1,549) (1,092) (721) (23,474)
Accounts payable and
accrued interest and
other liabilities...... 1,803 20,304 41,353 (13,981)
Subscriber advance
payments and deposits.. (1,523) 1,086 (447) 543
--------- --------- -------- --------
Net cash provided by (used
for) operating activities.... 24,047 62,791 57,178 (20,568)
--------- --------- -------- --------
Cash flows used for investing
activities:
Expenditures for property,
plant and equipment........ (32,738) (65,570) (75,120) (13,904)
Acquisitions................ (392,631) (307,595) (12,436) --
Proceeds from disposal of
assets..................... -- -- 6,698 --
Other....................... (406) (12) -- --
--------- --------- -------- --------
Net cash flows used for
investing activities......... (425,775) (373,177) (80,858) (13,904)
--------- --------- -------- --------
Cash flows from financing
activities:
Proceeds from debt.......... 523,000 316,485 13,229 --
Repayments of debt.......... (289,915) (76,875) (6,345) (6,340)
Costs associated with debt
financings................. (11,486) (395) (94) --
Partner capital
contributions.............. 179,903 72,648 12,000 48,224
--------- --------- -------- --------
Net cash provided by financing
activities................... 401,502 311,863 18,790 41,884
--------- --------- -------- --------
Increase (decrease) in cash
and cash equivalents......... (226) 1,477 (4,890) 7,412
Cash and cash equivalents,
beginning of period.......... 3,639 3,413 4,890 --
--------- --------- -------- --------
Cash and cash equivalents, end
of period.................... $ 3,413 $ 4,890 $ -- $ 7,412
========= ========= ======== ========
Supplemental disclosure of
cash flow activity--
Cash payments for interest.. $ 42,226 $ 62,789 $ 50,619 $ 28,240
========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. The Partnership and Basis of Presentation
FrontierVision Operating Partners, L.P. ("FVOP" or the "Company"), wholly-
owned by FrontierVision Holdings, L.P., a Delaware limited partnership
("Holdings"), is a Delaware limited partnership formed on July 14, 1995 for
the purpose of acquiring and operating cable television systems.
FrontierVision Partners, L.P. ("FVP") contributed to Holdings, both directly
and indirectly, all of the outstanding partnership interests of 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. 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 $200,000 aggregate
principal amount of 11% Senior Subordinated Notes due 2006 (the "Notes').
Capital has nominal assets and does not have any material operations. The
Formation Transaction was accounted for at predecessor cost.
On October 1, 1999, Adelphia Communications Corporation ("Adelphia")
purchased all outstanding FVP partnership interests in exchange for
approximately $543,000 in cash (subject to post-closing adjustments), 7.0
million shares of Adelphia Class A common stock and the assumption of certain
liabilities. Subsequent to the Definitive Sale Agreement that was entered into
February 22, 1999, Adelphia assumed the liability for payment to the Company's
programming vendors. The Company continued to incur programming costs at their
existing contractual rates. This liability of approximately $28,200 was
settled at the closing of the sale of FVP. At closing, Adelphia advanced an
additional $15,000 to the Company to cover the majority of bonus, severance
and deferred compensation payments of approximately $17,100 which are included
in transaction costs in the accompanying statement of operations for the nine
months ended September 30, 1999.
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 consolidated financial statements include the accounts of FVOP and its
majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On December 2, 1998, Holdings, along with 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.
On June 1, 1999, Adelphia loaned $12,000 to FVP to be used by FVOP to fund
an asset exchange with Intermedia Partners, L.P. IV. This asset exchange was
consummated on June 1, 1999. FVP contributed the $12,000 to Holdings as a
capital contribution. Holdings in turn contributed this amount to FVOP as a
capital contribution.
Generally, FVOP's Partnership Agreement provides that profits, losses and
distributions are allocated to the general partner and the limited partner pro
rata based on capital contributions.
Consolidated financial statements for periods prior to October 1,1999 are
referred to herein as "Old FVOP", whereas; periods subsequent to October 1,
1999 are referred to herein as "New FVOP".
The acquisition of FVP by Adelphia has been accounted for using the purchase
method of accounting. Accordingly, the preliminary allocation of Adelphia's
purchase price to acquire FVP has been reflected in New
36
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
FVOP's consolidated financial statements as of October 1, 1999. A final
allocation of Adelphia's purchase price to acquire FVP is pending the
completion of third-party valuations.
The approximate $2,099,997 aggregate purchase price was comprised of the
following:
<TABLE>
<S> <C>
Issuance of Adelphia Class A common stock........................... $ 406,686
Assumption of debt and working capital.............................. 1,150,000
Cash (subject to post-closing adjustments).......................... 543,311
----------
$2,099,997
==========
</TABLE>
The value assigned to the 7.0 million shares of Adelphia Class A common
stock was based on the average closing price of Adelphia Class A common stock
a few days before and after the acquisition was agreed to and announced on
February 22, 1999.
The following table reflects the opening condensed consolidated balance
sheet of New FVOP which includes the effects of the preliminary purchase
accounting adjustments resulting from the allocation of Adelphia's purchase
price to acquire FVP.
<TABLE>
<CAPTION>
New FVOP
October 1, 1999
---------------
<S> <C>
ASSETS:
Cable systems:
Property, plant and equipment................................. $ 403,448
Intangible assets............................................. 1,489,820
----------
Total....................................................... 1,893,268
Subscriber receivables--net..................................... 13,371
Prepaid expenses and other assets--net.......................... 15,719
----------
Total assets................................................ $1,922,358
==========
LIABILITIES AND PARTNERS' EQUITY:
Bank and public debt............................................ $ 880,500
Other debt...................................................... 10,994
Accounts payable................................................ 40,904
Subscriber advance payments and deposits........................ 7,861
Accrued interest and other liabilities.......................... 31,739
Deferred income taxes........................................... 9,774
----------
Total liabilities........................................... 981,772
Partners' equity................................................ 940,586
----------
Total liabilities and partners' equity...................... $1,922,358
==========
</TABLE>
As a result of the application of purchase accounting, New FVOP has recorded
its assets and liabilities at their preliminary fair values on October 1,
1999. As of December 31, 1999, the allocation of Adelphia's purchase price to
acquire FVP had not been finalized. Accordingly, the Company may make
additional refinements to the preliminary allocation of Adelphia's purchase
prices to acquire FVP in future periods based upon the results of
37
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
the completion of third- party valuations. Certain of the more significant
effects of purchase accounting are described below.
The $403,448 assigned to New FVOP's property, plant and equipment will be
depreciated over useful lives ranging primarily from 3 to 20 years. The
$1,489,820 assigned to New FVOP's intangible assets, which are primarily
comprised of franchise costs and will be amortized over useful lives of
primarily 40 years.
2. Summary of Significant Accounting Policies
Subscriber Revenues
Subscriber revenues are recognized in the month in which the service is
provided.
Subscriber Receivables
An allowance for doubtful accounts of $666 and $851 is recorded as a
reduction of subscriber receivables at December 31, 1998 and 1999,
respectively.
Programming Expense
Subsequent to the acquisition, Adelphia allocates charges from programmers
to affiliates (including New FVOP) based on the number of subscribers to each
programming service.
Property, Plant and Equipment
Property, plant and equipment are comprised of the following:
<TABLE>
<CAPTION>
Old FVOP New FVOP
------------ ------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Operating plant and equipment......................... $374,697 $353,219
Real estate and improvements.......................... 21,373 25,845
Support equipment..................................... 25,320 14,477
Construction in progress.............................. 14,141 23,811
-------- --------
435,531 417,352
Accumulated depreciation.............................. (92,777) (9,798)
-------- --------
$342,754 $407,554
======== ========
</TABLE>
Depreciation for Old FVOP was computed on a straight-line basis using an
average estimated useful life of 8 years for operating plant and equipment,
support equipment and real estate and improvements. New FVOP's depreciation is
computed on a straight-line basis using estimated useful lives of 5 to 12
years for operating plant and equipment and 3 to 20 years for support
equipment and real estate and improvements. Depreciation expense amounted to
$32,176, $44,346, $49,642 and $9,798 for the years ended December 31, 1997 and
1998, the nine months ended September 30, 1999 and the three months ended
December 31, 1999. Additions to property, plant and equipment are recorded at
cost, which includes amounts for material, applicable labor and interest.
38
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Intangible Assets
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
Old FVOP New FVOP
------------ ------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Purchased franchises.................................. $ 717,614 $1,330,869
Purchased subscriber lists............................ 146,411 101,971
Covenants not to compete.............................. 16,856 6,232
Goodwill.............................................. 53,937 68,509
--------- ----------
934,818 1,507,581
Accumulated amortization.............................. (114,294) (11,634)
--------- ----------
$ 820,524 $1,495,947
========= ==========
</TABLE>
A portion of the aggregate purchase price of cable television systems
acquired has been allocated to purchased franchises, purchased subscriber
lists, covenants not to compete and goodwill. Purchased franchises and
goodwill are amortized on the straight-line method over periods of up to 15
years for Old FVOP and 40 years for New FVOP. Purchased subscriber lists are
amortized on the straight-line method over the average periods that the listed
subscribers are expected to receive service from the date of acquisition,
which are 7 years for Old FVOP and 10 years for New FVOP. Covenants not to
compete are amortized on the straight-line method over 5 years for Old FVOP
and New FVOP.
Other Assets
The unamortized amount of deferred debt financing costs included in prepaid
expenses and other assets was $19,297 and $13,841 at December 31, 1998 and
1999, respectively. Such costs are amortized over the term of the related
debt.
Asset Impairments
FVOP periodically reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of assets may not be recoverable. Measurement of any impairment
would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Noncash Financing and Investing Activities
Capital leases entered into during the years ended December 31, 1997 and
1998, the nine months ended September 30, 1999 and the three months ended
December 31, 1999 totaled $0, $1,545, $9,527and $0, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
39
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Derivative Financial Instruments
Net settlement amounts under interest rate swap and collar agreements are
recorded as adjustments to interest expense during the period incurred (see
Note 4).
Franchise Expense
The typical term of the Company's franchise agreements upon renewal is 10
years. Franchise fees range from 3% to 5% of subscriber revenue and are
expensed currently.
Use of Estimates in the Preparation of Financial Statements
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.
Income Taxes
The Company and most of its direct and indirect subsidiaries 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 jurisdictions. The basis in the Company's assets and
liabilities differs for financial and tax reporting purposes.
Certain subsidiaries 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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Management of the Company has not completed its
evaluation of the impact of SFAS No. 133 on the Company's consolidated
financial statements. In July 1999, SFAS No. 137 was issued to delay the
effective date of SFAS No. 133 fiscal quarters of fiscal years beginning after
June 15, 2000.
At its January 2000 meeting, the Emerging Issues Task Force ("EITF") reached
consensus with respect to certain issued related to EITF 98-3, "Determining
Whether a Transaction is an Exchange of Similar Productive Assets or a
Business Combination." As a result of this consensus, the Company will be
required to treat cable system swaps as a purchase of a business and a
disposition of a business at fair value. Management of the Company will
monitor the impact of EITF 98-3 as it relates to future transactions of the
Company.
Reclassification
Certain 1997 and 1998 amounts have been reclassified to conform with the
1999 presentation.
40
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
3. Acquisitions and Dispositions
Acquisitions
The Company completed several acquisitions in 1997 and 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 their fair values at the respective dates
of acquisition. Amounts allocated to property and equipment and to intangible
assets are depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
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.
The combined purchase price of certain acquisitions has been allocated to
the acquired assets and liabilities as follows:
<TABLE>
<CAPTION>
Old FVOP
-------------------------
Acquisitions Acquisitions
through through
December 31, December 31,
1997(a) 1998(a)
------------ ------------
<S> <C> <C>
Property, plant and equipment......................... $ 48,805 $ 79,526
Intangible assets..................................... 344,490 244,492
-------- --------
393,295 324,018
-------- --------
Net working capital (deficit)......................... (164) 410
Deferred income taxes................................. -- (14,783)
Less--Earnest money deposits applied.................. (500) (2,050)
-------- --------
Total cash paid for acquisitions.................... $392,631 $307,595
======== ========
</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 had
been consummated on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Old FVOP
------------------
Year Ended
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Revenue.................................................... $250,659 $276,976
Operating expenses......................................... (135,044) (150,989)
Depreciation and amortization.............................. (113,045) (129,701)
-------- --------
Operating income (loss).................................... 2,570 (3,714)
Interest and other expenses................................ (82,347) (73,940)
-------- --------
Net loss................................................... $(79,777) $(77,654)
======== ========
</TABLE>
41
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
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 above
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
On January 7, 1999, the Company sold certain cable television system assets
serving approximately 4,400 basic subscribers to Helicon Partners I, L.P., for
an aggregate sales price of approximately $5,220.
System Swaps
On June 1, 1999, the Company completed the exchange of five systems located
in northern Kentucky for five Intermedia Partners, L.P. IV systems located in
communities near Lexington, Kentucky which are contiguous to other of the
Company's Kentucky systems. The Company paid approximately $13,300 as
consideration for approximately 5,300 subscribers the Company gained in the
transaction.
4. Debt
The aggregate fair value assigned in purchase accounting to New FVOP's debt
was greater than the aggregate recorded value at the date of the acquisition
by $13,000. The fair value of FVOP's debt is estimated based on the quoted
market prices for the same or similar issue or on the current rates offered to
FVOP for debt of the same remaining maturities. Such excess will be amortized
over the respective remaining 6 to 8 year lives of the underlying debt
obligations.
The Company's debt was comprised of the following:
<TABLE>
<CAPTION>
Old FVOP New FVOP
------------ ------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Bank and Public Debt:
Bank Credit Facility:
Revolving Credit Facility, interest based on
various floating rate options (7.25% and 8.33%
average at December 31, 1998 and 1999,
respectively), payable monthly.................. $172,000 $175,000
Term loans, interest based on various floating
LIBOR options (7.46% and 8.52% weighted average
at December 31, 1998 and 1999, respectively),
payable monthly................................. 498,125 486,981
11% Senior Subordinated Notes due 2006............. 200,000 212,541
-------- --------
Total.......................................... $870,125 $874,522
======== ========
Other Debt:
Capital leases..................................... $ 1,485 $ 10,173
======== ========
</TABLE>
Bank Credit Facility
On December 19, 1997, FVOP entered into a Second Amended and Restated Credit
Agreement (the "Amended Credit Facility"). The amount available under the
Amended Credit Facility includes two term loans
42
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
of $250,000 each ("Facility A Term Loan" and "Facility B Term Loan") and a
$300,000 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,
FVOP has a mandatory prepayment obligation upon a change of control of FVOP
and the sale of any of its operating systems. This obligation was waived in
connection with the acquisition of FVP by Adelphia with the consent of the
majority of the lenders. Further, beginning with the year ending December 31,
2001, FVOP is required to make prepayments equal to 50% of its excess cash
flow, as defined in the Amended Credit Facility. FVOP 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 FVOP 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 FVOP.
All partnership interests in FVOP and all assets of FVOP and its
subsidiaries are pledged as collateral for the Amended Credit Facility.
Public Debt
On October 7, 1996, FVOP issued $200,000 aggregate principal amount of 11%
Senior Subordinated Notes (the "Notes"). The Notes are unsecured subordinated
obligations of FVOP (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.
In connection with the anticipated issuance of the Notes, FVOP entered into
deferred interest rate setting agreements to reduce FVOP's interest rate
exposure in anticipation of issuing the Notes. The cost of such agreements
were recognized as a component of interest expense by Old Holdings.
The Subordinated Notes Indenture (the "Indenture") has certain restrictions
on incurrence of indebtedness, distributions, mergers, asset sales and changes
in control of FVOP. Holders of the Notes have the right to require FVOP to
repurchase their Notes at 101% of principal upon a change of control (as
defined in the Indenture). The acquisition of FVP by Adelphia constituted a
change of control in accordance with the Indenture and, upon the closing of
the transaction, FVOP was required to offer to repurchase all of the Notes.
FVOP's offer to repurchase the Notes expired without any holders exercising
their option.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Former Equity Holders") were affiliates of the Company, owning in the
aggregate, a 37.6% limited partnership interest in FVP prior to the Adelphia
purchase. Affiliates of the Former Equity Holders received underwriting fees
of approximately $3.6 million in connection with the issuance of the Notes.
Other Debt
Other debt consists of capital leases which were incurred in connection with
the acquisition of, and are collateralized by, certain equipment. The interest
rate on such debt is primarily based on the Federal Funds rate or U.S.
Treasury rates plus the applicable margin and is adjusted monthly.
43
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Interest Rate Swaps and Collars
FVOP has entered into interest rate swaps and collar agreements with banks
to reduce the impact of changes in interest rates on its bank debt. FVOP
enters into interest rate swap agreements to effectively convert a portion of
its variable-rate debt to fixed-rate debt. FVOP is exposed to credit loss in
the event of nonperformance by the banks. FVOP does not expect any such
nonperformance.
The following table summarizes the notional amounts outstanding and weighted
average interest rate data for all interest rate swaps and collars, which
expire at various dates through 2002.
<TABLE>
<CAPTION>
New FVOP
------------
December 31,
1999
------------
<S> <C>
Interest Rate Swaps:
Notional amount.................................................... $ 40,000
Average pay rate................................................... 7.70%
Average reserve rate............................................... 6.28%
Interest Rate Collars:
Notional amount.................................................... $200,000
Average maximum cap rate........................................... 6.64%
Average cap and floor rate......................................... 6.13%
Average minimum floor rate......................................... 4.80%
</TABLE>
Maturities of Debt
The following table sets forth the mandatory reductions in principal under
all agreements for indebtedness at December 31 of each of the next five years
based on amounts outstanding at December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31, 2000.......................................... $26,610
Year ending December 31, 2001.......................................... 36,610
Year ending December 31, 2002.......................................... 45,084
Year ending December 31, 2003.......................................... 56,334
Year ending December 31, 2004.......................................... 60,721
</TABLE>
FVOP intends to fund its debt maturities through borrowing under new credit
agreements and internally generated funds. Changing conditions in the
financial markets may have an impact on how FVOP will refinance its debt in
the future.
5. Guarantor Subsidiaries
The Indenture for the Notes has been amended to add certain subsidiaries 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.
44
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Following is unaudited condensed consolidating financial information for the
Company:
<TABLE>
<CAPTION>
Balance Sheet as of December 31, 1999
-----------------------------------------------------------------
Guarantor Non-Guarantor Consolidating Consolidated
FVOP Subsidiaries Subsidiaries Entries FVOP
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash.................... $ 6,859 $ 445 $ 108 $ -- $ 7,412
Subscriber receivables.. 13,201 476 123 -- 13,800
Prepaid expenses and
other assets............ 65,490 (11,703) (538) (32,659) 20,590
Cable television
systems, at cost, net of
accumulated depreciation
and amortization........ 1,846,466 50,276 6,759 -- 1,903,501
---------- -------- ------ -------- ----------
Total assets........... $1,932,016 $ 39,494 $6,452 $(32,659) $1,945,303
========== ======== ====== ======== ==========
Accounts payable........ $ 32,105 $ 2,607 $ 159 $ -- $ 34,871
Subscriber advance
payments and deposits.. 8,523 (261) 142 -- 8,404
Accrued interest and
other liabilities....... 23,195 189 406 -- 23,790
Deferred income taxes... -- 10,045 -- -- 10,045
Debt.................... 884,695 -- -- -- 884,695
Total partners' equity.. 983,498 26,914 5,745 (32,659) 983,498
---------- -------- ------ -------- ----------
Total liabilities and
partners' equity...... $1,932,016 $ 39,494 $6,452 $(32,659) $1,945,303
========== ======== ====== ======== ==========
<CAPTION>
Old FVOP Statement of Operations
for the Nine Months Ended September 30, 1999
-----------------------------------------------------------------
Guarantor Non-Guarantor Consolidating Consolidated
FVOP Subsidiaries Subsidiaries Entries FVOP
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 211,331 $ 8,944 $ 757 $ -- $ 221,032
Operating expenses...... 123,961 5,547 653 -- 130,161
Transaction costs....... 16,565 450 62 -- 17,077
Depreciation and
amortization............ 103,822 4,239 183 -- 108,244
---------- -------- ------ -------- ----------
Operating income........ (33,017) (1,292) (141) -- (34,450)
Interest expense, net... (49,740) (6,416) (6) -- (56,162)
Equity in losses of
affiliate............... (5,760) (5,614) -- 11,374 --
Other income............ 8,948 13 -- -- 8,961
Income tax benefit...... -- 2,082 -- -- 2,082
---------- -------- ------ -------- ----------
Net loss................ $ (79,569) $(11,227) $ (147) $ 11,374 $ (79,569)
========== ======== ====== ======== ==========
<CAPTION>
New FVOP Statement of Operations
for the Three Months Ended December 31, 1999
-----------------------------------------------------------------
Guarantor Non-Guarantor Consolidating Consolidated
FVOP Subsidiaries Subsidiaries Entries FVOP
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 72,062 $ 3,080 $ 233 $ -- $ 75,375
Operating expenses...... 35,715 1,450 208 -- 37,373
Management fees......... 1,801 78 -- -- 1,879
Transaction costs....... 269 -- -- -- 269
Depreciation and
amortization............ 21,373 648 252 -- 22,273
---------- -------- ------ -------- ----------
Operating income........ 12,904 904 (227) -- 13,581
Interest expense, net... (18,622) -- -- -- (18,622)
Equity in losses of
affiliate............... 406 633 (6) (1,033) --
Income tax benefit...... -- (271) -- -- (271)
---------- -------- ------ -------- ----------
Net (loss) income....... $ (5,312) $ 1,266 $ (233) $ (1,033) $ (5,312)
========== ======== ====== ======== ==========
</TABLE>
At December 31, 1998, the assets of the guarantor and non-guarantor
subsidiaries represented 4.8% and 0.4%, respectively of consolidated assets.
For the year ended December 31, 1998, the revenue of the guarantor as non-
guarantor subsidiaries represented 3.4% and 0.1%, respectively of consolidated
revenue.
45
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
6. Disclosures about Fair Values of Financial Instruments
Included in FVOP'S financial instrument portfolio are cash, notes payable to
banks, Notes and interest rate swap and collar agreements. The carrying values
of the notes payable to banks approximate their fair values at December 31,
1999. The carrying cost of the Notes exceeded their fair values by
approximately $2,541 and the fair value exceeded their carrying cost by
approximately $10,000 at December 31, 1998 and 1999, respectively. At December
31, 1999, FVOP would have been required to pay approximately $152 in the
aggregate to settle its interest rate swap and collar agreements, representing
the difference between fair value and carrying cost of these agreements. The
fair values of the debt and interest rate swap and collar agreements were
based upon quoted market prices of similar instruments or on rates available
to FVOP for instruments of the same remaining maturities.
7. Employee Benefit Plans
Old FVOP participated in an FVP savings plan (401(k)) which provides that
eligible full-time employees may contribute from 1% to 15% of their pre-tax
compensation subject to certain limitations. Old FVOP matched contributions
not exceeding 3% of each participant's pre-tax compensation. During the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999,
no significant matching contributions were made by Old FVOP.
New FVOP participates in an Adelphia savings plan (401(k)) and an Adelphia
stock incentive plan. The 401(k) savings plan provides that eligible full-time
employees may contribute from 2% to 16% of their pre-tax compensation subject
to certain limitations. New FVOP matches contributions not exceeding 1.5% of
each participant's pre-tax compensation. During the three months ended
December 31, 1999, no significant matching contributions were made by New
FVOP. The stock incentive plan rewards full time employees with compensation
bonuses based on Adelphia Class A common stock performance. During the three
months ended December 31, 1999, no significant costs associated with this plan
were allocated to the Company.
8. Taxes on Income
Certain subsidiaries of FVOP are corporations that file separate federal and
state income tax returns. At December 31, 1999, these subsidiaries had net
operating loss carryforwards for federal income tax purposes of approximately
$506 expiring through 2019. The partnership investments of FVOP are tax
entities in which the filing of returns and related tax liabilities are the
responsibility of the individual owners.
Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards.
The tax effects of significant items comprising FVOP's net deferred tax
liability as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Deferred tax liabilities:
Differences between book and tax basis of property, plant and
equipment and intangible assets................................ $10,171
-------
Deferred tax assets:
Operating loss carryforwards.................................... 126
-------
Net deferred tax liability........................................ $10,045
=======
</TABLE>
46
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The income tax benefit for the quarter ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
New FVOP
------------
Three Months
Ended
December 31,
1999
------------
<S> <C>
Federal:
Current.......................................................... $ --
Deferred......................................................... (219)
State:
Current.......................................................... --
Deferred......................................................... (52)
-----
$(271)
=====
</TABLE>
Reconciliations between the statutory federal income tax rate and FVOP's
effective income tax rate as a percentage of loss before income taxes are as
follows:
<TABLE>
<CAPTION>
New FVOP
------------
Three Months
Ended
December 31,
1999
------------
<S> <C>
Statutory federal income tax rate.................................. 35%
Operating losses passed through to partners........................ (39%)
State taxes, net of federal benefit................................ (1%)
-----
Effective income tax rate.......................................... (5%)
=====
</TABLE>
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, 1997 and 1998,
the nine months ended September 30, 1999 and the three months ended
December 31, 1999 was $4,065, $5,806, $5,162 and $1,543, respectively.
The cable television industry and FVOP are subject to extensive regulation
at the federal, state and local levels. Pursuant to the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), which
significantly expanded the scope of regulation of certain subscriber rates and
a number of other matters in the cable industry, the FCC has adopted rate
regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology or, in the alternative, a cost of service showing and (ii)
associated equipment and installation services based upon cost plus a
reasonable profit. Under the FCC rules, franchising authorities are authorized
to regulate rates for basic services and associated equipment and installation
services, and the FCC will regulate rates for regulated cable programming
services in response to complaints filed with the agency. The original rate
regulations became effective on September 1, 1993. Several amendments to the
rate regulations have subsequently been added.
The FCC has adopted regulations implementing virtually all of the
requirements of the 1992 Cable Act. The FCC is also likely to continue to
modify, clarify or refine the rate regulations. The Telecommunications Act of
1996 (the "1996 Act") deregulated the rates for cable programming services on
March 31, 1999. FVOP cannot predict the effect or outcome of the future
rulemaking proceedings, changes to the rate regulations or litigation.
47
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
11. Extraordinary Item
Old FVOP 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.
12. Transactions with Related Parties
FVOP has an agreement with a subsidiary of Adelphia (the "Managing
Affiliate") which provides for the payment of management fees by FVOP of up to
5% of gross revenues. For the three month period ended December 31, 1999,
payments in the amount of $1,879 were made to the Managing Affiliate.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
FrontierVision Capital Corporation:
We have audited the accompanying consolidated balance sheet of
FrontierVision Capital Corporation as of December 31, 1998 and the related
statements of operations, owner's deficit and cash flows for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement 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 balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet referred
to above. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of FrontierVision Capital Corporation as of
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998 and the nine months ended September 30,
1999 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
November 10, 1999
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
FrontierVision Capital Corporation:
We have audited the accompanying consolidated balance sheet of
FrontierVision Capital Corporation as of December 31, 1999 and the related
statements of operations, owner's deficit and cash flows for the three months
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement 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 balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet referred
to above. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of FrontierVision Capital Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
three months ended December 31, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 29, 2000
50
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
Old FVOP New FVOP
------------ ------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS:
Cash................................................. $ -- $ --
----- -----
Total assets....................................... $ -- $ --
===== =====
LIABILITIES AND OWNER'S DEFICIT:
Payable to FVOP...................................... $ 100 $ 100
Owner's deficit:
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) (200)
----- -----
Total owner's deficit............................ (100) (100)
----- -----
Total liabilities and owner's deficit............ $ -- $ --
===== =====
</TABLE>
See note to financial statements.
51
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Old FVOP New FVOP
--------------------------------------- ------------
For the Year For the Year Nine Months Three Months
Ended Ended Ended Ended
December 31, December 31, September 30, December 31,
1997 1998 1999 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue.................. $ -- $ -- $-- $--
General and
administrative
expenses................ 45 143 -- --
---- ----- --- ---
Net loss................. $(45) $(143) $-- $--
==== ===== === ===
</TABLE>
See note to financial statements.
52
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OWNER'S DEFICIT
<TABLE>
<CAPTION>
Common Additional Retained Total Owner's
Stock Paid-In Capital Deficit Deficit
------ --------------- -------- -------------
<S> <C> <C> <C> <C>
Old FVOP:
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)
Net loss....................... -- -- -- --
--- --- ----- -----
Balance, September 30, 1999...... $1 $99 $(200) $(100)
=== === ===== =====
- -------------------------------------------------------------------------------
New FVOP:
Balance, October 1, 1999......... $1 $99 $(200) $(100)
Net loss....................... -- -- -- --
--- --- ----- -----
Balance, December 31, 1999....... $1 $99 $(200) $(100)
=== === ===== =====
</TABLE>
See note to financial statements.
53
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Old FVOP New FVOP
--------------------------------------- ------------
For the Year For the Year Nine Months Three Months
Ended Ended Ended Ended
December 31, December 31, September 30, December 31,
1997 1998 1999 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss............... $(45) $(143) $-- $--
---- ----- --- ---
Net cash flows used in
operating activities.. (45) (143) -- --
---- ----- --- ---
Net decrease in cash and
cash equivalents........ (45) (143) -- --
Cash and cash
equivalents, beginning
of period............... 188 143 -- --
---- ----- --- ---
Cash and cash
equivalents, end of
period.................. $143 $ -- $-- $--
==== ===== === ===
</TABLE>
See note to financial statements.
54
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
NOTE TO 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 $200.0 million aggregate principal amount of the 11% Senior
Subordinated Notes.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective February 10, 2000, FVOP dismissed its independent public
accountants, KPMG LLP and subsequently engaged Deloitte & Touche LLP as FVOP's
principal independent public accountants. FVOP had no disagreements with KPMG
through the date of dismissal, nor did any of KPMG's reports on the financial
statements of FVOP contain an adverse opinion or disclaimer of opinion, nor
was any report modified as to uncertainty, audit scope, or accounting
principle. The change in accountants is fully disclosed in FVOP's Form 8-K
filed with the SEC on February 11, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
The directors and executive officers of ACC Operations, Inc., the Adelphia
subsidiary which indirectly wholly owns FVOP, Holdings and FVP, the managing
general partner of Holdings, are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John J. Rigas........... 75 Chairman and Director of ACC Operations, Inc.
Michael J. Rigas........ 46 Executive Vice President and Director of ACC Operations, Inc.
Timothy J. Rigas........ 43 Executive Vice President, Treasurer and Director of ACC Operations, Inc.
James P. Rigas.......... 42 Executive Vice President and Director of ACC Operations, Inc.
</TABLE>
John J. Rigas is Chairman and Director of ACC Operations, Inc. and is the
founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board
of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a
member of the Board of Directors of the Charles Cole Memorial Hospital. He is
a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the board of directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
ACC Operations, Inc.
Michael J. Rigas is an Executive Vice President and Director of ACC
Operations, Inc., Executive Vice President, Operations of Adelphia and a Vice
President of Adelphia's other subsidiaries. He has been with Adelphia since
1981. From 1979 to 1981, he worked for Webster, Chamberlain & Bean, a
Washington, D.C. law firm. Mr. Rigas graduated from Harvard University (magna
cum laude) in 1976 and received his J.D. degree from Harvard Law School in
1979.
Timothy J. Rigas is an Executive Vice President and Treasurer and Director
of ACC Operations, Inc., Executive Vice President, Chief Financial Officer and
Treasurer of Adelphia, and a Vice President of Adelphia's other subsidiaries.
He has been with Adelphia since 1979. Mr. Rigas graduated from the University
of Pennsylvania, Wharton School, with a B.S. degree in Economics (cum laude)
in 1978.
56
<PAGE>
James P. Rigas is an Executive Vice President and Director of ACC
Operations, Inc., Executive Vice President, Strategic Planning of Adelphia and
a Vice President of Adelphia's other subsidiaries. He has been with Adelphia
since 1986. Mr. Rigas graduated from Harvard University (magna cum laude) in
1980 and received a J.D. degree and an M.A. degree in Economics from Stanford
University in 1984. From June 1984 to February 1986, he was a consultant with
Bain & Co., a management consulting firm.
ITEM 11. EXECUTIVE COMPENSATION
Neither ACC Operations, Inc., FVOP, Holdings, nor FVP has employment
contracts in effect with the executive officers of FVOP or those named in Item
10 of this Form 10-K, including any compensatory plans or arrangements
resulting from the resignation, retirement or other termination of such
executive officers. Each of the executive officers named in Item 10 is an
executive officer of Adelphia. As executive officers of Adelphia, such
individuals are parties to employment contracts with Adelphia and are
compensated by Adelphia in accordance with the decisions and policies of the
Board of Directors of Adelphia and the Compensation Committee of the Board of
Directors of Adelphia. Pursuant to the Partnership Agreement, the Company pays
Adelphia a management fee representing an allocation of the corporate overhead
of Adelphia, which includes a portion for executive salaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sole general partner (owning 99.9% of the partnership interests therein)
of FrontierVision Operating Partners, L.P. 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
Adelphia GP Holdings, LLC. FVP's sole limited partner (owning 99% of the
partnership interests therein) is ACC Operations, Inc., which is wholly-owned
by Adelphia Communications Corporation. The executive officers of Adelphia
named in Item 10 of this Form 10-K and their affiliates hold various ownership
interests in Adelphia, as set forth on a Schedule 13D, as amended, filed by
them with respect to Adelphia under the Securities Exchange Act of 1934, as
amended, and as set forth in filings by Adelphia under the Securities Exchange
Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sole general partner (owning 99.9% of the partnership interests therein)
of FrontierVision Operating Partners, L.P. 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.
Prior to October 1, 1999 Acquisition by Adelphia. FVP's sole general partner
(owning 1% of the partnership interests therein) was FVP GP. FVP's limited
partners (owning 99% of the partnership interests therein) consisted 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) was FrontierVision Inc., which was owned by
James C. Vaughn and John S. Koo.
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 were
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.
57
<PAGE>
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
were "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 were entitled to receive "carried interest"
distributions or were allocated a portion of 15% of any remaining capital to
be distributed by FVP after certain other distributions were 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, were 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 Senior Subordinated Notes;
(2) received compensation in the aggregate of approximately $5.3 million
in connection with the issuance of the Senior Discount Notes, Series A
of Holdings;
(3) received compensation in the aggregate of approximately $1.5 million
in connection with the issuance of the Senior Discount Notes, Series B
of Holdings.
To the knowledge of the Company, during the nine months ended September 30,
1999, there were 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 received any additional compensation from FVOP or any of its
affiliates.
After the October 1, 1999 Acquisition by Adelphia. FVOP has an agreement
with a subsidiary of Adelphia (the "Managing Affiliate") which provides for
the payment of management fees by FVOP of up to 5% of gross revenues. For the
three month period ended December 31, 1999, payments in the amount of $1,879
were made to the Managing Affiliate.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) Exhibits
<TABLE>
<C> <S>
2.1 Purchase Agreement dated as of February 22, 1999 among FrontierVision
Partners, L.P., FVP GP, L.P., the General Partner and Certain Direct
and Indirect Limited Partners of FrontierVision Partners, L.P. and
Adelphia Communications Corporation. (6)
3.1 Amended and Restated Agreement of Limited Partnership of
FrontierVision Operating Partners, L.P. (1)
3.2 Certificate of Limited Partnership of FrontierVision Operating
Partners, L.P. (2)
3.3 Amended and Restated Agreement of Limited Partnership of
FrontierVision Partners, L.P. (9)
3.9 Certificate of Incorporation of FrontierVision Capital Corporation.
(2)
3.10 Bylaws of FrontierVision Capital Corporation. (2)
3.16 Agreement of Limited Partnership of FrontierVision Holdings, L.P. (1)
3.17 Certificate of Limited Partnership of FrontierVision Holdings, L.P.
(1)
3.18 Certificate of Incorporation of FrontierVision Holdings Capital
Corporation. (1)
3.19 Bylaws of FrontierVision Holdings Capital Corporation. (1)
3.20 Certificate of Incorporation of FrontierVision Holdings Capital II
Corporation. (7)
3.21 Bylaws of FrontierVision Holdings Capital II Corporation. (7)
4.1 Indenture dated as of October 7, 1996, among FrontierVision Operating
Partners, L.P., FrontierVision Capital Corporation and Colorado
National Bank, as Trustee. (3)
4.2 Indenture dated as of September 19, 1997, among FrontierVision
Holdings, L.P., FrontierVision Holdings Capital Corporation and U.S.
Bank National Association d/b/a Colorado National Bank, as Trustee.
(1)
4.3 Purchase Agreement, dated as of September 16, 1997, by and among
FrontierVision Holdings, L.P., FrontierVision Holdings Capital
Corporation, and J.P. Morgan Securities Inc., Chase Securities Inc.,
CIBC Wood Gundy Corp. and First Union Capital Markets Corp., as
Initial Purchasers. (1)
4.4 Registration Rights Agreement, dated as of September 19, 1997, by and
among FrontierVision Holdings, L.P., FrontierVision Holdings Capital
Corporation, and J.P. Morgan Securities Inc., Chase Securities Inc.,
CIBC Wood Gundy Corp. and First Union Capital Markets Corp., as
Initial Purchasers. (1)
4.5 Indenture dated as of December 9, 1998, among FrontierVision
Holdings, L.P., FrontierVision Holdings Capital II Corporation and
U.S. Bank National Association, as Trustee. (7)
4.6 Purchase Agreement dated as of December 2, 1998, by and among
FrontierVision Holdings, L.P., FrontierVision Holdings Capital II
Corporation and J.P. Morgan Securities, Inc. and Chase Securities
Inc., as Initial Purchasers. (7)
4.7 Registration Rights Agreement dated as of December 9, 1998, by and
among Frontier Vision Holdings, L.P., FrontierVision Holdings Capital
II Corporation and J.P. Morgan Securities Inc., and Chase Securities,
Inc., as Initial Purchasers. (7)
</TABLE>
59
<PAGE>
<TABLE>
<C> <S>
10.1 Amended Bank Credit Facility. (2)
10.2 Employment Agreement of James C. Vaughn. (2)
10.3 Asset Purchase Agreement dated July 20, 1995 between United Video
Cablevision, Inc. and FrontierVision Operating Partners, L.P. (2)
10.4 Asset Acquisition Agreement (July 27, 1995 Auction Sale) dated as of
July 27, 1995 among Stephen S. Gray in his capacity as Receiver of
Longfellow Cable Company, Inc., Carrabassett Electronics and
Carrabassett Cable Company, Inc. and FrontierVision Operating
Partners, L.P. (2)
10.5 Asset Purchase Agreement dated October 27, 1995 among C4 Media Cable
Southeast, Limited Partnership, County Cable Company, L.P. and
FrontierVision Operating Partners, L.P. (2)
10.6 Asset Purchase Agreement dated November 17, 1995 among Cox
Communications Ohio, Inc., Times Mirror Cable Television of Defiance,
Inc., Chillicothe Cablevision, Inc., Cox Communications Eastern
Kentucky, Inc. and FrontierVision Operating Partners, L.P. (2)
10.7 Asset Purchase Agreement dated February 27, 1996 between Americable
International Maine, Inc. and FrontierVision Operating Partners, L.P.
(2)
10.8 Asset Purchase Agreement dated May 16, 1996 among Triax Southeast
Associates, L.P., Triax Southeast General Partner, L.P. and
FrontierVision Operating Partners, L.P. (2)
10.9 Asset Purchase and Sale Agreement dated June 21, 1996 between HPI
Acquisition Co. LLC (assignee of Helicon Partners I, LP) and
FrontierVision Operating Partners, L.P. (2)
10.10 Asset Purchase Agreement dated July 15, 1996 between American Cable
Entertainment of Kentucky-Indiana, Inc. and FrontierVision Operating
Partners, L.P. (2)
10.11 Asset Purchase Agreement dated as of July 30, 1996 between Shenandoah
Cable Television Company and FrontierVision Operating Partners, L.P.
(2)
10.12 Purchase Agreement dated as of August 6, 1996 between Penn/Ohio
Cablevision, L.P. and FrontierVision Operating Partners, L.P. (2)
10.13 Asset Purchase Agreement dated July 19, 1996 between Phoenix
Grassroots Cable Systems, L.L.C. and FrontierVision Operating
Partners, L.P. (2)
10.14 Amendment No. 1 to Amended Bank Credit Facility. (2)
10.15 Consent and Amendment No. 2 to Amended Bank Credit Facility. (3)
10.16 Asset Purchase Agreement dated May 8, 1997 between A-R Cable
Services--ME, Inc. and FrontierVision Operating Partners, L.P. (1)
10.17 Asset Purchase Agreement dated as of May 12, 1997 between TCI
Cablevision of Vermont, Inc., Westmarc Development Joint Venture and
FrontierVision Operating Partners, L.P. (1)
10.18 Amended Credit Facility. (4)
10.19 Asset Purchase Agreement dated as of October 15, 1997 between Coxcom,
Inc. And FrontierVision Operating Partners, L.P. (1)
10.20 Asset Purchase Agreement dated as of June 24, 1998 between State
Cable TV Corporation, Better Cable TV Company and FrontierVision
Operating Partners, L.P. (5)
10.21 Amendment No. 2 to the Amended Credit Facility of FrontierVision
Operating Partners, L.P., dated as of July 15, 1999. (9)
16.1 Report of change in accountants. (8)
</TABLE>
60
<PAGE>
<TABLE>
<C> <S>
21.1 Subsidiaries of the Registrant. (9)
27.1 Financial Data Schedule as of and for the period ended December 31,
1999 (supplied for the information of the Commission). (10)
</TABLE>
- --------
(1) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Registration
Statement on Form S-4, Registration No. 333-36519.
(2) Incorporated by reference to the exhibits to FrontierVision Operating
Partners, L.P.'s and FrontierVision Capital Corporation's Registration
Statement on Form S-1, Registration No. 333-9535.
(3) Incorporated by reference to the exhibits to FrontierVision Operating
Partners, L.P.'s and FrontierVision Capital Corporation's Quarterly
Report on Form 10-Q, File No. 333-9535 for the quarter ended
September 30, 1996.
(4) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Annual Report on
Form 10-K, File No. 333-36519 for the year ended December 31, 1997.
(5) Incorporated by reference to the exhibit to FrontierVision Holdings,
L.P.'s Current Report on Form 8-K filed November 6, 1998, File No. 333-
36519.
(6) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Annual Report on
Form 10-K, File No. 333-36519 for the year ended December 31, 1998.
(7) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital II Corporation's Registration
Statement on Form S-4, Registration No. 333-75567.
(8) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s Current Report on Form 8-K filed February 11, 2000, File No. 333-
36519.
(9) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s Form 10-K for the year ended December 31, 1999, File No. 333-
36519.
(10) Filed herewith.
The Registrants will furnish to the Commission upon request copies of
instruments not filed herewith which authorize the issuance of long-term
obligations of Registrants not in excess of 10% of the Registrants' total
assets on a consolidated basis.
(b) The Registrants filed an Form 8-K on October 15, 1999 which reported
information under Item 1 thereof. No financial statements were filed with
such Form 8-K report.
(c) The Registrants hereby file as exhibits to this Annual Report on Form 10-
K the exhibits set forth in Item 14(a)(3) hereof which are not
incorporated by reference.
(d) The Registrants hereby file as financial statement schedules to this
Annual Report on Form 10-K the financial statement schedules set forth in
Item 14(a)(2) hereof.
61
<PAGE>
Supplemental Information To Be Furnished
With Reports Filed Pursuant To Section 15(D) Of
The Exchange Act By Registrant's Which Have Not
Registered Securities Pursuant To Section 12 Of
The Exchange Act
Other than a copy of this Form 10-K, no annual report or proxy material has
been or will be sent to security holders of FrontierVision Operating Partners,
L.P. or FrontierVision Capital Corporation.
62
<PAGE>
SCHEDULE I
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Deductions/ Balance at
of Period Expenses Write-offs End of Period
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for uncollectible
trade receivables:
Old FVOP
Year ended December 31,
1997....................... $767 $1,761 $(1,888) $640
Year ended December 31,
1998....................... $640 $3,076 $(3,050) $666
Nine Months Ended September
30, 1999................... $666 $4,254 $(4,307) $613
- ------------------------------------------------------------------------------
New FVOP
Three Months Ended December
31, 1999................... $613 $1,707 $(1,469) $851
</TABLE>
63
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FRONTIERVISION OPERATING PARTNERS, L.P.
By: FrontierVision Holdings, L.P., its general
partner
By: FrontierVision Partners, L.P., its general
partner
By: Adelphia GP Holdings, L.L.C., its general
partner
By: ACC Operations, Inc., its sole member
Date: March 30, 2000 /s/ Timothy J. Rigas
By: _____________________________________________
Timothy J. Rigas
Executive Vice President, Chief Financial
Officer,
Chief Accounting Officer, and Treasurer
FRONTIERVISION CAPITAL CORP.
Date: March 30, 2000 /s/ Timothy J. Rigas
By: _____________________________________________
Timothy J. Rigas
Executive Vice President, Chief Financial
Officer,
Chief Accounting Officer, and Treasurer
Date: March 30, 2000 /s/ John J. Rigas
By: _____________________________________________
John J. Rigas
Director ACC Operations, Inc.,
FrontierVision Operating Parnters, L.P.,
FrontierVision Capital Corporation
Date: March 30, 2000 /s/ Michael J. Rigas
By: _____________________________________________
Michael J. Rigas
Director ACC Operations, Inc.,
FrontierVision Operating Parnters, L.P.,
FrontierVision Capital Corporation
Date: March 30, 2000 /s/ Timothy J. Rigas
By: _____________________________________________
Timothy J. Rigas
Director ACC Operations, Inc.,
FrontierVision Operating Parnters, L.P.,
FrontierVision Capital Corporation
Date: March 30, 2000 /s/ James P. Rigas
By: _____________________________________________
James P. Rigas
Director ACC Operations, Inc.,
FrontierVision Operating Parnters, L.P.,
FrontierVision Capital Corporation
64
<PAGE>
EXHIBIT INDEX
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) Exhibits
<TABLE>
<C> <S>
2.1 Purchase Agreement dated as of February 22, 1999 among FrontierVision
Partners, L.P., FVP GP, L.P., the General Partner and Certain Direct
and Indirect Limited Partners of FrontierVision Partners, L.P. and
Adelphia Communications Corporation. (6)
3.1 Amended and Restated Agreement of Limited Partnership of
FrontierVision Operating Partners, L.P. (1)
3.2 Certificate of Limited Partnership of FrontierVision Operating
Partners, L.P. (2)
3.3 Amended and Restated Agreement of Limited Partnership of
FrontierVision Partners, L.P. (9)
3.9 Certificate of Incorporation of FrontierVision Capital Corporation.
(2)
3.10 Bylaws of FrontierVision Capital Corporation. (2)
3.16 Agreement of Limited Partnership of FrontierVision Holdings, L.P. (1)
3.17 Certificate of Limited Partnership of FrontierVision Holdings, L.P.
(1)
3.18 Certificate of Incorporation of FrontierVision Holdings Capital
Corporation. (1)
3.19 Bylaws of FrontierVision Holdings Capital Corporation. (1)
3.20 Certificate of Incorporation of FrontierVision Holdings Capital II
Corporation. (7)
3.21 Bylaws of FrontierVision Holdings Capital II Corporation. (7)
4.1 Indenture dated as of October 7, 1996, among FrontierVision Operating
Partners, L.P., FrontierVision Capital Corporation and Colorado
National Bank, as Trustee. (3)
4.2 Indenture dated as of September 19, 1997, among FrontierVision
Holdings, L.P., FrontierVision Holdings Capital Corporation and U.S.
Bank National Association d/b/a Colorado National Bank, as Trustee.
(1)
4.3 Purchase Agreement, dated as of September 16, 1997, by and among
FrontierVision Holdings, L.P., FrontierVision Holdings Capital
Corporation, and J.P. Morgan Securities Inc., Chase Securities Inc.,
CIBC Wood Gundy Corp. and First Union Capital Markets Corp., as
Initial Purchasers. (1)
4.4 Registration Rights Agreement, dated as of September 19, 1997, by and
among FrontierVision Holdings, L.P., FrontierVision Holdings Capital
Corporation, and J.P. Morgan Securities Inc., Chase Securities Inc.,
CIBC Wood Gundy Corp. and First Union Capital Markets Corp., as
Initial Purchasers. (1)
4.5 Indenture dated as of December 9, 1998, among FrontierVision
Holdings, L.P., FrontierVision Holdings Capital II Corporation and
U.S. Bank National Association, as Trustee. (7)
4.6 Purchase Agreement dated as of December 2, 1998, by and among
FrontierVision Holdings, L.P., FrontierVision Holdings Capital II
Corporation and J.P. Morgan Securities, Inc. and Chase Securities
Inc., as Initial Purchasers. (7)
4.7 Registration Rights Agreement dated as of December 9, 1998, by and
among Frontier Vision Holdings, L.P., FrontierVision Holdings Capital
II Corporation and J.P. Morgan Securities Inc., and Chase Securities,
Inc., as Initial Purchasers. (7)
</TABLE>
1
<PAGE>
<TABLE>
<C> <S>
10.1 Amended Bank Credit Facility. (2)
10.2 Employment Agreement of James C. Vaughn. (2)
10.3 Asset Purchase Agreement dated July 20, 1995 between United Video
Cablevision, Inc. and FrontierVision Operating Partners, L.P. (2)
10.4 Asset Acquisition Agreement (July 27, 1995 Auction Sale) dated as of
July 27, 1995 among Stephen S. Gray in his capacity as Receiver of
Longfellow Cable Company, Inc., Carrabassett Electronics and
Carrabassett Cable Company, Inc. and FrontierVision Operating
Partners, L.P. (2)
10.5 Asset Purchase Agreement dated October 27, 1995 among C4 Media Cable
Southeast, Limited Partnership, County Cable Company, L.P. and
FrontierVision Operating Partners, L.P. (2)
10.6 Asset Purchase Agreement dated November 17, 1995 among Cox
Communications Ohio, Inc., Times Mirror Cable Television of Defiance,
Inc., Chillicothe Cablevision, Inc., Cox Communications Eastern
Kentucky, Inc. and FrontierVision Operating Partners, L.P. (2)
10.7 Asset Purchase Agreement dated February 27, 1996 between Americable
International Maine, Inc. and FrontierVision Operating Partners, L.P.
(2)
10.8 Asset Purchase Agreement dated May 16, 1996 among Triax Southeast
Associates, L.P., Triax Southeast General Partner, L.P. and
FrontierVision Operating Partners, L.P. (2)
10.9 Asset Purchase and Sale Agreement dated June 21, 1996 between HPI
Acquisition Co. LLC (assignee of Helicon Partners I, LP) and
FrontierVision Operating Partners, L.P. (2)
10.10 Asset Purchase Agreement dated July 15, 1996 between American Cable
Entertainment of Kentucky-Indiana, Inc. and FrontierVision Operating
Partners, L.P. (2)
10.11 Asset Purchase Agreement dated as of July 30, 1996 between Shenandoah
Cable Television Company and FrontierVision Operating Partners, L.P.
(2)
10.12 Purchase Agreement dated as of August 6, 1996 between Penn/Ohio
Cablevision, L.P. and FrontierVision Operating Partners, L.P. (2)
10.13 Asset Purchase Agreement dated July 19, 1996 between Phoenix
Grassroots Cable Systems, L.L.C. and FrontierVision Operating
Partners, L.P. (2)
10.14 Amendment No. 1 to Amended Bank Credit Facility. (2)
10.15 Consent and Amendment No. 2 to Amended Bank Credit Facility. (3)
10.16 Asset Purchase Agreement dated May 8, 1997 between A-R Cable
Services--ME, Inc. and FrontierVision Operating Partners, L.P. (1)
10.17 Asset Purchase Agreement dated as of May 12, 1997 between TCI
Cablevision of Vermont, Inc., Westmarc Development Joint Venture and
FrontierVision Operating Partners, L.P. (1)
10.18 Amended Credit Facility. (4)
10.19 Asset Purchase Agreement dated as of October 15, 1997 between Coxcom,
Inc. And FrontierVision Operating Partners, L.P. (1)
10.20 Asset Purchase Agreement dated as of June 24, 1998 between State
Cable TV Corporation, Better Cable TV Company and FrontierVision
Operating Partners, L.P. (5)
10.21 Amendment No. 2 to the Amended Credit Facility of FrontierVision
Operating Partners, L.P., dated as of July 15, 1999. (9)
16.1 Report of change in accountants. (8)
</TABLE>
2
<PAGE>
<TABLE>
<C> <S>
21.1 Subsidiaries of the Registrant. (9)
27.1 Financial Data Schedule as of and for the period ended December 31,
1999 (supplied for the information of the Commission). (10)
</TABLE>
- --------
(1) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Registration
Statement on Form S-4, Registration No. 333-36519.
(2) Incorporated by reference to the exhibits to FrontierVision Operating
Partners, L.P.'s and FrontierVision Capital Corporation's Registration
Statement on Form S-1, Registration No. 333-9535.
(3) Incorporated by reference to the exhibits to FrontierVision Operating
Partners, L.P.'s and FrontierVision Capital Corporation's Quarterly
Report on Form 10-Q, File No. 333-9535 for the quarter ended
September 30, 1996.
(4) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Annual Report on
Form 10-K, File No. 333-36519 for the year ended December 31, 1997.
(5) Incorporated by reference to the exhibit to FrontierVision Holdings,
L.P.'s Current Report on Form 8-K filed November 6, 1998, File No. 333-
36519.
(6) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital Corporation's Annual Report on
Form 10-K, File No. 333-36519 for the year ended December 31, 1998.
(7) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s and FrontierVision Holdings Capital II Corporation's Registration
Statement on Form S-4, Registration No. 333-75567.
(8) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s Current Report on Form 8-K filed February 11, 2000, File No. 333-
36519.
(9) Incorporated by reference to the exhibits to FrontierVision Holdings,
L.P.'s Form 10-K for the year ended December 31, 1999, File No. 333-
36519.
(10) Filed herewith.
The Registrants will furnish to the Commission upon request copies of
instruments not filed herewith which authorize the issuance of long-term
obligations of Registrants not in excess of 10% of the Registrants' total
assets on a consolidated basis.
(b) The Registrants filed an Form 8-K on October 15, 1999 which reported
information under Item 1 thereof. No financial statements were filed with
such Form 8-K report.
(c) The Registrants hereby file as exhibits to this Annual Report on Form 10-
K the exhibits set forth in Item 14(a)(3) hereof which are not
incorporated by reference.
(d) The Registrants hereby file as financial statement schedules to this
Annual Report on Form 10-K the financial statement schedules set forth in
Item 14(a)(2) hereof.
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION AS OF AND FOR THE NINE
MONTHS ENDED SEPT. 30, 1999 AND SUMMARY FINANCIAL INFORMATION AS OF AND FOR THE
THREE MONTHS ENDED DEC. 30, 1999, EXTRACTED FROM BALANCE SHEETS AND STATEMENTS
OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED IN THIS FORM 10K.
</LEGEND>
<CIK> 0001019504
<NAME> FRONTIERVISION OPERATING PARTNERS LP
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<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 DEC-31-1999
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0 0
0 0
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<INCOME-TAX> (2,082) 271
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