Registration Nos. 333-36519 and 333-36519-01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FrontierVision Holdings, L.P.
FrontierVision Holdings Capital Corporation
(Exact names of Registrants as specified in their charters)
Delaware 4841 84-1432334
Delaware 4841 84-1432976
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Numbers)
organization)
1777 South Harrison Street, Suite P-200, Denver,
Colorado 80210 (303) 757-1588
(Address, including Zip Code, and telephone number,
including area code, of Registrants' principal executive offices)
-----------------
JAMES C. VAUGHN
President and Chief Executive Officer
FrontierVision Inc.
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
(303) 757-1588
(Name, address, including Zip Code, and telephone number,
including area code, of Registrants' agent for service)
-----------------
Please address a copy of all communications to:
EDWARD J. O'CONNELL, ESQ. GERALD S. TANENBAUM, ESQ.
Dow, Lohnes & Albertson, PLLC Cahill Gordon & Reindel
1200 New Hampshire Avenue, N.W. 80 Pine Street
Washington, D.C. 20036 New York, New York 10005
(202) 776-2000 (212) 701-3000
-----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
Prospectus
FrontierVision Holdings, L.P.
FrontierVision Holdings Capital Corporation
[LOGO]
117/8% Senior Discount Notes due 2007
Issue Price: 63.118%
This Prospectus relates to offers and sales by J.P. Morgan Securities Inc. and
First Union Capital Markets Corp. of 117/8% Senior Discount Notes due 2007 (the
"Exchange Notes") which have been issued by FrontierVision Holdings, L.P., a
Delaware limited partnership ("Holdings" or the "Company"), and FrontierVision
Holdings Capital Corporation, a Delaware corporation ("Holdings Capital") which
is a wholly owned subsidiary of Holdings. The Exchange Notes are the joint and
several obligations of Holdings and Holdings Capital (collectively, the
"Issuers"). The Exchange Notes were originally issued in a publicly registered
exchange offer in exchange for 117/8% Senior Discount Notes due 2007 with terms
substantially identical to the Exchange Notes (the "Old Notes," and collectively
with the Exchange Notes, the "Notes").
The Notes mature on September 15, 2007, unless previously redeemed. The Notes
were issued and sold at a price of $631.18 per $1,000 original Principal Amount
at Maturity (as defined), representing a yield to maturity of 117/8% (computed
on a semiannual bond-equivalent basis). Unless the Issuers have previously made
the Cash Interest Election (as defined), the Notes will not accrue cash interest
until September 15, 2001. Cash interest on the Notes accrues at a rate of 117/8%
per annum and is payable on a semiannual basis on each March 15 and September
15, commencing on the earlier of the Interest Payment Date (as defined)
following the Cash Interest Election or March 15, 2002. The Notes are not
redeemable prior to September 15, 2001, except as set forth below. The Notes are
redeemable at the option of the Issuers, in whole or in part, at any time on or
after September 15, 2001, at the redemption prices set forth herein, together
with accrued and unpaid interest to the redemption date. In addition, prior to
September 15, 2000, the Issuers may redeem up to 35% of the Principal Amount at
Maturity of the Notes with the net cash proceeds received from one or more
Public Equity Offerings or Strategic Equity Investments (as such terms are
defined) at a redemption price of 111.875% of the Accreted Value thereof, plus
accrued and unpaid interest, if any, to the redemption date; provided, however,
that at least 65% in aggregate Principal Amount at Maturity of the Notes
originally issued remains outstanding immediately after any such redemption.
Upon a Change of Control (as defined), the Issuers will be required to make an
offer to purchase all outstanding Notes at 101% of the principal amount thereof,
together with accrued and unpaid interest to the purchase date.
The Notes are general unsecured obligations of the Issuers and rank pari passu
in right of payment to all existing and future unsecured indebtedness of the
Issuers, other than indebtedness that by its terms is expressly subordinated in
right and priority of payment to the Notes. Holdings has no other outstanding
indebtedness that is senior in right of payment to the Notes. However, since
Holdings is a holding company and conducts its business through subsidiaries,
the Notes are effectively subordinated to all existing and future indebtedness
and other liabilities (including trade payables) of Holdings' subsidiaries, as
well as effectively subordinated to future secured debt of Holdings. At December
31, 1997, such subsidiaries had approximately $632.0 million of indebtedness
(including $432.0 million of indebtedness under the Amended Credit Facility (as
defined), which is secured by substantially all of the assets of Holdings). The
Notes mature on September 15, 2007, unless previously redeemed. No subsidiary of
Holdings or any other party guarantees the performance of the Issuers'
obligations under the Notes. Holdings Capital is a wholly-owned subsidiary of
Holdings that was formed solely for the purpose of serving as a co-issuer of the
Notes. Holdings Capital has nominal assets and does not conduct any operations.
See "Risk Factors" beginning on page 9 for a discussion of certain factors that
should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. in connection with offers
and sales of the Exchange Notes related to market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of sale. The Company will not receive any of the proceeds of such
sales. J.P. Morgan Securities Inc. First Union Capital Markets Corp. may act as
principal or agent in such transactions. The closing of the Exchange Offer
referred to herein, which constituted the delivery of the Exchange Notes in
place of the Old Notes, occurred on December 12, 1997. See "Plan of
Distribution."
J. P. Morgan & Co.
First Union Capital Markets Corp.
[Date of Effectiveness]
2
<PAGE>
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Issuers, J.P. Morgan Securities Inc. or First Union Capital Markets Corp.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the Exchange Notes in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof or that there has been no change in the affairs of the Issuers
since the date hereof.
TABLE OF CONTENTS
<TABLE>
Page Page
<S> <C> <C>
Available Information....................... 4 Principal Security Holders..................... 54
Prospectus Summary.......................... 5 Ownership Structure............................ 55
Risk Factors................................ 9 The Partnership Agreements..................... 56
Use of Proceeds............................. 16 Description of Other Indebtedness.............. 59
Selected Financial Data..................... 17 Description of the Notes....................... 64
Management's Discussion and Analysis of Certain Federal Income Tax Considerations...... 94
Financial Condition and Results of Operations 20 Plan of Distribution........................... 100
Business.................................... 28 Legal Matters ................................. 101
Legislation and Regulation.................. 42 Experts........................................ 101
Management.................................. 49 Glossary....................................... 102
Certain Relationships and Related Transactions 53 Index to Financial Statements.................. F-1
</TABLE>
3
<PAGE>
Available Information
The Issuers have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part and
which term shall encompass any amendments thereto) on Form S-4, pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Exchange Notes. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement, and the exhibits and schedules thereto. For further
information about the Issuers and the Notes, reference is hereby made to the
Registration Statement, and to such exhibits and schedules. Statements contained
herein concerning the provisions of any documents filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
As a result of the Offering, the Issuers are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports and other information with the
Commission. In addition, under the Indenture governing the Notes, the Issuers
are required to furnish to the Trustee and to registered holders of the Exchange
Notes audited annual consolidated financial statements, unaudited quarterly
consolidated financial reports and certain other reports. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports and
other information filed by the Issuers with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected without charge
and copied upon payment of certain fees at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048, and Chicago Regional Office, Northwestern Atrium, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports and other information regarding registrants that file
electronically with the Commission.
---------------
Holdings was organized as a Delaware limited partnership in 1997. Holdings
Capital is a Delaware corporation formed solely for the purpose of serving as an
Issuer of the Notes and is wholly owned by Holdings. The principal office of
each of the Issuers is located at 1777 South Harrison Street, Suite P-200,
Denver, Colorado 80210, and their telephone number is (303) 757-1588.
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<PAGE>
Prospectus Summary
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Holdings Capital is a wholly-owned subsidiary of the Company
and has nominal assets and no operations. See "Risk Factors" for a discussion of
certain risks associated with an investment in the Notes. See "Glossary" for the
definitions of certain terms used herein.
The Company
FrontierVision Holdings, L.P. and its subsidiaries ("Holdings" or the "Company")
own, operate and develop cable television systems in small and medium-sized
suburban and exurban communities in the United States. As of December 31, 1997,
the Company was one of the twenty largest operators of cable television systems
in the United States, owning systems which passed approximately 817,000 homes
and served approximately 559,800 basic subscribers (the "Existing Systems").
The Company seeks to maximize enterprise value by acquiring cable television
systems at attractive prices in geographically rational clusters to achieve
economies of scale and by improving system management to enhance operating
profit.
To date, the Company has been highly successful in its acquisition activities.
Since closing its first acquisition in November 1995, the Company has completed
20 acquisitions and has established significant critical mass and subscriber
density within its targeted geography. The following table illustrates the
Company's growth, and operating characteristics of its systems, through December
31, 1997.
<TABLE>
----------------------------------------------------------------------------------------------
Basic Premium EBITDA (as
Homes Passed Subscribers Units Total Revenue defined herein)
------------------ ---------------- ---------------- ------------------ ------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1995 125,300 92,700 35,700 4,369 991
December 31, 1996 498,900 356,400 152,100 76,464 34,353
December 31, 1997 817,000 559,800 275,400 145,126 66,394
</TABLE>
The Company has established 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, 1997, over 85% of the Company's subscribers were
within its three primary operating clusters. The Company is currently the second
largest MSO in Kentucky, the largest MSO in Maine and the third largest MSO in
Ohio. In the Southeast, the Company has accumulated attractive systems which it
expects to either consolidate with subsequent system acquisitions, trade for
systems within the Company's primary operating regions or divest at favorable
prices.
Business Strategy
The Company's objective is to acquire at least 750,000 subscribers in
geographically concentrated clusters of 150,000 subscribers or more. Holdings
seeks to maximize enterprise value by acquiring cable television systems at
attractive prices in geographically rational clusters to realize economies of
scale and by improving system management to enhance operating profit. The
Company believes that it can generate significant financial returns over a four-
to six-year investment horizon through the liquidation of its properties in
either the private or public market. To achieve its objective, the Company
pursues growth through strategic acquisitions by targeting clusters in small and
medium-sized markets and implementing operating efficiencies. In addition, the
Company continually seeks to provide superior customer service and aggressively
promote and expand its service offerings. The Company intends to selectively
upgrade its cable systems to increase channel capacities, enhance signal quality
and improve technical reliability. See "Business --Business Strategy."
5
<PAGE>
Summary Operating Data
The following table presents summary operating data derived from the Company's
financial statements as of and for the years ended December 31, 1997 and 1996
and as of and for the period from April 17, 1995 (inception) through December
31, 1995 which have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, and selected unaudited operating data for such periods.
Selected financial and operating data presented for the three months ended
December 31, 1997 has not been audited. The three-month period ended December
31, 1997 is the only period that includes all of the Existing Systems, although
certain systems were purchased during the period and are reflected only for that
portion of the period that such systems were owned by the Company.
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<PAGE>
<TABLE>
-----------------------------------------------------------------------------
Holdings
-----------------------------------------------------------------------------
For the Three For the Year For the Year From April 17,
Months Ended Ended Ended 1995 (inception)
December 31, December 31, December 31, to December 31,
1997 1997 1996 1995
--------- --------- --------- ---------
In thousands except ratios and
operating statistical data
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenue ........................... $ 42,740 $ 145,126 $ 76,464 $ 4,369
Operating expenses ................ 21,520 74,314 39,181 2,311
Corporate administrative expenses . 1,298 4,418 2,930 127
Depreciation and amortization ..... 19,308 64,398 35,336 2,308
Pre-acquisition expenses .......... -- -- -- 940
--------- --------- --------- ---------
Operating income/(loss) ........... 614 1,996 (983) (1,317)
Interest expense, net (1) ......... (15,159) (48,005) (22,422) (1,386)
Other income/(expenses) ........... (1,107) (1,161) (396) --
Extraordinary item - Loss on early
retirement of debt .............. (5,046) (5,046) -- --
--------- --------- --------- ---------
Net income/(loss) ................. $ (20,698) $ (52,216) $ (23,801) $ (2,703)
========= ========= ========= =========
BALANCE SHEET DATA (END OF PERIOD):
Total assets ...................... $ 927,275 $ 927,275 $ 549,168 $ 143,512
Total debt ........................ 787,047 787,047 398,194 93,159
Partners' capital ................. 115,440 115,440 130,003 46,407
FINANCIAL RATIOS AND OTHER DATA:
EBITDA (2) ........................ $ 19,922 $ 66,394 $ 34,353 $ 991
EBITDA margin ..................... 46.6% 45.7% 44.9% 22.7%
Total debt to EBITDA (3) .......... 7.71 7.71
Net cash flows from operating
activities ........................ $ 7,917 $ 26,486 $ 18,911 $ 1,907
Net cash flows from investing
activities ........................ (328,085) (428,064) (418,215) (131,345)
Net cash flows from financing
activities ........................ 240,895 402,667 400,293 132,088
Deficiency of earnings to fixed
charges (4) ....................... 20,698 52,216 23,801 2,703
OPERATING STATISTICAL DATA (END OF
PERIOD EXCEPT AVERAGE):
Homes passed ...................... 817,000 817,000 498,900 125,300
Basic subscribers ................. 559,800 559,800 356,400 92,700
Basic penetration ................. 68.5% 68.5% 71.4% 74.0%
Premium units ..................... 275,000 275,000 152,100 35,700
Premium penetration ............... 49.2% 49.2% 42.7% 38.5%
Average monthly revenue per basic
subscriber (5) .................. $ 31.53 $ 31.53 $ 29.73 $ 27.76
</TABLE>
- -------------
(1) Interest expense for the three months ended December 31, 1997, for the years
ended December 31, 1997 and 1996 and the period from April 17, 1995 through
December 31, 1995 is net of interest income of $596, $994, $471 and $60,
respectively.
(2) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's senior bank
indebtedness (the "Amended Credit Facility"), the Indenture governing the 11%
Senior Subordinated Notes due 2006 (the "FVOP Notes Indenture") and the
Indenture governing the 11 7/8% Senior Discount Notes due 2007 (the "Indenture")
contain certain covenants, compliance with which is measured by computations
substantially similar to those used in determining EBITDA. However, EBITDA is
not intended to be a performance measure that should be regarded as an
alternative either to operating income or net income as an indicator of
operating performance or to cash flows as a measure of liquidity, as determined
in accordance with generally accepted accounting principles.
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<PAGE>
(3) For purposes of this computation, EBITDA for the most recent quarter ended
is multiplied by four. This presentation is consistent with the incurrence of
indebtedness test in the Note Indenture. In addition, this ratio is commonly
used in the cable television industry as a measure of leverage.
(4) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges. Fixed charges are defined as the sum of
(i) interest costs (including capitalized interest expense) and (ii)
amortization of deferred financing costs.
(5) Average monthly revenue per basic subscriber equals revenue for the last
month of the period divided by the average number of basic subscribers for such
period.
<TABLE>
------------------------------------------------------------------------
Avg. Monthly
Revenue Per
Homes Basic Basic Premium Basic
Cable Systems Passed Subscribers Penetration Penetration Subscriber(1)
------- ------- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
New England 214,900 142,600 66.4% 58.8% $ 30.05
Ohio 328,600 231,500 70.5 51.1 33.25
Kentucky 170,100 123,900 72.8 38.4 32.59
Southeast 103,400 61,800 59.8 41.3 26.39
------- ------- ---- ---- ---------
Total Systems 817,000 559,800 68.5% 49.2% $ 31.53
------- ------- ---- ---- ---------
</TABLE>
(1) Average monthly revenue per basic subscriber equals revenue for the month
ended December 31, 1997 divided by the number of basic subscribers
generating revenue during such period.
8
<PAGE>
Risk Factors
Prior to purchasing any of the Notes, prospective investors should consider
carefully the following factors in addition to the other information contained
in this Prospectus. This Prospectus contains forward-looking statements, within
the meaning of Section 27A of the Securities Act, which are inherently
uncertain. Actual results and events may differ significantly from those
discussed in such forward-looking statements. In addition to the other
information set forth in this Prospectus, factors that might cause or contribute
to such differences include, but are not limited to, the following risk factors.
Substantial Leverage
The Company is, and will continue to be, highly leveraged as a result of the
substantial indebtedness it has incurred, and intends to incur, to finance
acquisitions and expand its operations. As of December 31, 1997, the Company's
aggregate consolidated indebtedness outstanding was approximately $787.0
million. All of the Company's indebtedness, other than the Notes, represents
indebtedness of FrontierVision Operating Partners, L.P. ("FVOP"). In addition,
subject to the restrictions in the Amended Credit Facility, the Indenture and
the FVOP Notes Indenture, the Company plans to incur additional indebtedness
from time to time, to finance acquisitions in the future, for capital
expenditures or for general business purposes. The Company anticipates that, in
light of the amount of its existing and planned indebtedness, it will continue
to be highly leveraged for the foreseeable future. The Company's highly
leveraged capital structure could adversely affect the Issuers' ability to
service the Notes and could significantly limit the Company's ability to finance
its operations and fund its capital expenditure requirements, to compete
effectively, to expand its business, to comply with its obligations under its
franchise agreements, or to operate under adverse economic conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Insufficiency of Earnings to Cover Fixed Charges
The combined historical earnings of the Company were insufficient to cover its
fixed charges for the year ended December 31, 1997 and for the year ended
December 31, 1996 by $52.2 million and $23.8 million, respectively. However, for
both periods, earnings are reduced by substantial non-cash charges, principally
consisting of depreciation and amortization. The high levels of depreciation and
amortization, together with interest expense, have caused the Company to report
net losses. Management believes that such net losses are common for cable
television companies, and the Company believes it will continue to incur net
losses in the future.
Since its founding in 1995, the Company's cash from equity investments, bank
borrowings and other debt issued by FVOP has been sufficient to finance the
Company's acquisitions and, together with cash generated from operating
activities, also has been sufficient to meet the Company's debt service, working
capital and capital expenditure requirements. The Company intends to continue to
finance such debt service, working capital and capital expenditure requirements
in the future through a combination of cash from operations and indebtedness,
and the Company believes that it will continue to generate cash and be able to
obtain financing sufficient to meet such requirements. The ability of the
Company to meet its debt service and other obligations will depend upon the
future performance of the Company which, in turn, is subject to general economic
conditions and to financial, political, competitive, regulatory and other
factors, many of which are beyond the Company's control. The Company's ability
to meet its debt service and other obligations also may be affected by changes
in prevailing interest rates, as borrowings under the Amended Credit Facility
will bear interest at floating rates, subject to certain interest rate
protection agreements. The Company believes that it will continue to generate
cash and obtain financing sufficient to meet such requirements in the future;
however, there can be no assurances that the Company will be able to meet its
debt service and other obligations. If the Company
9
<PAGE>
were unable to do so, it would have to refinance its indebtedness or obtain new
financing. Although in the past the Company has been able to obtain financing
through equity investments, bank borrowings and other debt issuances, there can
be no assurances that the Company will be able to do so in the future or that,
if the Company were able to do so, the terms available will be favorable to the
Company. See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Other
Indebtedness" and "Description of the Notes."
Holding Company Structure; Structural Subordination
Holdings is a holding company which has no significant assets other than its
direct and indirect equity interests in FVOP. Holdings Capital, a wholly-owned
subsidiary of Holdings, was formed solely for the purpose of serving as a
co-issuer of the Notes and has nominal assets and no operations from which it
will be able to repay the Notes. Accordingly, the Issuers must rely entirely
upon distributions from FVOP to generate the funds necessary to meet their
obligations, including the payment of Accreted Value or principal and interest
of the Notes. The the FVOP Notes Indenture and the Amended Credit Facility
contain significant restrictions on the ability of FVOP to distribute funds to
Holdings. See "Description of Other Indebtedness." There can be no assurance
that the Amended Credit Facility, the FVOP Notes Indenture or any agreement
governing indebtedness that refinances such indebtedness or other indebtedness
of FVOP will permit FVOP to distribute funds to Holdings in amounts sufficient
to pay the Accreted Value or principal or interest on the Notes when the same
become due (whether at maturity, upon acceleration or otherwise).
The only significant assets of Holdings are the partnership interests in FVOP
owned by it. All of such interests in FVOP are pledged by Holdings as collateral
under the Amended Credit Facility. Therefore, if Holdings were unable to pay the
Accreted Value or principal or interest on the Notes when due (whether at
maturity, upon acceleration or otherwise), the ability of the holders of the
Notes to proceed against the partnership interests of FVOP to satisfy such
amounts would be subject to the ability of such holders to obtain a judgment
against Holdings and the prior satisfaction in full of all amounts owing under
the Amended Credit Facility. Any action to proceed against the FVOP partnership
interests by or on behalf of the holders of Notes would constitute an event of
default under the Amended Credit Facility entitling the lenders thereunder to
declare all amounts owing to be immediately due and payable, which event would
in turn constitute an event of default under the FVOP Notes Indenture, entitling
the holders thereof to declare the principal and accrued interest of the FVOP
Notes to be immediately due and payable. In addition, as a secured creditor, the
lenders under the Amended Credit Facility would control the disposition and sale
of the FVOP partnership interests after an event of default under the Amended
Credit Facility and would not be legally required to take into account the
interests of unsecured creditors of Holdings, such as the holders of the Notes,
with respect to any such disposition or sale. There can be no assurance that the
assets of Holdings, after the satisfaction of claims of its secured creditors,
would be sufficient to satisfy any amounts owing with respect to the Notes.
Since Holdings is a holding company and conducts its business through
subsidiaries, the Notes will be effectively subordinated to all existing and
future claims of creditors of Holdings' subsidiaries, including the lenders
under the Amended Credit Facility, the holders of the FVOP Notes and FVOP's
trade creditors. At December 31, 1997, such subsidiaries had approximately
$656.7 million of total liabilities, including approximately $632.0 million of
indebtedness. The rights of the Issuers and their creditors, including the
holders of the Notes, to realize upon the assets of any of the Company's
subsidiaries upon any such subsidiary's liquidation or reorganization (and the
consequent rights of the holders of the Notes to participate in the realization
of those assets) will be subject to the prior claims of such subsidiary's
respective creditors, including, in the case of FVOP, the lenders under the
Amended Credit Facility and the holders of the FVOP Notes. In such event, there
may not be sufficient assets remaining to pay amounts due on any or all of the
Notes then outstanding. See "Description of the Notes--Ranking" and "Description
of Other Indebtedness." The Indenture for the Notes will permit the Company's
subsidiaries to incur additional indebtedness under certain circumstances. See
"Description of the Notes."
10
<PAGE>
The FVOP Notes and all amounts owing under the Amended Credit Facility will
mature prior to the maturity of the Notes. The Indenture will require that any
agreements governing indebtedness that refinances the FVOP Notes or the Amended
Credit Facility contain restrictions on the ability of FVOP to make
distributions to Holdings that are either no more restrictive than those
contained in the FVOP Notes Indenture or that do not prohibit distributions to
Holdings to make regularly scheduled interest payments (commencing March 15,
2002) and the payment of principal at the stated maturity of the Notes unless a
default or event of default has occurred under the Amended Credit Facility.
There can be no assurance that if FVOP is required to refinance the FVOP Notes
or any amounts under the Amended Credit Facility, it will be able to do so upon
acceptable terms, if at all.
Restrictions Imposed by Terms of the Company's Indebtedness
The Indenture relating to the Notes, the Amended Credit Facility and the FVOP
Notes Indenture impose restrictions that, among other things, limit the amount
of additional indebtedness that may be incurred by the Company or will impose
limitations on, among other things, investments, loans and other payments,
certain transactions with affiliates and certain mergers and acquisitions.
FVOP's Amended Credit Facility also requires FVOP to maintain specified
financial ratios and meet certain financial tests. The ability of FVOP to comply
with such covenants and restrictions can be affected by events beyond its
control, and there can be no assurances that the Company will achieve operating
results that would permit compliance with such provisions. The breach of any of
the provisions of the Amended Credit Facility would, under certain
circumstances, result in defaults thereunder, permitting the lenders thereunder
to prevent distributions to Holdings and to accelerate the indebtedness
thereunder. If FVOP were unable to pay the amounts due in respect of the Amended
Credit Facility the lenders thereunder could foreclose upon any assets pledged
to secure such payment, and such lenders and the holders of the FVOP Notes could
prevent the distribution of funds to Holdings. In such event, the holders of the
Notes might not be able to receive any payments, if ever, until the payment
default was cured or waived, any such acceleration was rescinded or the
indebtedness under the Amended Credit Facility or the FVOP Notes Indenture or
the Amended Credit Facility, as the case may be, was discharged or paid in full.
Any of such events would adversely affect the Issuers' ability to service the
Notes, including but not limited to the Issuers' ability to pay cash interest on
the Notes.
Key Personnel
The Company's business is substantially dependent upon the performance of
certain key individuals, including Mr. Vaughn and Mr. Koo. Although the Company
maintains a strong management team, the loss of the services of Mr. Vaughn or
Mr. Koo (neither of whom has an employment agreement with the Company), could
have a material adverse effect on the Company.
Limited Operating History
The Company was formed in July 1995 and has grown principally through
acquisitions. Prospective investors, therefore, have limited historical
financial information about the Company, and about the results that can be
achieved by the Company in managing the cable systems not previously managed by
the Company, upon which to base an evaluation of its performance and an
investment in the Notes. In addition, as a result of the Company's rapid growth
through acquisitions, past operating history is not necessarily indicative of
future results. Further, there can be no assurance that the Company will be able
to successfully implement its business strategy.
11
<PAGE>
Significant Capital Expenditures
Consistent with its business strategy, the Company expects to upgrade a
significant portion of its cable television distribution systems over the next
several years to, among other things, increase bandwidth and channel capacity.
The Company's inability to upgrade its cable television systems could have a
material adverse effect on its operations and competitive position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business."
Significant Competition in the Cable Television Industry
Cable television systems face competition from alternative methods of receiving
and distributing television signals and from other sources of news, information
and entertainment, such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, online computer services and home video
products, including videotape cassette recorders. Because the Company's
franchises are generally non-exclusive, there is the potential for competition
with the Company's systems from other operators of cable television systems,
including systems operated by local governmental authorities, and from other
distribution systems capable of delivering programming to homes or businesses,
including direct broadcast satellite ("DBS") systems and multichannel,
multipoint distribution service ("MMDS") systems. In recent years, there has
been significant national growth in the number of subscribers to DBS services.
Subscribership to MMDS also is increasing and can be expected to grow in the
future. Additionally, recent changes in federal law and recent administrative
and judicial decisions have removed certain of the restrictions that have
limited entry into the cable television business by potential competitors such
as telephone companies, registered utility holding companies and their
subsidiaries. Such developments will enable local telephone companies to provide
a wide variety of video services in the telephone company's own service area
which will be directly competitive with services provided by cable television
systems. Other new technologies, including Internet-based services, may also
become competitive with services that cable operators can offer.
Many of the Company's potential competitors have substantially greater resources
than the Company, and the Company cannot predict the extent to which competition
will materialize in its franchise areas from other cable television operators,
other distribution systems for delivering video programming and other broadband
telecommunications services to the home, or from other potential competitors,
or, if such competition materializes, the extent of its effect on the Company.
See "Business--Competition" and "Legislation and Regulation."
Risks Relating to New Lines of Business
The Company will selectively upgrade its cable systems to increase channel
capacity and expand addressability in part to enhance the potential for
increasing revenues through the introduction of new technologies, services and
program delivery capabilities, such as pay-per-view movies and events, HITS
digital programming, cable Internet access and telephony. See
"Business--Strategically Upgrade Systems" and "Business--Technological
Developments." While the Company is optimistic about the prospects for these new
lines of business, there can be no assurances that it will be able to enter them
successfully or to generate additional cash flow. Moreover, many of these new
lines of business are likely to have significant competition from businesses
that may have significant financial resources and market presence such as DBS
services, local telephone companies, long distance interexchange carriers and
traditional online Internet service providers.
Non-Exclusive Franchises; Non-Renewal or Termination of Franchises
Cable television companies operate under franchises granted by local authorities
which are subject to renewal and renegotiation from time to time. The Company's
business is dependent upon the retention and renewal of its
12
<PAGE>
local franchises. A franchise is generally granted for a fixed term ranging from
five to 15 years, but in many cases is terminable if the franchisee fails to
comply with the material provisions thereof. The Company's franchises typically
impose conditions relating to the use and operation of the cable television
system, including requirements relating to the payment of fees, system bandwidth
capacity, customer service requirements, franchise renewal and termination. The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") prohibits franchising authorities from granting exclusive cable
television franchises and from unreasonably refusing to award additional
competitive franchises; it also permits municipal authorities to operate cable
television systems in their communities without franchises. The Cable
Communications Policy Act of 1984 (the "1984 Cable Act" and collectively with
the 1992 Cable Act, the "Cable Acts") provides, among other things, for an
orderly franchise renewal process in which franchise renewal will not be
unreasonably withheld or, if renewal is denied and the franchising authority
acquires ownership of the system or effects a transfer of the system to another
person, the operator generally is entitled to the "fair market value" for the
system covered by such franchise. Although the Company believes that it
generally has good relationships with its franchise authorities, no assurances
can be given that the Company will be able to retain or renew such franchises or
that the terms of any such renewals will be on terms as favorable to the Company
as the Company's existing franchises. The non-renewal or termination of
franchises relating to a significant portion of the Company's subscribers could
have a material adverse effect on the Company's results of operations. See
"Business--Franchises."
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable Acts, both
of which amended the Communications Act of 1934 (as amended, the "Communications
Act"), established a national policy to guide the development and regulation of
cable television systems. The Communications Act was recently substantially
amended by the Telecommunications Act of 1996 (the "1996 Telecom Act").
Principal responsibility for implementing the policies of the Cable Acts and the
1996 Telecom Act has been allocated between the Federal Communications
Commission (the "FCC") and state or local regulatory authorities. 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 communications industry or on the operations of the Company.
FEDERAL LAW AND REGULATION. The 1992 Cable Act and the FCC's rules implementing
that act generally have increased the administrative and operational expenses of
cable television systems and have resulted in additional regulatory oversight by
the FCC and local or state franchise authorities. The Cable Acts and the
corresponding FCC regulations have established, among other things, (i) rate
regulations, (ii) mandatory carriage and retransmission consent requirements
that require a cable system under certain circumstances to carry a local
broadcast station or to obtain consent to carry a local or distant broadcast
station, (iii) rules for franchise renewals and transfers, and (iv) other
requirements covering a variety of operational areas such as equal employment
opportunity and technical standards and customer service requirements.
The 1996 Telecom Act deregulates rates for certain cable programming services
tiers ("CPSTs") in 1999 for most MSOs (including the Company) and, for certain
small cable operators, immediately eliminates rate regulation of CPSTs, and, in
certain circumstances, basic services and equipment. The FCC is currently
developing permanent regulations to implement the rate deregulation provisions
of the 1996 Telecom Act. The Company is currently unable to predict the ultimate
effect of the 1992 Cable Act or the 1996 Telecom Act, the ultimate outcome of
the various FCC rulemaking proceedings, or the litigation challenging various
aspects of this federal legislation and the FCC's regulations implementing the
legislation.
STATE AND LOCAL REGULATION. Cable television systems generally operate pursuant
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local governmental entity. The terms and conditions of franchises
vary materially from jurisdiction to jurisdiction. A number of states subject
cable
13
<PAGE>
systems to the jurisdiction of centralized state governmental agencies. To date,
the only state in which the Company currently operates that has enacted such
state level regulation is Vermont; however, upon completion of a pending
acquisition, the Company will acquire control of several cable systems in the
State of Massachusetts and will then be subject to regulation by the
Massachusetts Department of Telecommunications and Energy. The Company cannot
predict whether any of the other states in which it currently operates will
engage in such regulation in the future. See "Legislation and Regulation."
Risks Relating to Acquisition Strategy
A significant element of the Company's acquisition strategy is to expand in
certain regions of the United States by acquiring cable television systems
located in reasonable proximity to existing systems or of a sufficient size to
enable the acquired system to serve as the basis for a new local cluster. Any
acquisition may have an adverse effect upon the Company's operating results or
cash flow, particularly for acquisitions of new systems which must be integrated
with the Company's existing operations. There can be no assurances that the
Company will be able to integrate successfully any acquired business with its
existing operations or realize any efficiencies therefrom. There can also be no
assurances that any such acquisition, if consummated, will be profitable or that
the Company will be able to obtain any required financing to acquire additional
systems in the future. See "Business--Business Strategy" and
"Business--Development of the Systems."
Ability to Purchase Notes Upon a Change of Control
Upon the occurrence of a Change of Control (as defined in the Indenture), the
Issuers are required to make an offer to purchase all outstanding Notes at a
purchase price equal to 101% of the Accreted Value thereof, together with
accrued and unpaid interest, if any, to the purchase date. If a Change of
Control were to occur, there can be no assurance that the Company would have
sufficient financial resources, or would be able to arrange financing, to pay
the purchase price for all Notes tendered by holders thereof. In addition, both
the Amended Credit Facility and the FVOP Notes Indenture include "change of
control" provisions that permit, in the case of the Amended Credit Facility, the
lenders thereunder to accelerate the repayment of indebtedness thereunder and
that require, in the case of the FVOP Notes Indenture, FVOP to offer to purchase
all of the outstanding FVOP Notes. Any acceleration of the obligations of FVOP
under the Amended Credit Facility or the obligation of FVOP to offer to purchase
the FVOP Notes would make it unlikely that FVOP could make adequate
distributions to the Issuers so as to permit the Issuers to effect a purchase of
the Notes upon a Change of Control. See "Description of Other Indebtedness" and
"Description of the Notes." Any future credit agreements or other agreements
relating to other indebtedness to which the Company becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when the Company is prohibited from repurchasing Notes, the Company could
seek the consent of its lenders to repurchase Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such consent or repay such borrowing, the Company would remain prohibited
from repurchasing Notes. In such case, the Company's failure to repurchase
tendered Notes would constitute an Event of Default under the Indenture. See
"Description of the Notes--Change of Control."
Lack of Public Market for the Notes
The Notes are designated for trading among qualified institutional buyers in the
Private Offering, Resales and Trading through Automated Linkages ("PORTAL")
Market. The Company has been advised by J.P. Morgan & Co., Chase Securities,
Inc., CIBC Wood Gundy Securities, Corp. and First Union Capital Markets Corp.
(the "Initial Purchasers") that they presently intend to make a market in the
Exchange Notes. However, the Initial Purchasers are not obligated to do so, and
any market-making activity with respect to the Exchange Notes, may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits
14
<PAGE>
imposed by the Securities Act and the Exchange Act. There can be no assurance
that an active trading market will exist for the Exchange Notes or that such
trading market will be liquid.
Original Issue Discount Consequences of the Notes
The Notes were issued at a substantial discount from their principal amount at
maturity. Consequently, the purchasers of the Notes generally are required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which such income is attributable. See "Certain
Federal Income Tax Considerations" for a more detailed discussion of the U.S.
federal income tax consequences to the holders of the Notes of the purchase,
ownership and disposition of the Notes.
If a bankruptcy case is commenced by or against the Issuers under the U.S.
Bankruptcy Code after the issuance of the Notes, the claim of a holder of Notes
with respect to the principal amount thereof may be limited to an amount equal
to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount which is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any original issue discount that was
not amortized as of any such bankruptcy filing would constitute "unmatured
interest."
15
<PAGE>
Use of Proceeds
The amount of net proceeds received by the Company from the Offering was
approximately $144.7 million. The Company contributed $142.3 million of the
proceeds (net of approximately $2.4 million in transaction costs) to FVOP. FVOP
used the net proceeds to repay approximately $65.5 million of indebtedness
outstanding under the Company's senior bank indebtedness. The remaining proceeds
were placed in escrow by FVOP to finance the purchase prices of pending
acquisitions, and as of December 31, 1997, such proceeds were fully invested.
16
<PAGE>
Selected Financial Data
The following tables present selected financial data derived from the Company's
financial statements as of December 31, 1997, 1996 and 1995 and for the years
ended December 31, 1997 and 1996 and the period from inception (April 17, 1995)
through December 31, 1995 which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, and selected unaudited operating data
for such periods.
The following table also presents combined historical financial data as of and
for the years ended December 31, 1995, 1994 and 1993 for the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems (the
"Predecessor Systems"). The summary unaudited combined selected historical
financial data are derived from the audited and unaudited historical financial
statements of the Existing Systems and should be read in conjunction with the
audited financial statements and related notes thereto of the Predecessor
Systems and included elsewhere in this Prospectus. The combined selected
financial data set forth below represent the combined results of operations for
the systems for the periods during which the systems were not owned by the
Company and, accordingly, do not reflect any purchase accounting adjustments or
any changes in the operation or management of the systems that the Company has
made since the date of acquisition or intends to make in the future.
Accordingly, the Company does not believe that such operating results are
indicative of future operating results of the Company. See
"Business--Development of the Systems."
17
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------
Holdings Predecessor Systems
--------------------------------------------- -----------------------------------------
For the Year For the Year From April 17, For the Year For the Year For the Year
Ended Ended 1995(inception) Ended Ended Ended
December 31, December 31, to December 31, December 31, December 31, December 31,
1997 1996 1995 1995 (1)(2) 1994 (3)(4) 1993 (3)(4)
--------- --------- --------- --------- --------- ---------
In thousands, except ratios and
operating statistical data
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenue ........................... $ 145,126 $ 76,464 $ 4,369 $ 109,765 $ 105,368 $ 96,171
Operating expenses ................ 74,314 39,181 2,311 62,098 58,643 52,702
Corporate administrative expenses . 4,418 2,930 127 -- -- --
Depreciation and amortization ..... 64,398 35,336 2,308 42,354 46,345 41,863
Preacquisition expenses ........... -- -- 940 -- -- --
--------- --------- --------- --------- --------- ---------
Operating income (loss) ........... 1,996 (983) (1,317) 5,313 380 1,606
Interest expense, net(5) .......... (48,005) (22,422) (1,386) (37,898) (34,506) (31,230)
Other income (expense) ............ (1,161) (396) -- (4,409) (2,570) (3,450)
Extraordinary item - Loss on early
retirement of debt ............. (5,046) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss .................. $ (52,216) $ (23,801) $ (2,703) $ (36,994) $ (36,696) $ (33,074)
========= ========= ========= ========= ========= =========
BALANCE SHEET DATA
(END OF PERIOD):
Total assets ...................... $ 927,275 $ 549,168 $ 143,512 $ 288,253 $ 228,820 $ 255,108
Total debt ........................ 787,047 398,194 93,159 285,144 263,660 255,319
Partners' capital ................. 115,440 130,003 46,407
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(6) ......................... $ 66,394 $ 34,353 $ 991 $ 47,667 $ 46,725 $ 43,469
EBITDA margin(6) .................. 45.7% 44.9% 22.7% 43.4% 44.3% 45.2%
Total debt to EBITDA(7) ........... 7.71
Net cash flows from operating
activities ........................ $ 26,486 $ 18,911 $ 1,907
Net cash flows from investing
activities ........................ (428,064) (418,215) (131,345)
Net cash flows from financing
activities ........................ 402,667 400,293 132,088
Deficiency of earnings to fixed
charges(8) ........................ $ 52,216 $ 23,801 $ 2,703
OPERATING STATISTICAL DATA (END OF
PERIOD EXCEPT AVERAGE):
Homes passed ...................... 817,000 498,900 125,300
Basic subscribers ................. 559,800 356,400 92,700
Basic penetration ................. 68.5% 71.4% 74.0%
Premium units ..................... 275,400 152,100 35,700
Premium penetration ............... 49.2% 42.7% 38.5%
Average monthly revenue per
basic subscriber(9) ............... $ 31.53 $ 29.73 $ 27.76
</TABLE>
- -------------
(1) Includes the combined results of operations of the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems for the year
ended December 31, 1995 (except for the UVC Systems, which is for the period
ended November 8, 1995). As the results of operations of the UVC Systems are
included in the Company's historical results of operations subsequent to the
date of the Company's acquisition thereof (November 9, 1995), the amounts do not
include $4.2 million in revenue, $2.4 million in operating expenses and $2.2
million in depreciation and amortization (computed after the application of
purchase accounting adjustments) attributable to such systems.
(2) Includes combined balance sheet data for the UVC Systems as of November 9,
1995, the date of the Company's acquisition thereof, and combined balance sheet
data for the C4 Systems, the Cox Systems, the ACE Systems and the Triax Systems
as of December 31, 1995, because such acquisitions occurred subsequent to that
date.
(3) Includes the combined results of operations of the UVC Systems, the C4
Systems, the Cox Systems, the ACE Systems and the Triax Systems for the years
ended December 31, 1994 and 1993.
(4) Includes combined balance sheet data for the UVC Systems, the C4 Systems,
the Cox Systems, the ACE Systems and the Triax Systems as of December 31, 1994
and 1993.
(5) Interest expense for December 31, 1997, 1996 and 1995 was net of interest
income of $1,023, $471 and $60 respectively (dollars in thousands).
(6) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Amended Credit Facility,
the FVOP Notes
18
<PAGE>
Indenture and the Indenture for the Notes contain certain covenants, compliance
with which is measured by computations substantially similar to those used in
determining EBITDA. However, EBITDA is not intended to be a performance measure
that should be regarded as an alternative either to operating income or net
income as an indicator of operating performance or to cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. EBITDA margin represents the percentage of EBITDA to revenue.
(7) For purposes of this computation, EBITDA for the most recent quarter ended
is multiplied by four. This presentation is consistent with the incurrence of
indebtedness tests in the FVOP Notes Indenture and the Indenture for the Notes.
In addition, this ratio is commonly used in the cable television industry as a
measure of leverage.
(8) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges. Fixed charges are defined as the sum of
(i) interest costs (including an estimated interest component of rental expense)
and (ii) amortization of deferred financing costs.
(9) Average monthly revenue per basic subscriber equals revenue for the last
month of the period divided by the number of basic subscribers as of the end of
such period.
19
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
The following discussion of the financial condition and results of operations of
the Company, the description of the Company's business as well as other sections
of this Prospectus contain certain forward-looking statements. The Company's
actual results could differ materially from those discussed herein and its
current business plans could be altered in response to market conditions and
other factors beyond the Company's control.
The Company commenced operations on November 9, 1995 with the acquisition of its
first cable television systems. See "Business--Development of the Systems" for a
description of the Existing Systems. The Company has operated the Existing
Systems for a limited period of time and had no operations prior to November 9,
1995. All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's historical results of operations
include the results of operations for each acquired system subsequent to its
respective acquisition date.
The Company's objective is to increase its subscriber base and operating cash
flow through selective acquisitions of cable television systems that can be
integrated with the Existing Systems and to enhance enterprise value through
operating improvements and revenue growth. The Company continues the process of
acquiring cable systems, and integrating new systems with its current systems.
The Company also continues to invest significant capital for technical
enhancement, including the headend equipment needed to launch additional
channels contemporaneously with service rate increases which the Company expects
to implement over the course of 1998. To date, the Company has eliminated 20
customer service and sales offices and has established four regional customer
call centers which, as of year-end, handled customer call volume for
approximately 85% of the Company's subscribers. In addition, the Company is
offering digital cable television service in two of its systems and will
continue to launch such services in 1998.
During the fourth quarter of 1997, the Company completed three significant
acquisitions, in the process adding approximately 85,400 subscribers to its Ohio
cluster and approximately 76,400 subscribers to its New England cluster. The
Company currently serves approximately 142,600 subscribers in its New England
Cluster, 231,500 subscribers in its Ohio Cluster and 123,900 subscribers in its
Kentucky Cluster. In addition, the Company entered into a $800 million Amended
Credit Facility which the Company believes gives it sufficient available capital
to meet its growth objective of acquiring at least 750,000 subscribers.
On March 6, 1998, the Company consummated the acquisition of systems in Michigan
from TVC-Sumpter Limited Partnership and North Oakland Cablevision Partners
Limited Partnership for an aggregate purchase price of $14.2 million. On March
12, 1998 the Company completed an exchange of cable television systems in the
Southeast region with Comcast Cablevision of the South. As of March 25, 1998,
the Company had entered into three additional purchase agreements to acquire
certain cable television systems, primarily located in Ohio and New England, for
aggregate consideration of approximately $91.6 million. The transactions are
expected to close during the second and third quarter of 1998. These
transactions are subject to customary closing conditions and certain regulatory
approvals that are not completely within the Company's control. See Note 4 for
more detailed descriptions of the transactions.
During mid January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. The Company expects to recognize a
loss due to service outages and increased labor costs of approximately $925,000
due to the ice storms. Additionally, the Company will expend capital to replace
and repair subscriber drops. The Company expects the loss to be isolated to the
first quarter of 1998, although the long-term financial effect of the ice storms
cannot be determined.
20
<PAGE>
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
The following table sets forth, for the three-month periods ended December 31,
1997 and September 30, 1997, certain statements of operations and other data of
the Company. As a result of the Company's limited operating history, the Company
believes that its results of operations for the periods presented in this table
are not indicative of the Company's future results.
------------------------------------------
Three Months Ended Three Months Ended
December 31, 1997 September 30, 1997
------------------- -------------------
% of % of
Amount Revenue Amount Revenue
------- ---- ------- ----
In thousands (unaudited)
Revenue ............... $42,740 100.0% $36,750 100.0%
Expenses
Operating expenses 21,520 50.4 18,332 49.9
Corporate expenses 1,298 3.0 1,071 2.9
------- ---- ------- ----
EBITDA(1) ............. $19,922 46.6% $17,347 47.2%
======= ==== ======= ====
Basic subscribers...... 559,800 401,300
Premium units.......... 275,400 172,900
- --------------
(1) EBITDA represents operating income (loss) before depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Amended Credit Facility,
the FVOP Notes Indenture and the Indenture for the Notes contain certain
covenants, compliance with which is measured by computations substantially
similar to those used in determining EBITDA. However, EBITDA is not intended to
be a performance measure that should be regarded as an alternative either to
operating income or net income as an indicator of operating performance or to
cash flows as a measure of liquidity, as determined in accordance with generally
accepted accounting principles.
The three-month period ended December 31, 1997 is the only period in which the
Company operated all of the Existing Systems, although certain systems (the
Cablevision Systems, the Harold's System, the TCI-VT/NH Systems and the
Cox-Central Ohio Systems) were purchased during the period and are reflected
only for that portion of the period that such systems were owned by the Company.
The three-month period ended September 30, 1997 represents the integration of
all of the Existing Systems (except for the Cablevision Systems, the Harold's
System, the TCI-VT/NH Systems and the Cox-Central Ohio Systems), although
certain systems (the Blue Ridge Systems and the Bedford Systems) were purchased
during the period and are reflected only for that portion of the period that
such systems were owned by the Company.
The Company consummated the acquisitions of the Cablevision Systems, the
TCI-VT/NH Systems and the Cox-Central Ohio Systems during the fourth quarter of
1997, acquiring cable systems serving approximately 85,400 basic subscribers in
Ohio and 76,400 subscribers in Maine, New Hampshire and Vermont.
Revenue increased 16.3%, or approximately $5.9 million, to approximately $42.7
million for the three months ended December 31, 1997 from approximately $36.8
million for the three months ended September 30, 1997. Operating and corporate
expenses increased approximately 17.4% and 21.2%, respectively, for the three
months ended December 31, 1997 from the three months ended September 30, 1997.
The number of basic subscribers increased approximately 39.5% from 401,300 at
September 30, 1997 to 559,800 as of December 31, 1997, and the number of premium
units increased approximately 59.3% from 172,900 to 275,400 over the three-month
period.
Significant growth over the third quarter of 1997 in revenue, operating and
corporate expenses, basic subscribers and premium units is primarily
attributable to the Company's acquisitions of cable systems during
21
<PAGE>
October and December of 1997. As its operations base has developed, the Company
has increased its focus on integration of business operations to achieve
efficiencies, significant investment in technical plant and promotion of new and
existing services to enhance revenues. The impact of certain of these efforts
resulted in an increase in EBITDA margin over the course of the year. Overall,
the EBITDA margin decreased slightly in the fourth quarter as a result of the
integration of the significant acquisitions of the Cablevision Systems, the
TCI-VT/NH Systems and the Cox-Central Ohio Systems, however, on a same system
basis, the EBITDA margin remained flat at approximately 47.0%.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND YEAR
ENDED DECEMBER 31, 1996 COMPARED WITH PERIOD FROM APRIL 17, 1995 (INCEPTION)
THROUGH DECEMBER 31, 1995
The following table set forth, for the years ended December 31, 1997 and 1996
and for the period from April 15, 1995 through December 31, 1995, certain
statements of operations and other data of the Company. As a result of the
Company's limited operating history, the Company believes that its results of
operations for the periods presented in this table are not indicative of the
Company's future results.
<TABLE>
--------------------------------------------------------------------------
Year Ended Year Ended Period From April 17, 1995
December 31, 1997 December 31, 1996 to December 31,1995
------------------------ ----------------------- ------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
----------- ------ ---------- ------- ----------- ------
In thousands
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 145,126 100.0 % $ 76,464 100.0 % $ 4,369 100.0 %
Expenses
Operating expenses.............. 74,314 51.2 39,181 51.2 2,311 52.9
Corporate expenses.............. 4,418 3.0 2,930 3.9 127 2.9
Depreciation and amortization... 64,398 44.4 35,336 46.2 2,308 52.8
Pre-acquisition expenses........ - - - - 940 21.5
----------- ------ ---------- ------- ----------- ------
Total expenses........... 143,130 98.6 77,447 101.3 5,686 103.1
----------- ------ ---------- ------- ----------- ------
Operating income/(loss)............. 1,996 1.4 (983) (1.3) (1,317) (30.1)
Interest expense, net............... (48,005) (33.1) (22,422) (29.3) (1,386) (31.7)
Other expense....................... (1,161) (0.8) (396) (0.5) - -
Extraordinary item - Loss on early
retirement of debt.............. (5,046) (3.5) - - - -
------------ ------ ---------- ------- ----------- ------
Net loss............................ $ (52,216) (36.0)% $ (23,801) (31.1)% $ (2,703) (61.9)%
=========== ====== ========== ======= =========== ======
EBITDA $ 66,394 45.8 % $ 34,353 44.9 % $ 991 22.7 %
=========== ====== ========== ======== =========== ======
Basic subscribers................... 559,800 356,400 92,700
Premium units....................... 275,400 152,100 35,700
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue increased to $145.1 million in the year ended December 31, 1997 from
$76.5 million in the period ended December 31, 1996. This increase was
attributable in part to having a full year of operations from the acquisition of
the following systems: C4 Systems on February 1, 1996; the Americable Systems on
March 29, 1996; the Cox Systems on April 9, 1996; the Grassroots Systems on
August 29, 1996; the Triax Systems on October 7, 1996; the ACE Systems on
October 9, 1996; the Penn/Ohio Systems on October 31, 1996; and the Deep Creek
System on December 23, 1996. Revenue for the year ended December 31, 1997 also
reflects operations for the following systems from the date of their respective
acquisitions in 1997: the Bluegrass Systems on March 20, 1997; the Clear/B&G
Systems on March 31, 1997; the Milestone Systems on March 31, 1997; the Triax I
Systems on May 30, 1997; the Front Row Systems on May 30, 1997; the Bedford
System on August 29, 1997; the Blue Ridge Systems on September 3, 1997; the
Cablevision Systems on October 31, 1997;
22
<PAGE>
the Harold's System on October 31, 1997; the TCI-VT/NH Systems on December 2,
1997 and the Cox-Central Ohio Systems on December 19, 1997.
Operating and corporate expenses were reduced to 54.3% of revenue in the year
ended December 31, 1997 from 55.1% of revenues in the year ended December 31,
1996 due primarily to the achievement of efficiencies in the corporate office
through the elimination of duplicative expenses, such as customer billing,
accounting, accounts payable and payroll administration.
Depreciation and amortization increased 82.2% as a result of acquisition
activity that occurred in 1996 and 1997. Net interest expense increased to $48.0
million from $22.4 million as a result of the higher weighted average drawings
on the Company's senior bank indebtedness (the "Senior Credit Facility" prior to
December 19, 1997) as well as a result of the inclusion of a full year of
interest expense on FrontierVision Operating Partners, L.P.'s ("FVOP") 11%
Senior Subordinated Notes due 2006 (the "FVOP Notes") and three months of
accretion on the discount for the 11 7/8% Senior Discount Notes due 2007 (the
"Notes"). FVOP is directly and indirectly a wholly-owned subsidiary of Holdings.
The extraordinary item for the year ended December 31, 1997 represents the
write-off of $5.0 million of deferred financing costs related to the early
retirement of the Senior Credit Facility. Other expenses for the year ended
December 31, 1997 include the retirement of $1.1 million of plant assets in
connection with completed upgrade and rebuild projects.
In an effort to maximize revenue from existing subscribers, the Company also has
established and commenced operations at a centralized, in-house telemarketing
center equipped with state-of-the art predictive dialing and communications
equipment. The Company's efforts are focused on telemarketing premium services
to its subscribers in its New England, Kentucky and Ohio operating clusters.
Beginning in April 1997, telemarketers have contacted the Company's subscribers,
marketing the Company's "Ultimate TV" package, a premium service package
consisting of at least three premium channels. This has resulted in an increase
in the number of pay units purchased by those subscribers of approximately 24.5%
over the period from inception through December 31, 1997. The Company intends to
continue to aggressively market selected premium service packages through its
internal telemarketing resources.
Other marketing initiatives for the year-ended December 31, 1997 include sales
audit remarketing and channel additions and service rate increases in selected
cable systems. The Company has also continued its sales audit and door-to-door
marketing program, inspecting selected systems to clean up its billing data
base, verify homes passed data, market services to potential customers and
identify unauthorized subscribers, which the Company attempts to convert to
paying subscribers.
As a result of such cost efficiencies and the aforementioned acquisitions,
EBITDA increased to 45.8% of revenues in the year ended December 31, 1997 from
44.9% of revenues in the year ended December 31, 1996.
During the twelve months ended December 31, 1997, (i) the Company's annualized
subscriber churn rate (which represents the annualized number of subscriber
terminations divided by the weighted average number of subscribers during the
period) was approximately 32.0%, and (ii) the average subscriber life implied by
such subscriber churn rate was approximately 3.1 years. Churn rates are computed
without adjustment for the effects of seasonal subscriber activity and
acquisitions and are within the Company's expectations. The Company does not
expect churn rates to improve during its acquisition phase.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE PERIOD FROM APRIL 17, 1995
(INCEPTION) DECEMBER 31, 1995
Revenue increased to $76.5 million in the twelve months ended December 31, 1996
from $4.4 million in the period ended December 31, 1995. This increase was
attributable in part to having a full year of operations from the UVC Systems
and the Longfellow Systems (both acquired in November 1995). Revenue for the
twelve months ended December 31, 1996 also reflect operations for the following
systems from the date of their respective acquisitions: the C4 Systems on
February 1, 1996; the Americable Systems on March 29, 1996; the Cox Systems on
April 9, 1996; the Grassroots Systems on August 29, 1996; the Triax Systems on
October 7,
23
<PAGE>
1996; the ACE Systems on October 9, 1996; the Penn/Ohio Systems on October 31,
1996; and the Deep Creek System on December 23, 1996.
Operating and corporate expenses were reduced to 55.1% of revenue in the twelve
months ended December 31, 1996 from 55.8% of revenues in the period ended
December 31, 1995 due primarily to cost-cutting measures implemented by the
Company. These efforts included the establishment of centralized regional
service centers in Rockland, Maine, Greeneville, Tennessee, Richmond, Kentucky
and Chillicothe, Ohio and the elimination of certain customer service offices.
Other cost reductions have been realized through the elimination of duplicative
expenses, such as customer billing, accounting, accounts payable and payroll
administration.
The increase in depreciation and amortization expense of $33.0 million from the
period ended December 31, 1995 to the year ended December 31, 1996 was a result
of the inclusion of a full year of expense for acquisitions completed in 1995
and new acquisitions completed in 1996. Net interest expense increased by $21.0
million due to the higher weighted average debt balance outstanding over the
year ended December 31, 1996.
As a result of such cost efficiencies and the aforementioned acquisitions,
EBITDA increased to 44.9% of revenues in the twelve months ended December 31,
1996 from 22.7% of revenues in the period ended December 31, 1995.
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the
construction, expansion and maintenance of the delivery system. In addition, the
Company has pursued, and intends to pursue in the future, a business strategy
which includes selective acquisitions. Since its founding in 1995, the Company's
cash from equity investments, bank borrowings and other debt issued by FVOP and
Holdings has been sufficient to finance the Company's acquisitions and, together
with cash generated from operating activities, also has been sufficient to meet
the Company's debt service, working capital and capital expenditure
requirements. The Company intends to continue to finance such debt service,
working capital and capital expenditure requirements in the future through a
combination of cash from operations, indebtedness and equity capital sources,
and the Company believes that it will continue to generate cash and be able to
obtain financing sufficient to meet such requirements. The ability of the
Company to meet its debt service and other obligations will depend upon the
future performance of the Company which, in turn, is subject to general economic
conditions and to financial, political, competitive, regulatory and other
factors, many of which are beyond the Company's control.
On December 19, 1997 FVOP amended its existing senior bank indebtedness and
entered into an $800.0 million Amended 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 Credit Facility includes a $300.0 million, 7.75-year
reducing revolving credit facility (the "Revolving Credit Facility"), a $250.0
million, 7.75-year term loan (the "Facility A Term Loan") and a $250.0 million,
8.25-year term loan (the "Facility B Term Loan"). At December 31, 1997, the
Company had no amounts outstanding under the Revolving Credit Facility, $182.0
million outstanding under the Facility A Term Loan and $250.0 million
outstanding under the Facility B Term Loan. The weighted average interest rates
at December 31, 1997 on the outstanding borrowings under the Facility A Term
Loan and the Facility B Term Loan were approximately 8.25% and 8.38%,
respectively. FVOP has entered into interest rate swap agreements to hedge the
underlying LIBOR rate exposure for $170.0 million of borrowings through November
1999 and October 2000. For the year ended December 31, 1997, FVOP had recognized
an increase to interest expense of approximately $312,200 as a result of these
interest rate swap agreements.
In general, the Amended 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 Credit
24
<PAGE>
Facility and to reduce permanently commitments thereunder, subject to certain
exceptions permitting FVOP to use such proceeds to fund certain permitted
acquisitions, provided that FVOP is otherwise in compliance with the terms of
the Amended Credit Facility.
The Amended Credit Facility is secured by a pledge of all limited and general
partnership interests in FVOP and in any subsidiaries of FVOP and a first
priority lien on all the tangible and intangible assets of FVOP and each of its
subsidiaries. In addition, in the event of the occurrence and continuance of an
event of default under the Amended Credit Facility, the Administrative Agent is
entitled to replace the general partner of FVOP with its designee.
Holdings, as the general partner of FVOP, guaranties the indebtedness under the
Amended Credit Facility on a limited recourse basis. The Amended Credit Facility
is also secured by a pledge of all limited and general partnership interests in
FVOP and a first priority lien on all the assets of FVOP and its subsidiaries.
On October 7, 1996, FVOP issued $200.0 million aggregate principal amount of 11%
Senior Subordinated Notes due 2006 (the "FVOP Notes"). The FVOP Notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The Company paid its first interest
payment of $11.5 million on April 15, 1997. The FVOP Notes are general unsecured
obligations of the Company and rank subordinate in right of payment to all
existing and any future senior indebtedness. In anticipation of the issuance of
the FVOP Notes, the Company entered into deferred interest rate setting
agreements to reduce the interest rate exposure related to the FVOP Notes. The
financial statement effect of these agreements will be to increase the effective
interest rate which the Company incurs over the life of the FVOP Notes.
Holdings and Holdings Capital were formed for the purpose of acting as co-issuer
of $237.7 million aggregate principal amount of the Notes. FVP contributed to
Holdings, both directly and indirectly, all of the outstanding partnership
interests of FVOP prior to the issuance of the Notes (the "Formation
Transaction") and therefore, at that time, FVOP and FrontierVision Capital
Corporation ("FVOP Capital") became wholly-owned consolidated subsidiaries of
Holdings. Net proceeds from the issuance of the Notes of $142.3 million were
contributed by Holdings to FVOP as a capital contribution on September 19, 1997.
See "Use of Proceeds".
The capital contribution from Holdings was used by FVOP to repay certain
existing bank indebtedness of $65.5 million with the remainder placed in escrow
to finance pending acquisitions. The escrow proceeds have been fully invested as
of December 31, 1997. Holdings and Holdings Capital filed an exchange of the Old
Notes on Form S-4 with the Securities and Exchange Commission on September 26,
1997 (File No. 333-36519). The Issuers' registered exchange offer of $237.7
million aggregate original principal amount at maturity of the Exchange Notes
for the Old Notes was completed on Friday, December 12, 1997, in accordance with
its terms. The form and terms of the Exchange Notes are the same as the form and
terms of the Old Notes except that (i) the issuance of the Exchange Notes was
registered under the Securities Act and, therefore, the Exchange Notes do not
bear legends restricting their transfer, and (ii) holders of the Exchange Notes
are not entitled to certain rights of holders of the Old Notes under a
registration rights agreement.
In addition, in connection with the acquisition of the ACE Systems and the Triax
Systems, FrontierVision Partners, L.P. ("FVP"), FVOP's previous general partner,
received additional funding commitments of approximately $76.0 million. As of
December 31, 1997, all of such funding commitments had been invested in FVP and
FVP had contributed substantially all of such investments to FVOP as equity
(prior to the Formation Transaction).
During the year ended December 31, 1997, Holdings received approximately $37.7
million of equity contributions from its partners. Such equity contributions and
senior debt, along with cash flow generated from operations, have been
sufficient to finance capital improvement projects as well as acquisitions. FVOP
has adequately serviced its debt in accordance with the provisions of the
Amended Credit Facility from EBITDA of approximately $66.4 million generated by
FVOP for the year ended December 31, 1997.
25
<PAGE>
In connection with the acquisition of the UVC Systems in 1995, FVOP issued a
subordinated note to UVC in the aggregate principal amount of $7.2 million.
Under the terms of the UVC Note, FVOP repaid the UVC Note in connection with the
closing of the Amended Credit Facility.
The Company is in the process of performing a preliminary assessment of the
applicability of Year 2000 issues to its business and operations. The Company
uses specialized third-party service providers for all subscriber management
purposes, including billing, revenue collection and related reporting. These
third-party service providers have represented to the Company that Year 2000
issues are being addressed by such providers. The software utilized by the
Company's primary third-party billing service will be Year 2000-compatible by
the fourth quarter of 1998. As such, the Company does not expect the cost of
addressing the Year 2000 issues relative to its billing and revenue-related
functions to be a material event. Furthermore, with respect to the management
information system and technical equipment, the Company is uncertain as to the
ultimate cost of bringing such items into compliance with Year 2000 issues.
However, the Company believes that there will be no untimely resolution of these
issues relevant to its business and operations.
Cash Flows From Operating Activities
Cash flows from operating activities for the year ended December 31, 1997 were
$26.5 million compared to $18.9 million for the year ended December 31, 1996.
The increase was primarily a result of cable television system operations
acquired during 1996 and 1997.
Cash flows from operating activities for the year ended December 31, 1996 were
$18.9 million compared to $1.9 million for the period from inception (April 17,
1995) through December 31, 1995. The increase was the result of cable television
system operations acquired during 1996 as the UVC Systems and the Longfellow
Systems were acquired during the fourth quarter of 1995.
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the year ended
December 31, 1997 were approximately $32.7 million compared to approximately
$9.3 million for the year ended December 31, 1996. Capital expenditures
primarily consisted of expenditures for the construction and expansion of the
delivery system, and additional costs were incurred related to the expansion of
customer service facilities. The Company invested approximately $392.6 million
in acquisitions during the year ended December 31, 1997 compared with
approximately $421.5 million for the same period in 1996.
The Company had capital expenditures of $9.3 million during the year ended
December 31, 1996 compared to $0.6 million for the period from inception (April
17, 1995) through December 31, 1995. The 1996 expenditures primarily consisted
of expenditures for the construction and expansion of the delivery system and
additional costs were incurred related to the expansion of customer service
facilities. In addition, for the year ended December 31, 1996, the Company
capitalized approximately $2.0 million attributable to the cost of obtaining
certain franchise, leasehold and other long-term agreements. The Company
invested approximately $421.5 million in acquisitions during the year ended
December 31, 1996 compared with approximately $121.3 million for the period from
inception (April 17, 1995) through December 31, 1995. The Company also disposed
of cable television systems for net proceeds of $15.1 million in the year ended
December 31, 1996.
The Company expects to spend a total of approximately $73.0 million over the
next two years for capital expenditures with respect to the Existing Systems.
These expenditures will primarily be used for (i) installation of fiber optic
cable and microwave links which will allow for the consolidation of headends,
(ii) analog and digital converter boxes which will allow the Company to more
effectively market premium and pay-per-view services, (iii) the continued
deployment of coaxial cable to build-out the Existing Systems, (iv) headend
26
<PAGE>
equipment for the HITS digital television system and (v) the upgrade of a
portion of the Company's cable television distribution systems to, among other
things, increase bandwidth and channel capacity. See "Business--Technological
Developments."
Cash Flows From Financing Activities
Acquisitions during 1997 were financed with equity contributions from FVOP's
partners and borrowings under FVOP's senior bank indebtedness. Acquisitions
during the twelve months ended December 31, 1996 were financed with equity
contributions from FVOP's partners, borrowings under the Senior Credit Facility,
and issuance of $200.0 million aggregate principal amount of FVOP Notes;
acquisitions for the period from inception (April 17, 1995) were financed with
equity contributions from FVOP's partners and borrowings under the Senior Credit
Facility.
During the year ended December 31, 1997, Holdings had received approximately
$37.7 million of equity contributions from its partners as compared with $107.4
million for the year ended December 31, 1996, and $49.1 million for the period
from inception (April 17, 1995) through December 31, 1995.
As of December 31, 1997, Holdings received approximately $150.0 million in net
proceeds as a result of the issuance of the Old Notes. Furthermore, as of
December 31, 1997 FVP had received a total of $199.4 million of equity
commitments from its partners and all such equity commitments had been invested
in FVP and FVP had contributed substantially all such equity investments to FVOP
(prior to the Formation Transaction).
27
<PAGE>
Business
Holdings owns, operates and develops cable television systems in small and
medium-sized suburban and exurban communities in the United States. As of
December 31, 1997, the Company was one of the twenty largest operators of cable
television systems in the United States, owning systems which passed
approximately 817,000 homes and served approximately 559,800 basic subscribers.
The Company
The Company seeks to maximize enterprise value by acquiring cable television
systems at attractive prices in geographically rational clusters to achieve
economies of scale and by improving system management to enhance operating
profit.
To date, the Company has been highly successful in its acquisition activities.
Since closing its first acquisition in November 1995, the Company has completed
20 acquisitions and has established significant critical mass and subscriber
density within its targeted geography. The following table illustrates the
Company's growth, and operating characteristics of its systems, through December
31, 1997.
---------------------------------------------------------
Basic Premium Total Revenue
Homes Passed Subscribers Units (In Thousands)
---------------------------------------------------------
December 31, 1995 125,300 92,700 35,700 4,369
December 31, 1996 498,900 356,400 152,100 76,464
Decebmer 31, 1997 817,000 559,800 275,400 145,126
The Company has established 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, 1997, over 85% of the Company's subscribers were
within its three primary operating clusters. The Company is currently the second
largest MSO in Kentucky, the largest MSO in Maine and the third largest MSO in
Ohio. In the Southeast, the Company has accumulated attractive systems which it
expects to either consolidate with subsequent system acquisitions, trade for
systems within the Company's primary operating regions or divest at favorable
prices.
Business Strategy
The next phase of the Company's business plan will focus on increasing
subscriber density within its operating clusters through selective acquisitions,
reducing expenses through consolidating business operations, making significant
investment and improvements in technical plant and selectively introducing new
video and data services. The Company believes it can further enhance the
operational and financial performance of its cable systems as well as
effectively position the properties for a more widespread rollout of existing
and new cable and broadband telecommunications services. To achieve its business
objective, the Company pursues the following business strategies:
TARGET CLUSTERS IN SMALL AND MEDIUM-SIZED MARKETS. The Company has acquired
contiguous clusters of cable television systems serving small and medium-sized
suburban and exurban markets which are generally within 50 to 100 miles of
larger urban and suburban communities. The Company believes that such markets
have many of the beneficial attributes of larger urban and suburban markets,
including moderate to high household growth, economic stability, attractive
subscriber demographics and favorable potential for additional clustering.
Moreover, in such markets, the Company believes that (i) it will face less
direct competition given the lower population densities and higher costs per
subscriber of installing cable service; (ii) it will maintain higher subscriber
penetration levels and lower customer turnover based on fewer competing
entertainment alternatives; and (iii) its overhead and operating costs will
generally be lower than similar costs incurred in larger markets.
28
<PAGE>
GROW THROUGH STRATEGIC AND OPPORTUNISTIC ACQUISITIONS. In seeking to become the
consolidator of cable television systems within its targeted geographic areas,
the Company has systematically implemented a focused acquisition and
consolidation strategy within its three primary operating clusters of New
England, Ohio and Kentucky and its systems group in the Southeast. During the
fourth quarter of 1997, the Company significantly increased the size and scale
of its operating clusters by completing the acquisition of larger cable systems
deemed "non-core" by larger MSOs. The Company will continue to pursue both large
acquisitions and "fill-in" acquisitions in its operating clusters. The Company
believes that such acquisition targets will have diminished strategic value to
other prospective buyers given the Company's geographic prominence in these
regions. Consequently, the Company believes these acquisition targets can be
purchased at favorable prices.
IMPLEMENT OPERATING EFFICIENCIES AND INCREASE OPERATING CASH FLOW THROUGH
REGIONAL CONSOLIDATION. Upon acquiring a system, the Company implements
extensive management, operational and technical changes designed to improve
operating efficiencies and increase operating cash flow. By centralizing and
upgrading customer support functions, the Company has begun to reduce
administrative costs and better manage and train employees, while providing a
higher level of customer service than was previously provided by smaller,
dispersed offices. Within the Existing Systems, the Company plans to consolidate
up to 57 customer service and sales offices into five regional service centers
and 17 local payment offices. The Company also seeks to reduce technical
operating costs and capital expenditures by consolidating headend facilities. In
the Existing Systems, the Company plans to eliminate a significant number of the
246 headends. By serving more subscribers from a single distribution point, the
Company has begun to decrease ongoing technical maintenance expenses, improve
system reliability and enhance cost-efficiencies in adding new channels and
services.
PROMOTE AND EXPAND SERVICE OFFERINGS. Because many of the Company's customers
received limited service offerings prior to acquisition, the Company believes
that a significant opportunity exists to increase service revenue by increasing
the programming and pricing options available to its customers. The Company's
marketing programs include a mix of basic and premium service packages with an
emphasis on appealing to different customer segments in specific local markets
in order to maximize customer value, positive perception and overall
profitability. Towards this end, the Company has revised basic and tier
programming line-ups, launched several lower priced premium channels such as
Starz! and Encore, and created premium service package offerings. In April 1997,
the Company established a centralized, in-house telemarketing center to
telemarket premium service packages to its customers. During 1997,
tele-marketers working out of the Company's telemarketing center contacted over
175,000 of the Company's customers, generating over 12,000 sales of premium
units. As systems are consolidated and technically enhanced, the Company will
also continue to expand addressability, which is currently available to less
than 44% of its subscribers, and seek to increase revenues derived from
pay-per-view movies and events, as well as new pay services such as interactive
video games. With the expanded advertising market delivery afforded by larger,
contiguous system clusters, the Company plans to intensify local spot
advertising sales efforts. Additionally, the Company successfully introduced
digital cable television in two of its systems during the fourth quarter of
1997. Based on favorable early results in these test markets, the Company
anticipates a more widespread roll-out of digital programming services during
1998.
STRATEGICALLY UPGRADE SYSTEMS. The Company will selectively upgrade its cable
systems to increase channel capacities, enhance signal quality and improve
technical reliability. The Company believes that such technical upgrades will
not only enhance the potential for increasing revenues, but also will improve
customer and community relations and further solidify the Company's incumbent
position as the preeminent local provider of video services. Over the next five
years, the Company intends to establish a technical platform of 750 MHz (110
analog channels) in its larger markets and 400 MHz to 550 MHz (54 to 78 analog
channels) in most of its systems. Subsequent to this upgrade plan, over one-half
of the Company's subscribers will be served by systems with 550 MHz to 750 MHz
plant. Over the same period, the Company plans to invest substantial amounts in
new technologies. The Company continually monitors and evaluates new
technological developments to anticipate the introduction of new services and
program delivery capabilities, such as digital cable television and cable
Internet access. As a result, the Company may determine to reallocate the
investment of its capital in order to more widely deploy such technology and to
make optimal use of its assets.
29
<PAGE>
POSITION THE SYSTEMS FOR BROADBAND SERVICES. By implementing a hybrid fiber
optic/coaxial cable design ("HFC") across the majority of its cable plant, the
Company will effectively position itself for the introduction of new broadband
video, voice and data services. Given its fiber-rich local infrastructure and
the expanded bandwidth provided by coaxial cable, the Company believes it will
enjoy distinct advantages over competitive service providers. Such advantages
include higher speed, increased capacity, greater selectivity and better
technical reliability. The Company's full service broadband HFC networks will
enable it to offer a wide range of new services that include video applications
such as digital programming, regional advertising insertion and interactive
video games, as well as telecommunications and data services such as cable
Internet access, virtual LAN applications, high speed point-to-point data
transmission and competitive telephone access.
FOCUS ON THE CUSTOMER. The Company continually seeks to provide superior
customer service to its customers. Fundamental to this effort is development of
technically advanced customer call centers, the establishment of a common
billing and customer information platform and the continuous improvement of
programming and pricing options. To date, the Company has established four
state-of-the-art customer call centers which, as of December 31, 1997, handled
customer call volume for approximately 85% of the Company's customers. By
centralizing customer service at the regional level, all functions that directly
impact subscribers, including sales and marketing, customer service and
administration, and technical support, are implemented as close to the customer
as possible. In addition, as a result of its consolidation efforts, the Company
has been able to enhance its customer service by increasing hours of operation
for its customer service functions, better coordinating technical service and
installation calls, speeding responsiveness to customer inquiries and
standardizing maintenance procedures. While centralizing and improving customer
service, the Company has opened local payment and technical offices to maintain
its local presence and visibility within its communities. Additionally, the
Company expects to have converted all of the subscribers within the Existing
Systems to a single billing and customer information platform by the end of
1998. As part of the Company's plans to upgrade its acquired cable systems the
Company regularly evaluates the programming packages, pricing options and add-on
services available to its customers. During 1997, the Company added over 440 new
channels of programming and expects to add over 240 new channels during 1998.
Development of the Systems
The Company was organized in 1995 to exploit acquisition opportunities in the
cable television marketplace created by the confluence of several economic,
regulatory, competitive and technical forces. The cable television industry has
experienced rapid and continuing consolidation over the last several years for
various reasons. Operators have been faced with the need for increased levels of
capital expenditures to expand channel capacity and have recently begun to face
the threat of competition from new market entrants, including DBS services and
telephone company video programming services. Many smaller MSOs, particularly
those that were acquisitive during the late 1980's and purchased systems at
prices significantly higher than those paid by the Company, sought liquidity for
their investors or were constrained from accessing additional capital to upgrade
or rebuild aging plant to remain competitive with other video programming
providers. More recently, larger MSOs have embarked on their own program of
divesting or trading less strategic systems to redirect their resources to major
urban and suburban markets.
As a result of this supply and demand anomaly, the Company has been able to
selectively acquire cable television properties from both small and large MSO's,
thereby establishing core geographic clusters and subscriber mass. The aggregate
purchase price paid by the Company for the Existing Systems was approximately
$952.6 million, representing an average of 8.82 times the Acquisition Cash Flow
and $1,657 per subscriber. The following table summarizes the acquisitions of
the Existing Systems:
30
<PAGE>
<TABLE>
------------------------------------------------------------
Purchase Basic Purchase
Price(1) Subscribers Price Per
Predecessor Owner Date Acquired (in millions) Acquired(2) Subscriber
- ----------------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
United Video Cablevision, Inc. (the "UVC Systems ")....... November 9, 1995 $ 120.8 87,400 $1,382
Longfellow Cable Company, Inc. (the "Longfellow Systems ") November 21, 1995 6.1 5,100 1,196
C4 Media Cable Southeast, Limited Partnership (the "C4
Systems")................................................. February 1, 1996 47.6 40,400 1,178
Americable International Maine, Inc. (the "Americable March 29, 1996 4.8 3,350 1,433
Systems ").................................................
Cox Communications (the "Cox Systems ")................... April 9, 1996 136.0 77,200 1,762
Phoenix Grassroots Cable Systems, LLC (the "Grassroots
Systems")................................................. August 29, 1996 9.3 7,400 1,257
Triax Southeast Associates, L.P. (the "Triax Systems ")... October 7, 1996 84.7 53,200 1,592
American Cable Entertainment of Kentucky-Indiana, Inc. (the
"ACE Systems").......................................... October 9, 1996 146.0 83,250 1,754
SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio
Systems ")................................................. October 31, 1996 3.8 3,225 1,178
SRW, Inc.'s Deep Creek Cable TV, L.P. (the "Deep Creek
System").................................................. December 23, 1996 3.0 2,175 1,379
Bluegrass Cable Partners, L.P. (the "Bluegrass Systems "). March 20, 1997 9.9 7,225 1,370
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc. (the "Clear/B&G Systems ")........................ March 31, 1997 1.7 1,450 1,172
Milestone Communications of New York, L.P. (the "Milestone
Systems").............................................. March 31, 1997 2.8 2,125 1,318
Triax Associates I, L.P. (the "Triax I Systems ")......... May 30, 1997 34.5 20,700 1,667
Phoenix Front Row Cablevision (the "Front Row Systems ").. May 30, 1997 6.8 5,250 1,295
PCI Incorporated (the "Bedford System").................... August 29, 1997 13.5 7,750 1,742
SRW, Inc.'s Blue Ridge Cable Systems, L.P. (the "Blue Ridge
Systems").................................................. September 3, 1997 4.1 4,550 901
Harold's Home Furnishings, Inc. (the "Harold's System").... October 31, 1997 1.5 1,480 1,014
A-R Cable Services - ME, Inc. (the "Cablevision Systems").. October 31, 1997 78.2 54,300 1,440
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture (the "TCI-VT/NH Systems")................ December 2, 1997 34.5 22,100 1,561
Cox Communications, Inc. (the "Cox-Central Ohio Systems").. December 19, 1997 203.0 85,400 2,377
-------- ------- ------
Total...................................................... $ 952.6 575,030 $1,657
======== ======= ======
</TABLE>
- ---------
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that were sold by the Company in
1996.
The Company will continue to make acquisitions of cable systems to expand and
improve its existing operating clusters and will continue to dispose of or trade
non core cable systems. The Company believes that acquisition opportunities
continue to exist among the small and large MSO segments. During 1997, the
Company completed an $800 million senior secured credit facility and received
approximately $179.9 million in equity contributions from its general and
limited partners. Based on its well-defined geography focus, strong market
presence and financial capacity, the Company believes that it is well positioned
to continue to acquire cable systems at attractive values and meet its growth
objective of acquiring 750,000 subscribers.
As of January 16, 1998, the Company had entered into four purchase agreements to
acquire, for aggregate consideration of approximately $105.8 million, contiguous
cable systems or cable systems in close proximity to the Existing Systems. In
the aggregate, these systems served approximately 59,300 basic subscribers as of
December 31, 1997. Of the total subscribers, approximately 33,900 would be added
to the Company's Ohio cluster and approximately 25,400 to the Company's New
England cluster. These systems possess technical profiles generally superior to
the profiles for the Existing Systems and are generally larger in size. At
closing, the Company expects the nine acquired systems to offer an average of 62
analog channels and 450 MHz of capacity. On March 6, 1998, the Company
consummated the acquisition of systems in Michigan from TVC-Sumpter Limited
Partnership and North Oakland Cablevision Partners Limited Partnership for an
aggregate purchase price of $14.2 million. These systems will be integrated into
the Company's Ohio cluster. In addition, on December 12, 1997 the Company
entered into an asset exchange agreement to obtain two Tennessee systems serving
approximately 5,000 subscribers in exchange for three of its Southeast region
systems serving approximately 4,300 subscribers in the Southeast region. The
Company completed this exchange on March 12, 1998. There can be no assurance
that the remaining potential acquisitions will be consummated or that the
Company can successfully integrate any acquired business with its existing
operations.
31
<PAGE>
System Descriptions
The Company's cable television systems consist of three primary clusters--New
England, Ohio and Kentucky--with a fourth, smaller group of systems in the
Southeast. The following chart provides certain operating and technical profile
statistics as of December 31, 1997 for the Company.
<TABLE>
-----------------------------------------------------------------
New England Ohio Kentucky Southeast Existing
Cluster Cluster Cluster Region Systems
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Homes passed......................................... 214,900 328,600 170,100 103,400 817,000
Basic subscribers.................................... 142,600 231,500 123,900 61,800 559,800
Basic penetration.................................... 66.4% 70.5% 72.8% 59.8% 68.5%
Premium units........................................ 83,900 118,400 47,600 25,500 275,400
Premium penetration.................................. 58.8% 51.1% 38.4% 41.3% 49.2%
Average monthly revenue per basic subscriber (1)..... 30.05 33.25 32.59 26.39 31.53
Number of headends................................... 77 80 39 50 246
Percentage of subscribers with at least 54-channel
capacity.......................................... 44.4% 77.1% 57.0% 26.1% 58.7%
</TABLE>
___________
(1) Average monthly revenue per basic subscriber equals revenue for the month
ended December 31, 1997 divided by the number of basic subscribers as of the end
of such period.
NEW ENGLAND CLUSTER. The systems in the New England cluster passed approximately
214,900 homes and served approximately 142,600 basic subscribers and 83,900
premium units as of December 31, 1997. The New England cluster is comprised
primarily of systems located in communities in southern, middle and coastal
Maine, central New Hampshire and northern Vermont. Of the Maine systems'
approximately 116,000 total subscribers, approximately 90,000 subscribers are
located in Bangor and Lewiston and contiguous communities or in nearby coastal
communities. In addition, the Company serves resort communities in Maine's
Carrabassett Valley that include Sugarloaf/USA and Sunday River. Most of the
approximately 19,500 subscribers in New Hampshire are located in Lebanon and
surrounding communities, and most of the 7,100 Vermont subscribers are located
within 20 miles of Burlington, the state's largest city. The 1996 median
household income and projected household growth rates (from 1996 to 2001) in the
areas served by the New England Systems exceed U.S. averages for counties with
less than 100,000 households ("Comparable Counties"), according to Equifax
National Decision Systems, 1996.
Approximately 44.4% of the Company's subscribers in the New England cluster are
offered at least 54 channels. The Company plans to utilize excess channel
capacity by introducing new basic and premium services, increasing penetration
of addressable converters, available to only 46.3% of the New England cluster
subscribers as of December 31, 1997, and aggressively pursuing spot advertising
revenue, which accounted for $0.62 per subscriber per month during the fourth
quarter of 1997. The New England cluster's basic penetration rate is 16.9% below
the Maine state average penetration rate of 79.8% according to Warren
Publishing, Inc.'s Television and Cable Factbook, 1997.
OHIO CLUSTER. Systems in the Ohio cluster passed approximately 328,600 homes and
served approximately 231,500 basic subscribers and 118,400 premium units as of
December 31, 1997. The majority of the subscribers in the Ohio cluster are
located in northwest Ohio, extending from the northern suburbs of Toledo south
along the Indiana state border, and central Ohio, south and east of suburban
Columbus to the Ohio River. The 1996 median household income in the Ohio cluster
exceeds U.S. averages for Comparable Counties, according to Equifax National
Decision Systems, 1996, although household growth rates in the areas served by
the Ohio systems are projected to lag that of Comparable Counties over the next
five years.
Approximately 77.1% of the Company's subscribers in the Ohio cluster are offered
at least 54 channels, including a fiber-to-the-feeder 550 MHz design in Ashland,
Kentucky and Newark, Ohio. Although the Ohio cluster's basic penetration rate at
December 31, 1997 was above the 1996 Ohio state average of 65.6%, its pay
penetration rate was approximately 18.8% below the Ohio state average pay
penetration rate of 63.0% according to Warren Publishing, Inc.'s Television and
Cable Factbook, 1997.
32
<PAGE>
As part of its technical improvement program, the Company plans to increase the
deployment of addressable converters, which were available to only 37.3% of the
Ohio cluster subscribers as of December 31, 1997, and to more aggressively
market pay-per-view and other interactive services such as video games. In
addition, the Company plans to leverage its existing centralized advertising
facilities and personnel to increase advertising revenue in all of the Ohio
cluster, which accounted for $0.86 per subscriber per month during the fourth
quarter of 1997.
KENTUCKY CLUSTER. The systems in the Kentucky cluster passed approximately
170,100 homes and served approximately 123,900 basic subscribers and 47,600
premium units as of December 31, 1997. A single regional customer service center
in Richmond, Kentucky serves all Kentucky subscribers, the majority of which
reside in outlying communities of Lexington, Kentucky and Cincinnati, Ohio. The
1996 median household income and the projected growth rates (from 1996 to 2001)
in the areas served by the Kentucky systems exceed U.S. averages for Comparable
Counties, according to Equifax National Decision Systems, 1996.
Approximately 57.0% of the Company's subscribers in the Kentucky cluster are
offered at least 54 channels, including fiber-to-the-feeder 550 MHz design
systems in Nicholasville, Kentucky and Delhi, Ohio and 750 MHz design systems in
Madison, Indiana and Winchester, Kentucky. The Company continues to expend
capital to complete a fiber ring surrounding Lexington, Kentucky. When complete,
this fiber loop will serve approximately 60,000 subscribers from a single
headend facility, interconnecting approximately fifteen existing headend
facilities and passing nine colleges and universities. The Kentucky cluster will
then be effectively positioned to offer broadband telecommunications and data
services such as high speed Internet access, distance learning and
point-to-point telephony. The Company plans to utilize excess channel capacity
to introduce new basic and premium services to the Kentucky cluster. While the
Kentucky cluster's basic penetration rate at December, 1997 was less than the
Kentucky state average of 76.9%, its pay penetration rate was approximately
21.0% below the Kentucky state average pay penetration rate of 48.6% according
to Warren Publishing, Inc.'s Television and Cable Factbook, 1997.
As part of its technical improvement program, the Company also plans to increase
the deployment of addressable converters, which were available to only 65.9% of
the Kentucky cluster subscribers as of December 31, 1997, and to more
aggressively market pay-per-view and other interactive services. Additionally,
the Company plans to leverage its existing centralized advertising facilities
and advertising sales personnel to increase advertising revenue in all of the
Kentucky cluster, which accounted for $1.26 per subscriber per month during the
fourth quarter of 1997.
SOUTHEAST SYSTEMS. The Company plans to either consolidate further the systems
in its Southeast region through acquisitions, trade certain of the systems for
properties within its New England, Ohio and Kentucky clusters or sell the
systems outright. As such, the Company's operating and capital expenditure plans
for the Southeast systems will be limited to maintenance and discretionary
projects that will increase the value of the systems to a potential buyer or
trading partner. The Southeast systems passed approximately 103,400 homes and
served approximately 61,800 basic subscribers and 25,500 premium units as of
December 31, 1997. The Southeast systems at December 31, 1997 were comprised of
groups of systems located in the following states: (i) Tennessee, serving
approximately 19,600 basic subscribers; (ii) North Carolina, serving
approximately 14,300 basic subscribers; (iii) Virginia, serving approximately
19,500 basic subscribers; and (iv) Maryland/Pennsylvania, serving approximately
8,400 basic subscribers. The Tennessee systems are located primarily in
Greeneville, Tennessee and surrounding communities; the North Carolina systems
are located near Rocky Mount, North Carolina; and the Virginia systems are
located in north central Virginia between Charlottesville and Winchester and in
Eastern Virginia, near Richmond. The Maryland/Pennsylvania systems are located
along the Maryland and Pennsylvania border, approximately 120 miles west of
Washington, D.C. The 1996 median household income and actual and projected
growth rate in the number of households (from 1996 to 2001) in the areas served
by the Southeast systems exceed U.S. averages for Comparable Counties, according
to Equifax National Decision Systems, 1996.
33
<PAGE>
Approximately 26.1% of the current plant design in the Southeast region is at
least 54 channels. The Company will continue to evaluate capital expenditures to
rebuild and upgrade plant based on the sales or trading status of the Southeast
systems.
Technological Developments
As part of its commitment to customer service, the Company maintains high
technical performance standards in all of its cable systems, and systems are
selectively upgraded and maintained to maximize channel capacity and to improve
picture quality and reliability of the delivery of additional programming and
new services. Before committing the capital to upgrade or rebuild a system,
management carefully assesses (i) subscribers' demand for more channels, (ii)
requirements in connection with franchise renewals, (iii) competing technologies
that are currently available, (iv) subscriber demand for other cable and
broadband telecommunications services, (v) the extent to which system
improvements will increase the attractiveness of the property to a future buyer
and (vi) the cost effectiveness of any such capital outlay.
The following tables set forth certain information regarding the channel
capacities and miles of plant and the average number of subscribers per headend
for the Existing Systems as of December 31, 1997.
<TABLE>
-------------------------------------------------------------------
<220 MHz: 221-399 MHz: 400-549 MHz: 550-750 MHz:
Up to 32 33 to 53 54 to 77 78 to 110
Channels Channels Channels Channels Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Miles of plant 264 10,596 7,699 2,294 20,853
% miles of plant 1.3% 50.8% 36.9% 11.0% 100.0%
% of basic subscribers 1.5% 39.8% 40.7% 18.0% 100.0%
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------
Number of Subscribers Per Headend
-------------------------------------------------------------------------------------------
1,001- 5,001- 10,001-
<1,000 5,000 10,000 25,000 >25,001 Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
# of subscribers 60,430 164,810 109,130 143,080 82,350 559,800
% of subscribers 10.8% 29.4% 19.5% 25.6% 14.7% 100.0%
</TABLE>
The Company's Existing Systems have an average capacity of approximately 56
channels and delivered an average of 46 channels of programming to its
subscribers as of December 31, 1997. Approximately 60% of the Company's
subscribers are served by systems with more than 5,000 subscribers and over 40%
are served by systems serving more than 10,000 subscribers. The Company believes
that its current excess channel capacity and significant number of larger
systems will allow it to cost effectively introduce new service offerings.
Approximately 43.9% of the Company's subscribers currently have access to
addressable technology. Addressable technology enables the Company, from the
office or headend, to change the premium channels being delivered to each
subscriber or to activate pay-per-view services. These service level changes can
be effectuated without the delay or expense associated with dispatching a
technician to the subscriber's home. Addressable technology also reduces premium
service theft and allows the Company automatically to disconnect delinquent
accounts electronically from the customer service center.
The use of fiber optic technology in concert with coaxial cable has
significantly enhanced cable system performance. Fiber optic strands are capable
of carrying hundreds of video, data and voice channels over extended distances
without the extensive signal amplification typically required for coaxial cable.
To date, the Company has used fiber to interconnect headends, to eliminate
headends by installing fiber backbones and to reduce amplifier cascades, thereby
improving both picture quality, system reliability and operational efficiencies.
Recently, digital cable television has become commercially viable with
technological cost reductions. The Company believes that this development will
allow it to increase services to its subscribers. The Company has
34
<PAGE>
successfully launched digital cable television service in two of its systems
and, based on favorable early results in these test markets, is in the process
of installing necessary headend equipment for launches in additional systems.
The Company will continue to monitor customer demand and profitability of such
digital cable television services to assess the viability of a more wide-spread
roll-out during 1998.
The Cable Television Industry
A cable television system receives television, radio and data signals that are
transmitted to the system's headend site by means of off-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial, and in some instances,
fiber optic cable, to customers who pay a fee for this service. Cable television
systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years, generally for extended periods of up to 15 years.
The cable television industry developed in the United States in the late 1940's
and early 1950's in response to the needs of residents in predominantly rural
and mountainous areas of the country where the quality of off-air television
reception was inadequate due to factors such as topography and remoteness from
television broadcast towers. In the late 1960's, cable television systems also
developed in small and medium-sized cities and suburban areas that had a limited
availability of clear off-air television station signals. All of these markets
are regarded within the cable industry as "classic" cable television station
markets. In more recent years, cable television systems have been constructed in
large urban cities and nearby suburban areas, where good off-air reception from
multiple television stations usually is already available, in order to receive
the numerous, satellite-delivered channels carried by cable television systems
which are not otherwise available via broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of cable
services consisting of (i) off-air television signals of local network,
independent and educational stations, (ii) a limited number of television
signals from so-called "superstations" originating from distant cities (such as
WGN), (iii) various satellite-delivered, non-broadcast channels (such as Cable
News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"),
Entertainment and Sports Programming Network ("ESPN") and Turner Network
Television ("TNT")), (iv) certain programming originated locally by the cable
television system (such as public, governmental and educational access programs)
and (v) informational displays featuring news, weather, stock market and
financial reports and public service announcements. For an extra monthly charge,
cable television systems also offer premium television services to their
customers. These services (such as Home Box Office (R) ("HBO"), Showtime (R) and
regional sports networks) are satellite-delivered channels consisting
principally of feature films, live sports events, concerts and other special
entertainment features, usually presented without commercial interruption.
A customer generally pays an initial installation charge and fixed monthly fees
for basic and premium television services and for other services (such as the
rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenue for cable television operators. In
addition to customer revenue from these services, cable television operators
generate revenue from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming networks, such as ESPN,
MTV and USA. Cable television operators frequently also offer to their customers
home shopping services, which pay the systems a share of revenue from sales of
products in the systems' service areas. See "--Programming, Services and Rates."
35
<PAGE>
Programming, Services and Rates
The Company has various contracts to obtain basic and premium programming for
its systems from program suppliers whose compensation is typically based on a
fixed fee per customer. The Company's programming contracts are generally for a
fixed period of time and are subject to negotiated renewal. Some program
suppliers provide volume discount pricing structures or offer marketing support
to the Company. In particular, the Company has negotiated programming agreements
with premium service suppliers that offer cost incentives to the Company under
which premium service unit prices decline as certain premium service growth
thresholds are met. The Company's successful marketing of multiple premium
service packages emphasizing customer value has enabled the Company to take
advantage of such cost incentives. In addition, the Company is a member of a
programming consortium consisting of small to medium-sized MSOs serving, in the
aggregate, over eight million cable subscribers. The consortium was formed to
help create efficiencies in the areas of securing and administering programming
contracts, as well as to establish more favorable programming rates and contract
terms for small to medium-sized operators. The Company intends to negotiate
programming contract renewals both directly and through the consortium to obtain
the best available contract terms. The Company also has various retransmission
consent arrangements with commercial broadcast stations. Some of these consents
require direct payment of nominal fees for carriage. In some other instances no
payment is required; however, the Company has entered into agreements with
certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations. The Company renewed or
renegotiated a substantial portion of agreements through December 1999 under
substantially the same terms. See "Legislation and Regulation--Must
Carry/Retransmission Consent."
Although services vary from system to system due to differences in channel
capacity, viewer interests and community demographics, the majority of the
Company's systems offer a "basic service tier," consisting of local television
channels (network and independent stations) available over-the-air and local
public, governmental, home-shopping and leased access channels. The majority of
the Company's systems offer, for a monthly fee, an expanded basic tier of
"superstations" originating from distant cities (such as WGN), various
satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN and
TNT) and certain programming originated locally by the cable system (such as
public, governmental and educational access programs) providing information with
respect to news, time, weather and the stock market. In addition to these
services, the Company's systems typically provide one or more premium services
purchased from independent suppliers and combined in different formats to appeal
to the various segments of the viewing audience, such as HBO (R), Cinemax (R),
Showtime (R), The Movie Channel (TM) and Starz!. These services are
satellite-delivered channels consisting principally of feature films, original
programming, live sports events, concerts and other special entertainment
features, usually presented without commercial interruption. Such premium
programming services are offered by the Company's systems both on an a la carte
basis and as part of premium service packages designed to enhance customer value
and to enable the Company's systems to take advantage of programming agreements
offering cost incentives based on premium unit growth. Subscribers may subscribe
for one or more premium units. Additionally, the Company plans to upgrade
certain of its systems with fiber optic cable, which will allow the Company to
expand its ability to use "tiered" packaging strategies for marketing premium
services and promoting niche programming services. The Company believes that
this ability will increase basic and premium penetration as well as revenue per
subscriber.
Rates to subscribers vary from market to market and in accordance with the type
of service selected. As of December 31, 1997, the average monthly rate for the
Existing Systems was $24.51 for the basic and expanded basic service tiers.
These rates reflect reductions effected in response to the federal re-regulation
of cable television industry rates in 1992, and in particular, the FCC's rate
regulations implementing the 1992 federal law, which became effective in 1993. A
one-time installation fee, which may be waived in whole or in part during
certain promotional periods, is charged to new subscribers. Management believes
that the Company's rate practices are generally consistent with the current
practices in the industry. See "Legislation and Regulation."
36
<PAGE>
Marketing, Customer Service and Community Relations
The Company aggressively markets and promotes its cable television services with
the objective of adding and retaining customers and increasing subscriber
revenue. The Company actively markets its basic and premium program packages
through a number of coordinated marketing techniques, which include (i) direct
consumer sales and subscriber audit programs, (ii) direct mail for basic and
upgrade acquisition campaigns, (iii) monthly subscriber statement inserts, (iv)
local newspaper and broadcast/radio advertising where population densities are
sufficient to provide a reasonable cost per sale and (vi) cross-channel
promotion of new services and pay-per-view. Towards this end, the Company has
established a single centralized telemarketing center to provide the outbound
telemarketing support for all operating regions. Using a predictive dialing
system platform, the operation will focus on (i) basic and pay unit acquisition,
(ii) delinquent account collection activities, (iii) customer satisfaction
surveys and (iv) targeted marketing campaigns.
The Company is dedicated to providing superior customer service. To meet this
objective, the Company provides its customers with a full line-up of
programming, a wide variety of programming options and packages, timely and
reliable service and improved technical quality. The Company's employees receive
ongoing training in customer service, sales and subscriber retention and
technical support. In general, following a new installation, a customer service
representative will follow up by telephone contact with the subscriber to assess
the quality of installation and the service the subscriber is receiving and to
ensure overall subscriber satisfaction. Customer service representatives and
technicians are also trained to market upgrades or cross-sell services at the
point of sale of service. As part of its consolidation efforts, the Company has
established centralized customer service facilities, increased hours of
operation, and installed state-of-the-art telephone, information and billing
systems to improve responsiveness to customer needs. In addition, the Company
has retained local payment and technical offices to maintain its local presence
and visibility within its communities.
Recognizing that strong governmental, franchise and public relations are crucial
to the overall success of the Company, the Company aggressively maintains and
improves the working relationships with all governmental entities within the
franchise areas. Regional management meets regularly with local officials for
the purposes of keeping them advised on the Company's activities within the
communities, to receive information and feedback on the Company's standing with
officials and customers alike and to ensure that the Company can maximize its
growth potential in areas where new housing development is occurring or where
significant technical plant improvement is underway. The regional management is
also responsible for franchise renewal negotiations as well as the maintenance
of Company visibility through involvement in various community and civic
organizations and charities. In addition, the Company has hired experienced
community relations personnel in its New England, Ohio and Kentucky clusters to
enhance local visibility and long-term relationships.
Franchises
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to
regulation under state and federal law, including the Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable," and together with the
1984 Cable Act, the "Cable Acts") and the Telecommunications Act of 1996 (the
"1996 Telecom Act"), as well as the rules, regulations and policies of the
Federal Communications Commission (the "FCC") and applicable state agencies. See
"Legislation and Regulation."
As of December 31, 1997, the Company held 665 franchises. These franchises, most
of which are non-exclusive, provide for the payment of fees to the issuing
authority. In all of the Existing Systems, such franchise fees are passed
through directly to the customers. The Cable Acts prohibit franchising
authorities from
37
<PAGE>
imposing franchise fees in excess of 5% of gross revenue and also permit the
cable system operator to seek renegotiation and modification of franchise
requirements if warranted by changed circumstances. See "Legislation and
Regulation."
Approximately 98.0% of the Existing System's basic subscribers are in service
areas that require a franchise. The table below groups the franchises of the
Existing Systems by date of expiration and presents the approximate number and
percentage of basic subscribers for each group of franchises as of December 31,
1997.
<TABLE>
-----------------------------------------------------
Percentage of Percentage of
Number of Total Number of Franchised
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
-----------------------------------------------------
<S> <C> <C> <C> <C>
1997 through 2001 234 35% 196,100 35%
2002 and thereafter 431 65% 353,000 65%
------- ------- ------- -------
Total 665 100% 549,100 100%
</TABLE>
The Cable Acts provide, among other things, for an orderly franchise renewal
process in which franchise renewal will not be unreasonably withheld or, if
renewal is denied and the franchising authority acquires ownership of the system
or effects a transfer of the system to another person, the operator generally is
entitled to the "fair market value" for the system covered by such franchise. In
addition, the Cable Acts established comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
The Company believes that it generally has very good relationships with its
franchising communities. The Company has never had a franchise revoked or failed
to have a franchise renewed. In addition, all of the franchises of the Company
eligible for renewal have been renewed or extended at or prior to their stated
expirations, and no franchise community has refused to consent to a franchise
transfer to the Company.
Competition
Cable television systems face competition from alternative methods of receiving
and distributing television signals and from other sources of news, information
and entertainment such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive online computer services and
home video products, including videotape cassette recorders. The extent to which
a cable communications system is competitive depends, in part, upon the cable
system's ability to provide, at a reasonable price to customers, a greater
variety of programming and other communications services than those which are
available off-air or through other alternative delivery sources and upon
superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted on a
nonexclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable television systems. See "Legislation and
Regulation." It is possible that a franchising authority might grant additional
franchises to other companies containing terms and conditions more favorable
than those afforded the Company. Well-financed businesses from outside the cable
industry (such as the public utilities that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. See "Legislation and Regulation." Competition from other video service
providers exists in areas served by the Company. In a limited number of the
Company's franchise areas, the Company faces direct competition from another
franchised cable television system.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. The 1992 Cable Act contains provisions, which the FCC implemented
with regulations, to enhance the ability of cable competitors to purchase and
make available to HSD owners certain satellite-delivered cable programming
38
<PAGE>
at competitive costs. The 1996 Telecom Act and FCC regulations implementing that
law preempt certain local restrictions on the use of HSDs and roof-top antennae
to receive satellite programming and over-the-air broadcasting services. See
"Legislation and Regulation."
Cable operators also face competition from private satellite master antenna
television ("SMATV") systems that serve condominiums, apartment and office
complexes and private residential developments. The 1996 Telecom Act broadens
the definition of SMATV systems not subject to regulation as a franchised cable
television system. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services
offered by franchised cable television systems. SMATV operators often enter into
exclusive agreements with building owners or homeowners' associations, although
some states have enacted laws that authorize franchised cable operators access
to such private complexes. These laws have been challenged in the courts with
varying results. In addition, some companies are developing and/or offering to
these private residential and commercial developments packages of telephony,
data and video services. The ability of the Company to compete for customers in
residential and commercial developments served by SMATV operators is uncertain.
Congress has enacted legislation and the FCC has adopted regulatory policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS service whereby signals are transmitted by satellite to receiving
facilities located on customer premises. Programming is currently available to
individual households, condominiums, apartment and office complexes through
conventional, medium and high-powered satellites. DBS providers can offer more
than 100 channels of video programming to their subscribers and are providing
movies, broadcast stations, and other program services comparable to those of
cable television systems. The FCC and Congress are presently considering
proposals to enhance the ability of DBS providers to gain access to additional
programming and to authorize DBS carriers to transmit local signals to local
markets. Currently, Primestar Partners (a consortium comprised of cable
operators and a satellite company), DirecTV, and EchoStar Communications Corp.
("EchoStar") are providing nation-wide DBS services. There are other companies
that are currently providing or are planning to provide domestic DBS services.
American Sky Broadcasting ("ASkyB"), a joint venture between MCI Communications
Corp. ("MCI") and The News Corporation Limited ("News Corp."), is currently
developing high-power DBS services. Primestar, News Corp., MCI and ASkyB
recently announced several agreements in which News Corp., MCI and ASkyB will
sell to Primestar two satellites under construction and MCI will assign to
Primestar (subject to various governmental approvals) an FCC DBS license. The
satellites to be sold to Primestar, when operational, are expected to be capable
of providing approximately 200 channels of DBS service in the United States. The
Primestar partners recently announced an agreement to consolidate their DBS
assets into a new publicly traded company. DBS providers provide significant
competition to cable service providers, including the Company.
Digital satellite service ("DSS") offered by DBS systems currently has certain
advantages over cable systems with respect to programming and digital quality,
as well as disadvantages that include high up-front customer equipment and
installation costs and a lack of local programming, service and equipment
distribution. While DSS presents a competitive threat, the Company currently has
excess channel capacity available in most of its systems, as well as strong
local customer service and technical support, which will enhance its ability to
compete. By selectively increasing channel capacities of systems to between 54
and 100 channels and introducing new premium channels, pay-per-view and other
services, the Company will seek to maintain programming parity with DSS and
magnify competitive service price points. Based on internal tracking of
subscriber disconnects, the Company believes it lost less than 2,400 subscribers
to DBS during the year ended December 31, 1997. On an annualized basis, this
represents less than 0.7% of the subscribers of the Existing Systems as of
December 31, 1997. The Company will continue to monitor closely the activity
level and the product and service needs of its customer base to counter
potential erosion of its market position or unit growth to DSS.
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low power microwave frequencies to transmit
video programming over the air to customers. Additionally, the
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FCC adopted new regulations allocating frequencies in the 28 GHz band for a new
multichannel wireless video service called Local Multipoint Distribution Service
("LMDS") that is similar to MMDS. The FCC initiated spectrum auctions for LMDS
licenses in February 1998. Wireless distribution services generally provide many
of the programming services provided by cable systems, and digital compression
technology is likely to increase significantly the channel capacity of their
systems. Because MMDS and LMDS service requires unobstructed "line of sight"
transmission paths, the ability of MMDS and LMDS systems to compete may be
hampered in some areas by physical terrain and large buildings. In the majority
of the Company's franchise service areas, prohibitive topography and limited
"line of sight" access have limited, and are likely to continue to limit,
competition from MMDS systems. The Company is not aware of any significant MMDS
operation currently within its cable franchise service areas.
The 1996 Telecom Act makes it easier for local exchange telephone companies
("LECs") and others to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
subscribers. See "Legislation and Regulation." Various LECs currently are
providing video programming services within and outside their telephone service
areas through a variety of distribution methods, including both the deployment
of broadband wire facilities and the use of wireless transmission facilities.
LECs and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video, interactive online computer services and other non-video services by
LECs becomes widespread, since LECs are not required, under certain
circumstances, to obtain local franchises to deliver such services or to comply
with the variety of obligations imposed upon cable television systems under such
franchises. Issues of cross-subsidization by LECs of video, data and telephony
services also pose strategic disadvantages for cable operators seeking to
compete with LECs that provide such services. The Company cannot predict the
likelihood of success of such video and broadband service ventures by LECs or
the impact on the Company of such competitive ventures. The Company believes,
however, that the small to medium-sized markets in which it provides or expects
to provide cable services are unlikely to support competition in the provision
of video and telecommunications broadband services given the lower population
densities and high costs per subscriber of installing plant. The 1996 Telecom
Act's provision promoting facilities-based broadband competition is primarily
targeted at larger markets, and its prohibition on buy-outs and joint ventures
between incumbent cable operators and LECs exempts small operators and carriers
meeting certain criteria. See "Legislation and Regulation." The Company believes
that significant growth opportunities exist for the Company by establishing
cooperative rather than competitive relationships with LECs within its service
areas, to the extent permitted by law.
Competition in the online services area is significant. Recently, a number of
large corporations in the telecommunications and technology industries,
including the Regional Bell Operating Companies ("RBOCs"), GTE Corporation,
Microsoft, Compaq Computer Corporation and Intel Corporation, announced the
formation of a working group to accelerate the deployment of Asymmetric Digital
Subscriber Line ("ADSL") technology. It is anticipated that ADSL technology will
allow Internet access at peak data transmission speeds equal to or greater than
that of modems over conventional telephone lines. Bell Atlantic Corporation
("Bell Atlantic") and several other RBOCs recently requested the FCC in separate
petitions to fully deregulate packet-switched networks to allow it to provide
high-speed broadband services, including online services, without regarding to
present LATA boundaries and other regulatory restrictions. Competitors in the
online services area include existing Internet service providers, LECs, long
distance carriers and others, many of whom have more substantial resources than
the Company. The Company cannot predict the likelihood of success of the online
services offered by the Company's competitors or the impact on the Company of
such competitive ventures.
Other new technologies may become competitive with services that cable
television systems can offer. The 1996 Telecom Act directed the FCC to
establish, and the FCC has adopted, regulations and policies for the issuance of
licenses for digital television ("DTV") to incumbent television broadcast
licensees. DTV is expected to deliver high definition television pictures,
multiple digital-quality program streams, as well as CD-quality audio
programming and advanced digital services, such as data transfer or subscription
video. The FCC also has authorized television broadcast stations to transmit
textual and graphic information useful both to consumers
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and businesses. The FCC also permits commercial and noncommercial FM stations to
use their subcarrier frequencies to provide nonbroadcast services including data
transmissions. The FCC established an over-the-air Interactive Video and Data
Service that will permit two-way interaction with commercial and educational
programming along with informational and data services. The FCC has conducted
spectrum auctions for licenses to provide PCS. PCS will enable license holders,
including cable operators, to provide voice and data services.
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environments are constantly occurring. Thus, it
is not possible to predict the effect that ongoing or future developments might
have on the cable industry or on the operations of the Company.
Employees
At December 31, 1997, the Company had approximately 937 equivalent full-time
employees, nine of whom belonged to a collective bargaining unit. The Company
considers its relations with its employees to be good.
Properties
The Company's principal physical assets consist of cable television operating
plant and equipment, including signal receiving, encoding and decoding devices,
headends and distribution systems and customer house drop equipment for each of
its cable television systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headends, consisting of associated electronic
equipment necessary for the reception, amplification and modulation of signals,
are located near the receiving devices. The Company's distribution system
consists primarily of coaxial and fiber optic cables and related electronic
equipment. Customer devices consist of decoding converters, which expand channel
capacity to permit reception of more than twelve channels of programming. Some
of the Existing Systems utilize converters that can be addressed by sending
coded signals from the headend over the cable network. See
"Business--Technological Developments."
The Company owns or leases parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices, and
owns most of its service vehicles. The Company believes that its properties,
both owned and leased, are in good condition and are suitable and adequate for
the Company's business operations.
The Company's cables generally are attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in underground ducts or trenches. The physical components of the
Company's systems require maintenance and periodic upgrading to keep pace with
technological advances.
Legal Proceedings
There are no material pending legal proceedings to which the Company is a party
or to which any of its properties are subject.
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Legislation and Regulation
The Cable Acts and the 1996 Telecom Act amended the Communications Act of 1934
(as amended, the "Communications Act") and established a national policy to
guide the development and regulation of cable systems. The 1996 Telecom Act is
the most comprehensive reform of the nation's telecommunications laws since the
Communications Act. Although the long-term goal of the 1996 Telecom Act is to
promote competition and decrease regulation of various communications
industries, in the short-term the law delegates to the FCC (and in some cases to
the states) broad new rulemaking authority. Principal responsibility for
implementing the policies of the Cable Acts and the 1996 Telecom Act is
allocated between the FCC and state or local franchising authorities. The FCC
and state regulatory agencies are required to conduct numerous rulemaking and
regulatory proceedings to implement the 1996 Telecom Act, and such proceedings
may materially affect the cable communications industry. The following is a
summary of federal laws and regulations materially affecting the growth and
operation of the cable communications industry and a description of certain
state and local laws.
RATE REGULATION. The 1992 Cable Act authorized rate regulation for cable
communications services and equipment in communities that are not subject to
"effective competition," as defined by federal law. Most cable communications
systems are now subject to rate regulation for basic cable service and equipment
by local officials under the oversight of the FCC which has prescribed detailed
criteria for such rate regulation. The 1992 Cable Act also requires the FCC to
resolve complaints about rates for cable programming service tiers ("CPSTs")
(other than programming offered on a per channel or per program basis, which
programming is not subject to rate regulation) and to reduce any such rates
found to be unreasonable. The 1996 Telecom Act eliminates the right of
individuals to file CPST rate complaints with the FCC and requires the FCC to
issue a final order within 90 days after receipt of CPST rate complaints filed
by any franchising authority. The 1992 Cable Act limits the ability of cable
television systems to raise rates for basic and certain cable programming
services (collectively, the "Regulated Services").
FCC regulations govern rates that may be charged to subscribers for Regulated
Services. The FCC uses a benchmark methodology as the principal method of
regulating rates for Regulated Services. Cable operators are also permitted to
justify rates using a cost-of-service methodology, which contains a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an operator's
allowable rate base. Franchising authorities are empowered to regulate the rates
charged for monthly basic service, for additional outlets and for the
installation, lease and sale of equipment used by subscribers to receive the
basic cable service tier, such as converter boxes and remote control units. The
FCC's rules require franchising authorities to regulate these rates on the basis
of actual cost plus a reasonable profit, as defined by the FCC. Cable operators
required to reduce rates may also be required to refund overcharges with
interest. The FCC has also adopted comprehensive and restrictive regulations
allowing operators to modify their regulated rates on a quarterly or annual
basis using various methodologies that account for changes in the number of
regulated channels, inflation and increases in certain external costs, such as
franchise and other governmental fees, copyright and retransmission consent
fees, taxes, programming fees and franchise-related obligations. The Company
cannot predict whether the FCC will modify these "going forward" regulations in
the future.
The 1996 Telecom Act provides for rate deregulation of CPSTs by March 1999,
although legislation has been proposed to extend the regulatory period.
Deregulation will occur sooner for systems in markets where comparable video
programming services, other than DBS, are offered by local telephone companies,
or their affiliates, or by third parties using the local telephone company's
facilities, or where "effective competition" is established under the 1992 Cable
Act. The 1996 Telecom Act also modifies the uniform rate provisions of the 1992
Cable Act by prohibiting regulation of non-predatory bulk discount rates offered
to subscribers in commercial and residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level.
The 1996 Telecom Act deregulates rates for CPSTs for certain small cable
operators immediately and, in certain circumstances deregulates basic services
and equipment. The deregulation of a smaller cable operator's
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rates only applies in franchise areas in which the small cable operator serves
50,000 or fewer subscribers. To qualify for the "small cable operator" rate
deregulation under the 1996 Telecom Act, the operator (and its affiliates) must
serve in the aggregate less than one percent (currently estimated by the FCC to
be approximately 617,000 subscribers) of all U.S. cable television subscribers
and may not be affiliated with an entity or group of entities that in the
aggregate has annual gross revenue exceeding $250 million. The FCC has adopted
interim rules in which it has defined "affiliate" as any entity that has a 20%
or greater equity interest in the small cable operator (active or passive) or
that holds de jure or de facto control over the small cable operator. The FCC is
currently conducting a rulemaking to implement the 1996 Telecom Act's "small
cable operator" rate deregulation, including adoption of permanent affiliation
standards.
In addition to rate deregulation for certain small cable operators under the
1996 Telecom Act, the FCC adopted regulations in June 1995 ("Small System
Regulations") pursuant to the 1992 Cable Act that were designed to reduce the
substantive and procedural burdens of rate regulation on "small cable systems."
For purposes of these FCC regulations, a "small cable system" is a system
serving 15,000 or fewer subscribers that is owned by or affiliated with a cable
company which serves, in the aggregate, 400,000 or fewer subscribers. Under the
FCC's Small System Regulations, qualifying systems may justify their regulated
service and equipment rates using a simplified cost-of-service formula. The
regulatory benefits accruing to qualified small cable systems under certain
circumstances remain effective even if such systems are later acquired by a
larger cable operator that serves in excess of 400,000 subscribers. Various
franchising authorities and municipal groups have requested the FCC to
reconsider its Small System Regulations. The FCC has determined that the 1996
Telecom Act does not require modification of its Small System Regulations. The
Company believes that many of the Existing Systems currently satisfy the
eligibility criteria under the FCC's Small System Regulations and would
therefore be eligible to use the FCC's simplified cost-of-service methodology to
justify basic service, CPST and equipment rates if regulated by a franchising
authority or the FCC. Because the Company now serves in the aggregate more than
400,000 subscribers, most of the systems acquired from larger MSOs, such as TCI,
Cox and Cablevision, generally will not be eligible for rate regulatory
treatment as "small cable systems"; however, certain systems acquired from
qualified "small cable operators" will be "grandfathered" under the FCC's Small
System Regulations and will continue to be eligible to justify regulated rates
using the FCC's simplified cost-of-service formula until they serve more than
15,000 subscribers.
The Company's basic service rates are currently regulated in 82 communities
covering approximately 27% of its subscribers. Additionally, to the Company's
knowledge, there are pending at the FCC five CPST rate complaints that generally
were filed against the Company's predecessors and that cover approximately 4% of
its subscribers. While the Company cannot predict the outcome of the FCC CPST
rate proceedings or of any pending local regulation of its basic service rates,
the Company believes that the ultimate resolution of local and FCC rate
proceedings will not have a material adverse impact on the Company's financial
position or its results of operations.
"ANTI-BUY THROUGH" PROVISIONS. The 1992 Cable Act also requires cable systems to
permit customers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic service tier, unless the system's lack of
addressable converter boxes or other technological limitations do not permit it
to do so. The statutory exemption for cable systems that do not have the
technological capacity to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Most of
the Company's cable systems do not have the technological capability to offer
programming in the manner required by the statute and currently are exempt from
complying with the requirement.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations pursuant to the mandatory carriage requirements of the 1992
Cable Act. Local noncommercial television stations are also given mandatory
carriage rights; however, such stations are
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not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all "distant" commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WGN), commercial radio stations and certain low power television stations
carried by such systems. In March 1997, the U.S. Supreme Court affirmed a
three-judge district court decision upholding the constitutional validity of the
1992 Cable Act's mandatory signal carriage requirements. The FCC will conduct a
rulemaking in the future to consider the requirements, if any, for mandatory
carriage of digital television signals. The Company cannot predict the ultimate
outcome of such a rulemaking or the impact of new carriage requirements of the
Company or its business.
As a result of the mandatory carriage rules, some of the Company's systems have
been required to carry television broadcast stations that otherwise would not
have been carried and have caused displacement of possibly more attractive
programming. The retransmission consent rules have resulted in the deletion of
certain local and distant televisions broadcast stations which various Company
systems were carrying. To the extent retransmission consent fees must be paid
for the continued carriage of certain television stations, the Company's cost of
doing business will increase with no assurance that such fees can be recovered
through rate increases.
DESIGNATED CHANNELS. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. Federal law also requires a cable system
with 36 or more channels to designate a portion of its channel capacity for
commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity. The U.S. Supreme Court recently held parts of the 1992 Cable
Act regulating "indecent" programming on local access channels to be
unconstitutional, but upheld the statutory right of cable operators to prohibit
or limit the provision of "indecent" programming on commercial leased access
channels.
FRANCHISE PROCEDURES. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises, (ii) preventing franchising authorities from granting
exclusive franchises or unreasonably refusing to award additional franchises
covering an existing cable system's service area, and (iii) prohibiting (with
limited exceptions) the common ownership of cable systems and co-located MMDS or
SMATV systems. The FCC had relaxed its restrictions on ownership of SMATV
systems to permit a cable operator to acquire SMATV systems in the operator's
existing franchise area so long as the programming services provided through the
SMATV system are offered according to the terms and conditions of the cable
operator's local franchise agreement. The 1996 Telecom Act provides that the
cable/SMATV and cable/MMDS cross-ownership rules do not apply in any franchise
area where the cable operator faces "effective competition" as defined by
federal law. The 1996 Telecom Act also permits local telephone companies to
provide video programming services as traditional cable operators with local
franchises.
The Cable Acts also provide that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit franchise fees to 5% of cable system
revenue derived from the provision of cable services and permit cable operators
to obtain modification of franchise requirements by the franchising authority or
judicial action if warranted by changed circumstances. The Company's franchises
typically provide for payment of fees to franchising authorities of up to 5% of
"revenue" (as defined by each franchise agreement), which fees may be passed on
to subscribers. Recently, a federal appellate court held that a cable operator's
gross revenue includes all revenue received from subscribers, without deduction,
and overturned an FCC order which had held that a cable operator's gross revenue
does not include money collected from subscribers that is allocated to pay local
franchise fees. The 1996 Telecom Act generally prohibits franchising authorities
from (i) imposing requirements in the cable franchising process that require,
prohibit or
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restrict the provision of telecommunications services by an operator, (ii)
imposing franchise fees on revenue derived by the operator from providing
telecommunications services over its cable system, or (iii) restricting an
operator's use of any type of subscriber equipment or transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act makes
several changes to the renewal process which could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service, and it anticipates that
its future franchise renewal prospects generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit franchise awards to a single cable operator and to impose certain
substantive franchise requirements (i.e., access channels, universal service and
other technical requirements). These decisions have been inconsistent and, until
the U.S. Supreme Court rules definitively on the scope of cable operators' First
Amendment protections, the legality of the franchising process generally and of
various specific franchise requirements is likely to be in a state of flux.
OWNERSHIP LIMITATIONS. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national customer limits and limits on the number of channels that
can be occupied on a cable system by a video programmer in which the cable
operator has an attributable interest. The FCC's horizontal ownership limits
have been stayed because a federal district court found the statutory limitation
to be unconstitutional. An appeal of that decision is pending and has been
consolidated with an appeal of the FCC's regulations which implemented the
national customer and channel limitation provisions of the 1992 Cable Act. The
1996 Telecom Act eliminates the statutory prohibition on the common ownership,
operation or control of a cable system and a television broadcast station in the
same service area and directs the FCC to eliminate its regulatory restrictions
on cross-ownership of cable systems and national broadcasting networks and to
review its broadcast-cable ownership restrictions to determine if they are
necessary in the public interest. Pursuant to the mandate of the 1996 Telecom
Act, the FCC eliminated its regulatory restriction on cross-ownership of cable
systems and national broadcasting networks and has initiated a formal inquiry to
review its broadcast-cable ownership restriction.
TELEPHONE COMPANY OWNERSHIP OF CABLE SYSTEMS. The 1996 Telecom Act makes
far-reaching changes in the regulation of telephone companies that provide video
programming services. The 1996 Telecom Act eliminated federal legal barriers to
competition in the local telephone and cable communications businesses,
preempted legal barriers to competition that previously existed in state and
local laws and regulations and set basic standards for relationships between
telecommunications providers. The 1996 Telecom Act eliminated the statutory
telephone company/cable television cross-ownership prohibition, thereby allowing
LECs to offer video services in their telephone service areas. LECs may provide
service as traditional cable operators with local franchises or they may opt to
provide their programming over unfranchised "open video systems," subject to
certain conditions, including, but not limited to, setting aside a portion of
their channel capacity for use by unaffiliated program distributors on a
non-discriminatory basis. The 1996 Telecom Act generally limits acquisitions and
prohibits certain joint ventures between LECs and cable operators in the same
market. There are some statutory exceptions to the buy-out and joint venture
prohibitions, including exceptions for certain small cable systems (as defined
by federal law) and for cable systems or telephone facilities serving certain
rural areas, and the FCC is authorized to grant waivers of the prohibitions
under certain circumstances. The FCC adopted regulations implementing the 1996
Telecom Act requirement that LECs open their telephone networks to competition
by providing competitors interconnection, access to unbundled network elements
and retail services at wholesale rates. Numerous parties appealed these
regulations. The U.S. Court of Appeals for the Eighth Circuit, where the appeals
were consolidated, recently vacated key portions of the FCC's regulations,
including the FCC's pricing and nondiscrimination rules. In January 1998, the
U.S. Supreme Court agreed to
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review the Eighth Circuit's decision. The Company cannot predict the outcome of
this litigation or the FCC rulemakings, and the ultimate impact of any final FCC
regulations on the Company or its businesses cannot be determined at this time.
POLE ATTACHMENT. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates, as is the case in certain states
in which the Company operates. In the absence of state regulation, the FCC
administers pole attachment rates through the use of a formula that it has
devised. In some cases, utility companies have increased pole attachment fees
for cable systems that have installed fiber optic cables and that are using such
cables for the distribution of nonvideo services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The FCC's existing
pole attachment rate formula, which may be modified by a pending rulemaking,
governs charges by utilities for attachments by cable operators providing only
cable services. The 1996 Telecom Act and the FCC's implementing regulations
modify the current pole attachment provisions of the Communications Act by
immediately permitting certain providers of telecommunications services to rely
upon the protections of the current law and by requiring that utilities provide
cable systems and telecommunications carriers with nondiscriminatory access to
any pole, conduit or right-of-way controlled by the utility. The FCC recently
adopted new regulations to govern the charges for pole attachments used by
companies providing telecommunications services, including cable operators.
These new pole attachment rate regulations will become effective in February
2001 and any resulting increase in attachment rates resulting from the FCC's new
regulations will be phased in equal annual increments over a period of five
years beginning in February 2001. The ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on the Company or its
business cannot be determined at this time.
OTHER STATUTORY PROVISIONS. The 1992 Cable Act, the 1996 Telecom Act and FCC
regulations preclude a satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly to
customers, from favoring an affiliated company over competitors and require such
a programmer to sell its programming to other multichannel video distributors.
These provisions limit the ability of cable program suppliers affiliated with
cable companies or with common carriers providing satellite-delivered video
programming directly to customers to offer exclusive programming arrangements to
their affiliates. In December 1997, the FCC initiated a rulemaking to address a
number of possible changes to its program access rules. The 1992 Cable Act
requires operators to block fully both the video and audio portion of sexually
explicit or indecent programming on channels that are primarily dedicated to
sexually oriented programming or, alternatively, to carry such programming only
at "safe harbor" time periods currently defined by the FCC as the hours between
10 p.m. to 6 a.m. Several adult-oriented cable programmers have challenged the
constitutionality of this statutory provision, but the U.S. Supreme Court
recently refused to overturn a lower court's denial of a preliminary injunction
motion seeking to enjoin the enforcement of this law. The FCC's regulations
implementing this statutory provision became effective in May 1997. The
Communications Act also includes provisions, among others, concerning horizontal
and vertical ownership of cable systems, customer service, customer privacy,
marketing practices, equal employment opportunity, obscene or indecent
programming, technical standards, and consumer equipment compatibility.
OTHER FCC REGULATIONS. The FCC recently revised its cable inside wiring rules to
provide a more specific procedure for the disposition of internal cable wiring
that belongs to an incumbent cable operator that is forced to terminate its
cable services in a multiple dwelling unit ("MDU") building by the building
owner. The FCC is also considering additional rules relating to MDU inside
wiring that, if adopted, may disadvantage incumbent cable operators. The FCC has
various rulemaking proceedings pending that will implement the 1996 Telecom Act;
it also has adopted regulations implementing various provisions of the 1992
Cable Act and the 1996 Telecom Act that are the subject of petitions requesting
reconsideration of various aspects of its rulemaking proceedings. In addition to
the FCC regulations noted above, there are other FCC regulations covering such
areas as equal employment opportunity, syndicated program exclusivity, network
program nonduplication, closed captioning of video programming, registration of
cable systems, maintenance of various records and
46
<PAGE>
public inspection files, microwave frequency usage, lockbox availability,
origination cablecasting and sponsorship identification, antenna structure
notification, marking and lighting, carriage of local sports broadcast
programming, application of rules governing political broadcasts, limitations on
advertising contained in nonbroadcast children's programming, consumer
protection and customer service, ownership of home wiring, indecent programming,
programmer access to cable systems, programming agreements, technical standards,
consumer electronics equipment compatibility and DBS implementation. The FCC has
the authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations.
The 1992 Cable Act, the 1996 Telecom Act and the FCC's rules implementing these
statutory provisions generally have increased the administrative and operational
expenses of cable systems and have resulted in additional regulatory oversight
by the FCC and local franchise authorities. The Company will continue to develop
strategies to minimize the adverse impact that the FCC's regulations and the
other provisions of the 1992 Cable Act and the 1996 Telecom Act have on the
Company's business. However, no assurances can be given that the Company will be
able to develop and successfully implement such strategies to minimize the
adverse impact of the FCC's rate regulations, the 1992 Cable Act or the 1996
Telecom Act on the Company's business.
Copyright
Cable systems are subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports
and contributing a percentage of their revenue to a federal copyright royalty
pool, cable operators can obtain blanket permission to retransmit copyrighted
material on broadcast signals. The nature and amount of future payments for
broadcast signal carriage cannot be predicted at this time. In a recent report
to Congress, the Copyright Office recommended that Congress make major revisions
of both the cable television and satellite compulsory licenses to make them as
simple as possible to administer, to provide copyright owners with full
compensation for the use of their works, and to treat every multichannel video
delivery system the same, except to the extent that technological differences or
differences in the regulatory burdens placed upon the delivery system justify
different copyright treatment. The possible simplification, modification or
elimination of the compulsory copyright license is the subject of continuing
legislative review. The elimination or substantial modification of the cable
compulsory license could adversely affect the Company's ability to obtain
suitable programming and could substantially increase the cost of programming
that remained available for distribution to the Company's customers. The Company
cannot predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use music controlled
by the two major music performing rights organizations, the Association of
Songwriters, Composers, Artists and Producers ("ASCAP") and Broadcast Music,
Inc. ("BMI"). In October 1989, the special rate court of the U.S. District Court
for the Southern District of New York imposed interim rates on the cable
industry's use of ASCAP-controlled music. The same federal district court
established a special rate court for BMI. BMI and certain cable industry
representatives recently concluded negotiations for a standard licensing
agreement covering the usage of BMI music contained in advertising and other
information inserted by operators into cable programming and on certain local
access and origination channels carried on cable systems. ASCAP and cable
industry representatives have met to discuss the development of a standard
licensing agreement covering ASCAP music in local origination and access
channels and pay-per-view programming. Although the Company cannot predict the
ultimate outcome of these industry negotiations or the amount of any license
fees it may be required to pay for past and future use of ASCAP-controlled
music, it does not believe such license fees will be material to the Company's
operations.
47
<PAGE>
State and Local Regulation
Cable systems are subject to state and local regulation, typically imposed
through the franchising process, because they use local streets and
rights-of-way. Regulatory responsibility for essentially local aspects of the
cable business such as franchisee selection, billing practices, system design
and construction, and safety and consumer protection remains with either state
or local officials and, in some jurisdictions, with both.
Cable systems generally are operated pursuant to nonexclusive franchises,
permits or licenses granted by a municipality or other state or local government
entity. Franchises generally are granted for fixed terms and in many cases are
terminable if the franchisee fails to comply with material provisions. The terms
and conditions of franchises vary materially from jurisdiction to jurisdiction.
Each franchise generally contains provisions governing payment of franchise
fees, franchise term, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards,
franchise renewal, sale or transfer of the franchise, territory of the
franchisee, indemnification of the franchising authority, use and occupancy of
public streets and types of cable services provided. A number of states subject
cable systems to the jurisdiction of centralized state governmental agencies,
some of which impose regulation of a character similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. To date, the only state in which the Company
currently operates that has enacted such state level regulation is Vermont;
however, upon completion of a pending acquisition, the Company will acquire
control of several cable systems in the State of Massachusetts and will then be
subject to regulation by the Massachusetts Department of Telecommunications and
Energy. The Company cannot predict whether any of the other states in which it
currently operates will engage in such regulation in the future. State and local
franchising jurisdiction is not unlimited, however, and must be exercised
consistently with federal law. The 1992 Cable Act immunizes franchising
authorities from monetary damage awards arising from regulation of cable systems
or decisions made on franchise grants, renewals, transfers and amendments.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative and legislative proposals
which could change, in varying degrees, the manner in which cable systems
operate. Neither the outcome of these proceedings nor the impact on the cable
communications industry or the Company can be predicted at this time. Other
bills and administrative proposals pertaining to cable television have
previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that further attempts will be
made by Congress and other governmental bodies relating to the regulation of
communications services.
48
<PAGE>
Management
Directors and Executive Officers of FrontierVision Inc.
Holdings' sole general partner is FVP. FVP's sole general partner is FVP GP,
L.P. ("FVP GP"). FVP GP's sole general partner is FrontierVision Inc.
Information with respect to the directors and executive officers of
FrontierVision Inc. and FrontierVision Holdings Capital Corporation,
respectively, is set forth below:
<TABLE>
FRONTIERVISION INC.
<S> <C> <C>
Name Age Position
- ---- --- --------
James C. Vaughn 52 President, Chief Executive Officer and Director
John S. Koo 36 Senior Vice President, Chief Financial Officer, Secretary and Director
David M. Heyrend 47 Vice President of Engineering
Albert D. Fosbenner 43 Vice President - Treasurer
William P. Brovsky 41 Vice President of Marketing and Sales
James W. McHose 34 Vice President - Finance
Richard G. Halle' 34 Vice President of Business Development
Todd E. Padgett 32 Vice President of Operations
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
Name Age Position
- ---- --- --------
James C. Vaughn 52 President, Chief Executive Officer and Director
John S. Koo 36 Senior Vice President, Chief Financial Officer, Secretary and Director
Albert D. Fosbenner 43 Vice President - Treasurer
</TABLE>
JAMES C. VAUGHN, President, Chief Executive Officer and a Director of
FrontierVision Inc. and Holdings Capital and a founder of the Company, is a
cable television system operator and manager with over 30 years of experience in
the cable television industry. From 1987 to 1995, he served as Senior Vice
President of Operations for Triax Communications Corp., a top 40 MSO, where he
was responsible for managing all aspects of small and medium-sized cable
television systems. These systems grew from serving 57,000 subscribers to over
376,000 subscribers during Mr. Vaughn's tenure. Prior to joining Triax
Communications, Mr. Vaughn served as Director of Operations for
Tele-Communications, Inc. from 1986 to 1987, with responsibility for managing
the development of Chicago-area cable television systems. From 1985 to 1986, Mr.
Vaughn was Division Manager for Harte-Hanks Communications. From 1983 to 1985,
Mr. Vaughn served as Vice President of Operations for Bycom, Inc. From 1979 to
1983, Mr. Vaughn served as Director of Engineering for the Development Division
of Cox Cable Communications Corp. From 1970 to 1979, Mr. Vaughn served as Senior
Staff Engineer for Viacom, Inc.'s cable division, and a Director of Engineering
for Showtime, a division of Viacom International, Inc.
JOHN S. KOO, Senior Vice President, Chief Financial Officer, Secretary and a
Director of FrontierVision Inc. and Holdings Capital and a founder of the
Company, has over eleven years of banking experience in the telecommunications
industry. From 1990 to 1995, Mr. Koo served as a Vice President at Canadian
Imperial Bank of Commerce ("CIBC"), where he co-founded CIBC's Mezzanine Finance
Group, targeted at emerging media and telecommunications businesses. From 1986
to 1990, Mr. Koo was a Vice President at Bank of New England specializing in
media finance. From 1984 to 1986, he was a management consultant to the
financial services industry.
DAVID M. HEYREND, Vice President of Engineering of FrontierVision Inc., has 23
years of cable television engineering management and operations experience.
Prior to joining the Company in 1996, Mr. Heyrend served from 1988 to 1995 as
Director of Engineering for UVC, where he developed technical standards,
employee development programs and oversaw plant construction projects. From 1985
to 1988, as Director of Programs
49
<PAGE>
for Tele-Engineering Corporation, he developed and managed broadband LAN
projects for clients such as Allen Bradley, Ford Motor Company and TRW. Mr.
Heyrend also worked for several years with Daniels & Associates in system
technical operations and engineering management.
ALBERT D. FOSBENNER, Vice President - Treasurer of FrontierVision Inc. and
Capital, has fourteen years of domestic, international and new business cable
television experience and is responsible for the Company's accounting,
reporting, treasury and information technology activities. Prior to joining the
Company in early 1998 Mr. Fosbenner served as the CFO of a Denver-based
interactive television network startup company from 1994 to 1997, where he was
responsible for all finance, treasury, accounting and administrative functions
of the company. From 1991 to 1994 Mr. Fosbenner served (in Norway) as the CFO of
Norkabel A/S, a Norwegian cable television MSO (owned by United International
Holdings, Inc.) serving 142,000 subscribers. While at Norkabel Mr. Fosbenner was
responsible for finance, accounting, treasury, investor relations and MIS. From
1985 to 1991 Mr. Fosbenner worked for both United Cable Television and United
Artists Entertainment in a number of financial and operations management
positions, including Director of Finance & Administration and Division Business
Manager. Mr. Fosbenner is a Certified Public Accountant and a Certified
Management Accountant.
WILLIAM P. BROVSKY, Vice President of Marketing and Sales of FrontierVision
Inc., has fourteen years of cable television experience and is responsible for
programming and contract negotiations in addition to overseeing the sales and
marketing activities of the Company's operating divisions. Before joining the
Company in 1996, Mr. Brovsky managed day-to-day sales and marketing operations
from 1989 to 1996 for Time Warner Cable of Cincinnati, serving almost 200,000
subscribers. He also served as Project Manager, supervising all aspects of
system upgrades to fiber optics. From 1982 to 1989, Mr. Brovsky served as
General Sales Manager for American Television and Communications, where he was
responsible for sales, marketing and telemarketing operations for Denver and its
suburban markets.
JAMES W. MCHOSE, Vice President - Finance of FrontierVision Inc., has over ten
years of accounting and tax experience, including six years providing tax,
accounting and consulting services to companies engaged in the cable television
industry. Through early 1998, Mr. McHose served the Company as the Vice
President - Treasurer. Prior to joining the Company in 1996, Mr. McHose was a
Senior Manager in the Information, Communications, and Entertainment practice of
KPMG Peat Marwick, LLP, where he specialized in taxation of companies in the
cable television industry. In this capacity, Mr. McHose served MSOs with over 14
million subscribers in the aggregate. Mr. McHose is a member of the Cable
Television Tax Professional's Institute and is a Certified Public Accountant.
RICHARD G. HALLE', Vice President of Business Development of FrontierVision Inc.
since February 1997, is responsible for the evaluation and development of new
businesses including cable modems and Internet access, digital programming
delivery, distance learning and alternative telephone access. Prior to joining
the Company, from 1995 to 1996 Mr. Halle served as the Vice President of
Operations and then as the Vice President of Development at Fanch
Communications, a top 20 MSO, where he was initially responsible for the
management of an operating region of 100,000 subscribers and subsequently
responsible for the planning and deployment of all advanced services including
digital television, dial-up Internet access and high speed cable modems. Prior
to that, he spent nine years in the banking industry, specializing in media and
telecommunications finance.
TODD E. PADGETT, Vice President of Operations of FrontierVision Inc., has over
six years of project management and corporate finance experience. Through early
1998, Mr. Padgett served the Company as the Vice President - Finance. From 1990
to 1995, Mr. Padgett served as Project Manager for Natural Gas Pipeline Company
of America, a subsidiary of MidCon Corp., which is a division of Occidental
Petroleum Corporation, where he specialized in developing, evaluating,
negotiating and financing natural gas pipeline and international power projects.
Mr. Padgett is a Certified Public Accountant and has an MBA from the University
of Chicago.
50
<PAGE>
Advisory Committee
The partnership agreement of FVP provides for the establishment of an Advisory
Committee to consult with and advise FVP GP, the general partner of FVP, with
respect to FVP's business and overall strategy. The Advisory Committee has broad
authority to review and approve or disapprove matters relating to all material
aspects of FVP's business. The approval of seventy-five percent (75%) of the
members of the Advisory Committee that are entitled to vote on the matter is
required in order for the Company to effect any cable television system
acquisition. The Advisory Committee consists of four representatives of the
Attributable Class A Limited Partners of FVP and one representative of FVP GP.
Subject to certain conditions, each of the four Attributable Class A Limited
Partners of FVP listed in "Principal Security Holders" is entitled to designate
(directly or indirectly) one of the four Attributable Class A Limited Partner
representatives on the Advisory Committee. The designees of J.P. Morgan
Investment Corporation, 1818 II Cable Corp. (whose designee is selected by two
affiliated individuals specified in the FVP Partnership Agreement), Olympus
Cable Corp. and First Union Capital Partners Inc. are John W. Watkins, Richard
H. Witmer, Jr., James A. Conroy and L. Watts Hamrick, III, respectively. FVP
GP's designee is Mr. Vaughn.
Executive Compensation
The following table summarizes the compensation paid to FrontierVision Inc.'s
Chief Executive Officer and to each of the four remaining most highly
compensated officers receiving compensation in excess of $100,000 for services
rendered during the fiscal years ended December 31, 1997, 1996 and 1995.
Summary Compensation Table
<TABLE>
SUMMARY COMPENSATION TABLE
----------------------------------------------------
Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation (1)
- --------------------------- ---- --------- -------- ----------------
<S> <C> <C> <C> <C>
James C. Vaughn 1997 $305,030 $ 90,000 $ 11,465
President and Chief Executive Officer 1996 283,986 120,000 7,882
1995 169,695 110,000
John S. Koo 1997 179,745 150,000 5,241
Senior Vice President, Chief Financial Officer and Secretary 1996 170,192 111,618 4,760
1995 93,416 90,000
William J. Mahon, Jr. 1997 121,175 25,000 3,761
Vice President of Business Development 1996 13,900 53,350 --
1995 -- -- --
William P. Brovsky 1997 89,339 49,525 2,730
Vice President of Marketing and Sales 1996 38,750 -- 842
1995 -- -- --
James W. McHose 1997 91,614 41,000 2,834
Vice President - Finance 1996 39,015 22,800 889
1995 -- -- --
________
</TABLE>
(1) Consists of FVP's contributions to the 401(k) Plan and to a key man life
insurance plan.
Deferred Compensation Plan
FVP established the FrontierVision Partners, L.P. Executive Deferred
Compensation Plan (the "Deferred Compensation Plan") effective January 1, 1996
to allow key employees the opportunity to defer the payment of compensation to a
later date and to participate in any appreciation of FVP's business. The
Deferred Compensation Plan is administered by FVP's Advisory Committee.
Participation in the Deferred Compensation Plan is limited to James C. Vaughn,
John S. Koo and other key executives of FVP or its affiliates approved by the
Compensation Committee of the Advisory Committee (the "Compensation Committee").
51
<PAGE>
Under the Deferred Compensation Plan, eligible participants may elect to defer
the payment of a portion of their compensation each year up to an amount
determined by the Compensation Committee. Any amount deferred is credited to a
bookkeeping account, which is credited with interest at the rate of 12% per
annum. Each participant's account also has a phantom equity component through
which the account will be credited with earnings in excess of 12% per annum to
the extent the Net Equity Value of FVP appreciates in excess of 12% per annum
during the term of the deferral. Net Equity Value of FVP is determined by
multiplying each cable television system's EBITDA for the most recent fiscal
quarter by the weighted average multiple of EBITDA paid by FVP to acquire each
cable television system; provided that if substantially all of the assets or
partnership interests of FVP are sold, Net Equity Value shall be based upon such
actual sale price adjusted to reflect any prior distributions to the partners
and any payments during the term of the deferral to the holders of certain
subordinated notes issued to the limited partners of FVP. Accounts shall be paid
following (i) the sale of all of FVP's partnership interests or upon liquidation
of FVP, other than sales or liquidations which are part of a reorganization, or
(ii) the death or disability of the participant prior to termination of
employment with FVP. The Compensation Committee may agree to pay the account in
the event the participant incurs a severe financial hardship or if the
participant agrees to an earlier payment. There are 11 employees currently
participating in the Deferred Compensation Plan, including Messrs. Vaughn and
Koo.
Compensation Committee Interlocks and Insider Participation
A Compensation Committee of the Advisory Committee of FVP, consisting of Messrs.
Watkins and Witmer, as representative of J.P. Morgan Investment Corporation and
1818 II Cable Corp., respectively, sets the compensation of the executive
officers of the Company. See "Certain Relationships and Related Transactions."
Employment Agreement
In connection with the formation of the Company, James. C. Vaughn entered into
an employment agreement with FVP, dated as of April 17, 1995 (the "Employment
Agreement"). The Employment Agreement expired by its terms as of April 17, 1997.
The Employment Agreement provided that Mr. Vaughn would be employed as President
and Chief Executive Officer of FVP. The Employment Agreement established a base
salary to be paid to Mr. Vaughn each year, subject to annual adjustment to
reflect increases in the Consumer Price Index for All Urban Consumers, as
published by the Bureau of Labor Statistics of the United States Department of
Labor (or, in the event of the discontinuance thereof, another appropriate index
selected by FVP, with the approval of the Advisory Committee). In addition, Mr.
Vaughn was entitled to annual bonuses of up to $75,000, subject to the
attainment of certain performance objectives set forth in the Employment
Agreement. Mr. Vaughn agreed not to compete with FVP for the term of his
employment with FVP and for an additional period of two years thereafter and to
keep certain information in connection with FVP confidential.
52
<PAGE>
Certain Relationships and Related Transactions
Holdings' sole general partner (owning 99.9% of the partnership interests
therein) is FVP. Holdings' sole limited partner (owning 0.1% of the partnership
interests therein) is FrontierVision Holdings, LLC, which is a wholly owned
subsidiary of FVP. FVP's sole general partner (owning 1% of the partnership
interests therein) is FVP GP. FVP's limited partners (owning 99% of the
partnership interests therein) consist of J.P. Morgan Investment Corporation, an
affiliate of J.P. Morgan Securities Inc., First Union Capital Partners, Inc., an
affiliate of First Union Capital Markets Corp., and various institutional
investors and accredited investors. FVP GP's sole general partner (owning 1% of
the partnership interests therein) is FrontierVision Inc., which is owned by
James C. Vaughn and John S. Koo. See "Principal Security Holders."
As of December 31, 1997, 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, 1997, FrontierVision Inc. had committed and contributed
approximately $19,935 to FVP, representing contributions of approximately
$13,290 and $6,645 by James C. Vaughn and John S. Koo, respectively, who are
directors of FrontierVision Inc. Such capital commitments were contributed as
equity to FVOP in connection with the closing of acquisitions by FVOP, for
escrow deposits for acquisitions by FVOP under contract and for FVOP working
capital requirements.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc. are
"Special Class A" limited partners of FVP. Upon the termination of FVP and in
connection with distributions to its partners in respect of their partnership
interests, J.P. Morgan Investment Corporation, First Union Capital Partners,
Inc. and FVP GP will be entitled to receive "carried interest" distributions or
will be allocated a portion of 15% of any remaining capital to be distributed by
FVP after certain other distributions are made. J.P. Morgan Securities Inc.
acted as placement agent for the initial offering of limited partnership
interests of FVP (other than with respect to the investment made by J.P. Morgan
Investment Corporation) and the placement of debt securities of FVP and in
connection with those activities received customary fees and reimbursement of
expenses.
J.P. Morgan Securities Inc., The Chase Manhattan Bank, an affiliate of Chase
Securities Inc., and CIBC Inc., an affiliate of CIBC Wood Gundy Securities
Corp., are agents and lenders under the Amended Credit Facility and have
received customary fees for acting in such capacities. In addition, J.P. Morgan
Securities Inc., Chase Securities Inc., CIBC Wood Gundy Securities Corp. and
First Union Capital Markets Corp. (collectively, the "Underwriters") received
compensation in the aggregate of approximately $6.0 million in connection with
the issuance of the FVOP Notes and received aggregate compensation in the
aggregate of approximately $5.3 million in connection with the issuance of the
Old Notes. There are no other arrangements between the FVOP Underwriters and
their affiliates and the Company or any of its affiliates pursuant to which the
Underwriters or their affiliates will receive any additional compensation from
the Company or any of its affiliates.
53
<PAGE>
Principal Security Holders
The following table sets forth, as of December 31, 1997, (i) the percentage of
the total partnership interests of FVP beneficially owned by the directors and
executive officers of FrontierVision Inc. and each person who is known to the
Company to own beneficially more than 5.0% of any class of FVP's partnership
interests and (ii) the percentage of the equity securities of FrontierVision
Inc., FVP GP, FVP and Holdings owned by each director or executive officer of
FrontierVision Inc. named in the Summary Compensation Table and by all executive
officers of FrontierVision Inc. as a group. Holdings was formed as a Delaware
limited partnership in August 1997. FVP has contributed its 99.9% general
partner interest in FVOP to Holdings in connection with the Formation
Transaction. FVP has contributed its 100% interest in FVOP Inc. to Holdings,
with the result that FVOP is wholly owned, directly or indirectly, by Holdings.
Holdings Capital was incorporated in August, 1996 and is a wholly-owned
subsidiary of Holdings. It has nominal assets and does not conduct any
operations. For a more detailed discussion of the ownership of the Company, see
"Certain Relationships and Related Transactions".
<TABLE>
<S> <C> <C>
Name and Address of Beneficial Owners Type of Interest % of Class
- ------------------------------------- ---------------- -----------
FrontierVision Partners, L.P. ( "FVP ")(1) General Partner Interest in Holdings (2) 99.90%
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
FVP GP, L.P. (3) General Partner Interest in FVP 1.00%
1777 South Harrison Street, Suite P-200
Denver, Colorado 80210
J.P. Morgan Investment Corporation Limited Partnership Interest in FVP 22.83%
101 California Street, Suite 3800 (Attributable Class A Limited Partner)
San Francisco, CA 94111 Limited Partnership Interest in FVP GP 7.18%
1818 II Cable Corp. Limited Partnership Interest in FVP 23.63%
c/o Brown Brothers Harriman & Co. (Attributable Class A Limited Partner)
59 Wall Street Limited Partnership Interest in FVP GP 7.18%
New York, NY 10005
Olympus Cable Corp. Limited Partnership Interest in FVP 14.77%
Metro Center--One Station Place (Attributable Class A Limited Partner)
Stamford, CT 06920 Limited Partnership Interest in FVP GP 7.18%
First Union Capital Partners, Inc. Limited Partnership Interest in FVP 15.05%
One First Union Center, 5th Floor (Attributable Class A Limited Partner)
Charlotte, NC 28288 Limited Partnership Interest in FVP GP 4.31%
James C. Vaughn Stockholder of FrontierVision Inc. 66.67%
1777 South Harrison Street, Suite P-200 Limited Partnership Interest in FVP GP 48.78%
Denver, Colorado 80210
John S. Koo Stockholder of FrontierVision Inc. 33.33%
1777 South Harrison Street, Suite P-200 Limited Partnership Interest in FVP GP 24.39%
Denver, Colorado 80210
All other executive officers and directors as a group 0.00%
</TABLE>
- ----------------
(1) FVP's limited partners (owning 99% of the partnership interests therein) are
various institutional investors and accredited investors.
(2) Holdings' sole limited partner (owning 0.1% of the partnership interests
therein) is FrontierVision Holdings, LLC.
(3) FVP GP's sole general partner (owning 1% of the partnership interests
therein) is FrontierVision Inc., which is owned by James C. Vaughn and John S.
Koo. FVP GP's limited partners (owning 99% of the partnership interests therein)
consist of various institutional investors, James C. Vaughn and John S. Koo.
54
<PAGE>
<TABLE>
<S> <C>
Ownership Structure
----------------------------------------
| |
| James C. Vaughn |
| John S. Koo |
| |
----------------------------------------
| (100% interest)
|
------------------------------------- ----------------------------------------
| Institutional Investors | | |
| James C. Vaughn | | FrontierVision Inc. |
| John S. Koo | | |
------------------------------------- ----------------------------------------
| Limited Partners | General Partner
| (99.0% interest) | (1.0% interest)
| ----------------------------------------
-------------------------------------------| |
| FVP GP, L.P. |
| ("FVP GP") |
----------------------------------------
|
------------------------------------- |
| Institutional Investors | | General Partner
| Other Limited Partners | | (1.0% interest)
| | |
------------------------------------- |
| Limited Partners |
| -----------------------------------------
| (99.0% interest) | |
| | FrontierVision Partners, L.P. |
--------------------------------------------| |
| ("FVP") |
----------------------------------------------| |
| (100% Interest) -----------------------------------------
| |
------------------------------------ |
| | | General Partner
| FrontierVision | | (99.9% Interest)
| Holdings, LLC | |
| ("FV Holdings") | |
| | |
------------------------------------ |
| Limited Partner (0.1% Interest) |
| |
---------------------------- -----------
| |
--------------------------------------------------
| |
| FrontierVision Holdings, L.P. |
--------------| |------------
| | ("Holdings" or the "Company") | |
| | | |
| -------------------------------------------------- |
(100% Interest) | | General Partner | (100% Interest)
| | (99.9% Interest) |
| | |
| | |
- -------------------------- ------------------------------------- ----------------------------------
| | | | | |
|FrontierVision Operating| | FrontierVision Operating | | FrontierVision Holdings |
| Partners, Inc. | | Partners, L.P. | | Capital Corporation |
| |-----------| | | |
| ("FVOP Inc.") | | ("FVOP") | | ("Holdings Capital") |
| |Limited | | | |
- --------------------------Partner ------------------------------------- ----------------------------------
(0.1%interest) |
|
| (100% interest)
|
-------------------------------------
| FrontierVision Capital Corporation|
| ("Capital") |
| |
-------------------------------------
</TABLE>
55
<PAGE>
The Partnership Agreements
The following is a summary of certain material terms of the Agreement of Limited
Partnership of Holdings (the "Holdings Partnership Agreement"), the Agreement of
Limited Partnership of FVOP, as amended (the "FVOP Partnership Agreement"), the
First Amended and Restated Agreement of Limited Partnership of FVP, as amended
(the "FVP Partnership Agreement"), and the First Amended and Restated Agreement
of Limited Partnership of FVP GP, as amended (the "FVP GP Partnership Agreement"
and together with the Holdings Partnership Agreement, the FVOP Partnership
Agreement and FVP Partnership Agreement, the "Partnership Agreements"). The
statements under this caption are summaries and do not purport to be complete,
and where reference is made to particular provisions of the Partnership
Agreements, such provisions, including the definitions of certain terms, are
incorporated by reference as a part of such summaries or terms, which are
qualified in their entirety by such reference. Complete copies of the form of
Partnership Agreements have been filed as exhibits to the Registration Statement
of which this Prospectus is a part and as exhibits to FVOP's and Capital's
Registration Statement on Form S-1 (File No. 333-9535) and are available in the
manner described in "Additional Information.". All capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the
respective Partnership Agreement.
Holdings Partnership Agreement
ORGANIZATION AND DURATION. Holdings was formed on August 29, 1997 as a Delaware
limited partnership to acquire, own and operate cable systems and to engage in
all activities necessary, desirable or incidental for such purpose. Unless
otherwise terminated in accordance with the terms of the Holdings Partnership
Agreement, Holdings may exist until June 30, 2008.
CONTROL OF OPERATIONS. The Holdings Partnership Agreement provides that its
General Partner shall have the right and power to manage and control the
business and affairs of Holdings.
CAPITAL CONTRIBUTIONS. Under the Holdings Partnership Agreement, the partners of
Holdings have made certain capital contributions to Holdings. Each partner of
Holdings may, but is not required to, make additional capital contributions to
Holdings. The Holdings Partnership Agreement provides that, upon the admission
of any additional limited partners or substituted limited partners to Holdings,
Holdings' Limited Partner shall withdraw from Holdings and shall be entitled to
receive the return of its capital contribution, without interest or deduction.
WITHDRAWAL OR REMOVAL OF PARTNERS. In general, no right is given to any partner
of Holdings to withdraw from Holdings. The General Partner of Holdings may admit
(i) additional limited partners, (ii) an assignee of the Limited Partner's
partnership interest in Holdings as a substituted limited partner of Holdings
and (iii) one or more additional general partners to Holdings.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the Holdings Partnership Agreement,
the Limited Partner may assign all or any part of its partnership interest in
Holdings only with the consent of the General Partner. The Limited Partner has
no right to grant an assignee of its partnership interest in Holdings the right
to become a Substituted Limited Partner of Holdings. Following the admission of
a new General Partner to Holdings, neither the General Partner nor the Limited
Partner may transfer its partnership interest in Holdings without the prior
written consent of the new General Partner.
FVOP Partnership Agreement
ORGANIZATION AND DURATION. FVOP was formed on July 14, 1995 as a Delaware
limited partnership to acquire, own and operate cable systems and to engage in
all activities necessary, desirable or incidental for such
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purpose. Unless otherwise terminated in accordance with the terms of the FVOP
Partnership Agreement, FVOP may exist until June 30, 2008.
CONTROL OF OPERATIONS. The FVOP Partnership Agreement provides that its General
Partner shall have the right and power to manage and control the business and
affairs of FVOP. Upon the occurrence and continuance of any Event of Default
under and as defined in the Senior Credit Facility, The Chase Manhattan Bank
(the "Administrative Agent") shall be entitled to be substituted (or to have a
designee of its choice substituted) as a new General Partner of FVOP.
CAPITAL CONTRIBUTIONS. Under the FVOP Partnership Agreement, the partners of
FVOP have made certain capital contributions to FVOP. Each partner of FVOP may,
but is not required to, make additional capital contributions to FVOP. The FVOP
Partnership Agreement provides that, upon the admission of any additional
Limited Partners or Substituted Limited Partners to FVOP, FVOP's Limited Partner
shall withdraw from FVOP and shall be entitled to receive the return of its
capital contribution, without interest or deduction.
WITHDRAWAL OR REMOVAL OF PARTNERS. In general, no right is given to any partner
of FVOP to withdraw from FVOP. The General Partner of FVOP may admit (i)
additional Limited Partners, (ii) an assignee of the Limited Partner's
partnership interest in FVOP as a Substituted Limited Partner of FVOP and (iii)
one or more additional general partners to FVOP. In addition, upon the
occurrence and continuance of any Event of Default under and as defined in the
Senior Credit Facility, the Administrative Agent shall be entitled to be
substituted (or to have a designee of its choice substituted) as a new General
Partner.
ASSIGNMENT OF PARTNERSHIP INTERESTS. Under the FVOP Partnership Agreement, the
Limited Partner may assign all or any part of its partnership interest in FVOP
only with the consent of the General Partner of FVOP. The Limited Partner has no
right to grant an assignee of its partnership interest in FVOP the right to
become a Substituted Limited Partner of FVOP. Following the admission of a new
General Partner to FVOP, neither the General Partner of FVOP nor the Limited
Partner may transfer its partnership interest in FVOP without the prior written
consent of the new General Partner of FVOP.
FVP Partnership Agreement
ORGANIZATION AND DURATION. FVP was formed on April 17, 1995 as a Delaware
limited partnership to (i) acquire, invest in, own, finance, operate, improve,
develop, maintain, promote, sell, dispose of and otherwise exploit cable
television systems and properties and interests therein, (ii) conduct related
business activities, including telephony and other communications businesses and
activities that are related to FVP's cable television businesses and activities,
directly or indirectly through other entities, alone or with others, and (iii)
do any and all acts necessary, desirable or incidental to the accomplishment of
such purpose. Unless otherwise terminated in accordance with the terms of the
FVP Partnership Agreement, FVP may exist until June 30, 2008.
CONTROL OF OPERATIONS. The FVP Partnership Agreement provides that its General
Partner has the right, power and discretion to operate, manage and control the
affairs and business of FVP and to make all decisions affecting FVP's affairs
and business, subject to the terms and provisions of the FVP Partnership
Agreement.
ADVISORY COMMITTEE. The FVP Partnership Agreement provides for the establishment
of an Advisory Committee to consult with and advise FVP GP with respect to FVP's
business and overall strategy. Under the FVP Partnership Agreement, the Advisory
Committee has broad authority to review and approve or disapprove matters
relating to all material aspects of FVP's business. The failure of the General
Partner to follow any such direction of the Advisory Committee in connection
with such determinations shall constitute a material breach of the FVP
Partnership Agreement whereby FVP GP may be removed from FVP. As provided in the
FVP Partnership Agreement, the approval of seventy-five percent (75%) of the
members of the Advisory Committee that are entitled to vote on the matter is
required in order for FVOP to effect any cable television system acquisition.
The Advisory Committee consists of four representatives of the Attributable
Class A Limited
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Partners of FVP and one representative of FVP GP. Subject to certain conditions,
each of the four Attributable Class A Limited Partners of FVP listed in
"Principal Security Holders" is entitled to designate (directly or indirectly)
one of the four Attributable Class A Limited Partner representatives on the
Advisory Committee.
VOTING RIGHTS. Except as to matters for which consent or approval is expressly
required under the FVP Partnership Agreement, the Limited Partners of FVP have
no right to vote on any partnership matters.
AMENDMENTS AND MODIFICATIONS. In general, the FVP Partnership Agreement is
subject to modification or amendment only with the written consent of the
General Partner of FVP and a majority in Interest of the Class A and Class B
Limited Partners of FVP.
CAPITALIZATION AND CERTAIN DISTRIBUTIONS. In connection with its initial
formation, FVP issued to its Limited Partners units consisting of limited
partnership interests in FVP, 12% Senior Subordinated Notes due 2008 and 14%
Junior Subordinated Notes due 2008. Pursuant to such transaction, and under the
FVP Partnership Agreement, each General Partner and Limited Partner of FVP has
made certain capital contributions and loans to FVP. The General Partner of FVP
is required under the FVP Partnership Agreement to make such Capital Commitments
to FVP as are necessary to maintain at all times a Capital Commitment equal to
not less than one percent (1%) of the total Capital Commitments of all Partners.
The Limited Partners of FVP are not required to make additional capital
contributions to FVP in excess of their respective Capital Commitments. Except
for provisions allowing for the return of capital to Partners upon dissolution
of FVP, the FVP Partnership Agreement provides that no Partner of FVP shall have
the right to withdraw or demand return of its capital contribution.
FVP GP Partnership Agreement
ORGANIZATION AND DURATION. FVP GP was formed on April 17, 1995 as a Delaware
limited partnership to (i) serve as general partner of FVP and (ii) do all other
lawful things necessary, desirable or incidental to the accomplishment of such
purposes. Unless otherwise terminated in accordance with the terms of the FVP GP
Partnership Agreement, FVP GP shall exist until the partners of FVP GP may
unanimously elect to carry on the business of FVP GP.
CONTROL OF OPERATIONS. The FVP GP Partnership Agreement provides that its
General Partner has the right, power and discretion to operate, manage and
control the affairs and business of FVP GP and to make all decisions affecting
FVP GP's affairs and business, subject to certain customary exceptions specified
in the FVP GP Partnership Agreement.
VOTING RIGHTS. Except as to matters for which consent or approval is expressly
required under the FVP GP Partnership Agreement, the Limited Partners of FVP GP
have no right to vote on any partnership matters.
AMENDMENTS AND MODIFICATIONS. In general, the FVP GP Partnership Agreement is
subject to modification or amendment only with the written consent of the
General Partner of FVP GP and a majority in Interest of the Class X and Class Z
Limited Partners of FVP GP and a majority in Interest of the Class Y Limited
Partners.
CAPITAL CONTRIBUTIONS. Under the FVP GP Partnership Agreement, the Partners of
FVP GP have made certain capital contributions to FVP GP. The General Partner is
required under the FVP GP Partnership Agreement to make such Capital Commitments
to FVP GP as are necessary to maintain at all times a Capital Commitment equal
to not less than one percent (1%) of the total Capital Commitments of all
Partners. The Limited Partners of FVP GP are not required to make additional
capital contributions to FVP GP. Except for provisions allowing for the return
of capital to Partners of FVP GP upon dissolution of FVP GP, the FVP GP
Partnership Agreement provides that no Partner of FVP GP shall have the right to
withdraw or demand return of its capital contribution.
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Description of Other Indebtedness
The FVOP Notes
The FVOP Notes are joint and several obligations of FVOP and Capital
(collectively the "FVOP Note Issuers"). The FVOP Notes are general unsecured
senior subordinated obligations of the FVOP Note Issuers, are limited to $200
million aggregate principal amount and rank subordinate in right of payment to
all existing and future Senior Indebtedness of FVOP. The FVOP Notes rank pari
passu in right of payment with all other senior subordinated indebtedness of the
FVOP Note Issuers. Capital has nominal assets and does not conduct any
operations.
The FVOP Notes mature on October 15, 2006 and bear interest at 11% per annum
from the date of issuance or from the most recent interest payment date to which
interest has been paid or provided for. Interest is payable semiannually on
April 15 and October 15 of each year.
The FVOP Notes are not redeemable prior to October 15, 2001, except as set forth
below. The FVOP Notes are subject to redemption, at the option of the FVOP Note
Issuers, in whole or in part, at any time on or after October 15, 2001 and prior
to maturity, at the following redemption prices (expressed as percentages of
principal amount) plus accrued and unpaid interest to but excluding the date
fixed for redemption, if redeemed during the 12-month period beginning on
October 15 of the years indicated:
Year Percentage
2001 105.50%
2002 103.67
2003 101.83
2004 and thereafter 100.00
In addition, prior to October 15, 1999, the FVOP Note Issuers may redeem up to
35% of the principal amount of the FVOP Notes with the net cash proceeds
received by FVOP from one or more Public Equity Offerings or Strategic Equity
Investments, at a redemption price (expressed as a percentage of the principal
amount) of 111% of the principal amount thereof, plus accrued and unpaid
interest to the date fixed for redemption; provided, however, that at least 65%
in aggregate principal amount of the FVOP Notes originally issued remains
outstanding immediately after any such redemption (excluding any FVOP Notes
owned by the FVOP Note Issuers or any of their Affiliates).
Upon a Change of Control, the FVOP Note Issuers will be required to make an
offer to purchase all outstanding FVOP Notes at 101% of the principal amount
thereof, together with accrued and unpaid interest to the purchase date.
The FVOP Notes Indenture contains the following covenants which limit the
ability of FVOP and certain of its Subsidiaries to incur indebtedness or make
distributions to Holdings. Capitalized terms used below and not otherwise
described herein have the respective meanings ascribed to such terms in the FVOP
Notes Indenture, a copy of which will be made available to prospective investors
upon request.
LIMITATION ON INDEBTEDNESS. The FVOP Notes Indenture provides that FVOP will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
Incur any Indebtedness (including Acquired Indebtedness) or issue any
Disqualified Equity Interests except for Permitted Indebtedness; provided,
however, that FVOP or any Restricted Subsidiary may Incur Indebtedness and FVOP
or any Restricted Subsidiary may issue Disqualified Equity Interests if, at the
time of and immediately after giving pro forma effect to such Incurrence of
Indebtedness or issuance of Disqualified Equity Interests and the application of
the proceeds therefrom, the Debt to Operating Cash Flow Ratio would be less than
or equal to (i) 7.0 to 1.0 if the date of such Incurrence is on or before
December 31, 1997 and (ii) 6.75 to 1.0 thereafter.
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The foregoing limitations will not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(a) Indebtedness under the FVOP Notes and the FVOP Notes Indenture;
(b) Indebtedness and Disqualified Equity Interests of FVOP and the
Restricted Subsidiaries outstanding on the Issue Date;
(c) Indebtedness under the Senior Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed the sum of (a) $265.0
million, which amount shall be reduced by (x) any permanent reduction
of commitments thereunder and (y) any other repayment accompanied by a
permanent reduction of commitments thereunder (other than in connection
with any refinancing thereof) plus (B) any amounts outstanding under
the Senior Credit Facility that utilizes subparagraph (i) below;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by FVOP
or any Wholly Owned Restricted Subsidiary and (y) Indebtedness of FVOP
owed to and held by any Wholly Owned Restricted Subsidiary which is
unsecured and subordinated in right of payment to the payment and
performance of the Issuers' obligations under any Senior Indebtedness,
the FVOP Notes Indenture and the FVOP Notes; provided, however, that an
Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon (i) any sale or other disposition
of any Indebtedness of FVOP or a Wholly Owned Restricted Subsidiary
referred to in this clause (d) to a Person (other than FVOP or a Wholly
Owned Restricted Subsidiary), (ii) any sale or other disposition of
Equity Interests of a Wholly Owned Restricted Subsidiary which holds
Indebtedness of the Company or another Wholly Owned Restricted
Subsidiary such that such Wholly Owned Restricted Subsidiary ceases to
be a Wholly Owned Restricted Subsidiary or (iii) designation of a
Wholly Owned Restricted Subsidiary which holds Indebtedness of FVOP as
an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Indebtedness of FVOP;
(f) Interest Rate Protection Obligations of FVOP or any Restricted
Subsidiary relating to Indebtedness of FVOP or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest
at fluctuating interest rates and (ii) is otherwise permitted to be
Incurred under this covenant); provided, however, that the notional
principal amount of such Interest Rate Protection Obligations does not
exceed the principal amount of the Indebtedness to which such Interest
Rate Protection Obligations relate;
(g) Purchase Money Indebtedness and Capitalized Lease Obligations of FVOP
or any Restricted Subsidiary which do not exceed $5.0 million in the
aggregate at any one time outstanding;
(h) Indebtedness or Disqualified Equity Interests of FVOP or any Restricted
Subsidiary to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness or Disqualified Equity Interests of FVOP or any Restricted
Subsidiary Incurred in compliance with the Debt to Operating Cash Flow
Ratio of the first paragraph of this covenant or clause (a) or (b) of
this paragraph of this covenant; provided, however, that (i)
Indebtedness or Disqualified Equity Interests of the Company may not be
refinanced under this clause (h) with Indebtedness or Disqualified
Equity Interests of any Restricted Subsidiary, (ii) any such
refinancing shall not exceed the sum of the principal amount (or, if
such Indebtedness or Disqualified Equity Interests provide for a lesser
amount to be due and payable upon a declaration of acceleration thereof
at the time of such refinancing, an amount no greater than such lesser
amount) of the Indebtedness or Disqualified Equity Interests being
refinanced plus the amount of accrued interest or dividends thereon and
the amount of any reasonably determined prepayment premium necessary to
accomplish such refinancing and such reasonable fees and expenses
incurred in connection therewith,
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(iii) Indebtedness representing a refinancing of Indebtedness other
than Senior Indebtedness shall have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being refinanced, and (iv) Indebtedness that is pari passu
with the Notes may only be refinanced with Indebtedness that is made
pari passu with or subordinate in right of payment to the Notes and
Subordinated Indebtedness or Disqualified Equity Interests may only be
refinanced with Subordinated Indebtedness or Disqualified Equity
Interests; and
(i) in addition to the items referred to in clauses (a) through (h) above,
Indebtedness of FVOP (including any Indebtedness under the Senior
Credit Facility that utilizes this subparagraph (i)) having an
aggregate principal amount not to exceed $20.0 million at any time
outstanding.
LIMITATION ON RESTRICTED PAYMENTS. The FVOP Notes Indenture provides that FVOP
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of FVOP or any Restricted Subsidiary or make any payment or
distribution to the direct or indirect holders (in their capacities as
such) of Equity Interests of FVOP or any Restricted Subsidiary (other
than payments or distributions made to FVOP or a Wholly Owned
Restricted Subsidiary and dividends or distributions payable solely in
Qualified Equity Interests of the Company or in options, warrants or
other rights to purchase Qualified Equity Interests of FVOP);
(ii)purchase, redeem or otherwise acquire or retire for value any Equity
Interests of FVOP or any Restricted Subsidiary (other than any such
Equity Interests owned by FVOP or a Wholly Owned Restricted
Subsidiary);
(iii) purchase, redeem, defease or retire for value more than one year
prior to the stated maturity thereof any Subordinated Indebtedness
(other than any Subordinated Indebtedness held by a Wholly Owned
Restricted Subsidiary); or
(iv)make any Investment (other than Permitted Investments) in any Person
(other than in FVOP, a Wholly Owned Restricted Subsidiary or a Person
that becomes a Wholly Owned Restricted Subsidiary, or is merged with or
into or consolidated with FVOP or a Wholly Owned Restricted Subsidiary
(provided FVOP or a Wholly Owned Restricted Subsidiary is the
survivor), as a result of or in connection with such Investment)
(such payments or any other actions (other than Permitted Investments) described
in (i), (ii), (iii) and (iv) collectively, "Restricted Payments"), unless
(a) no Default or Event of Default shall have occurred and be continuing at
the time or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, FVOP would
be able to Incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" above; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or
after the Issue Date does not exceed an amount equal to the sum of (1)
the difference between (x) the Cumulative Available Cash Flow
determined at the time of such Restricted Payment and (y) 140% of
cumulative Consolidated Interest Expense of FVOP determined for the
period commencing on the Issue Date and ending on the last day of the
latest fiscal quarter for which consolidated financial statements of
FVOP are available preceding the date of such Restricted Payment, plus
(2) the aggregate net proceeds (with the value of any non-cash proceeds
to be the Fair Market Value thereof as determined by an Independent
Financial Advisor) received by FVOP either (x) as capital contributions
to FVOP after the Issue Date or (y) from the issue and sale (other than
to a
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Restricted Subsidiary) of its Qualified Equity Interests after the
Issue Date (excluding the net proceeds from any issuance and sale of
Qualified Equity Interests financed, directly or indirectly, using
funds borrowed from FVOP or any Restricted Subsidiary until and to the
extent such borrowing is repaid), plus (3) the principal amount (or
accrued or accreted amount, if less) of any Indebtedness of FVOP or any
Restricted Subsidiary Incurred after the Issue Date which has been
converted into or exchanged for Qualified Equity Interests of FVOP,
plus (4) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
(to the extent not included in the computation of Cumulative Available
Cash Flow) equal to the lesser of: (i) the return of capital with
respect to such Investment and (ii) the amount of such Investment which
was treated as a Restricted Payment, in either case, less the cost of
the disposition of such Investment, plus (5) FVOP's proportionate
interest in the lesser of the Fair Market Value or the net worth of any
Unrestricted Subsidiary that has been redesignated as a Restricted
Subsidiary after the Issue Date not to exceed in any case the
Designation Amount with respect to such Restricted Subsidiary upon its
Designation, minus (6) the Designation Amount with respect to any
Subsidiary of FVOP which has been designated as an Unrestricted
Subsidiary after the Issue Date.
The foregoing provisions will not prevent (i) the payment of any dividend or
distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of the
FVOP Indenture, (ii) so long as no Default or Event of Default shall have
occurred and be continuing, the retirement of any Equity Interests of FVOP in
exchange for, or out of the net cash proceeds of the substantially concurrent
issue and sale (other than to a Restricted Subsidiary) of, Qualified Equity
Interests of FVOP; provided, however, that any such net cash proceeds and the
value of any Equity Interests issued in exchange for such retired Equity
Interests are excluded from clause (c)(2) of the preceding paragraph (and were
not included therein at any time), (iii) so long as no Default or Event of
Default shall have occurred and be continuing, the purchase, redemption,
retirement or other acquisition of Subordinated Indebtedness made in exchange
for, or out of the net cash proceeds of, a substantially concurrent issue and
sale (other than to a Restricted Subsidiary) of (x) Qualified Equity Interests
of FVOP; provided, however, that any such net cash proceeds and the value of any
Equity Interests issued in exchange for Subordinated Indebtedness are excluded
from clauses (c)(2) and (c)(3) of the preceding paragraph (and were not included
therein at any time) or (y) other Subordinated Indebtedness having no stated
maturity for the payment of principal thereof prior to the final stated maturity
of the FVOP Notes, (iv) the payment of any dividend or distribution on Equity
Interests of FVOP or any Restricted Subsidiary to the extent necessary to permit
the direct or indirect beneficial owners of such Equity Interests to pay federal
and state income tax liabilities arising from income of FVOP or such Restricted
Subsidiary and attributable to them solely as a result of FVOP or such
Restricted Subsidiary (and any intermediate entity through which such holder
owns such Equity Interests) being a partnership or similar pass-through entity
for federal income tax purposes, (v) so long as no Default or Event of Default
has occurred and is continuing, any Investment made out of the net cash proceeds
of the substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of Qualified Equity Interests of FVOP; provided, however, that any
such net cash proceeds are excluded from clause (c)(2) of the preceding
paragraph (and were not included therein at any time) or (vi) the purchase,
redemption or other acquisition, cancellation or retirement for value of Equity
Interests, or options, warrants, equity appreciation rights or other rights to
purchase or acquire Equity Interests, of FVOP or any Restricted Subsidiary, or
similar securities, held by officers or employees or former officers or
employees of FVOP or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon death, disability, retirement or
termination of employment not to exceed $1.0 million in any calendar year.
The Indenture governing the terms of the FVOP Notes contains certain other
covenants that, among other things, limit the ability of each FVOP Note Issuer
and certain of its Subsidiaries to create certain Liens, enter into certain
transactions with Affiliates, permit dividend or other payment restrictions to
apply to certain Subsidiaries or consummate certain merger, consolidation or
similar transactions. In addition, in certain circumstances, the FVOP Note
Issuers are required to offer to purchase the FVOP Notes at 100% of the
principal amount thereof with the net proceeds of certain asset sales.
These covenants are subject to a number of significant exceptions and
qualifications.
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The Amended Credit Facility
On December 19, 1997, FVOP entered into a $800.0 million Amended Credit Facility
with The Chase Manhattan Bank, as Administrative Agent, J.P. Morgan Securities
Inc., as Syndication Agent, CIBC Inc., as Documentation Agent, and other lenders
signatory thereto. FVOP used these proceeds to refinance an existing $265.0
million senior credit facility, to finance the purchase of the Cox-Central Ohio
Systems and for general business purposes. As of December 31, 1997, borrowings
under the Amended Credit Facility totaled $432.0 million.
The Amended Credit Facility consists of a $300.0 million, 8.25-year Revolving
Credit Facility, a $250.0 million, 8.25-year Facility A Term Loan and a $250.0
million, 7.75-year Facility B Term Loan. The Facility A Term Loan and the
Facility B Term Loan must be fully drawn as a condition to the availability of
borrowings under the Revolving Credit Facility. In addition, the Amended Credit
Facility contemplates that the lenders may make available, in their sole
discretion, following a request by FVOP, up to a $200.0 million Incremental Term
Loan Facility to fund future acquisitions. No lender will be required to have
committed to fund the Incremental Term Loan Facility at the closing of the
Amended Credit Facility. If the lenders determine to fund the Incremental Term
Loan Facility, the final maturity of such facility will be the same as the
maturity of the Facility B Term Loan.
In general, the Amended Credit Facility requires FVOP to make mandatory
prepayments of amounts outstanding under the Amended Credit Facility, beginning
in 2002, based on a percentage of available excess cash flow. In addition, the
Amended Credit Facility requires FVOP to use the proceeds from any cable system
disposition (subject to certain qualifications) to reduce indebtedness for
borrowings under the Amended Credit Facility. The Amended Credit Facility
provides that FVOP may engage in cable system dispositions of up to $150.0
million in the aggregate without the need to permanently reduce the commitments
under the Amended Credit Facility if the net proceeds of such dispositions are
either applied to temporarily reduce the Amended Credit Facility or held in a
special account pending permitted reinvestment in subsequent acquisitions of
cable systems. The Amended Credit Facility also permits FVOP to make
acquisitions of up to $150.0 million in the aggregate (as such amount may be
increased by the proceeds of dispositions being held for reinvestment). The
Amended Credit Facility also contains customary financial and other covenants,
which include limitations on the ability of Holdings and its subsidiaries to
incur additional indebtedness. The Amended Credit Facility permits FVOP to make
distributions to Holdings in order to make regularly scheduled interest payments
(commencing March 15, 2002) and the payment of principal at the stated maturity
date of the Notes unless a default or an event of default has occurred under the
Amended Credit Facility.
Holdings, as the general partner of FVOP, guaranties the indebtedness under the
Amended Credit Facility on a limited recourse basis. The Amended Credit Facility
is secured by a pledge of all limited and general partnership interests in FVOP
and a first priority lien on all the assets of FVOP and its subsidiaries.
The UVC Note
In connection with the Company's acquisition of systems from UVC, FVOP issued a
subordinated promissory note to UVC in November 1995 in the original principal
amount of $7.2 million. The UVC Note bears interest at 9% for the first three
years. At the end of each subsequent year, the annual interest rate increases 2%
per year. Under the terms of the UVC Note, FVOP may issue additional
subordinated promissory notes rather than making cash interest payments. In this
event, the subordinated note bears interest equal to the annual interest of the
original promissory note plus 2.5% for the first three years and 3% for each
subsequent year. In addition, if FVOP's leverage ratio exceeds certain amounts,
the interest rate increases by 2%. Under its terms, FVOP prepaid the UVC Note in
conjunction with the closing of the Amended Credit Facility.
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Description of the Notes
As used below in this "Description of the Notes" section, the "Company" means
FrontierVision Holdings, L.P., but not any of its subsidiaries, unless otherwise
specified. The Exchange Notes, like the Old Notes, were under an Indenture,
dated as of September 19, 1997 (the "Indenture"), among the Issuers and U.S.
Bank National Association d/b/a Colorado National Bank, as Trustee (the
"Trustee"). The Indenture is subject to and governed by the Trust Indenture Act
of 1939, as amended. The statements under this caption relating to the Notes,
the Indenture and the Registration Rights Agreement are summaries and do not
purport to be complete, and where reference is made to particular provisions of
the Indenture or the Registration Rights Agreement, such provisions, including
the definitions of certain terms, are incorporated by reference as a part of
such summaries or terms, which are qualified in their entirety by such
reference.
The form and terms of the Exchange Notes are the same as the form and terms of
the Old Notes (which they replace) except that (i) the issuance of the Exchange
Notes have been registered under the Securities Act and, therefore, the Exchange
Notes do not bear legends restricting the transfer thereof, and (ii) the holders
of Exchange Notes are be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
interest rate on the Old Notes in certain circumstances relating to the timing
of the Exchange Offer, which rights terminated when the Exchange Offer was
consummated. A copy of the Indenture has been filed as an exhibit to the
Exchange Offer Registration Statement of which this Prospectus forms a part.
Certain definitions of terms used in the following summary are set forth under
"--Certain Definitions" below. The Old Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes." References to "Senior
Credit Facility" in the Indenture and in the description of certain provisions
of the Indenture below include and are applicable to the Amended Credit
Facility.
The Notes are joint and several obligations of the Company and Holdings Capital.
The Notes are general unsecured obligations of the Issuers, will be limited to
$237,650,000 aggregate original Principal Amount at Maturity, designed to result
in gross proceeds to the Company of approximately $150 million. Holdings Capital
has nominal assets and does not conduct any operations.
Maturity, Interest and Principal
The Notes mature on September 15, 2007. Cash interest will not be required to
accrue or be payable on the Notes prior to September 15, 2001; provided that on
any Interest Payment Date prior to September 15, 2001, the Company may elect to
begin accruing cash interest on the Notes, with notice of such election to the
Trustee and the holders of the Notes (the "Cash Interest Election"). Cash
interest will accrue on the Notes at the rate of 117/8% per annum (except as set
forth under "--Registration Rights") from the earlier of the Interest Payment
Date on which the Cash Interest Election is made or September 15, 2001 and will
be payable semiannually on March 15 and September 15, commencing on the earlier
of the Interest Payment Date following the Cash Interest Election or March 15,
2002, to the Person in whose name a Note is registered at the close of business
on the preceding March 1 or September 1 (each, a "Record Date"), as the case may
be. Cash interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the earlier of the
Interest Payment Date on which the Cash Interest Election is made or September
15, 2001. Cash interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months. Holders must surrender the Notes to the paying
agent for the Notes to collect principal payments. The Issuers will pay
principal and cash interest by check and may mail interest checks to a holder's
registered address.
The Notes were issued only in fully registered form, without coupons, in
denominations of $1,000 Principal Amount at Maturity and any integral multiple
thereof. No service charge was made for any registration of transfer or exchange
of Notes, but the Issuers required payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith. Initially, the
Trustee acted as paying agent and registrar for the Notes. The Notes were
presented for registration of transfer and exchange at the offices of the
registrar for the Notes.
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Notes that remain outstanding after consummation of the Exchange Offer and
Exchange Notes are treated as a single class of securities under the Indenture.
Optional Redemption
The Notes are not redeemable prior to September 15, 2001, except as set forth
below. The Notes are subject to redemption, at the option of the Issuers, in
whole or in part, at any time on or after September 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of Notes to be redeemed at his address appearing in the register for the
Notes, in amounts of $1,000 Principal Amount at Maturity or an integral multiple
of $1,000 Principal Amount at Maturity, at the following redemption prices
(expressed as percentages of Principal Amount at Maturity) plus accrued and
unpaid interest, if any, to but excluding the date fixed for redemption (subject
to the right of holders of record on the relevant Record Date to receive
interest, if any, due on an Interest Payment Date that is on or prior to the
date fixed for redemption), if redeemed during the 12-month period beginning on
September 15 of the years indicated:
Year Percentage
2001 107.917%
2002 105.937
2003 103.958
2004 101.979
2005 and thereafter 100.000
In addition, prior to September 15, 2000, the Issuers may redeem up to 35% of
the aggregate Principal Amount at Maturity of the Notes with the net cash
proceeds received by the Company from one or more Public Equity Offerings or
Strategic Equity Investments at a redemption price of 111.875% of the Accreted
Value thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided, however, that at least 65% in aggregate Principal Amount
at Maturity of the Notes originally issued remains outstanding immediately after
any such redemption (excluding any Notes owned by the Issuers or any of their
Affiliates). Notice of redemption pursuant to this paragraph must be mailed to
holders of Notes not later than 60 days following the consummation of such
Public Equity Offering or Strategic Equity Investment.
Selection of Notes for any partial redemption shall be made by the Trustee, in
accordance with the rules of any national securities exchange on which the Notes
may be listed or, if the Notes are not so listed, pro rata or by lot or in such
other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 Principal Amount at Maturity may be redeemed in
part but only if the unredeemed portion is an integral multiple of $1,000
Principal Amount at Maturity. Notice of redemption will be mailed before the
date fixed for redemption to each holder of Notes to be redeemed at his
registered address. On and after the date fixed for redemption, interest will
cease to accrue on Notes or portions thereof called for redemption.
The Notes do not have the benefit of any sinking fund.
Registration Rights
The Issuers entered into a Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Issuers agreed, for the benefit of the holders
of Old Notes, that they, at their cost, file and use their best efforts to cause
to become effective a registration statement with respect to a registered offer
to exchange (the "Exchange Offer") the Old Notes for the Exchange Notes. Such
registration statement was declared effective on November 12, 1997. At that
point, the Issuers offered the Exchange Notes in return for surrender of the Old
Notes. The Exchange Offer remained opened until December 12, 1997. For each Old
Note surrendered to the Issuers under the Exchange Offer, the holder thereof
received an Exchange Note of equal Accreted Value and Principal Amount at
Maturity.
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Covenants
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly, Incur
any Indebtedness (including Acquired Indebtedness) or issue any Disqualified
Equity Interests except for Permitted Indebtedness; provided, however, that the
Company or any Restricted Subsidiary may Incur Indebtedness and the Company or
any Restricted Subsidiary may issue Disqualified Equity Interests if, at the
time of and immediately after giving pro forma effect to such Incurrence of
Indebtedness or issuance of Disqualified Equity Interests and the application of
the proceeds therefrom, the Debt to Operating Cash Flow Ratio would be less than
or equal to (i) 8.0 to 1.0 if the date of such Incurrence is on or before
December 31, 1998 and (ii) 7.5 to 1.0 thereafter.
The foregoing limitations will not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness and Disqualified Equity Interests of the Company and the
Restricted Subsidiaries outstanding on the Issue Date (including
Indebtedness under the FVOP Indenture and the UVC Note);
(c) Indebtedness of the Company and the Restricted Subsidiaries under the
Senior Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the sum of (a) $650.0 million, which amount
shall be reduced by (x) any permanent reduction of commitments
thereunder and (y) any other repayment accompanied by a permanent
reduction of commitments thereunder (other than, in the case of either
clause (x) or (y), in connection with any refinancing thereof) plus (B)
any amounts outstanding under the Senior Credit Facility that utilizes
subparagraph (i) below;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Wholly Owned Restricted Subsidiary and (y) Indebtedness
of the Company owed to and held by any Wholly Owned Restricted
Subsidiary which is unsecured and subordinated in right of payment to
the payment and performance of the Issuers' obligations under the
Indenture and the Notes; provided, however, that an Incurrence of
Indebtedness that is not permitted by this clause (d) shall be deemed
to have occurred upon (i) any sale or other disposition of any
Indebtedness of the Company or a Wholly Owned Restricted Subsidiary
referred to in this clause (d) to a Person (other than the Company or a
Wholly Owned Restricted Subsidiary), (ii) any sale or other disposition
of Equity Interests of a Wholly Owned Restricted Subsidiary which holds
Indebtedness of the Company or another Wholly Owned Restricted
Subsidiary such that such Wholly Owned Restricted Subsidiary ceases to
be a Wholly Owned Restricted Subsidiary or (iii) designation of a
Wholly Owned Restricted Subsidiary which holds Indebtedness of the
Company as an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Indebtedness of the Company;
(f) Interest Rate Protection Obligations of the Company or any Restricted
Subsidiary relating to Indebtedness of the Company or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest
at fluctuating interest rates and (ii) is otherwise permitted to be
Incurred under this covenant); provided, however, that the notional
principal amount of such Interest Rate Protection Obligations does not
exceed the principal amount of the Indebtedness to which such Interest
Rate Protection Obligations relate;
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(g) Purchase Money Indebtedness and Capitalized Lease Obligations of the
Company or any Restricted Subsidiary which do not exceed $10.0 million
in the aggregate at any one time outstanding;
(h) Indebtedness or Disqualified Equity Interests of the Company or any
Restricted Subsidiary to the extent representing a replacement,
renewal, refinancing or extension (collectively, a "refinancing") of
outstanding Indebtedness or Disqualified Equity Interests of the
Company or any Restricted Subsidiary Incurred in compliance with the
Debt to Operating Cash Flow Ratio of the first paragraph of this
covenant or clause (a) or (b) of this paragraph of this covenant;
provided, however, that (i) Indebtedness or Disqualified Equity
Interests of the Company may not be refinanced under this clause (h)
with Indebtedness or Disqualified Equity Interests of any Restricted
Subsidiary, (ii) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness or Disqualified Equity
Interests provide for a lesser amount to be due and payable upon a
declaration of acceleration thereof at the time of such refinancing, an
amount no greater than such lesser amount) of the Indebtedness or
Disqualified Equity Interests being refinanced plus the amount of
accrued interest or dividends thereon and the amount of any reasonably
determined prepayment premium necessary to accomplish such refinancing
and such reasonable fees and expenses incurred in connection therewith,
(iii) Indebtedness representing a refinancing of Indebtedness of the
Company shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced and (iv) Subordinated Indebtedness of the Company or
Disqualified Equity Interests of the Company may only be refinanced
with Subordinated Indebtedness of the Company or Disqualified Equity
Interests of the Company; and
(i) in addition to the items referred to in clauses (a) through (h) above,
Indebtedness of the Company (including any Indebtedness under the
Senior Credit Facility that utilizes this subparagraph (i)) having an
aggregate principal amount not to exceed $25.0 million at any time
outstanding.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any
Restricted Subsidiary (other than payments or distributions made to the
Company or a Wholly Owned Restricted Subsidiary and dividends or
distributions payable solely in Qualified Equity Interests of the
Company or in options, warrants or other rights to purchase Qualified
Equity Interests of the Company);
(ii)purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any Restricted Subsidiary (other than any
such Equity Interests owned by the Company or a Wholly Owned Restricted
Subsidiary);
(iii) purchase, redeem, defease or retire for value more than one year
prior to the stated maturity thereof any Subordinated Indebtedness of
the Company (other than any such Subordinated Indebtedness held by a
Wholly Owned Restricted Subsidiary); or
(iv)make any Investment (other than Permitted Investments) in any Person
(other than in the Company, a Wholly Owned Restricted Subsidiary or a
Person that becomes a Wholly Owned Restricted Subsidiary, or is merged
with or into or consolidated with the Company or a Wholly Owned
Restricted Subsidiary (provided the Company or a Wholly Owned
Restricted Subsidiary is the survivor), as a result of or in connection
with such Investment)
(such payments or any other actions (other than Permitted Investments) described
in (i), (ii), (iii) and (iv) collectively, "Restricted Payments"), unless
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(a) no Default or Event of Default shall have occurred and be continuing at
the time or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the Company
would be able to Incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" above; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or
after the Issue Date does not exceed an amount equal to the sum of (1)
the difference between (x) the Cumulative Available Cash Flow
determined at the time of such Restricted Payment and (y) 140% of
cumulative Consolidated Interest Expense of the Company determined for
the period commencing on the Issue Date and ending on the last day of
the latest fiscal quarter for which consolidated financial statements
of the Company are available preceding the date of such Restricted
Payment, plus (2) the aggregate net proceeds (with the value of any
non-cash proceeds to be the Fair Market Value thereof as determined by
an Independent Financial Advisor) received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from
the issue and sale (other than to a Restricted Subsidiary) of its
Qualified Equity Interests after the Issue Date (excluding the net
proceeds from any issuance and sale of Qualified Equity Interests
financed, directly or indirectly, using funds borrowed from the Company
or any Restricted Subsidiary until and to the extent such borrowing is
repaid), plus (3) the principal amount (or accrued or accreted amount,
if less) of any Indebtedness of the Company or any Restricted
Subsidiary Incurred after the Issue Date which has been converted into
or exchanged for Qualified Equity Interests of the Company, plus (4) in
the case of the disposition or repayment of any Investment constituting
a Restricted Payment made after the Issue Date, an amount (to the
extent not included in the computation of Cumulative Available Cash
Flow) equal to the lesser of: (i) the return of capital with respect to
such Investment and (ii) the amount of such Investment which was
treated as a Restricted Payment, in either case, less the cost of the
disposition of such Investment, plus (5) the Company's proportionate
interest in the lesser of the Fair Market Value or the net worth of any
Unrestricted Subsidiary that has been redesignated as a Restricted
Subsidiary after the Issue Date in accordance with "--Designation of
Unrestricted Subsidiaries" below not to exceed in any case the
Designation Amount with respect to such Restricted Subsidiary upon its
Designation, minus (6) the Designation Amount with respect to any
Subsidiary of the Company which has been designated as an Unrestricted
Subsidiary after the Issue Date in accordance with "--Designation of
Unrestricted Subsidiaries" below.
The foregoing provisions will not prevent (i) the payment of any dividend or
distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of the
Indenture, (ii) so long as no Default or Event of Default shall have occurred
and be continuing, the retirement of any Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
issue and sale (other than to a Restricted Subsidiary) of, Qualified Equity
Interests of the Company; provided, however, that any such net cash proceeds and
the value of any Equity Interests issued in exchange for such retired Equity
Interests are excluded from clause (c)(2) of the preceding paragraph (and were
not included therein at any time), (iii) so long as no Default or Event of
Default shall have occurred and be continuing, the purchase, redemption,
retirement or other acquisition of Subordinated Indebtedness of the Company made
in exchange for, or out of the net cash proceeds of, a substantially concurrent
issue and sale (other than to a Restricted Subsidiary) of (x) Qualified Equity
Interests of the Company; provided, however, that any such net cash proceeds and
the value of any Equity Interests issued in exchange for Subordinated
Indebtedness of the Company are excluded from clauses (c)(2) and (c)(3) of the
preceding paragraph (and were not included therein at any time) or (y) other
Subordinated Indebtedness of the Company having no stated maturity for the
payment of principal thereof prior to the final stated maturity of the Notes,
(iv) the payment of any dividend or distribution on Equity Interests of the
Company or any Restricted Subsidiary to the extent necessary to permit the
direct or indirect beneficial owners of such Equity Interests to pay federal and
state income tax liabilities arising from income of the Company or such
Restricted Subsidiary and attributable to them solely as a result of the Company
or such Restricted
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Subsidiary (and any intermediate entity through which such holder owns such
Equity Interests) being a partnership or similar pass-through entity for federal
income tax purposes, (v) so long as no Default or Event of Default has occurred
and is continuing, any Investment made out of the net cash proceeds of the
substantially concurrent issue and sale (other than to a Restricted Subsidiary)
of Qualified Equity Interests of the Company; provided, however, that any such
net cash proceeds are excluded from clause (c)(2) of the preceding paragraph
(and were not included therein at any time), (vi) the purchase, redemption or
other acquisition, cancellation or retirement for value of Equity Interests, or
options, warrants, equity appreciation rights or other rights to purchase or
acquire Equity Interests, of the Company or any Restricted Subsidiary, or
similar securities, held by officers or employees or former officers or
employees of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon death, disability, retirement or
termination of employment not to exceed $2.0 million in any calendar year; (vii)
the payment of any dividend or distribution on Equity Interests of a Restricted
Subsidiary out of such Restricted Subsidiary's net income from the Issue Date to
Persons other than the Company or a Restricted Subsidiary; provided that such
dividend or distribution is paid pro rata to all holders of such Equity
Interests; (viii) Investments in Persons (including, without limitation,
Restricted Subsidiaries which are not Wholly Owned Restricted Subsidiaries and
Unrestricted Subsidiaries) engaged in a Related Business, not to exceed $30.0
million at any one time outstanding; and (ix) Permitted Strategic Investments.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (vi) and (ix) of the
immediately preceding paragraph shall be included as Restricted Payments and
amounts expended pursuant to clauses (ii) through (v) and (vii) and (viii) shall
be excluded. The amount of any non-cash Restricted Payment shall be deemed to be
equal to the Fair Market Value thereof at the date of the making of such
Restricted Payment.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The
Indenture provides that in the event that any Restricted Subsidiary (other than
a Subsidiary Guarantor), directly or indirectly, guarantees any Indebtedness of
the Company other than the Notes (the "Other Indebtedness") the Company shall
cause such Restricted Subsidiary to concurrently guarantee (a "Subsidiary
Guarantee") the Company's obligations under the Indenture and the Notes to the
same extent that such Restricted Subsidiary guaranteed the Company's obligations
under the Other Indebtedness (including waiver of subrogation, if any);
provided, however, that if such Other Indebtedness is (i) not Subordinated
Indebtedness of the Company, the Subsidiary Guarantee shall be pari passu in
right of payment with the guarantee of the Other Indebtedness or (ii)
Subordinated Indebtedness of the Company, the Subsidiary Guarantee shall be
senior in right of payment to the guarantee of the Other Indebtedness; provided,
further, however, that each Subsidiary issuing a Subsidiary Guarantee will be
automatically and unconditionally released and discharged from its obligations
under such Subsidiary Guarantee upon the release or discharge of the guarantee
of the Other Indebtedness that resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by, or as a result of, any payment
under the guarantee of such Other Indebtedness by such Subsidiary Guarantor. The
Company shall cause each Restricted Subsidiary issuing a Subsidiary Guarantee to
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture, (ii)
deliver to the Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Restricted Subsidiary
and constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary (which opinion may be subject to customary assumptions and
qualifications) and (iii) execute and deliver to the Initial Purchasers a
counterpart to the Registration Rights Agreement as a Subsidiary Guarantor
thereunder. Thereafter, such Restricted Subsidiary shall (unless released in
accordance with the terms of the Indenture) be a Subsidiary Guarantor for all
purposes of the Indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (b) make
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loans or advances to, or guarantee any Indebtedness or other obligations of, the
Company or any other Restricted Subsidiary or (c) transfer any of its properties
or assets to the Company or any other Restricted Subsidiary (any such
encumbrance or restriction in the foregoing clauses (a), (b) and (c), a "Payment
Restriction"), except for (i) any such encumbrance or restriction existing on
the Issue Date, including, without limitation, pursuant to the Senior Credit
Facility or the FVOP Indenture, in each case as in effect on the Issue Date, and
any amendments, restatements, renewals, replacements or refinancings
(collectively, a "refinancing") thereof; provided, however, that such
refinancings are either (x) no more restrictive in the aggregate with respect to
such encumbrances or restrictions than those contained in the FVOP Indenture as
in effect on the Issue Date or (y) do not prohibit the payment of dividends or
distributions to the Company in an amount sufficient to pay cash interest on the
Notes (assuming no Cash Interest Election) as required under the Indenture or to
pay the Principal Amount at Maturity of the Notes at their Stated Maturity
unless an event has occurred which permits (or with the giving of notice or the
lapse of time or both would permit) the acceleration of the maturity of such
Indebtedness, (ii) any such encumbrance or restriction existing under or by
reason of applicable law, (iii) any such encumbrance or restriction existing
under or by reason of any instrument governing Indebtedness or Equity Interests
of an Acquired Person acquired by the Company or any Restricted Subsidiary as in
effect at the time of such acquisition (except to the extent such Indebtedness
was Incurred by such Acquired Person in connection with, as a result of or in
contemplation of such acquisition); provided, however, that such encumbrances
and restrictions are not applicable to the Company or any Restricted Subsidiary,
or the properties or assets of the Company or any Restricted Subsidiary, other
than the Acquired Person, (iv) any such encumbrance or restriction existing
under or by reason of customary non-assignment provisions in leases or cable
television franchises entered into in the ordinary course of business and
consistent with past practices, (v) any such encumbrance or restriction existing
under or by reason of any agreement governing Purchase Money Indebtedness for
property acquired in the ordinary course of business that only imposes
encumbrances and restrictions on the property so acquired, (vi) any such
encumbrance or restriction existing under or by reason of any agreement for the
sale or disposition of the Equity Interests or assets of any Restricted
Subsidiary; provided, however, that such encumbrances and restrictions described
in this clause (vi) are only applicable to such Restricted Subsidiary or assets,
as applicable, and any such sale or disposition is made in compliance with
"--Disposition of Proceeds of Asset Sales" below to the extent applicable
thereto, (vii) any such encumbrance or restriction existing under or by reason
of any agreement governing refinancing Indebtedness permitted under clause (h)
of "--Limitation on Indebtedness" above; provided, however, that the
encumbrances and restrictions contained in the agreements governing such
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced immediately prior to
such refinancing, (viii) any such encumbrance or restriction existing under or
by reason of the Indenture or (ix) any such encumbrance or restriction existing
under any other agreement, instrument or document hereafter in effect; provided,
however, that the terms and conditions of any such encumbrance or restriction
are either (a) not more restrictive than those contained in the FVOP Indenture
as in effect on the Issue Date or (b) in the case of any such agreement,
instrument or document governing Indebtedness, do not prohibit the payment of
dividends or distributions to the Company in an amount sufficient to pay cash
interest on the Notes (assuming no Cash Interest Election) as required under the
Indenture or to pay the Principal Amount at Maturity of the Notes at their
Stated Maturity unless an event has occurred which permits (or with the giving
of notice or the lapse of time or both would permit) the acceleration of the
maturity of such Indebtedness.
LIMITATION ON LIENS. The Indenture provides that the Company will not, directly
or indirectly, Incur any Liens of any kind against or upon any of its properties
or assets now owned or hereafter acquired, or any proceeds therefrom or any
income or profits therefrom, to secure any Indebtedness unless contemporaneously
therewith effective provision is made to secure the Notes equally and ratably
with such Indebtedness with a Lien on the same properties and assets securing
such Indebtedness for so long as such Indebtedness is secured by such Lien,
except for (i) Liens on Equity Interests of Subsidiaries of the Company (and
their successors) securing obligations under the Senior Credit Facility, (ii)
Liens on Equity Interests of Unrestricted Subsidiaries and (iii) Permitted
Liens.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Asset Sale, unless (a) the Company or such
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Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold or
otherwise disposed of and (b) either (i) at least 75% of such consideration
consists of cash or Cash Equivalents or (ii) at least 75% of such consideration
consists of (x) properties and capital assets (including franchises and licenses
required to own or operate such properties) to be used in the same lines of
business being conducted by the Company or any Restricted Subsidiary at such
time or (y) Equity Interests in one or more Persons which thereby become Wholly
Owned Restricted Subsidiaries whose assets consist primarily of such properties
and capital assets. The amount of any (i) liabilities of the Company or any
Restricted Subsidiary that are actually assumed by the transferee in such Asset
Sale and from which the Company and the Restricted Subsidiaries are fully
released shall be deemed to be cash for purposes of determining the percentage
of cash consideration received by the Company or the Restricted Subsidiaries and
(ii) notes or other similar obligations received by the Company or the
Restricted Subsidiaries from such transferee that are immediately converted (or
are converted within thirty days of the related Asset Sale) by the Company or
the Restricted Subsidiaries into cash shall be deemed to be cash, in an amount
equal to the net cash proceeds realized upon such conversion, for purposes of
determining the percentage of cash consideration received by the Company or the
Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i) apply the
Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to repay
(x) Indebtedness of the Company secured by a Lien on the property or assets
subject to such Asset Sale or (y) Indebtedness of any Restricted Subsidiary and,
in each case, permanently reduce any related commitment; provided, however, that
if Indebtedness under the revolving credit portion of the Senior Credit Facility
is repaid, the Company need not reduce the commitments for such revolving credit
portion, or (ii) commit in writing to acquire, construct or improve properties
and capital assets (including franchises and licenses required to own or operate
any such assets or properties) to be used in the same line of business being
conducted by the Company or any Restricted Subsidiary at such time and so apply
such Net Cash Proceeds within 365 days of the receipt thereof.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not so
applied within 365 days of such Asset Sale (such Net Cash Proceeds, the
"Unutilized Net Cash Proceeds"), the Company shall, within 30 days of such 365th
day, make an Offer to Purchase from all holders of Notes. Notes with an
aggregate Accreted Value as of such Purchase Date equal to such Unutilized Net
Cash Proceeds, at a purchase price in cash equal to 100% of such Accreted Value
thereof, plus accrued and unpaid interest to the Purchase Date; provided,
however, that the Offer to Purchase may be deferred until there are aggregate
Unutilized Net Cash Proceeds equal to or in excess of $5.0 million, at which
time the entire amount of such Unutilized Net Cash Proceeds, and not just the
amount in excess of $5.0 million, shall be applied as required pursuant to this
paragraph. In the event that any other Indebtedness of the Company which ranks
pari passu with the Notes requires the repayment or prepayment thereof, or an
offer to purchase to be made to repurchase such Indebtedness, upon the
consummation of any Asset Sale, the Company may apply the Unutilized Net Cash
Proceeds otherwise required to be applied to an Offer to Purchase to repay,
prepay or offer to purchase such other Indebtedness and to an Offer to Purchase
pro rata based upon (i) the aggregate Accreted Value of the Notes then
outstanding on the applicable Purchase Date and (ii) the aggregate principal
amount (or accreted amount, if less) of such other Indebtedness then outstanding
on such Purchase Date. The Offer to Purchase shall remain open for a period of
20 Business Days or such longer period as may be required by law. To the extent
the aggregate Accreted Value of Notes tendered pursuant to the Offer to Purchase
exceeds the Unutilized Net Cash Proceeds, Notes shall be purchased among holders
on a proportionate basis (based on the relative aggregate Accreted Value of
Notes validly tendered for purchase by holders thereof). To the extent the
Unutilized Net Cash Proceeds exceed the aggregate Accreted Value of Notes
tendered by the holders of the Notes pursuant to the Offer to Purchase, the
Company may retain and utilize any portion of the Unutilized Net Cash Proceeds
not applied to repurchase the Notes for any purpose consistent with the other
terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
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LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS. The Indenture
provides that the Company will not, and will not permit, cause or suffer any
Restricted Subsidiary to, directly or indirectly, conduct any business or enter
into any transaction (or series of related transactions) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Equity Interests of the Company or any officer, director or employee of the
Company or any Restricted Subsidiary (each an "Affiliate Transaction"), unless
(a) such Affiliate Transaction is on terms which are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party, (b) if
such Affiliate Transaction (or series of related Affiliate Transactions)
involves aggregate payments or other consideration having a Fair Market Value in
excess of $5.0 million, a majority of the disinterested members of the Board of
Directors of the Company shall have approved such transaction and determined
that such transaction complies with the foregoing provisions and (c) if such
Affiliate Transaction (or series of related Affiliate Transactions) involves
aggregate payments or other consideration having a Fair Market Value of $25.0
million or more, the Company has obtained a written opinion from an Independent
Financial Advisor stating that the consideration to be paid or received, as the
case may be, by the Company or the Restricted Subsidiary pursuant to such
Affiliate Transaction is fair to the Company or the Restricted Subsidiary, as
the case may be, from a financial point of view.
Notwithstanding the foregoing, the restrictions set forth in this covenant shall
not apply to (i) transactions with or among the Company and the Wholly Owned
Restricted Subsidiaries, (ii) customary directors' fees, indemnification and
similar arrangements, consulting fees, employee salaries, bonuses, or employment
agreements, compensation or employee benefit arrangements, and incentive
arrangements with any officer, director or employee of the Company entered into
in the ordinary course of business (including customary benefits thereunder) and
payments under any indemnification arrangements permitted by applicable law,
(iii) the Agreement of Limited Partnership of the Company or the Agreement of
Limited Partnership of FVOP, in each case, as in effect on the Issue Date,
including any amendments or extensions thereof that do not otherwise violate any
other covenant set forth in the Indenture, and any transactions undertaken
pursuant to any other contractual obligations in existence on the Issue Date (as
in effect on the Issue Date), (iv) the issue and sale by the Company to its
partners or stockholders of Qualified Equity Interests, (v) any Restricted
Payments made in compliance with "--Limitation on Restricted Payments" above
(including without limitation the making of any payments or distributions
permitted to be made in accordance with clauses (i) through (ix) of the
penultimate paragraph of "--Limitation on Restricted Payments"), (vi) loans and
advances to officers, directors and employees of the Company and the Restricted
Subsidiaries for travel, entertainment, moving and other relocation expenses, in
each case made in the ordinary course of business and consistent with past
business practices, (vii) customary commercial banking, investment banking,
underwriting, placement agent or financial advisory fees paid in connection with
services rendered to the Company and its Subsidiaries in the ordinary course,
(viii) the Incurrence of intercompany Indebtedness permitted pursuant to clause
(d) under the definition of "Permitted Indebtedness" set forth under
"--Limitation on Indebtedness," (ix) the pledge of Equity Interests of
Unrestricted Subsidiaries to support the Indebtedness thereof and (x) the Senior
Credit Facility.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The Indenture provides that the
Company may designate any Subsidiary of the Company as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(b) at the time of and after giving effect to such Designation, the
Company could incur $1.00 of additional Indebtedness under the Debt to
Operating Cash Flow Ratio of the first paragraph of "--Limitation on
Indebtedness" above; and
(c) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"--Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to the Company's proportionate interest in
the Fair Market Value of such Subsidiary on such date;
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provided, however, that the condition set forth in this clause (c)
shall not be applicable to the designation of a Subsidiary as an
Unrestricted Subsidiary which is made as part of an Investment or
Permitted Strategic Investment made in accordance with clause (viii)
or (ix) of the penultimate paragraph of "--Limitation on Restricted
Payments."
Neither the Company nor any Restricted Subsidiary shall at any time (x) provide
credit support for, subject any of its property or assets (other than the Equity
Interests of any Unrestricted Subsidiary) to the satisfaction of, or guarantee,
any Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary, except, in the case of clause (x)
or (y), to the extent otherwise permitted under the terms of the Indenture,
including, without limitation, pursuant to "--Limitation on Restricted Payments"
and "--Limitation on Indebtedness" above.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time,
have been permitted to be Incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by resolutions of the Board
of Directors of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
LIMITATION ON CONDUCT OF BUSINESS OF HOLDINGS CAPITAL. The Indenture provides
that Holdings Capital will not own any operating assets or other properties or
conduct any business other than to serve as an Issuer and an obligor on the
Notes and as a guarantor of obligations under the Senior Credit Facility.
Change of Control
The Indenture provides that within 35 days following the date of consummation of
a transaction resulting in a Change of Control, the Company will commence an
Offer to Purchase all outstanding Notes at a purchase price in cash equal to
101% of the Accreted Value of the Notes on such Purchase Date, plus accrued and
unpaid interest, if any, to such Purchase Date. Each holder shall be entitled to
tender all or any portion of the Notes owned by such holder pursuant to the
Offer to Purchase, subject to the requirement that any portion of a Note
tendered must be in an integral multiple of $1,000 Principal Amount at Maturity.
In the event that the Company makes an Offer to Purchase the Notes, the Company
shall comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act, and any violation of the provisions of the Indenture relating to such Offer
to Purchase occurring as a result of such compliance shall not be deemed an
Event of Default or an event that with the passing of time or giving of notice,
or both, would constitute an Event of Default.
With respect to the sale of assets referred to in the definition of "Change of
Control," the phrase "all or substantially all" of the assets of the Company or
the General Partner will likely be interpreted under applicable state law and
will be dependent upon particular facts and circumstances. As a result, there
may be a degree of uncertainty in ascertaining whether a sale or transfer of
"all or substantially all" of the assets of the Company or the General Partner
has occurred. In addition, no assurances can be given that the Company will be
able to
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acquire Notes tendered upon the occurrence of a Change of Control. The ability
of the Company to pay cash to the holders of Notes upon a Change of Control may
be limited by its then existing financial resources. The Senior Credit Facility
and the FVOP Indenture contain certain covenants which will have the effect of
limiting or prohibiting, or requiring waiver or consent of the lenders
thereunder prior to, the repurchase of the Notes upon a Change of Control, and
future debt agreements of the Company or the Restricted Subsidiaries may provide
the same. See "Risk Factors--Ability to Purchase Notes Upon a Change of
Control." None of the provisions relating to a repurchase upon a Change of
Control are waivable by the Board of Directors of FV Inc. or the Trustee.
The foregoing provisions will not prevent the Company from entering into a
transaction of the type described under the definition of "Change of Control"
with management or their affiliates. In addition, such provisions may not
necessarily afford the holders of the Notes protection in the event of a highly
leveraged transaction, including a reorganization, restructuring, merger or
similar transaction, involving the Company that may adversely affect the holders
of the Notes because such transactions may not involve a shift in voting power
or beneficial ownership or, even if they do, may not involve a shift of the
magnitude required under the definition of "Change of Control" to trigger the
provisions.
Provision of Financial Information
The Indenture provides that whether or not the Issuers are subject to Section
13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the
Issuers shall file with the Commission the annual reports, quarterly reports and
other documents which the Issuers would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) or any successor provision
thereto if the Issuers were so required, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which the Issuers would have been required so to file such documents if the
Issuers were so required. The Issuers shall also in any event (a) within 15 days
of each Required Filing Date (whether or not permitted or required to file with
the Commission) (i) transmit by mail to all holders of Notes, as their names and
addresses appear in the Note register, without cost to such holders, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents which the Issuers are required to file with the Commission pursuant to
the preceding sentence or, if such filing is not so permitted, information and
data of a similar nature, and (b) if, notwithstanding the preceding sentence,
filing such documents by the Issuers with the Commission is not permitted under
the Exchange Act, promptly upon written request supply copies of such documents
to any prospective holder of Notes. The Issuers shall not be obligated to file
any such reports with the Commission if the Commission does not permit such
filings for all companies similarly situated other than due to any action or
inaction by the Issuers. Notwithstanding the foregoing provisions, this covenant
shall be deemed to have been satisfied during the period prior to the
effectiveness of a registration statement with respect to the Notes or the
Exchange Notes if the Issuers cause such annual reports, quarterly reports and
other documents to be filed with the Commission by FVOP if such filings contain
substantially the same information that would be required if such documents were
filed by the Issuers.
Merger, Sale of Assets, etc.
The Indenture provides that an Issuer will not consolidate with or merge with or
into (whether or not such Issuer is the Surviving Person) any other entity and
the Issuers will not and will not permit any of their respective Restricted
Subsidiaries to sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of such Issuer's properties and assets (determined, in
the case of the Company, on a consolidated basis for the Company and the
Restricted Subsidiaries) to any entity in a single transaction or series of
related transactions, unless: (a) either (i) such Issuer shall be the Surviving
Person or (ii) the Surviving Person (if other than such Issuer) shall be, in the
case of Holdings Capital, a corporation or, in any other case, a corporation,
partnership, limited liability company, limited liability limited partnership or
trust organized and validly existing under the laws of the United States of
America or any State thereof or the District of Columbia,
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and shall, in any such case, expressly assume by a supplemental indenture the
due and punctual payment of the principal of, premium, if any, and interest on
all the Notes and the performance and observance of every covenant of the
Indenture to be performed or observed on the part of the applicable Issuer; (b)
immediately thereafter, no Default or Event of Default shall have occurred and
be continuing; (c) immediately after giving effect to any such transaction
involving the Incurrence by the Company or any Restricted Subsidiary, directly
or indirectly, of additional Indebtedness (and treating any Indebtedness not
previously an obligation of the Company or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred at
the time of such transaction), the Surviving Person could Incur, on a pro forma
basis after giving effect to such transaction as if it had occurred at the
beginning of the latest fiscal quarter for which consolidated financial
statements of the Company are available, at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the Debt to Operating
Cash Flow Ratio of the first paragraph of "--Limitation on Indebtedness" above;
and (d) immediately thereafter the Surviving Person shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of such Issuer
immediately prior to such transaction.
The Indenture provides that, subject to the requirements of the immediately
preceding paragraph, in the event of a sale of all or substantially all of the
assets of any Subsidiary Guarantor or all of the Equity Interests of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, then the
Surviving Person of any such merger or consolidation, or such Subsidiary
Guarantor, if all of its Equity Interests are sold, shall be released and
relieved of any and all obligations under the Subsidiary Guarantee of such
Subsidiary Guarantor if (i) the Person or entity surviving such merger or
consolidation or acquiring the Equity Interests of such Subsidiary Guarantor is
not a Restricted Subsidiary, and (ii) the Net Cash Proceeds from such sale are
used after such sale in a manner that complies with the provisions of
"--Disposition of Proceeds of Asset Sales" above. Except as provided in the
preceding sentence, the Indenture will provide that no Subsidiary Guarantor
shall consolidate with or merge with or into another Person, whether or not such
Person is affiliated with such Subsidiary Guarantor and whether or not such
Subsidiary Guarantor is the Surviving Person, unless (i) the Surviving Person is
a corporation, partnership, limited liability company, limited liability limited
partnership or trust organized or existing under the laws of the United States,
any State thereof or the District of Columbia, (ii) the Surviving Person (if
other than such Subsidiary Guarantor) assumes all the Obligations of such
Subsidiary Guarantor under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, (iii)
at the time of and immediately after such Disposition, no Default or Event of
Default shall have occurred and be continuing, and (iv) the Surviving Person
will have Consolidated Net Worth (immediately after giving pro forma effect to
the Disposition) equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately preceding the transaction; provided, however,
that clause (iv) of this paragraph shall not be a condition to a merger or
consolidation of a Subsidiary Guarantor if such merger or consolidation only
involves the Company and/or one or more Wholly Owned Restricted Subsidiaries.
In the event of any transaction (other than a lease) described in and complying
with the conditions listed in the immediately preceding paragraphs in which an
Issuer or any Subsidiary Guarantor is not the Surviving Person and the Surviving
Person is to assume all the obligations of such Issuer or any such Subsidiary
Guarantor under the Notes and the Indenture pursuant to a supplemental
indenture, such Surviving Person shall succeed to, and be substituted for, and
may exercise every right and power of, such Issuer or such Subsidiary Guarantor,
as the case may be, and such Issuer or such Subsidiary Guarantor, as the case
may be, shall be discharged from its Obligations under the Indenture, the Notes
or its Subsidiary Guarantee, as the case may be.
Events of Default
The following are Events of Default under the Indenture:
(a) failure to pay interest on any Note when due and payable, continued
for 30 days;
(b) failure to pay the Accreted Value or principal of (or premium, if any,
on) any Note when due and payable at maturity, upon redemption or
otherwise;
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(c) failure to perform or comply with any of the provisions described
under "--Merger, Sale of Assets, etc.," "--Change of Control" and
"--Covenants--Disposition of Proceeds of Asset Sales" above;
(d) failure to observe or perform any other covenant, warranty or
agreement of the Issuers or any Subsidiary Guarantor under the
Indenture or the Notes continued for 30 days after written notice to
the Issuers by the Trustee or holders of at least 25% in aggregate
principal amount at maturity of outstanding Notes;
(e) default under the terms of one or more instruments evidencing or
securing Indebtedness of the Company or any Restricted Subsidiary
having an outstanding principal amount of $10 million or more
individually or in the aggregate that has resulted in the acceleration
of the payment of such Indebtedness or failure to pay principal when
due at the stated maturity of any such Indebtedness;
(f) the rendering of a final judgment or judgments (not subject to appeal)
against the Company or any Restricted Subsidiary in an amount of $10
million or more (net of any amounts covered by reputable and
creditworthy insurance companies) which remains undischarged or
unstayed for a period of 60 days after the date on which the right to
appeal has expired;
(g) any holder or holders of at least $10 million in aggregate principal
amount of Indebtedness of the Company or any Restricted Subsidiary,
after a default under such Indebtedness, shall notify the Trustee of
the intended sale or disposition of any assets of the Company or any
Restricted Subsidiary with an aggregate Fair Market Value (as
determined in good faith by the Board of Directors of the Company) of
at least $2 million that have been pledged to or for the benefit of
such holder or holders to secure such Indebtedness or shall commence
proceedings, or take any action (including by way of setoff), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of such Indebtedness such assets
of the Company or any Restricted Subsidiary (including funds on
deposit or held pursuant to lock-box and other similar arrangements)
which continues for five Business Days after notice has been given to
the Company and the representative of such Indebtedness;
(h) certain events of bankruptcy, insolvency or reorganization affecting
either of the Issuers or any Significant Restricted Subsidiary; and
(i) other than as provided in or pursuant to any Subsidiary Guarantee or
the Indenture, such Subsidiary Guarantee ceases to be in full force
and effect or is declared null and void and unenforceable or found to
be invalid or any Subsidiary Guarantor denies its liability under its
Subsidiary Guarantee (other than by reason of a release of such
Subsidiary Guarantor from its Subsidiary Guarantee in accordance with
the terms of the Indenture and such Subsidiary Guarantee).
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default (as defined) shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders, unless
such holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the holders of a
majority in aggregate Principal Amount at Maturity of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee.
If an Event of Default (other than an Event of Default with respect to either of
the Issuers described in clause (h) above) shall occur and be continuing, the
Trustee or the holders of at least 25% in aggregate Principal Amount at Maturity
of the outstanding Notes by notice in writing to the Issuers (and to the Trustee
if given by the holders) may declare the Accreted Value of all the outstanding
Notes, together with all accrued and unpaid interest, if any, thereon as of such
date of declaration to be immediately due and payable (provided that Notes whose
Accreted Value remains unpaid after such date of declaration shall continue to
accrete pursuant to the
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definition of "Accreted Value" and accrue interest as provided in the Notes).
Upon any such declaration, such Accreted Value and accrued and unpaid interest,
if any, shall become immediately due and payable. If an Event of Default
specified in clause (h) above with respect to either of the Issuers occurs, the
Accreted Value on all of the outstanding Notes, together with all accrued and
unpaid interest, if any, thereon will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder (provided that Notes whose Accreted Value remains unpaid after the date
of such Event of Default shall continue to accrete pursuant to the definition of
"Accreted Value" and accrue interest as provided in the Notes).
After such acceleration, but before a judgment or decree based on acceleration
has been obtained, the holders of not less than a majority in aggregate
Principal Amount at Maturity of then outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the non-payment of accelerated Accreted Value or principal and
interest, as the case may be, have been cured or waived as provided in the
Indenture. For information as to waiver of defaults, see "--Modification and
Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the holders thereof notice of all uncured Defaults or Events of Default known to
it; provided, however, that, except in the case of an Event of Default or a
Default in payment with respect to the Notes or a Default or Event of Default in
complying with "Merger, Sale of Assets, etc." above, the Trustee shall be
protected in withholding such notice if and so long as the Board of Directors or
responsible officers of the Trustee in good faith determine that the withholding
of such notice is in the interest of the holders of the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate Principal Amount at
Maturity of the outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the holders of a majority in
aggregate Principal Amount at Maturity of the outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a holder of a Note for enforcement of payment of Accreted Value
of, the principal of and premium, if any, or interest on such Note on or after
the respective due dates expressed in such Note and the Indenture.
The Issuers are required to furnish to the Trustee annually a statement as to
the performance by them of certain of their obligations under the Indenture and
as to any default in such performance.
No Personal Liability of Directors, Officers, Employees and Partners
The Indenture provides that no director, officer, employee, incorporator or
limited or general partner of the Issuers or any of their Subsidiaries shall
have any liability for any obligation of the Issuers or any of their
Subsidiaries under the Indenture or the Notes or for any claim based on, in
respect of, or by reason of, any such obligation or the creation of any such
obligation. Each holder by accepting a Note waives and releases such Persons
from all such liability and such waiver and release is part of the consideration
for the issuance of the Notes.
Satisfaction and Discharge of Indenture; Defeasance
The Issuers may terminate their and any Subsidiary Guarantor's substantive
obligations in respect of the Notes by delivering all outstanding Notes to the
Trustee for cancellation and paying all sums payable by them on account of
Accreted Value of or principal of, premium, if any, and interest on all Notes or
otherwise. In addition to the foregoing, the Issuers may, provided that no
Default or Event of Default has occurred and is continuing or would arise
therefrom (or, with respect to a Default or Event of Default specified in clause
(h) of
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"--Events of Default" above, any time on or prior to the 91st calendar day after
the date of such deposit (itbeing understood that this condition shall not be
deemed satisfied until after such 91st day)), terminate their and any Subsidiary
Guarantor's substantive obligations in respect of the Notes (except for their
obligations to pay the principal of (and premium, if any) and the interest on
the Notes and the Subsidiary Guarantors' guarantee thereof) by (i) depositing
with the Trustee, under the terms of an irrevocable trust agreement, money or
United States Government Obligations sufficient (without reinvestment) to pay
all remaining Indebtedness on the Notes to their maturity, (ii) delivering to
the Trustee either an Opinion of Counsel or a ruling directed to the Trustee
from the Internal Revenue Service to the effect that the holders of the Notes
will not recognize income, gain or loss for federal income tax purposes solely
as a result of such deposit and termination of obligations, (iii) delivering to
the Trustee an Opinion of Counsel to the effect that the Issuers' exercise of
their option under this paragraph will not result in either of the Issuers, the
Trustee or the trust created by the Issuers' deposit of funds pursuant to this
provision becoming or being deemed to be an "investment company" under the
Investment Company Act of 1940, as amended, and (iv) complying with certain
other requirements set forth in the Indenture. In addition, the Issuers may,
provided that no Default or Event of Default has occurred and is continuing or
would arise therefrom (or, with respect to a Default or Event of Default
specified in clause (h) of "--Events of Default" above, any time on or prior to
the 91st calendar day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until after such 91st day)),
terminate all of their and any Subsidiary Guarantor's substantive obligations in
respect of the Notes (including their obligations to pay the principal of (and
premium, if any) and interest on the Notes and the Subsidiary Guarantors'
guarantee thereof) by (i) depositing with the Trustee, under the terms of an
irrevocable trust agreement, money or United States Government Obligations
sufficient (without reinvestment) to pay all remaining Indebtedness on the Notes
to their maturity, (ii) delivering to the Trustee either a ruling directed to
the Trustee from the Internal Revenue Service to the effect that the holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes solely as a result of such deposit and termination of obligations or an
Opinion of Counsel based upon such a ruling addressed to the Trustee or a change
in the applicable federal tax law since the date of the Indenture to such
effect, (iii) delivering to the Trustee an Opinion of Counsel to the effect that
the Issuers' exercise of their option under this paragraph will not result in
either of the Issuers, the Trustee or the trust created by the Issuers' deposit
of funds pursuant to this provision becoming or being deemed to be an
"investment company" under the Investment Company Act of 1940, as amended, and
(iv) complying with certain other requirements set forth in the Indenture.
Governing Law
The Indenture and the Notes are governed by the laws of the State of New York
without regard to principles of conflicts of laws.
Modification and Waiver
The Issuers and each Subsidiary Guarantor (if any), when authorized by a
resolution of their respective Boards of Directors, and the Trustee may amend or
supplement the Indenture or the Notes without notice to or consent of any
holder: (i) to cure any ambiguity, defect or inconsistency; provided, however,
that such amendment or supplement does not materially and adversely affect the
rights of any holder; (ii) to effect the assumption by a successor Person of all
obligations of the Issuers under the Notes and the Indenture in connection with
any transaction complying with "--Merger, Sale of Assets, etc." above; (iii) to
provide for uncertificated Notes in addition to or in place of certificated
Notes; (iv) to comply with any requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act;
(v) to make any change that would provide any additional benefit or rights to
the holders; (vi) to make any other change that does not materially and
adversely affect the rights of any holder under the Indenture; (vii) to evidence
the succession of another Person to any Subsidiary Guarantor and the assumption
by any such successor of the covenants of such Subsidiary Guarantor in the
Indenture and in the Subsidiary Guarantee; (viii) to add to the covenants of the
Issuers or the Subsidiary Guarantors for the benefit of the holders, or to
surrender any right or power conferred
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upon the Issuers or any Subsidiary Guarantor under the Indenture; (ix) to secure
the Notes pursuant to the requirements of "--Covenants--Limitation on Liens"
above or otherwise; or (x) to reflect the release of a Subsidiary Guarantor from
its obligations with respect to its Subsidiary Guarantee in accordance with the
provisions of the Indenture and to add a Subsidiary Guarantor pursuant to the
requirements of the Indenture; provided, however, that the Issuers have
delivered to the Trustee an Opinion of Counsel stating that such amendment or
supplement complies with the provisions of the Indenture.
Modifications and amendments of the Indenture and the Notes may be made by the
Issuers and each Subsidiary Guarantor (if any) when authorized by a resolution
of their respective Boards of Directors and the Trustee with the consent of the
holders of a majority in aggregate Principal Amount at Maturity of the
outstanding Notes; provided, however, that no such modification or amendment
may, without the consent of the holder of each Note affected thereby, (a) change
the definition of "Accreted Value" or change the definition of Principal Amount
at Maturity or change the Stated Maturity of the principal of or any installment
of interest on any Note or alter the optional redemption or repurchase
provisions of any Note or the Indenture in a manner adverse to the holders of
the Notes, (b) reduce the Accreted Value or the Principal Amount at Maturity (or
the premium) of any Note, (c) reduce the rate of or extend the time for payment
of interest on any Note, (d) change the place or currency of payment of Accreted
Value or principal of (or premium) or interest on any Note, (e) modify any
provisions of the Indenture relating to the waiver of past defaults (other than
to add sections of the Indenture subject thereto) or the right of the holders to
institute suit for the enforcement of any payment on or with respect to any Note
or the modification and amendment of the Indenture and the Notes (other than to
add sections of the Indenture or the Notes which may not be amended,
supplemented or waived without the consent of each holder affected), (f) reduce
the percentage of the Principal Amount at Maturity of outstanding Notes
necessary for amendment to or waiver of compliance with any provision of the
Indenture or the Notes or for waiver of any Default, (g) waive a default in the
payment of the Accreted Value of, principal of, interest on, or a redemption
payment with respect to, any Note (except a rescission of acceleration of the
Notes by the holders as provided in the Indenture and a waiver of the payment
default that resulted from such acceleration), (h) modify the ranking or
priority of the Notes or the Subsidiary Guarantee of any Subsidiary Guarantor in
any manner adverse to the holders, (i) release any Subsidiary Guarantor from any
of its obligations under its Subsidiary Guarantee or the Indenture otherwise
than in accordance with the Indenture, or (j) modify the provisions relating to
any Offer to Purchase required under the covenants described under
"--Covenants--Disposition of Proceeds of Asset Sales" or "--Change of Control"
above in a manner materially adverse to the holders.
The holders of a majority in aggregate Principal Amount at Maturity of the
outstanding Notes, on behalf of all holders of Notes, may waive compliance by
the Issuers with certain restrictive provisions of the Indenture. Subject to
certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate Principal Amount at Maturity of the outstanding Notes, on
behalf of all holders of Notes, may waive any past default under the Indenture,
except a default in the payment of the Accreted Value of, principal of, premium
or interest on or a default arising from failure to purchase any Note tendered
pursuant to an Offer to Purchase, or a default in respect of a provision that
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Note affected.
The Trustee
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a creditor of either
of the Issuers, any Subsidiary Guarantor or any other obligor upon the Notes, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claim as security or otherwise. The
Trustee is permitted to
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engage in other transactions with the Issuers or an Affiliate of either of the
Issuers; provided, however, that if it acquires any conflicting interest (as
defined in the Indenture or in the Trust Indenture Act), it must eliminate such
conflict or resign. The Trustee is also the trustee under the FVOP Indenture.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accreted Value" as of any date (the "Specified Date ") means, with respect to
each $1,000 original principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates (each a
"Semi-Annual Accrual Date"), the amount set forth opposite such date
below:
Semi-Annual Accrual Date Accreted
Value
Issue Date $631.18
March 15, 1998 668.66
September 15, 1998 708.36
March 15, 1999 750.42
September 15, 1999 794.97
March 15, 2000 842.17
September 15, 2000 892.18
March 15, 2001 945.15
September, 2001 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (a) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (b) an amount equal to
the product of (x) the Accreted Value for the immediately following
Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date and (y) a fraction, the numerator
of which is the number of days actually elapsed from the immediately
preceding Semi-Annual Accrual Date to the Specified Date and the
denominator of which is 180; and
(iii) if the Specified Date is after September 15, 2001, $1,000;
provided, however, that if the Company makes the Cash Interest Election, the
Accreted Value shall be, and remain through the Stated Maturity of the Notes,
the Accreted Value as of the Semi-Annual Accrual Date on which the Cash Interest
Election is made.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in connection
with an Asset Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other Person
which merges with or into or becomes a Subsidiary of such specified Person.
"Advisory Committee" means the Advisory Committee of the General Partner
established pursuant to the provisions of Article VI of the First Amended and
Restated Agreement of Limited Partnership of the General Partner, as amended to
the date of issuance of the Notes.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and
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policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated or merged with or into the Company or any Restricted
Subsidiary, or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of (i) any Equity Interest of
any Restricted Subsidiary, (ii) any material license, franchise or other
authorization of the Company or any Restricted Subsidiary, (iii) any assets of
the Company or any Restricted Subsidiary which constitute substantially all of
an operating unit or line of business of the Company or any Restricted
Subsidiary or (iv) any other property or asset of the Company or any Restricted
Subsidiary outside of the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" shall not include (i) any transaction
consummated in compliance with "--Merger, Sale of Assets, etc." above and the
creation of any Lien not prohibited by the provisions described under
"--Covenants--Limitation on Liens" above, (ii) sales of property or equipment
that has become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of the Company or any Restricted Subsidiary, as the
case may be, and (iii) any transaction consummated in compliance with
"--Covenants--Limitation on Restricted Payments" above. In addition, solely for
purposes of "--Covenants--Disposition of Proceeds of Asset Sales" above, any
sale, conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions, involving assets
with a Fair Market Value not in excess of $1.0 million individually or $2.0
million in any fiscal year shall be deemed not to be an Asset Sale.
"Board of Directors" means (i) in the case of a Person that is a partnership,
the board of directors of such Person's corporate general partner (or if such
general partner is itself a partnership, the board of directors of such general
partner's corporate general partner), (ii) in the case of a Person that is a
corporation, the board of directors of such Person and (iii) in the case of any
other Person, the board of directors, management committee or similar governing
body or any authorized committee thereof responsible for the management of the
business and affairs of such Person. By way of illustration, as of the date of
the Indenture, any reference herein to the Board of Directors of any of the
Company, the General Partner or FVP GP means the board of directors of FV Inc.
"Capitalized Lease Obligation" means, with respect to any Person for any period,
an obligation of such Person to pay rent or other amounts under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of such obligation shall be the capitalized amount shown on
the balance sheet of such Person as determined in accordance with GAAP.
"Cash Equivalents" means (i) any security maturing not more than six months
after the date of acquisition issued by the United States of America or an
instrumentality or agency thereof and guaranteed fully as to principal, premium,
if any, and interest by the United States of America, (ii) any certificate of
deposit, time deposit, money market account or bankers' acceptance maturing not
more than six months after the date of acquisition issued by any commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $500.0
million whose debt has a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "a-1" (or higher) according to Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc., or any successor
rating agency and (iii) commercial paper maturing not more than three months
after the date of acquisition issued by any corporation
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(other than an Affiliate of the Company) organized and existing under the laws
of the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. or any successor rating agency, or "A-1" (or higher) according to
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies,
Inc., or any successor rating agency.
"Change of Control" means the occurrence of any of the following events: (a) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of 50%
or more of the total voting power of the outstanding Voting Equity Interests of
the Company, the General Partner, FVP GP or FV Inc., as the case may be; (b) the
Company, the General Partner, FVP GP or FV Inc., as the case may be,
consolidates with, or merges with or into, another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into, the Company, the General Partner, FVP GP or FV Inc., as the case may be,
in any such event pursuant to a transaction in which the outstanding Voting
Equity Interests of the Company, the General Partner, FVP GP or FV Inc., as the
case may be, are converted into or exchanged for cash, securities or other
property, other than any such transaction where the outstanding Voting Equity
Interests of the Company, the General Partner, FVP GP or FV Inc., as the case
may be, are converted into or exchanged for Voting Equity Interests (other than
Disqualified Equity Interests) of the surviving or transferee Person and,
immediately after such transaction, the Permitted Holders or the holders of the
Voting Equity Interests of the Company, the General Partner, FVP GP or FV Inc.,
as the case may be, immediately prior thereto own, directly or indirectly, more
than 50% of the total voting power of the outstanding Voting Equity Interests of
the surviving or transferee Person; (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company, the General Partner, FVP GP or FV Inc., as the case
may be (together with any new directors whose election to such Board of
Directors was approved by the Permitted Holders or by a vote of at least a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved), cease for any reason (other than by action of the
Permitted Holders) to constitute a majority of the Board of Directors of the
Company, the General Partner, FVP GP or FV Inc., as the case may be, then in
office in any such case in connection with any actual or threatened solicitation
to which Rule 14a-11 of Regulation 14A promulgated under the Exchange Act
applies or other actual or threatened solicitation of proxies or consents; (d)
any Person or Persons other than Permitted Holders are or become entitled to
appoint or designate more than 25% of the members of the Advisory Committee; or
(e) the admission of any Person as a general partner of the Company, the General
Partner or FVP GP, as the case may be, after which the General Partner, FVP GP
or FV Inc., as the case may be, does not have the sole power to take all of the
actions it is entitled or required to take under the limited partnership
agreement of the Company, the General Partner or FVP GP, as the case may be, as
in effect on the Issue Date; provided, however, that a Change of Control will be
deemed not to have occurred in any of the foregoing circumstances (i) with
respect to FV Inc. (either in its own capacity or in its capacity as a direct or
indirect corporate general partner of any other Person), (ii) with respect to or
as a result of the conversion of the general partnership interest of FVP GP in
the General Partner into a limited partnership interest, or (iii) with respect
to the events in clause (e), if the change, event or condition giving rise
thereto has been approved by the Permitted Holders holding a majority in
interest of the total outstanding Equity Interests of the General Partner held
by the Permitted Holders.
"Consolidated Income Tax Expense" means, with respect to the Company for any
period, the provision for federal, state, local and foreign income taxes payable
by the Company and the Restricted Subsidiaries for such period as determined on
a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount, (b) the net cost under Interest Rate Protection
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and
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charges owed with respect to letters of credit and bankers' acceptance financing
and (e) all capitalized interest and all accrued interest, (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP and (iii)
dividends and distributions in respect of Disqualified Equity Interests actually
paid in cash by the Company during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income of
the Company and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (i) all
extraordinary gains or losses and all gains and losses from the sale or other
disposition of assets out of the ordinary course of business (net of taxes, fees
and expenses relating to the transaction giving rise thereto) for such period,
(ii) that portion of such net income derived from or in respect of investments
in Persons other than Restricted Subsidiaries, except to the extent actually
received in cash by the Company or any Restricted Subsidiary, (iii) the portion
of such net income (or loss) allocable to minority interests in unconsolidated
Persons for such period, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject, in the case of any Restricted
Subsidiary, to the provisions of the immediately following sentence of this
definition) and (iv) net income (or loss) of any other Person combined with the
Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination. In calculating
Consolidated Net Income as a component of Consolidated Operating Cash Flow (x)
for purposes of calculating the Debt to Operating Cash Flow Ratio in connection
with determining whether an Incurrence of Indebtedness by the Company (but not
the Restricted Subsidiaries) is permitted under the Debt to Operating Cash Flow
Ratio of the first paragraph of "Covenants--Limitation on Indebtedness" and (y)
for purposes of calculating (I) Cumulative Available Cash Flow pursuant to
clause (c)(1) of "Covenants--Limitation on Restricted Payments" and (II) the
Debt to Operating Cash Flow Ratio pursuant to clause (b) under
"Covenants--Limitation on Restricted Payments" in connection with determining
whether a Restricted Payment by the Company pursuant to clauses (i), (ii) or
(iii) under "Covenants--Limitation on Restricted Payments" is permitted under
such covenant, the net income of any Restricted Subsidiary shall be excluded to
the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time (regardless of any
waiver) permitted, directly or indirectly, by reason of any Payment Restriction;
provided, however, that that net income shall not be so excluded in determining
whether the Company could incur $1.00 of Indebtedness under the Debt to
Operating Cash Flow Ratio of the first paragraph under "Covenants--Limitation on
Indebtedness" (a) (or in calculating Cumulative Available Cash Flow) for
purposes of determining whether any Restricted Payment other than those referred
to in clause (y) of this sentence is permitted under "Covenants--Limitation on
Restricted Payments," (B) for purposes of determining whether a Designation is
permitted pursuant to clause (b) under "Covenants--Designation of Unrestricted
Subsidiaries" and (C) for purposes of determining compliance with clause (c)
under "Merger, Sale of Assets, etc." (unless the applicable transaction involves
the Incurrence by the Company of additional Indebtedness).
"Consolidated Net Worth" with respect to any Person means the equity of the
holders of Qualified Equity Interests of such Person and its Restricted
Subsidiaries, as reflected in a balance sheet of such Person determined on a
consolidated basis and in accordance with GAAP.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication) by the
sum of (i) Consolidated Income Tax Expense accrued according to GAAP for such
period to the extent deducted in determining Consolidated Net Income for such
period, (ii) Consolidated Interest Expense (other than dividends on Preferred
Equity Interests) for such period to the extent deducted in determining
Consolidated Net Income for such period, and (iii) depreciation, amortization
and any other non-cash items for such period to the extent deducted in
determining Consolidated Net Income for such period (other than any non-cash
item which requires the accrual of, or a reserve for, cash charges for any
future period) of the Company and the Restricted Subsidiaries, including,
without limitation, amortization of capitalized debt issuance costs for such
period, all of the foregoing determined on a consolidated basis in accordance
with GAAP minus non-cash items to the extent they increase Consolidated Net
Income (including the partial or entire reversal of reserves taken in prior
periods) for such period.
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"Cumulative Available Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the period
commencing on the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Debt to Operating Cash Flow Ratio" means the ratio of (i) the Total
Consolidated Indebtedness as of the date of calculation (the "Determination
Date") to (ii) four times the Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For purposes of
calculating Consolidated Operating Cash Flow for the Measurement Period
immediately prior to the relevant Determination Date, (I) any Person that is a
Restricted Subsidiary on the Determination Date (or would become a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed to have been a Restricted Subsidiary at all times during such Measurement
Period, (II) any Person that is not a Restricted Subsidiary on such
Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (III) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (including through an Asset Acquisition or the commencement of
activities constituting such operating business) or (y) disposed of (including
by way of an Asset Sale or the termination or discontinuance of activities
constituting such operating business) any operating business during such
Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Asset Acquisition or the
commencement of activities constituting such operating business, all such
transactions had been consummated on the first day of such Measurement Period
and, in the case of an Asset Sale or termination or discontinuance of activities
constituting such operating business, all such transactions had been consummated
prior to the first day of such Measurement Period.
"Default" means any event that is or with the passing of time or giving of
notice or both would be an Event of Default.
"Designation" has the meaning set forth under "--Covenants--Designation of
Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth under "--Covenants--Designation
of Unrestricted Subsidiaries" above.
"Disposition" means, with respect to any Person, any merger, consolidation or
other business combination involving such Person (whether or not such Person is
the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the earlier
of the maturity date of the Notes or the date on which no Notes remain
outstanding.
"Equity Interest" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock or other equity participations,
including partnership interests, whether general or limited, in such Person,
including any Preferred Equity Interests.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission thereunder.
"Fair Market Value" means, with respect to any asset, the price (after taking
into account any liabilities relating to such assets) which could be negotiated
in an arm's-length free market transaction, for cash, between a willing seller
and a willing and able buyer, neither of which is under pressure or compulsion
to complete the transaction; provided, however, that the Fair Market Value of
any such asset or assets shall be determined by the Board of Directors of the
Company, acting in good faith, and shall be evidenced by resolutions of the
Board of Directors of the Company delivered to the Trustee.
"FV Inc." means FrontierVision Inc., a Delaware corporation.
"FVOP" means FrontierVision Operating Partners, L.P., a Delaware limited
partnership.
"FVOP Indenture" means the Indenture dated as of October 7, 1996 among FVOP,
FrontierVision Capital Corporation and Colorado National Bank, as trustee.
"FVP GP" means FVP GP, L.P., a Delaware limited partnership.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"General Partner" means FrontierVision Partners, L.P., a Delaware limited
partnership.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit. A guarantee shall include, without
limitation, any agreement to maintain or preserve any other Person's financial
condition or to cause any other Person to achieve certain levels of operating
results.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence", "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
(or is merged into or consolidates with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was incurred in connection with,
or in contemplation of, such Person becoming a Restricted Subsidiary (or being
merged into or consolidated with the Company or any Restricted Subsidiary),
shall be deemed Incurred at the time any such Person becomes a Restricted
Subsidiary or merges into or consolidates with the Company or any Restricted
Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable incurred in the ordinary course of
business and payable in accordance with industry practices, or other accrued
liabilities
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arising in the ordinary course of business which are not overdue or which are
being contested in good faith), (v) every Capitalized Lease Obligation of such
Person, (vi) every net obligation under interest rate swap or similar agreements
or foreign currency hedge, exchange or similar agreements of such Person, (vii)
every obligation of the type referred to in clauses (i) through (vi) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has guaranteed or is responsible or liable for, directly or
indirectly, as obligor, guarantor or otherwise, and (viii) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (i) through (vii) above. Indebtedness (i) shall never be calculated
taking into account any cash and cash equivalents held by such Person, (ii)
shall not include obligations of any Person (x) arising from the honoring by a
bank or other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business, provided that such obligations are extinguished within two Business
Days of their incurrence unless covered by an overdraft line, (y) resulting from
the endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices and (z) under stand-by
letters of credit to the extent collateralized by cash or Cash Equivalents,
(iii) which provides that an amount less than the principal amount thereof shall
be due upon any declaration of acceleration thereof shall be deemed to be
Incurred or outstanding in an amount equal to the accreted value thereof at the
date of determination, (iv) shall include the liquidation preference and any
mandatory redemption payment obligations in respect of any Disqualified Equity
Interests of the Company or any Restricted Subsidiary and (v) shall not include
obligations under performance bonds, performance guarantees, surety bonds and
appeal bonds, letters of credit or similar obligations, incurred in the ordinary
course of business, including in connection with the requirements of cable
television franchising authorities, and otherwise consistent with industry
practice.
"Independent Financial Advisor" means a nationally recognized investment banking
firm (i) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the Company
and (ii) which, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Interest Payment Date" means each of March 15 and September 15.
"Interest Rate Protection Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business) or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other Person.
"Issue Date" means the date of original issuance of the Notes under the
Indenture.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash
Equivalents received by the Company or any Restricted Subsidiary in respect of
any Asset Sale, including all cash or Cash Equivalents received upon any sale,
liquidation or other exchange of proceeds of Asset Sales received in a form
other than cash or Cash Equivalents, net of (i) the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses Incurred as a
result thereof, (ii) taxes paid or payable as a result thereof (after taking
into account any available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale, (iv) amounts
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deemed, in good faith, appropriate by the Board of Directors of FV Inc. to be
provided as a reserve, in accordance with GAAP, against any liabilities
associated with such assets which are the subject of such Asset Sale (provided
that the amount of any such reserves shall be deemed to constitute Net Cash
Proceeds at the time such reserves shall have been released or are not otherwise
required to be retained as a reserve) and (v) with respect to Asset Sales by
Restricted Subsidiaries, the portion of such cash payments attributable to
Persons holding a minority interest in such Restricted Subsidiaries.
"Offer to Purchase" means a written offer (the "Offer") sent by or on behalf of
the Company by first class mail, postage prepaid, to each holder at his address
appearing in the register for the Notes on the date of the Offer offering to
purchase up to the Accreted Value of Notes specified in such Offer at the
purchase price specified in such Offer (as determined pursuant to the
Indenture). Unless otherwise required by applicable law, the Offer shall specify
an expiration date (the "Expiration Date") of the Offer to Purchase, which shall
be not less than 20 Business Days nor more than 60 days after the date of such
Offer and a settlement date (the "Purchase Date") for purchase of Notes to occur
no later than five Business Days after the Expiration Date. The Company shall
notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain all the information required by
applicable law to be included therein. The Offer shall contain all instructions
and materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate Principal Amount at Maturity of the outstanding Notes
offered to be purchased by the Company pursuant to the Offer to
Purchase (including, if less than all of the Notes, the manner by
which such amount has been determined pursuant to the Section of the
Indenture requiring the Offer to Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
Principal Amount at Maturity of Notes accepted for payment (as
specified pursuant to the Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered in
a denomination of less than $1,000 Principal Amount at Maturity must
be tendered in whole;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that Notes not tendered or tendered but not purchased by the Company
pursuant to the Offer to Purchase will continue to accrete Accreted
Value as provided in the Indenture;
(8) that interest on any Note not tendered or tendered but not purchased
by the Company pursuant to the Offer to Purchase will continue to
accrue as provided the Indenture;
(9) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the
Offer to Purchase and that the Accreted Value thereof will cease to
increase on and that interest thereon shall cease to accrue on and
after the Purchase Date;
(10) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such
Note at the place or places specified in the Offer prior to the close
of business on the Expiration Date (such Note being, if the Company or
the Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the
Trustee duly
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executed by, the holder thereof or his attorney duly authorized in
writing);
(11) that holders will be entitled to withdraw all or any portion of Notes
tendered if the Company (or its Paying Agent) receives, not later than
the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount at maturity
of the Note the holder tendered, the certificate number of the Note
the holder tendered and a statement that such holder is withdrawing
all or a portion of his tender;
(12) that if Notes with an aggregate Accreted Value less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such Notes and
(b) if Notes with an aggregate Accreted Value in excess of the
Purchase Amount are tendered and not withdrawn pursuant to the Offer
to Purchase, the Company shall purchase Notes with an aggregate
Accreted Value equal to the Purchase Amount on a pro rata basis (with
such adjustments as may be deemed appropriate so that no Notes in
denominations of less than $1,000 Principal Amount at Maturity are
purchased in part); and
(13) that in the case of any holder whose Note is purchased only in part,
the Company shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge a new Note
or Notes, of any authorized denomination as requested by such holder,
in an Aggregate Principal Amount at Maturity equal to and in exchange
for the unpurchased portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with the
provisions above pertaining to any Offer.
"Payment Restriction" has the meaning set forth under "Covenants--Limitation on
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries."
"Permitted Holders" means any of (a) the General Partner, FVP GP or FV Inc. for
so long as a majority of the voting power of the Voting Equity Interests of such
Person is beneficially owned by any of the Persons listed in the other clauses
of this definition, (b) James C. Vaughn, the President and Chief Executive
Officer of FV Inc. on the Issue Date, (c) John S. Koo, the Senior Vice President
and Chief Financial Officer of FV Inc. on the Issue Date, (d) any of J. P.
Morgan Investment Corporation, a Delaware corporation, Olympus Cable Corp., a
Delaware corporation, First Union Capital Partners, Inc., a Virginia
corporation, and 1818 II Cable Corp., a Delaware corporation, (e) any Person
controlling, controlled by or under common control with any other Person
described in clauses (a)-(d) of this definition and (f) (i) the spouse or
children of any Person named in clause (b) or (c) of this definition and any
trust for the benefit of any such Persons or their respective spouses or
children; provided, however, that with respect to any such trust, such Persons
have the sole right to direct and control any such trust and any Voting Equity
Interest owned by such trust, and (ii) any such Person's estate, executor,
administrator and heirs.
"Permitted Investments" means (a) Cash Equivalents, (b) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits, (c) loans and
advances to employees made in the ordinary course of business not to exceed $1
million in the aggregate at any one time outstanding, (d) Interest Rate
Protection Obligations, (e) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under "--Covenants--Disposition of
Proceeds of Asset Sales" above not to exceed 25% of the total consideration for
such Asset Sales, (f) transactions with officers, directors and employees of the
Company, the General Partner, FVP GP, FV Inc. or any Restricted Subsidiary
entered into in the ordinary course of business (including compensation or
employee benefit arrangements with any such director or employee) and consistent
with past business practices, (g) Investments existing as of the Issue Date and
any amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the Company
or any
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Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith, (h) any Investment for
which the sole consideration provided is Qualified Equity Interests of the
Company and (i) any Investment consisting of a guarantee permitted under clause
(e) of "--Covenants--Limitation on Indebtedness" above.
"Permitted Liens" means (a) Liens on property of a Person existing at the time
such Person is merged into or consolidated with the Company; provided, however,
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation, (b) Liens imposed by law such as
carriers', warehousemen's and mechanics' Liens and other similar Liens arising
in the ordinary course of business which secure payment of obligations not more
than sixty (60) days past due or which are being contested in good faith and by
appropriate proceedings, (c) Liens existing on the Issue Date, (d) Liens
securing the Notes, (e) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; provided,
however, that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor, (f) easements, reservation
of rights-of-way, restrictions and other similar easements, licenses,
restrictions on the use of properties, or minor imperfections of title that in
the aggregate are not material in amount and do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of the Company and the Restricted Subsidiaries, (g)
Liens resulting from the deposit of cash or securities in connection with
contracts, tenders or expropriation proceedings, or to secure workers'
compensation, surety or appeal bonds, costs of litigation when required by law
and public and statutory obligations or obligations under franchise arrangements
entered into in the ordinary course of business, (h) Liens securing Indebtedness
consisting of Capitalized Lease Obligations of the Company, Purchase Money
Indebtedness of the Company, mortgage financings of the Company, industrial
revenue bonds of the Company or other monetary obligations of the Company, in
each case Incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used in the
business of the Company, or repairs, additions or improvements to such assets,
provided, however, that (I) such Liens secure Indebtedness in an amount not in
excess of the original purchase price or the original cost of any such assets or
repair, addition or improvement thereto (plus an amount equal to the reasonable
fees and expenses in connection with the Incurrence of such Indebtedness), (II)
such Liens do not extend to any other assets of the Company or the Restricted
Subsidiaries (and, in the case of repairs, additions or improvements to any such
assets, such Lien extends only to the assets (and improvements thereto or
thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "--Covenants--Limitation on Indebtedness" above and
(IV) such Liens attach within 90 days of such purchase, construction,
installation, repair, addition or improvement, (i) Liens to secure any
refinancings, renewals, extensions, modifications or replacements (collectively,
"refinancing") (or successive refinancings), in whole or in part, of any
Indebtedness secured by Liens referred to in the clauses above so long as such
Lien does not extend to any other property (other than improvements thereto),
and (j) Liens securing letters of credit entered into in the ordinary course of
business and consistent with past business practice.
"Permitted Strategic Investment" means an Investment in a Person (including,
without limitation, a Restricted Subsidiary which is not a Wholly Owned
Restricted Subsidiary or an Unrestricted Subsidiary) engaged in a Related
Business if, at the time of and immediately after giving pro forma effect to
such Investment (and any related transaction or series of transactions), the
Debt to Operating Cash Flow Ratio would be less than or equal to (i) 7.0 to 1.0,
if the date of such Investment is on or before December 31, 1998, and (ii) 6.5
to 1.0 thereafter.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets
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upon any voluntary or involuntary liquidation or dissolution of such Person,
over Equity Interests of any other class in such Person.
"Principal Amount at Maturity" means, with respect to each $1,000 original
principal amount at maturity of the Notes, (i) $1,000, if no Cash Interest
Election is made by the Company, or (ii) if the Cash Interest Election is made,
the Accreted Value of such Notes as of the Interest Payment Date on which the
Cash Interest Election is made.
"Public Equity Offering" means, with respect to any Person, a public offering by
such Person of some or all of its Qualified Equity Interests, the net proceeds
of which (after deducting any underwriting discounts and commissions) exceed
$25.0 million.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase".
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Related Business" means a cable or broadcast television, telecommunications,
Internet or data transmission business or a business reasonably related thereto.
"Restricted Subsidiary" means any Subsidiary of the Company that has not been
designated by the Board of Directors of the Company by a resolution of the Board
of Directors of the Company delivered to the Trustee as an Unrestricted
Subsidiary pursuant to "--Covenants--Designation of Unrestricted Subsidiaries"
above. Any such designation may be revoked by a resolution of the Board of
Directors of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Senior Credit Facility" means the Amended and Restated Credit Agreement, dated
as of April 9, 1996, among FVOP, the lenders named therein, The Chase Manhattan
Bank, as Administrative Agent, J.P. Morgan Securities Inc., as Syndication
Agent, and CIBC Inc., as Managing Agent, including any deferrals, renewals,
extensions, restatements, replacements, refinancings or refundings thereof or
amendments, modifications or supplements thereto, and any agreement providing
therefor, whether by or with the same or any other lender, creditor, group or
groups of lenders or group or groups of creditors, and including related notes,
guarantee and security agreements and other instruments and agreements executed
in connection therewith.
"Significant Restricted Subsidiary" means, at any date of determination, (a) any
Restricted Subsidiary that, together with its Subsidiaries that constitute
Restricted Subsidiaries, (i) for the most recent fiscal year of the Company
accounted for more than 10.0% of the consolidated revenues of the Company and
the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 10.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary which, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (h) of "--Events of
Default" above has occurred, would constitute a Significant Restricted
Subsidiary under clause (a) of this definition.
"Stated Maturity," when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
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"Strategic Equity Investment" means the issuance and sale of Qualified Equity
Interests of the Company for net proceeds to the Company of at least $25.0
million to a Person engaged primarily in the cable television, wireless cable
television, telephone or interactive television business.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation of which the
outstanding Voting Equity Interests having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person or (ii) any other Person of which at
least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Subsidiary Guarantee" means any guarantee of the Issuers' obligations under the
Indenture and the Notes issued after the Issue Date pursuant to
"--Covenants--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries" above.
"Subsidiary Guarantor" means any Subsidiary of the Company that guarantees the
Issuers' obligations under the Indenture and the Notes issued after the Issue
Date pursuant to "--Covenants--Limitation on Guarantees of Indebtedness by
Restricted Subsidiaries" above.
"Surviving Person" means, with respect to any Person involved in or that makes
any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness and Disqualified Equity
Interests of the Company and the Restricted Subsidiaries outstanding as of such
date of determination.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as such
pursuant to the provisions of "--Covenants--Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required scheduled payment of principal,
including payment of final maturity, in respect thereof by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding aggregate principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of the
outstanding Voting Equity Interests (other than directors' qualifying shares) of
which are owned, directly or indirectly, by the Company.
Book-Entry; Delivery and Form
The certificates representing the Notes were issued in fully registered form
without interest coupons.
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Notes sold in offshore transactions in reliance on Regulation S under the
Securities Act were initially be represented by a single, temporary global Note
in definitive, fully registered form without interest coupons (the "Temporary
Regulation S Global Note") and were deposited with the Trustee as custodian for
The Depositary Trust Company, as depositary (the "Depositary"), and registered
in the name of a nominee of the Depositary for the accounts of Euroclear and
Cedel. The Temporary Regulation S Global Note was exchangeable for a single,
permanent global note (the "Permanent Regulation S Global Note", and, together
with the Temporary Regulation S Global Note, the "Regulation S Global Note") on
or after the 40th day after the later of the commencement of the Offering and
the Issue Date. Prior to such date, beneficial interests in the Temporary
Regulation S Global Note were held through Euroclear or Cedel, and any resale or
other transfer of such interests to U.S. persons was not be permitted during
such period unless such resale or transfer was made pursuant to Rule 144A or
Regulation S and in accordance with the certification requirements described
below.
Notes sold in reliance on Rule 144A were represented by a single, permanent
global Note in definitive, fully registered form without interest coupons (the
"Restricted Global Note") and were deposited with the Trustee as custodian for
and registered in the name of a nominee of the Depositary. The Restricted Global
Note and the Temporary Regulation S Global Note (and any Notes issued in
exchange therefor) are subject to certain restrictions on transfer.
The Global Notes
Upon the issuance of the Regulation S Global Note and the Restricted Global Note
(each a "Global Note" and together the "Global Notes"), the Depositary or its
custodian credited on its internal system the respective principal amount at
maturity of the individual beneficial interests represented by such Global Note
to the accounts of persons who have accounts with the Depositary. Such accounts
initially were designated by or on behalf of the Initial Purchasers. Ownership
of beneficial interests in a Global Note will be limited to persons who have
accounts with the Depositary ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in a Global Note are
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Global Note directly through the Depositary, if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in the Regulation S Global Note directly
through Cedel or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system. Investors
may also hold such interests through organizations other than Cedel or Euroclear
that are participants in the Depositary's system. Cedel and Euroclear will hold
interests in the Regulation S Global Note on behalf of their participants
through the Depositary.
So long as the Depositary, or its nominee, is the registered holder of a Global
Note, the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with the procedures provided for under "Notice to Investors," as well as the
Depositary's applicable procedures and, if applicable, those of Euroclear and
Cedel.
Payments of the Accreted Value of, the principal of, and interest on, the Global
Notes will be made to the Depositary or its nominee, as the case may be, as the
registered owner thereof. None of the Issuers, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Issuers expect that the Depositary or its nominee, upon receipt of any
payment of Accreted Value, principal or interest in respect of a Global Note,
will credit participants' accounts with payments in amounts
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proportionate to their respective beneficial interests in the principal amount
at maturity of such Global Note as shown on the records of the Depositary or its
nominee. The Issuers also expect that payments by participants to owners of
beneficial interests in such Global Note held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the name of
nominees for such customers. Such payments will be the responsibility of such
participants. Transfers between participants in the Depositary will be effected
in the ordinary way in accordance with the Depositary's rules and will be
settled in same-day funds.
The Depositary has advised the Issuers that it will take any action permitted to
be taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
accounts an interest in the Global Notes is credited and only in respect of such
portion of the aggregate principal amount at maturity of Notes as to which such
participant or participants has or have given such direction.
The Depositary has advised the Issuers as follows: the Depositary is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities for its participants and facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the Depositary system is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although the Depositary, Euroclear and Cedel have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among participants of the Depositary, Euroclear and Cedel, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuers nor the Trustee
have any responsibility for the performance by the Depositary, Euroclear or
Cedel or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If the Depositary is at any time unwilling or unable to continue as a depositary
for the Global Notes and a successor depositary is not appointed by the Issuers
within 90 days, the Issuers will issue certificated notes in exchange for the
Global Notes which will bear the legend referred to under the heading "Notice to
Investors."
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Certain Federal Income Tax Considerations
General
The following discussion is a summary of material United States federal income
tax consequences of the purchase, ownership and disposition of the Notes, but
does not purport to be a complete analysis of all potential tax effects. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. Unless
otherwise specifically noted, this summary applies only to those persons who are
the initial holders of Notes, who acquired the Notes for cash and who hold Notes
as capital assets ("Holders") and does not address the tax consequences to
taxpayers who are subject to special rules (such as financial institutions,
tax-exempt organizations, insurance companies, S corporations, regulated
investment companies, real estate investment trusts, broker-dealers, taxpayers
subject to the alternative minimum tax, persons that will hold Notes as part of
a position in a "straddle" or as part of a "hedging" or "conversion"
transaction, foreign corporations, foreign partnerships, foreign trusts, foreign
estates and persons who are not citizens or residents of the United States) or
aspects of federal income taxation that may be relevant to a prospective
investor based upon such investor's particular tax situation. Accordingly,
Holders of Notes should consult their own tax advisors with respect to the
particular consequences to them of the purchase, ownership and disposition of
the Notes, including the applicability of any state, local or foreign tax laws
to which they may be subject, as well as with respect to the possible effects of
changes in federal and other tax laws.
The following discussion is based on the position that, for federal income tax
purposes, Holdings will be deemed to be the sole issuer of the Notes, insofar as
Holdings Capital will have nominal assets and no business operations.
Effect of Exchange of Old Notes for Exchange Notes
The Issuers believe that the exchange of Old Notes for Exchange Notes pursuant
to the Exchange Offer should not be treated as an "exchange" for federal income
tax purposes because the Exchange Notes are not considered to differ materially
in kind or extent from the Old Notes. Rather, the Exchange Notes received by a
holder are treated as a continuation of the Old Notes in the hands of such
holder. As a result, there were no federal income tax consequences to holders
exchanging Old Notes for Exchange Notes pursuant to the Exchange Offer.
Original Issue Discount; Special Interest
Because the Notes were issued at a discount from their "stated redemption price
at maturity," the Notes will have original issue discount ("OID") for federal
income tax purposes. For federal income tax purposes, OID on a Note is the
excess of the stated redemption price at maturity of the Note over its "issue
price." The issue price of the Notes was the first price at which a substantial
amount of the Notes was sold to the public (excluding sales to bond houses,
brokers, or similar persons or organizations acting in the capacity of
underwriters or wholesalers). For purposes of this discussion, it is assumed
that all initial Holders purchased their Notes at the issue price. The stated
redemption price at maturity of a Note is the sum of all payments to be made on
such Note, including all stated interest payments, other than payments of
"qualified stated interest." Qualified stated interest is stated interest that
is unconditionally payable at least annually at a single fixed rate that
appropriately takes into account the length of the interval between payments.
Because there is no required payment of interest on the Notes until March 15,
2002, none of the interest payments on the Notes, under the stated payment
schedule, will constitute qualified stated interest. It is anticipated that the
stated redemption price at maturity of the Notes will exceed their issue price
by more than a de minimis amount. Therefore, each Note will bear OID
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in an amount equal to the excess of (i) the sum of its principal amount and all
stated interest payments over (ii) its issue price.
A Holder will be required to include OID in income periodically over the term of
a Note before receipt of the cash or other payment attributable to such income,
regardless of the Holder's method of tax accounting. The amount of OID required
to be included in a Holder's gross income for any taxable year is the sum of the
"daily portions" of OID with respect to the Note for each day during the taxable
year or portion of a taxable year during which such Holder holds the Note. The
daily portion is determined by allocating to each day of any "accrual period"
within a taxable year a pro rata portion of an amount equal to the excess of (i)
the "adjusted issue price" of the Note at the beginning of the accrual period
multiplied by the "yield to maturity" of the Note, over (ii) the sum of the
amounts payable as interest on such debt instrument during such accrual period.
For purposes of computing OID, the Company will use six-month accrual periods
that end on the days in the calendar year corresponding to the maturity date of
the Notes and the date six months prior to such maturity date, with the
exception of an initial short accrual period. The adjusted issue price of a Note
at the beginning of any accrual period is the issue price of the Note increased
by the amount of OID previously includible in the gross income of the Holder,
and decreased by any payments (excluding Special Interest) previously made on
the Note. The yield to maturity is the discount rate that, when used in
computing the present value of all payments of principal and interest to be made
on the Note, produces an amount equal to the issue price of the Note. The
Issuers are obligated to pay additional interest ("Special Interest") to the
Holder under certain circumstances described above. Any such payments should be
treated for tax purposes as interest, taxable to Holders as such payments become
fixed and payable. No amount of Special Interest is being included in computing
the yield to maturity of the Notes because it is currently believed that the
Issuers will take all steps necessary to avoid incurring the obligation to pay
Special Interest. A Holder's tax basis in a Note will be increased by the amount
of any OID includible in the Holder's income under the rules discussed above and
decreased by the amount of any payment (including payments of stated interest
but excluding payments of Special Interest) with respect to the Note.
In the event the Issuers make the Cash Interest Election, the payments of
interest made pursuant to the Cash Interest Election should be treated first, as
payments of accrued OID, and second, as payments of principal. The IRS may take
the position, however, that the interest paid pursuant to the Cash Interest
Election should be treated as a "pro rata prepayment" of a portion of the Note.
A pro rata prepayment would be treated as a payment in retirement of a portion
of the Note, which may result in gain or loss to the Holder, as described in the
section entitled "Sale, Exchange, or Redemption of Senior Discount Notes."
Acquisition or Bond Premium and Market Discount
A Holder who purchases a Note subsequent to its original issuance for an amount
that is greater than its adjusted issue price as of the purchase date will be
considered to have purchased such Note at an "acquisition premium." The amount
of OID that such Holder must include in its gross income with respect to such
Note for any taxable year is generally reduced by the portion of such
acquisition premium properly allocable to such year. Alternatively, such Holder
may make an election, applicable to all Notes held by such holder, to amortize
such premium, using a constant yield method, over the remaining term of the Note
(or, if a smaller amortization allowance would result, by computing such
allowance with reference to the amount payable on an earlier call date, and by
amortizing such allowance over the shorter period to such call date).
A U.S. Holder who purchases a Note at a cost in excess of the total amounts
payable under the Note after the date of purchase will be considered to have
purchased the Note at a premium, and does not include any OID in gross income.
If a Holder purchases, subsequent to its original issuance, a Note for an amount
that is less than its "revised issue price" as of the purchase date, the amount
of the difference generally will be treated as "market discount," unless such
difference is less than a specified de minimis amount. The Code provides that
the revised issue
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price of a Note equals its issue price plus the amount of OID includable in the
income of all Holders for periods prior to the purchase date (disregarding any
deduction for acquisition premium) reduced by the amount of all prior cash
payments on the Note. Subject to a de minimis exception, a Holder will be
required to treat any gain recognized on the sale, exchange, redemption,
retirement or other disposition of the Note as ordinary income to the extent of
the accrued market discount that has not previously been included in income. In
addition, the Holder may be required to defer, until the maturity date of the
Note or its earlier disposition in a taxable transaction, the deduction of all
or a portion of the interest expense on any indebtedness incurred or continued
to purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period from
the date of acquisition to the maturity date of the Note, unless the Holder
elects to accrue market discount on a constant interest method. A Holder of a
Note may elect to include market discount in income currently as it accrues
(under either the ratable or constant interest method). This election to include
currently, once made, applies to all market discount obligations acquired in or
after the first taxable year to which the election applies and may not be
revoked without the consent of the IRS. If the Holder of Notes makes such an
election, the foregoing rules with respect to the recognition of ordinary income
on sales and other dispositions of such instruments, and with respect to the
deferral of interest deductions on debt incurred or maintained to purchase or
carry such debt instruments, would not apply.
Effect of Mandatory and Optional Redemption on OID
The Issuers may redeem the Notes, in whole or in part, at any time on or after
September 15, 2001, at redemption prices specified elsewhere herein plus accrued
interest to the date of redemption. The Treasury Regulations contain rules for
determining the "maturity date" and the stated redemption price at maturity of
an instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. Under the OID rules, solely for purposes of the accrual of
OID, it is assumed that the issuer will exercise any option to redeem a debt
instrument if such exercise will lower the yield-to-maturity of the debt
instrument. The Issuers believe that it would not be presumed to exercise their
right to redeem the Notes prior to their stated maturity under these rules.
In the event of certain Public Equity Offerings or Strategic Equity Investments
(as defined in the Indenture) prior to September 15, 2000, the Issuers at their
option may redeem up to 35% of the aggregate principal amount at maturity of the
Notes then outstanding at redemption prices specified elsewhere herein; provided
that at least 65% in aggregate principal amount at maturity of the Notes
originally issued remains outstanding immediately after such redemption. See
"Description of the Notes--Optional Redemption." The Treasury Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date upon the occurrence of one or more contingencies. Under such
Treasury Regulations, if the timing and amounts of the payments that comprise
each payment schedule are known as of the issue date, the "maturity date" and
stated redemption price at maturity of such an instrument are determined by
assuming that payments will be made according to the instrument's stated payment
schedule, unless based upon all the facts and circumstances as of the issue
date, it is more likely than not that the instrument's stated payment schedule
will not occur. The Issuers believe that under these regulations, the "maturity
date" and stated redemption price at maturity of the Notes would be determined
on the basis of the stated maturity and stated payment schedule, because such
stated maturity and stated payment schedule are more likely than not to occur
based on the facts and circumstances known as of the issue date.
If, notwithstanding the foregoing, it is presumed that the Issuers will exercise
their option to redeem, then the maturity date of the Notes for the purpose of
calculating yield to maturity would be the exercise date of such optional
redemption right and the stated redemption price at maturity for each Note would
equal the amount payable upon such redemption. If, subsequently, the optional
redemption right is not exercised, then, for purposes of the OID rules, the
Issuers would be treated as having issued on the presumed exercise date of the
optional redemption right a new debt instrument in exchange for the existing
instrument. The new debt
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instrument deemed issued would have an issue price equal to the call price. As a
result, another OID computation would have to be made with respect to the
constructively issued new debt instrument.
In the event of a Change of Control, as defined in the Indenture, the Issuers
will be required to offer to redeem all of the Notes at redemption prices
specified elsewhere herein. See "Description of the Notes--Change of Control."
Such redemption rights should not affect, and will be treated by the Issuers as
not affecting, the determination of the yield or maturity of the Notes. Holders
should consult their own tax advisors regarding the treatment of payments upon
such a redemption.
Sale, Exchange or Redemption of Senior Discount Notes
Generally, a sale, exchange or redemption of Notes will result in taxable gain
or loss equal to the difference between the amount of cash or other property
received and the Holder's adjusted tax basis in the Note. A Holder's adjusted
tax basis for determining gain or loss on the sale or other disposition of a
Note will initially equal the cost of the Note to such Holder and will be
increased by any amounts included in income as OID, and decreased by the amount
of any cash payments received by such Holder (excluding Special Interest)
regardless of whether such payments are denominated as principal or interest.
Gain or loss upon a sale, exchange, or redemption of a Note will be capital gain
or loss if the Note is held as a capital asset.
An individual will be taxed on his or her net capital gain at a maximum rate of
(i) 28%, for property held for 18 months or less but more than one year, (ii)
20%, for property held for more than 18 months and (iii) 18%, for property (X)
acquired after December 31, 2000 and (Y) held for more than five years. Special
rules (and generally lower maximum rates) apply for individuals in lower tax
brackets.
Neither an exchange of the Notes for Exchange Notes of the Issuers with terms
identical to those of the Notes nor the filing of a registration statement with
respect to the resale of the Notes should be a taxable event to the Holders of
the Notes, and Holders should not recognize any taxable gain or loss or any
interest income as a result of such an exchange or such a filing.
Election to Treat All Interest as OID
A Holder of a Note may elect, subject to certain limitations, to include all
interest that accrues on the Note in gross income on a constant-yield basis. For
purposes of this election, interest includes stated interest, OID, market
discount, de minimis market discount and unstated interest, as adjusted by any
amortizable bond premium or acquisition premium.
In applying the constant-yield method to a Note with respect to which this
election has been made, the issue price of the Note will equal the Holder's
basis in the Note immediately after its acquisition, the issue date of the Note
will be the date of its acquisition by the Holder, and no payments on the Notes
will be treated as payments of qualified stated interest. The election will
generally apply only to the Note with respect to which it is made and may not be
revoked without consent of the Internal Revenue Service.
If the election to apply the constant-yield method to all interest on a Note is
made with respect to a Note on which there is market discount, the electing
Holder will be treated as having made the election described above under
Acquisition and Market Discount to include market discount in income currently
over the life of all debt instruments held or thereafter acquired by such
Holder.
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Foreign Holders
The following is a general discussion of certain United States federal income
tax consequences of the ownership and sale or other disposition of the Notes by
a Holder that, for United States federal income tax purposes, is not a "United
States person" (a "Foreign Person"). For purposes of this discussion, a "United
States person" means a citizen or resident (as determined for United States
federal income tax purposes) of the United States; a corporation, partnership or
other entity created or organized in the United States or under the laws of the
United States or of any political subdivision thereof; an estate the income of
which is includible in gross income for U.S. federal income tax purposes,
regardless of its source; or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. Resident alien individuals will be subject to United
States federal income tax with respect to the Notes as if they were United
States citizens.
If the income or gain on the Notes is "effectively connected with the conduct of
a trade or business within the United States" by the Foreign Person holding the
Note, such income or gain will be subject to tax essentially in the same manner
as if the Notes were held by a United States person, as discussed above, and in
the case of a Foreign Person that is a foreign corporation, may also be subject
to the branch profits tax.
If the income on the Notes is not "effectively connected," then under the
"portfolio interest" exception to the general rules for the withholding of tax
on interest and original issue discount paid to a Foreign Person, a Foreign
Person will not be subject to United States tax (or to withholding) on interest
or OID on a Note, provided that (i) the Foreign Person does not actually or
constructively own 10% or more of a capital or profits interest in Holdings
within the meaning of Section 871(h)(3) of the Code, and (ii) the Issuers, their
paying agent or the person who would otherwise be required to withhold tax
receives either (a) a statement (an "Owner's Statement") on the Internal Revenue
Service's Form W-8 signed under penalties of perjury by the beneficial owner of
the Note in which the owner certifies that the owner is not a United States
person and which provides the owner's name and address, or (B) a statement
signed under penalties of perjury by a financial institution holding the Note on
behalf of the beneficial owners, together with a copy of each beneficial owner's
Owner's Statement. Regulations proposed in April 1996, but which have not yet
gone into effect, would retain these procedures for certifying that a Holder is
a Foreign Person and would add several alternative certification procedures. A
Foreign Person who does not qualify for the "portfolio interest" exception would
be subject to United States withholding tax at a flat rate of 30% (or a lower
applicable treaty rate upon delivery of requisite certification of eligibility)
on interest payments and payments (including proceeds from a sale, exchange or
retirement) attributable to OID (and Special Interest) on the Notes.
If the gain on the Notes is not "effectively connected" with the conduct of a
United States trade or business, then gain recognized by a Foreign Person upon
the redemption, sale or exchange of a Note (including any gain representing
accrued market discount) will not be subject to United States tax unless the
Foreign Person is an individual present in the United States for 183 days or
more during the taxable year in which the Note is redeemed, sold or exchanged,
and certain other requirements are met, in which case the Foreign Person will be
subject to United States tax at a flat rate of 30% (unless exempt by applicable
treaty upon delivery of requisite certification of eligibility). Foreign Persons
who are individuals may also be subject to tax pursuant to provisions of United
States federal income tax law applicable to certain United States expatriates.
Backup Withholding
A Holder may be subject, under certain circumstances, to backup withholding at a
31% rate with respect to payments received with respect to the Notes. This
withholding applies if the Holder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) is notified by the Internal Revenue Service that he or she
has failed to report properly payments of interest and dividends and the
Internal Revenue Service has notified the Issuers that he or she is subject to
backup withholding, or (iv) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN
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provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from a payment to a Holder under the
backup withholding rules is allowable as a credit against such Holder's U.S.
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service. Certain Holders (including, among
others, corporations and foreign individuals who comply with certain
certification requirements described above under "Foreign Holders") are not
subject to backup withholding. Holders should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
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Plan of Distribution
This Prospectus is to be used by J.P. Morgan Securities Inc. and First Union
Capital Markets Corp. in connection with offers and sales of the Exchange Notes
in market-making transactions in the over-the-counter market at negotiated
prices related to prevailing market prices at the time of sale. J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. may act as principals or
agents in such transactions and have no obligation to make a market in the
Exchange Notes and may discontinue their market-making activities at any time
without notice, at their sole discretion. There is currently no trading market
for the Exchange Notes. No assurances can be given as to the development or
liquidity of any trading market for the Exchange Notes.
The Issuers have agreed to indemnify jointly and severally J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that J.P. Morgan Securities Inc. and First Union Capital Markets Corp.
may be required to make in respect thereof.
J.P. Morgan Investment Corporation, an affiliate of J.P. Morgan Securities Inc.,
beneficially owns approximately 22.8% of the partnership interests of the
Company. Subject to certain conditions, J.P. Morgan Investment Corporation is
entitled to designate one member of the Advisory Committee of FVP. See "Certain
Relationships and Related Transactions," "Management--The Advisory Committee,"
"Principal Security Holders" and "The Partnership Agreements." Its current
designee is John W. Watkins. Mr. Watkins is Manager and a director of each of
J.P. Morgan Investment Corporation and J.P. Morgan Capital Corporation, which
are affiliates of J.P. Morgan Securities Inc.
J.P. Morgan Securities Inc. or its affiliates have provided investment banking
and other financial services to the Company in the past and may do so in the
future. In addition, an affiliate of J.P. Morgan Securities Inc. serves as a
lender and an agent under the Amended Credit Facility and has received customary
fees for acting in such capacities. See "Certain Relationships and Related
Transactions."
First Union Capital Partners, Inc., an affiliate of First Union Capital Markets
Corp., beneficially owns approximately 15.1% of the partnership interests of the
Company. Subject to certain conditions, First Union Capital Partners, Inc. is
entitled to designate one member of the Advisory Committee of FVP. See "Certain
Relationships and Related Transactions," "Management--The Advisory Committee,"
"Principal Security Holders" and "The Partnership Agreements." Its current
designee is L. Watts Hamrick, III. Mr. Hamrick is Senior Vice President of First
Union Capital Corporation and First Union Capital Partners, Inc., each an
affiliate of First Union Capital Markets Corp.
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Legal Matters
The validity of the Exchange Notes was passed upon for the Issuers by Dow,
Lohnes & Albertson, PLLC, Washington, D.C. Certain legal matters in connection
with the Exchange Notes offered hereby were passed upon for J.P. Morgan
Securities Inc. and First Union Capital Markets Corp. by Cahill Gordon & Reindel
(a partnership including a professional corporation), New York, New York.
Experts
The financial statements of FrontierVision Holdings, L.P., as of December 31,
1997 and 1996 and for the years ended December 31, 1997 and 1996 and the period
from April 17, 1995 (inception) through December 31, 1995, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The balance sheet of FrontierVision Holdings Capital Corporation as of December
31, 1997 has been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated balance sheets of FrontierVision Partners, L.P. as of December
31, 1997 and 1996 have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements for United Video Cablevision, Inc. included elsewhere
in this Prospectus have been audited by Piaker & Lyons, P.C., independent public
accountants, as indicated in their report with respect thereto. The financial
statements referred to above are included in the Prospectus in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements for Ashland and Defiance Clusters and Central Ohio
Clusters included elsewhere in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements for C4 Media Cable Southeast, Limited
Partnership included elsewhere in this Prospectus have been audited by Williams,
Rogers, Lewis & Co., P.C., independent public accountants, as indicated in their
report with respect thereto. The consolidated financial statements referred to
above are included in the Prospectus in reliance upon the authority of said firm
as experts in giving said reports.
The financial statements of Triax Southeast Associates, L.P. included elsewhere
in this Prospectus have been audited by Arthur Andersen LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of American Cable Entertainment of Kentucky-Indiana,
Inc. included elsewhere in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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Glossary
The following is a description of certain terms used in this Prospectus.
ACQUISITION CASH FLOW--Forecasted net income of an acquired system, for a period
believed to be appropriate based on the facts and circumstances of a specific
acquisition, calculated as of the date of acquisition of such system, before
interest, taxes, depreciation, amortization and corporate administrative
expenses. The Company believes that Acquisition Cash Flow is a measure commonly
used in the cable television industry to analyze and compare the purchase price
of cable television systems. However, Acquisition Cash Flow is not intended to
be an indicator of actual operating performance and is not determined in
accordance with generally accepted accounting principles.
A LA CARTE--The purchase of programming services on a per-channel or per-program
basis.
ADDRESSABILITY--"Addressable" technology permits the cable operator to activate
remotely the cable television services to be delivered to subscribers who are
equipped with addressable converters. With addressable technology, a cable
operator can add to or reduce services provided to a subscriber from the headend
site without dispatching a service technician to the subscriber's home.
BASIC PENETRATION--Basic subscribers as a percentage of the total number of
homes passed in the system.
BASIC SERVICE--A package of over-the-air broadcast stations, local access
channels and certain satellite-delivered cable television services (other than
premium services).
BASIC SUBSCRIBER--A subscriber to a cable or other television distribution
system who receives the basic level of cable television service and who is
usually charged a flat monthly rate for a number of channels. A home with one or
more television sets connected to a cable system is counted as one basic
subscriber.
CABLE PLANT--A network of coaxial and/or fiber optic cables that transmit
multiple channels carrying video-programming, sound and data between a central
facility and an individual customer's television set. Networks may allow one-way
(from a headend to a residence and/or business) or two-way (from a headend to a
residence and/or business with a data return path to the headend) transmission.
CHANNEL CAPACITY--The number of video programming channels that can be carried
over a communications system.
CLUSTERING--A general term used to describe the strategy of operating cable
television systems in a specific geographic region, thus allowing for the
achievement of economies of scale and operating efficiencies in such areas as
system management, marketing and technical functions.
COAXIAL PLANT--Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
copper wire, but less than is possible with optical fiber.
COMPETITIVE ACCESS PROVIDER (CAP)--A company that provides its customers with an
alternative to the local telephone company for local transport of private line,
special access services and switched access services. CAPs are also referred to
in the industry as alternative access vendors, alternative local
telecommunications service providers (ALTS) and metropolitan area network
providers (MANs).
COST-OF-SERVICE--A general term used to refer to the regulation of prices
charged to a customer. Existing prices are set and price increases are regulated
by allowing a company to earn a reasonable rate of return, as determined by the
regulatory authority.
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DENSITY--A general term used to describe the number of homes passed per mile of
cable plant.
DIGITAL COMPRESSION--The conversion of the standard analog video signal into
digital signal, and the compression of that signal so as to facilitate multiple
channel transmission through a single channel's bandwidth.
DIGITAL PROGRAMMING SYSTEM--A programming distribution system under which
multiple channels of programming are digitally transmitted via satellite to a
cable television system's headend and then retransmitted, using the cable
system's existing distribution platform, to subscribers equipped with special
digital converters. One such example is the Headend-in-the-Sky digital
programming system ("HITS"). The use of the HITS system enables a cable operator
to transmit from 6 to 14 digital channels using the same bandwidth as used by a
single analog channel and, thus, has the potential to dramatically expand a
system's channel capacity.
DIRECT BROADCAST SATELLITE (DBS)--A service by which packages of
satellite-delivered television programming are transmitted directly into
individual homes, each serviced by a single satellite dish.
EXPANDED BASIC SERVICE--A package of satellite-delivered cable programming
services available only for additional subscription over and above the basic
level of television service.
FCC--Federal Communications Commission.
FIBER OPTICS--Technology that involves sending laser light pulses across glass
strands to transmit digital information; fiber is virtually immune to electrical
interference and most environmental factors that affect copper wiring and
satellite transmissions. Use of fiber optic technology reduces noise on the
cable system, improves signal quality and increases system channel capacity and
reliability.
FIBER OPTIC BACKBONE CABLE--The principal fiber optic trunk lines for a cable
system which is using a hybrid fiber-coaxial architecture to deliver signals to
customers.
FIBER OPTIC TRUNK LINES--Cables made of glass fibers through which signals are
transmitted as pulses of light to the distribution portion of the cable
television system which in turn goes to the customer's home. Capacity for a very
large number of channels can be more easily provided.
FIBER-TO-THE-FEEDEr--Network topology/architecture using a combination of fiber
optic cable and coaxial cable transmission lines to deliver signals to
customers. Initially signals are transmitted from the headend on fiber optic
trunk lines into neighborhood nodes (an individual point of origination and
termination or intersection on the network, usually where electronics are
housed) and then from the nodes to the end user on a combination of coaxial
cable distribution/feeder and drop lines. The coaxial feeder and drop lines
typically represent the operator's "last mile" of plant to the end user.
HEADEND--A collection of hardware, typically including satellite receivers,
modulators, amplifiers and video cassette playback machines, within which
signals are processed and then combined for distribution within the cable
network.
HOMES PASSED--Homes that can be connected to a cable distribution system without
further extension of the distribution network.
HFC--Hybrid fiber optic/coaxial cable design, used in a cable television
system's distribution plant.
INTERNET--The large, worldwide network of thousands of smaller, interconnected
computer networks. Originally developed for use by the military and for academic
research purposes, the Internet is now accessible by millions of consumers
through online services.
LAN--LOCAL AREA NETWORK--A communications network that serves users within a
confined geographical area, consisting of servers, workstations, a network
operating system and a communications link.
103
<PAGE>
MICROWAVE LINKS--The transmission of voice, video or data using microwave radio
frequencies, generally above 1 GHz, from one location to another.
MMDS--Multichannel Multipoint Distribution Service. A one-way radio transmission
of programming over microwave frequencies from a fixed station transmitting to
multiple receiving facilities located at fixed points.
MSO--A term used to describe cable television companies that are "multiple
system operators."
NEW PRODUCT TIERS--A general term used to describe unregulated cable television
services.
OVER-THE-AIR BROADCAST STATIONS--A general term used to describe signals
transmitted by local television broadcast stations, including network affiliates
or independent television stations, that can be received directly through the
air by the use of a standard rooftop receiving antenna.
PAY-PER-VIEW--Payment made for individual movies, programs or events as opposed
to a monthly subscription for a whole channel or group of channels.
PCS--Personal Communications Services, or PCS, is the name given to a new
generation of cellular-like telecommunications services which are expected to
provide customers new choices in wireless mobile telecommunications using
digital technology for voice and data service compared to traditional analog
technology.
PREMIUM PENETRATION--Premium service units as a percentage of the total number
of basic service subscribers. A customer may purchase more than one premium
service, each of which is counted as a separate premium service unit. This ratio
may be greater than 100% if the average customer subscribes to more than one
premium service unit.
PREMIUM SERVICE--An individual cable programming service available only for
additional subscription over and above the basic or expanded basic levels of
cable television service.
PREMIUM UNITS--The number of subscriptions to premium services which are paid
for on an individual basis.
REBUILD--The replacement or upgrade of an existing cable system, usually
undertaken to improve either its technological performance or to expand the
system's channel or bandwidth capacity in order to provide more services.
SMATV--Satellite Master Antenna Television System. A video programming delivery
system to multiple dwelling units utilizing satellite transmissions.
TELEPHONY--The provision of telephone service.
TIERS--Varying levels of cable services consisting of differing combinations of
several over-the-air broadcast and satellite-delivered cable television
programming services.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 and for the
period from inception (April 17, 1995) through December 31, 1995 F-5
Consolidated Statements of Partners' Capital for the years ended December 31, 1997 and 1996 and for
the period from inception (April 17, 1995) through December 31, 1995 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and for the
period from inception (April 17, 1995) through December 31, 1995 F-7
Notes to Consolidated Financial Statements F-8
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
Independent Auditors' Report F-18
Balance Sheet as of December 31, 1997 F-19
Note to the Balance Sheet F-20
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
Independent Auditors' Report F-21
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-22
Notes to Consolidated Balance Sheets F-23
UNITED VIDEO CABLEVISION, INC. (SELECTED ASSETS ACQUIRED BY FVOP)
Independent Auditors' Report F-33
Divisional Balance Sheets as of November 8, 1995 and December 31, 1994 F-34
Statements of Divisional Operations for the period from January 1, 1995 through November 8, 1995
and for the years ended December 31, 1994 and 1993 F-35
Statements of Divisional Equity for the period from January 1, 1995 through November 8, 1995 and
for the years ended December 31, 1994 and 1993 F-36
Statements of Divisional Cash Flows for the period from January 1, 1995 through November 8, 1995
and for the years ended December 31, 1994 and 1993 F-37
Notes to Divisional Financial Statements
F-38
ASHLAND AND DEFIANCE CLUSTERS (SELECTED ASSETS ACQUIRED FROM COX COMMUNICATIONS, INC. BY FVOP)
Independent Auditors' Report F-41
Combined Statements of Net Assets as of December 31, 1995 and 1994 F-42
Combined Statements of Operations for the eleven-month period ended December 31, 1995, for the
one-month period ended January 31, 1995 and for the years ended December 31, 1994 and 1993 F-43
Combined Statements of Changes in Net Assets for the eleven-month period ended December 31, 1995,
for the one-month period ended January 31, 1995 and for the years ended December 31, 1994 and 1993 F-44
Combined Statements of Cash Flows for the eleven-month period ended December 31, 1995, for the
one-month period ended January 31, 1995 and for the years ended December 31, 1994 and 1993 F-45
Notes to Combined Financial Statements F-46
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Page
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
Independent Auditors' Report F-54
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-55
Consolidated Statements of Loss for the years ended December 31, 1995 and 1994 F-56
Consolidated Statements of Partners' Deficit for the years ended December 31, 1995 and 1994 F-57
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-58
Notes to Consolidated Financial Statements F-59
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
Independent Auditors' Report F-64
Balance Sheets as of September 30, 1996(unaudited) and December 31, 1995 and 1994 F-65
Statements of Operations for the nine-month period ended September 30, 1996 (unaudited) and for
the years ended December 31, 1995, 1994 and 1993 F-66
Statements of Shareholders' Deficiency for the nine-month period ended September 30, 1996
(unaudited) and for the years ended December 31, 1995, 1994 and 1993 F-67
Statements of Cash Flows for the nine-month period ended September 30, 1996 (unaudited) and for
the years ended December 31, 1995, 1994 and 1993 F-68
Notes to Financial Statements F-69
TRIAX SOUTHEAST ASSOCIATES, L.P.
Report of Independent Public Accountants F-77
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 and 1994 F-78
Statements of Operations for the nine-month period ended September 30, 1996 (unaudited) and for
the years ended December 31, 1995, 1994 and 1993 F-79
Statements of Partners' Capital for the nine-month period ended September 30, 1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993 F-80
Statements of Cash Flows for the nine-month period ended September 30, 1996 (unaudited) and for
the years ended December 31, 1995, 1994 and 1993 F-81
Notes to Financial Statements F-82
CENTRAL OHIO CLUSTER (SELECTED ASSETS ACQUIRED FROM COX COMMUNICATIONS, INC. BY FVOP)
Independent Auditor's Report F-89
Combined Statements of Net Assets as of September 30, 1997 (unaudited) and December 31, 1996 F-90
Combined Statements of Income for the nine-month periods ended September 30, 1997 (unaudited)
and September 30, 1996 (unaudited) and for the year ended December 31, 1996 F-91
Combined Statements of Changes in Net Assets for the nine-month period ended September 30, 1997
(unaudited) and for the year ended December 31, 1996 F-92
Combined Statements of Cash Flows for the nine-month periods ended September 30, 1997
(unaudited) and September 30, 1996 (unaudited) and for the year ended December 31, 1996 F-93
Notes to Combined Financial Statements F-94
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of FrontierVision Holdings, L.P.:
We have audited the accompanying consolidated balance sheets of FrontierVision
Holdings, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and cash flows
for the years ended December 31, 1997 and 1996 and the period from inception
(April 17, 1995 -- see Note 1) through December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FrontierVision
Holdings, L. P. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 and the period from inception (April 17, 1995 - see Note 1)
through December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 16, 1998
F-3
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
-------------------------------------
December 31, December 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,728 $ 3,639
Accounts receivable, net of allowance for doubtful accounts
of $640 and $767 8,071 4,544
Other receivables -- 846
Prepaid expenses and other 2,642 2,231
Investment in cable television systems, net:
Property and equipment 247,724 199,461
Franchise cost and other intangible assets 637,725 324,905
-------- --------
Total investment in cable television systems, net 885,449 524,366
-------- --------
Deferred financing costs, net 24,242 13,042
Earnest money deposits 2,143 500
-------- --------
Total assets $927,275 $549,168
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,770 $ 1,994
Accrued liabilities 15,126 10,825
Subscriber prepayments and deposits 1,828 1,862
Accrued interest payable 5,064 6,290
Debt 787,047 398,194
-------- --------
Total liabilities 811,835 419,165
-------- --------
Partners' capital:
FrontierVision Partners, L.P. 115,325 129,874
FrontierVision Holdings, LLC 115 129
-------- --------
Total partners' capital 115,440 130,003
Commitments
-------- --------
Total liabilities and partners' capital $927,275 $549,168
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS
In Thousands
<TABLE>
-------------------------------------------------------------------
For the Period
From Inception
For the Year Ended For the Year Ended (April 17, 1995 --
December 31, December 31, see Note 1) through
1997 1996 December 31, 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 145,126 $ 76,464 $ 4,369
Expenses:
Operating expenses 74,314 39,181 2,311
Corporate administrative expenses 4,418 2,930 127
Depreciation and amortization 64,398 35,336 2,308
Pre-acquisition expenses -- -- 940
--------- --------- ---------
Total expenses 143,130 77,447 5,686
--------- --------- ---------
Operating income/(loss) 1,996 (983) (1,317)
Interest expense, net (48,005) (22,422) (1,386)
Other expense (1,161) (396) --
--------- --------- ---------
Loss before extraordinary item (47,170) (23,801) (2,703)
Extraordinary item - Loss on early
retirement of debt (5,046) -- --
--------- --------- ---------
Net loss $ (52,216) $ (23,801) $ (2,703)
========= ========= =========
Net loss allocated to:
FrontierVision Partners, L.P.
(General Partner) $ (52,164) $ (23,776) $ (2,700)
FrontierVision Holdings, LLC
(Limited Partner) (52) (25) (3)
--------- --------- ---------
$ (52,216) $ (23,801) $ (2,703)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
-------------------------------------------------------------
FrontierVision FrontierVision
Partners, L.P. Holdings, LLC
(General Partner) (Limited Partner) Total
--------- --------- ---------
Balance, at inception
<S> <C> <C> <C>
(April 17, 1995 -- see Note 1) $ -- $ -- $ --
Capital contributions 49,061 49 49,110
Net loss (2,700) (3) (2,703)
--------- --------- ---------
Balance, December 31, 1995 46,361 46 46,407
Capital contributions 107,289 108 107,397
Net loss (23,776) (25) (23,801)
--------- --------- ---------
Balance, December 31, 1996 129,874 129 130,003
Capital contributions 37,615 38 37,653
Net loss (52,164) (52) (52,216)
--------- --------- ---------
Balance, December 31, 1997 $ 115,325 $ 115 $ 115,440
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
In Thousands
<TABLE>
-----------------------------------------------------
For the Period
For the Year For the Year From Inception
Ended Ended (April 17, 1995 --
December 31, December 31, see Note 1) through
1997 1996 December 31, 1995
--------- --------- ---------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net loss $ (52,216) $ (23,801) $ (2,703)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Extraordinary item - Loss on early retirement of debt 5,046 -- --
Depreciation and amortization 64,398 35,336 2,308
Net loss on disposal of assets 1,104 388 --
Amortization of deferred debt issuance costs 1,825 999 69
Accretion of interest on indebtedness 5,768 924 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (582) (1,946) (261)
Receivable from seller 846 1,377 --
Prepaid expenses and other (106) (1,266) 75
Accounts payable and accrued liabilities 3,152 3,423 1,637
Subscriber prepayments and deposits (1,523) (2,393) 362
Accrued interest payable (1,226) 5,870 420
--------- --------- ---------
Total adjustments 78,702 42,712 4,610
--------- --------- ---------
Net cash flows from operating activities 26,486 18,911 1,907
--------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures (32,738) (9,304) (573)
Pending acquisition costs (146) -- --
Cash paid for franchise costs (406) (2,009) --
Earnest money deposits (2,143) (500) (9,502)
Proceeds from disposition of cable television systems -- 15,065 --
Cash paid in acquisitions of cable television systems (392,631) (421,467) (121,270)
--------- --------- ---------
Net cash flows from investing activities (428,064) (418,215) (131,345)
--------- --------- ---------
Cash Flows From Financing Activities:
Debt borrowings 523,000 137,700 85,900
Payments on debt borrowings (289,845) (33,600) --
Proceeds of issuance of Senior Subordinated Notes -- 200,000 --
Proceeds of issuance of Senior Discount Notes 150,000 --
Principal payments on capital lease obligations (70) (16) --
Increase in deferred financing fees (11,357) (3,771) (2,922)
Offering costs related to Senior Subordinated Notes (129) (7,417) --
Offering costs related to Senior Discount Notes (6,585) -- --
Partner capital contributions 37,653 107,397 49,110
--------- --------- ---------
Net cash flows from financing activities 402,667 400,293 132,088
--------- --------- ---------
Net Increase in Cash and Cash Equivalents 1,089 989 2,650
Cash and Cash Equivalents, at beginning of period 3,639 2,650 --
--------- --------- ---------
Cash and Cash Equivalents, end of period $ 4,728 $ 3,639 $ 2,650
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 42,226 $ 15,195 $ 957
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
F-23
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(1) THE COMPANY
Organization and Capitalization
FrontierVision Holdings, L.P. ("Holdings"), wholly-owned by FrontierVision
Partners, L.P., a Delaware limited partnership ("FVP"), is a Delaware limited
partnership formed on September 3, 1997 for the purpose of acting as co-issuer
with its wholly-owned subsidiary, FrontierVision Holdings Capital Corporation
("Holdings Capital"), of $237,650 aggregate principal amount at maturity of 11
7/8% Senior Discount Notes due 2007 (the "Discount Notes"). FVP contributed to
Holdings, both directly and indirectly, all of the outstanding partnership
interests of FrontierVision Operating Partners, L.P. ("FVOP") prior to the
issuance of the Discount Notes on September 19, 1997 (the "Formation
Transaction") and therefore, at that time, FVOP and its wholly-owned subsidiary,
FrontierVision Capital Corporation ("Capital"), became wholly-owned,
consolidated subsidiaries of Holdings. The Formation Transaction was accounted
for as if it were a pooling of interests. As used herein, the "Company" refers
to Holdings, Holdings Capital, FrontierVision Operating Partners, Inc. ("FVOP
Inc."), FVOP and Capital.
As of September 30, 1997, the Company owned and operated cable television
systems in three primary operating clusters - New England, Ohio and Kentucky -
with a fourth, smaller group of cable television systems in the Southeast.
The Company was initially capitalized in November 1995 with approximately $38
from its sole limited partner, FVOP Inc., a Delaware corporation, and
approximately $38,300 from at the time its sole general partner, FVP. During
the year ended December 31, 1997, the Company received additional capital
contributions of approximately $37,653 from its partners. These capital
contributions and a portion of the proceeds from the Discount Notes was used by
FVOP to repay certain bank indebtedness of $65,500 with the remainder placed in
escrow to finance pending acquisitions. Prior to the Formation Transaction, FVP
allocated certain administrative expenses to the Company, which are included as
capital contributions from its partners. Such expense allocations were
approximately $231 and $735 for the years ended December 31, 1997 and 1996.
Allocation of Profits, Losses and Distributions
Generally, Holdings' Partnership agreement provides that profits, losses and
distributions will be allocated to the general partner and the limited partner
pro rata based on capital contributions.
Pre-Acquisition Expenses
The Company had no substantive operations of its own until the date of the
acquisitions described in Note 4. However, FVP, which was formed on April 17,
1995, incurred certain general and administrative costs deemed attributable to
the Company prior to the Company's legal formation. Such expenditures have been
reflected in the accompanying financial statements as pre-acquisition expenses
as if the Company had incurred those costs directly. All such amounts have been
reflected as capital contributions in the accompanying financial statements.
F-8
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and those
of its wholly-owned subsidiaries (Holdings Capital, FVOP Inc., FVOP and
Capital). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the financial statements, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost and include the following:
distribution facilities, support equipment and leasehold improvements.
Replacements, renewals and improvements are capitalized and costs for repairs
and maintenance are charged to expense when incurred. The Company capitalized
direct labor and overhead related to installation activities of approximately
$3,844 and $1,577 for the periods ended December 31, 1997 and 1996. Depreciation
is computed on a straight-line basis using an average estimated useful life of 8
years. At the time of ordinary retirements, sales or other dispositions of
property, a gain or loss is recognized.
Franchise Costs, Covenants not to Compete, Subscriber Lists and Goodwill
Franchise costs, covenants not to compete, subscriber lists and goodwill result
from the application of the purchase method of accounting to business
combinations. Such amounts are amortized on a straight-line basis over the
following periods: 15 years for franchise costs (which reflects the Company's
ability to renew existing franchise agreements), 5 years for covenants not to
compete, 7 years for subscriber lists and 15 years for goodwill.
The Company periodically reviews the carrying amount of its property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
Deferred Financing Costs
Deferred financing costs are being amortized using the straight line method over
the life of the loans. Accumulated amortization at December 31, 1997 and 1996 is
$1,246 and $1,068, respectively.
F-9
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Revenue is recognized in the period in which the related services are provided
to the subscribers.
Derivative Financial Instruments
The Company manages risk arising from fluctuations in interest rates by using
interest rate swap agreements, as required by its credit agreements. These
agreements are treated as off-balance sheet financial instruments. The interest
rate swap agreements are being accounted for as a hedge of the debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
Income Taxes
No provision has been made for federal, state or local income taxes related to
the Company because they are the responsibility of the individual partners. The
principal difference between results reported for financial reporting purposes
and for income tax purposes results from differences in depreciable lives and
amortization methods utilized for tangible and intangible assets.
Reclassification
Certain amounts have been reclassified for comparability.
(3) INVESTMENT IN CABLE TELEVISION SYSTEMS
The Company's investment in cable television systems is comprised of the
following:
<TABLE>
----------------- -- -----------------
December 31, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Property and equipment $ 297,229 $ 217,148
Less--accumulated depreciation (49,505) (17,687)
------------ -------------
Property and equipment, net 247,724 199,461
------------ -------------
Franchise costs 523,096 258,453
Covenants not to compete 14,983 14,934
Subscriber lists 106,270 41,777
Goodwill 44,702 28,845
------------ -------------
689,051 344,009
Less--accumulated amortization (51,326) (19,104)
------------ -------------
Franchise costs and other intangible assets, net 637,725 324,905
------------ -------------
Total investment in cable television systems, net $ 885,449 $ 524,366
============ =============
</TABLE>
F-10
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(4) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since FVOP's inception through
December 31, 1997. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition. Such allocations are subject to
adjustments as final appraisal information is received by the Company. Amounts
allocated to property, plant and equipment and to intangible assets will be
respectively depreciated and amortized, prospectively from the date of
acquisition based upon the Company's useful lives and amortization periods. The
following table lists the acquisitions and the purchase price for each.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Video Cablevision, Inc. Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $85,800
American Cable Entertainment of Kentucky-Indiana, Inc. ("ACE") Kentucky and Indiana October 9, 1996 $147,300
SRW, Inc.'s Penn/Ohio Cablevision, L.P. Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,800
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,800
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,600
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,700
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $203,700*
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
December 31, 1997.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
-----------------------------------------------------
1997 1996 1995
Acquisitions(a) Acquisitions(a) Acquisitions
--------- --------- ---------
<S> <C> <C> <C>
Property, plant and equipment $ 48,805 $ 169,240 $ 43,333
Franchise costs and other intangible assets 344,490 268,836 84,595
--------- --------- ---------
Subtotal 393,295 438,076 127,928
--------- --------- ---------
Net working capital (deficit) (164) (7,107) 542
Less - Earnest money deposits applied (500) (9,502) -
Less - Subordinated promissory note to seller - - (7,200)
--------- --------- ---------
Total cash paid for acquisitions $ 392,631 $ 421,467 $ 121,270
========= ========= =========
</TABLE>
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
F-11
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(4) ACQUISITIONS AND DISPOSITIONS (continued)
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 C4, Cox, Triax, ACE, Triax I,
Cablevision, TCI-VT/NH and Cox-Central Ohio acquisitions (the "Acquisitions")
had been consummated on January 1, 1996, are as follows:
<TABLE>
--------------------------------------------------
Year Ended December 31, 1997
--------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 145,126 $ 60,011 $ 205,137
Operating, selling, general and administrative expenses (78,732) (30,486) (109,218)
Depreciation and amortization (64,398) (23,960) (88,358)
--------- --------- ---------
Operating income 1,996 5,565 7,561
Interest and other expenses (54,212) (31,946) (86,158)
--------- --------- ---------
Net loss $ (52,216) $ (26,381) $ (78,597)
========= ========= =========
--------------------------------------------------
Year Ended December 31, 1996
--------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
--------- --------- ---------
Revenue $ 76,464 $ 110,309 $ 186,773
Operating, selling, general and administrative expenses (42,111) (60,990) (103,101)
Depreciation and amortization (35,336) (51,660) (86,996)
--------- --------- ---------
Operating loss (983) (2,341) (3,324)
Interest and other expenses (22,818) (52,182) (75,000)
--------- --------- ---------
Net loss $ (23,801) $ (54,523) $ (78,324)
========= ========= =========
</TABLE>
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregate basis.
As of December 31, 1997, the Company had advanced $30 and $113 to Bluegrass and
Front Row, respectively, in the form of letters of credit in connection with the
transfer of certain franchises in favor of the Company.
On December 12, 1997, the Company entered into an agreement with the
shareholders of New England Cable Television of Massachusetts, Inc. ("NECMA") to
acquire all of the outstanding stock of NECMA for a price of approximately
$43,600. NECMA is a Massachusetts S-Corporation which owns cable television
assets in Massachusetts. As of December 31, 1997, the Company had advanced
$2,000 as an earnest money deposit related to this transaction.
On December 19, 1997, the Company entered into an asset purchase agreement with
TCI Cablevision of Ohio, Inc. to acquire certain cable television assets in Ohio
for a cash purchase price of $10,000.
On January 15, 1998, the Company entered into an asset purchase agreement with
TVC-Sumpter Limited Partnership and North Oakland Cablevision Partners Limited
Partnership to acquire certain cable television assets in Michigan for a cash
purchase price of $14,200. This acquisition was consummated on March 6, 1998.
F-12
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(4) ACQUISITIONS AND DISPOSITIONS (continued)
On January 16, 1998, the Company entered into an asset purchase agreement with
Ohio Cablevision Network, Inc. to acquire certain cable television assets in
Ohio for a cash purchase price of $38,000.
Asset Exchange
On December 12, 1997, the Company entered into an asset exchange agreement with
Comcast Cablevision of the South to exchange certain cable television assets in
the Southeast region. This asset exchange was consummated on March 12, 1998.
Dispositions
The Company has completed two dispositions from its inception through December
1996.
On July 24, 1996, the Company sold certain cable television system assets
located primarily in Chatsworth, Georgia to an affiliate of Helicon Partners for
an aggregate sales price of approximately $7,900.
On September 30, 1996, the Company sold certain cable television system assets
located in Virginia to Shenandoah Cable Television Company, an affiliate of
Shenandoah Telephone Company, for an aggregate sales price of approximately
$7,100.
(5) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
December 31, December 31,
1997 1996
------------ ----------
Bank Credit Facility (a) --
<S> <C> <C>
Term loans, interest based on various floating libor rate options
(8.33% and 8.60% weighted average at December 31, 1997 and 1996,
respectively), payable monthly $ 432,000 $ 190,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
11 7/8% Senior Discount Notes due 2007 (c) 155,047 -
Subordinated promissory note to UVC at 11.5% interest, repaid in December 1997 - 8,124
Other - 70
------------ ----------
Total debt $ 787,047 $ 398,194
============ ==========
</TABLE>
(a) Bank Credit Facility.
As of December 31, 1996, the Company had entered into an amended credit
agreement (the "Senior Credit Facility") with a maximum availability of
$265.0 million of which $190.0 million was available in term loans and
$75.0 million was available as a revolving line of credit. The Company
had drawn $190.0 million in term loans as of December 31, 1996.
F-13
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(5) DEBT (continued)
On December 19, 1997, the Company entered into a Second Amended and
Restated Credit Agreement (the "Amended Credit Facility") increasing the
available senior debt by $535.0 million, for a total availability of
$800.0 million. The amount available under the Amended Credit Facility
includes two term loans of $250.0 million each ("Facility A Term Loan"
and "Facility B Term Loan") and a $300.0 million revolving credit
facility ("Revolving Credit Facility"). The Facility A Term Loan and the
Revolving Credit Facility both mature on September 30, 2005. The entire
outstanding principal amount of the Revolving Credit Facility is due on
September 30, 2005, with escalating principal payments due quarterly
beginning December 31, 1998 under the Facility A Term Loan. The Facility
B Term Loan matures March 31, 2006 with 95% of the principal being repaid
in the last two quarters of the term of the facility.
Under the terms of the Amended Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon a change of
control of the Company and the sale of any of its operating systems.
Further, beginning with the year ending December 31, 2001, the Company is
required to make prepayments equal to 50% of its excess cash flow, as
defined in the Amended Credit Facility. The Company also pays commitment
fees ranging from 1/2% - 3/8% per annum on the average unborrowed portion
of the total amount available under the Amended Credit Facility.
The Amended Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company. As of December 31, 1997, the Company was in compliance with the
financial covenants of the Amended Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
In order to convert certain of the interest payable at variable rates
under the Amended Credit Facility to interest at fixed rates, the Company
has entered into interest rate swap agreements for notional amounts
totaling $170,000, and maturing between November 15, 1999 and October 7,
2000. According to these agreements, the Company pays or receives the
difference between (1) an average fixed rate of 5.932% and (2) various
available floating rate options applied to the same $170,000 notional
amount every three months during the term of the interest rate swap
agreement. For the years ended December 31, 1997 and 1996, the Company
had recognized an increase in interest expense of approximately $312 and
$195, respectively, as a result of these interest rate swap agreements.
On October 3, 1997, in order to convert certain of the future interest
payable at various rates under future indebtedness, the Company entered
into a forward interest rate swap agreement, commencing October 15, 1998,
for a notional amount totaling $150,000, maturing on October 15, 2001.
According to this agreement, the Company will pay or receive the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every three months during the term of the interest rate swap agreement.
(b) Senior Subordinated Notes
On October 7, 1996, FVOP issued, pursuant to a public offering (the
"Offering"), $200,000 aggregate principal amount of the Senior
Subordinated Notes due 2006 (the "Notes"). Net proceeds from the Offering
of $192,500, after costs of approximately $7,500, were available to FVOP
on October 7, 1996.
F-14
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(5) DEBT (continued)
In connection with the anticipated issuance of the Notes in connection
with the Offering, 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, amounting to $1,390, are
recognized as a component of interest expense over the term of the Notes.
The Notes are unsecured subordinated obligations of 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.
The Subordinated Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers, asset
sales and changes in control of FVOP.
(c) Senior Discount Notes
On September 19, 1997, Holdings issued, pursuant to a private offering,
the Discount Notes. The Discount Notes were sold at approximately 63.1%
of the stated principal amount at maturity and provided net proceeds of
$144,750, after underwriting fees of approximately $5,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital (collectively, the "Issuers"), ranking pari passu in right of
payment to all existing and future unsecured indebtedness of the Issuers
and will mature on September 15, 2007. The discount on the Discount Notes
is being accreted using the interest method over four years until
September 15, 2001, the date at which cash interest begins to accrue.
Cash interest will accrue at a rate of 11 7/8% per annum and will be
payable each March 15 and September 15, commencing March 15, 2002.
The Discount Notes are redeemable at the option of the Issuers, in whole
or in part, at any time on or after September 15, 2001, at redemption
prices set forth in the Indenture for the Discount Notes (the "Discount
Notes Indenture"), plus any unpaid interest, if any, at the date of the
redemption. The Issuers may redeem, prior to September 15, 2001, up to
35% of the principal amount at maturity of the Discount Notes with the
net cash proceeds received from one or more public equity offerings or
strategic equity investments at a redemption prices set forth in the
Discount Notes Indenture, plus any unpaid interest, if any, at the date
of the redemption.
The Discount Notes Indenture has certain restrictions on incurrence of
indebtedness, distributions, mergers, asset sales and changes in control
of Holdings.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes and received compensation in the aggregate of
approximately $3.1 million in connection with the issuance of the Discount
Notes.
F-15
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(5) DEBT (continued)
The debt of the Company matures as follows:
Year Ended December 31 --
1998 $ 1,365
1999 8,254
2000 18,455
2001 25,735
2002 33,015
Thereafter 700,223
--------
$787,047
========
(6) DEFERRED FINANCING COSTS
The Company refinanced its Senior Credit Facility in December, 1997.
Accordingly, the deferred financing costs related to the initial debt were
written off. The effect of this write-off was a $5,046 charge to expense and was
recorded as an extraordinary item. Additional costs related to the Amended
Credit Facility were recorded as deferred financing costs during 1997.
(7) INCOME TAXES
Income taxes have not been recorded in the accompanying financial statements
because they accrue directly to the partners. Taxable losses reported to the
partners are different from those reported in the accompanying statements of
operations due primarily to differences in depreciation and amortization methods
and estimated useful lives under regulations prescribed by the Internal Revenue
Service.
A reconciliation between the net loss reported for financial reporting purposes
and the net loss reported for federal income tax purposes is as follows:
<TABLE>
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss for financial reporting purposes $(52,216) $(23,801) $ (2,703)
Excess depreciation and amortization recorded for income tax purposes (11,678) (15,647) (192)
Interest expense not deductible for tax 5,018 -- --
Other temporary differences (643) 326 186
-------- -------- --------
Net loss for federal income tax purposes $(59,519) $(39,122) $ (2,709)
======== ======== ========
</TABLE>
(8) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate their fair value
due to the nature and length of maturity of the investments.
The estimated fair value of the Company's Amended Credit Facility is based on
floating market rates at December 31, 1997; therefore, there is no material
difference in the fair market value and the carrying value of such debt
instruments. The Notes have an aggregate principal amount of $200,000 with a 11%
coupon rate. The current fair value for the Notes at December 31, 1997 is 111%.
The Discount Notes have an aggregate principal amount at maturity of $237,650
with a 11 7/8% coupon. The current fair value at December 31, 1997 for the
Discount Notes is 73% of the face value (the Discount Notes were issued at
63.118%).
F-16
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts In Thousands
(9) COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the years ended December 31, 1997, 1996 and
1995 was $4,065, $2,365 and $194, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1997 are as follows:
Year Ended December 31 --
1998 $ 873
1999 663
2000 412
2001 218
2002 159
Thereafter 279
------
$2,604
======
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. The Federal Communications
Commission ("FCC") adopted comprehensive regulations, effective September 1,
1993, governing rates charged to subscribers for basic cable and cable
programming services which allowed cable operators to justify regulated rates in
excess of the FCC benchmarks through cost of service showings at both the
franchising authority level for basic service and at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholder of
FrontierVision Holdings Capital Corporation:
We have audited the accompanying balance sheet of FrontierVision Holdings
Capital Corporation as of December 31, 1997. This financial statement is 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 balance sheet is free of material misstatement. An
audit of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. An audit of a
balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of FrontierVision Holdings Capital
Corporation as of December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 16, 1998
F-18
<PAGE>
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
--------------
December 31,
1997
----------
ASSETS
<S> <C>
Cash $ 100
----------
Total assets $ 100
==========
LIABILITIES AND OWNER'S EQUITY
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding $ 1
Additional paid-in capital 99
----------
Total owner's equity 100
----------
Total liabilities and owner's equity $ 100
==========
</TABLE>
See accompanying note to the balance sheet.
F-19
<PAGE>
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
NOTE TO THE BALANCE SHEET
FrontierVision Holdings Capital Corporation, a Delaware corporation ("Holdings
Capital"), is a wholly owned subsidiary of FrontierVision Holdings, L.P.
("Holdings"), and was organized on August 22, 1997 for the sole purpose of
acting as co-issuer with Holdings of $237.7 million aggregate principal amount
at maturity of the 11 7/8% Senior Discount Notes. Holdings Capital had no
operations from September 18, 1997 through December 31, 1997.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of FrontierVision Partners, L.P.:
We have audited the accompanying consolidated balance sheets of FrontierVision
Partners, L.P. and subsidiaries as of December 31, 1997 and 1996. These
consolidated balance sheets are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated balance sheets referred to above present
fairly, in all material respects, the financial position of FrontierVision
Partners, L.P. and subsidiaries as of December 31, 1997 and 1996 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 16, 1998
F-21
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
---------------------------------------
December 31, December 31,
1997 1996
---------------- ----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,873 $ 7,560
Accounts receivable, net of allowance for doubtful
accounts of $640 and $767 8,071 4,544
Other receivables -- 846
Prepaid expenses and other
2,642 2,231
Investment in cable television systems, net:
Property and equipment 247,724 199,461
Franchise cost and other intangible assets 637,725 324,905
----------- -----------
Total investment in cable television systems, net 885,449 524,366
----------- -----------
Deferred financing costs, net 26,283 15,391
Organization costs, net 377 479
Earnest money deposits 2,143 500
----------- -----------
Total assets $ 931,838 $ 555,917
=========== ===========
LIABILITIES
Accounts payable $ 2,770 $ 2,096
Accrued liabilities 15,126 10,969
Subscriber prepayments and deposits 1,828 1,862
Accrued interest payable 5,064 6,290
Senior Notes due to partners 141,642 105,632
Junior Notes due to partners 66,266 48,908
Other debt 787,047 398,194
----------- -----------
Total liabilities 1,019,743 573,951
----------- -----------
Partners' capital
General partner (880) (182)
Limited partners --
Special Class A (66,723) (13,063)
Class A (20,302) (4,789)
----------- -----------
Total partners' capital (87,905) (18,034)
Commitments
----------- -----------
Total liabilities and partners' capital $ 931,838 $ 555,917
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(1) THE PARTNERSHIP
Organization and Capitalization:
FrontierVision Partners, L.P. ("FVP") is a Delaware limited partnership formed
April 17, 1995, for the purpose of acquiring and operating cable television
systems. FVP was capitalized in August 1995 with approximately $16,600 of
limited partner contributions, and approximately $168 from its sole general
partner, FVP GP, L.P., a Delaware partnership. FVP's limited partners include
individuals, corporations and partnerships.
FrontierVision Holdings, L.P. ("Holdings"), a Delaware limited partnership, is
directly and indirectly a wholly-owned subsidiary of FVP and was formed on
September 3, 1997 for the purpose of acting as co-issuer with its wholly-owned
subsidiary, FrontierVision Holdings Capital Corporation ("Holdings Capital"), of
$237,650 aggregate principal amount at maturity of 11 7/8% Senior Discount Notes
due 2007 (the "Discount Notes"). FVP contributed to Holdings, both directly and
indirectly, all of the outstanding partnership interests of FrontierVision
Operating Partners, L.P. ("FVOP") prior to the issuance of the Discount Notes on
September 19, 1997 (the "Formation Transaction") and therefore, at that time,
FVOP and its wholly-owned subsidiary, FrontierVision Capital Corporation
("Capital"), became wholly-owned, consolidated subsidiaries of Holdings. FVP is
the 99.9% general partner of Holdings and FrontierVision Holdings, LLC ("FV
Holdings") is the 0.1% limited partner of Holdings. As used herein, the
"Partnership" refers collectively to FVP, FV Holdings, Holdings, Holdings
Capital, FVOP Inc. and FVOP.
Prior to the Formation Transaction, FVP allocated certain administrative
expenses to FVOP which are included as capital contributions to FVOP from its
partners. Such expense allocations were approximately $231 and $735 for the
periods ended December 31, 1997 and 1996, respectively.
FVP's partners have committed to provide debt and equity capital commitments
totaling approximately $199,400 through two limited partnership and note
purchase agreements. As of December 31, 1997, FVP had received all of these
commitments. Of the total capital contributed to FVP by December 31, 1997,
approximately $27,100 is in the form of general and limited partner capital
contributions, approximately $52,700 in the form of 14% junior subordinated
notes (the "Junior Notes") and approximately $119,600 in the form of 12% senior
subordinated notes (the "Senior Notes").
Under the terms of the FVP partnership agreement and the limited and partnership
interest note purchase agreement of $123,500, the Partnership agreed to issue
partnership interests, Senior Notes and Junior Notes to a limited partner, in an
amount equal to 3% of total limited partner debt and equity commitments (less
that limited partner's debt and equity commitments) as a syndication fee. As of
December 31, 1997, the Partnership has credited the capital account of the
limited partner with $428 related to limited partner capital contributions
received, and issued Senior Notes and Junior Notes totaling $2,604 related to
this arrangement. The amount issued related to the Senior Notes and the Junior
Notes is reflected as a deferred financing cost in the accompanying consolidated
financial statements and the amount issued related to limited partnership
interests is reflected as a partners' capital syndication fee.
Allocation of Profits, Losses and Distributions:
The Partnership may issue Class A, Special Class A, Class B, Special Class B and
Class C limited partnership interests. As of December 31, 1996, the Partnership
had only issued Class A, Special Class A and Class C limited partnership
interests.
F-23
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(1) THE PARTNERSHIP (continued)
Net losses are allocated to the partners in proportion to their capital
commitments until the limited partners have been allocated amounts equal to
their capital contributions, except no losses shall be allocated to any limited
partner which would cause the limited partner's capital account to become
negative by an amount greater than the limited partner's share of the
Partnership's "minimum gain" (the excess of the Partnership's nonrecourse debt
over its adjusted basis in the assets encumbered by nonrecourse debt).
Thereafter, losses are allocated to the general partner.
Profits are allocated first to the general and limited partners to the extent of
their negative capital accounts; then to the general and limited partners to the
extent of their capital contributions; then to the general and limited partners
until the Class A and Class B limited partners receive a 12% preferred return on
their capital contributions; thereafter, 85% to the Class A and Class B limited
partners and the general partner in proportion to their capital contributions,
7% to the general partner and Class C limited partners (the "General Partner
Special Allocation"), and 8% to the Special Class A and Special Class B limited
partners.
Distributions are made first, 99% to the Class A and Class B limited partners
and 1% to the general partner until the Class A and Class B limited partners
have received a return of their contributed capital; second, 99% to the Class A
and Class B limited partners and 1% to the general partner until the Class A and
Class B limited partners receive a 12% preferred annual rate of return on their
capital contributions; thereafter, 85% to the Class A and Class B limited
partners and the general partner in proportion to their capital contributions,
7% to the general partner and Class C limited partners (the "general partner
special allocation") and 8% to the Special Class A and Special Class B limited
partners. Under the terms of the FVP partnership agreement, the general partner
may issue Class C limited partnership interests to employees of the Partnership
which entitle the holder to receive distributions from the Partnership. However,
in no event shall the Class C limited partners be entitled to receive more than
1% of the aggregate distributions made. The percentage of the aggregate
distributions made to the Class C limited partners shall result in a reduction
to the General Partner's Special Allocation percentage. As of December 31, 1997,
the Partnership had received total commitments of approximately $43,132 and
$154,229 from its Class A limited partners and from its Special Class A limited
partners, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Partnership
and its direct and indirect wholly-owned subsidiaries, FrontierVision Holdings,
LLC ("FV Holdings"), Holdings, Holdings Capital, FVOP, FrontierVision Operating
Partners, Inc. ("FVOP Inc."), FrontierVision New England Cable, Inc. ("New
England"), FrontierVision Access Partners, LLC ("Access") and Capital. All
significant intercompany accounts and transactions have been eliminated in
consolidation. FV Holdings holds a 0.1% limited partnership interest in Holdings
as its only asset. FVOP Inc. holds a 0.01% limited partnership interest in FVOP
as its only asset. FVOP owns and operates cable television properties, primarily
in Maine and Ohio. Capital, New England and Access are wholly-owned subsidiaries
of FVOP.
F-24
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the financial statements, the Partnership considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost and include the following:
distribution facilities, support equipment and leasehold improvements.
Replacements, renewals and improvements are capitalized and costs for repairs
and maintenance are charged to expense when incurred. The Partnership
capitalized direct labor and overhead related to installation activities of
approximately $3,844 and $1,577 for the periods ended December 31, 1997 and
1996. Depreciation is computed on a straight-line basis using an average
estimated useful life of 8 years. At the time of ordinary retirements, sales or
other dispositions of property, a gain or loss is recognized.
Franchise Costs, Covenants not to Compete, Subscriber Lists and Goodwill
Franchise costs, covenants not to compete, subscriber lists and goodwill result
from the application of the purchase method of accounting to business
combinations. Such amounts are amortized on a straight-line basis over the
following periods: 15 years for franchise costs (which reflects the
Partnership's ability to renew existing franchise agreements), 5 years for
covenants not to compete, 7 years for subscriber lists and 15 years for
goodwill.
The Partnership periodically reviews the carrying amount of its property, plant
and equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
Deferred Financing Costs
Deferred financing costs are being amortized using the straight line method over
the life of the loans. Accumulated amortization at December 31, 1997 and 1996 is
$1,808 and $1,323, respectively.
Organizational Costs
Organizational costs are being amortized using the straight line method over a
five year life. Accumulated amortization at December 31, 1997 and 1996 is $271
and $146, respectively.
F-25
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative Financial Instruments
The Partnership manages risk arising from fluctuations in interest rates by
using interest rate swap agreements, as required by its credit agreements. These
agreements are treated as off-balance sheet financial instruments. The interest
rate swap agreements are being accounted for as a hedge of the debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
Income Taxes
No provision has been made for federal, state or local income taxes related to
the Partnership because they are the responsibility of the individual partners.
The principal difference between results reported for financial reporting
purposes and for income tax purposes results from differences in depreciable
lives and amortization methods utilized for tangible and intangible assets.
Reclassification
Certain amounts have been reclassified for comparability.
(3) INVESTMENT IN CABLE TELEVISION SYSTEMS
The Partnership's investment in cable television systems is comprised of the
following:
<TABLE>
----------------- -- -----------------
December 31, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Property and equipment $ 297,229 $ 217,148
Less--accumulated depreciation (49,505) (17,687)
------------ -------------
Property and equipment, net 247,724 199,461
------------ -------------
Franchise costs 523,096 258,453
Covenants not to compete 14,983 14,934
Subscriber lists 106,270 41,777
Goodwill 44,702 28,845
------------ -------------
689,051 344,009
Less--accumulated amortization (51,326) (19,104)
------------ -------------
Franchise costs and other intangible assets, net 637,725 324,905
------------ -------------
Total investment in cable television systems, net $ 885,449 $ 524,366
============ =============
</TABLE>
(4) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Partnership has completed several acquisitions since its inception through
December 31, 1997. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition. Such allocations are subject to
adjustments as final appraisal information is received by the Company. Amounts
allocated to property, plant and equipment and to intangible assets will be
respectively depreciated and amortized, prospectively from the date of
acquisition based upon the Partnership's useful lives and amortization periods.
The following table lists the acquisitions and the purchase price for each.
F-26
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(4) ACQUISITIONS AND DISPOSITIONS (continued)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Video Cablevision, Inc. Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $85,800
American Cable Entertainment of Kentucky-Indiana, Inc. ("ACE") Kentucky and Indiana October 9, 1996 $147,300
SRW, Inc.'s Penn/Ohio Cablevision, L.P. Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,800
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,800
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,600
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,700
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $203,700*
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
December 31, 1997.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
-----------------------------------------------------
1997 1996 1995
Acquisitions(a) Acquisitions(a) Acquisitions
--------- --------- ---------
<S> <C> <C> <C>
Property, plant and equipment $ 48,805 $ 169,240 $ 43,333
Franchise costs and other intangible assets 344,490 268,836 84,595
--------- --------- ---------
Subtotal 393,295 438,076 127,928
--------- --------- ---------
Net working capital (deficit) (164) (7,107) 542
Less - Earnest money deposits applied (500) (9,502) -
Less - Subordinated promissory note to seller - - (7,200)
--------- --------- ---------
Total cash paid for acquisitions $ 392,631 $ 421,467 $ 121,270
========= ========= =========
</TABLE>
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
As of December 31, 1997, the Partnership had advanced $30 and $113 to Bluegrass
and Front Row, respectively, in the form of letters of credit in connection with
the transfer of certain franchises in favor of the Partnership.
On December 12, 1997, the Partnership entered into an agreement with the
shareholders of New England Cable Television of Massachusetts, Inc. ("NECMA") to
acquire all of the outstanding stock of NECMA for a price of approximately
$43,600. NECMA is a Massachusetts S-Corporation which owns cable television
assets in Massachusetts. As of December 31, 1997, the Partnership had advanced
$2,000 as an earnest money deposit related to this transaction.
F-27
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(4) ACQUISITIONS AND DISPOSITIONS (continued)
On December 19, 1997, the Partnership entered into an asset purchase agreement
with TCI Cablevision of Ohio, Inc. to acquire certain cable television assets in
Ohio for a cash purchase price of $10,000.
On January 15, 1998, the Partnership entered into an asset purchase agreement
with TVC-Sumpter Limited Partnership and North Oakland Cablevision Partners
Limited Partnership to acquire certain cable television assets in Michigan for a
cash purchase price of $14,200. This acquisition was consummated on March 6,
1998.
On January 16, 1998, the Partnership entered into an asset purchase agreement
with Ohio Cablevision Network, Inc. to acquire certain cable television assets
in Ohio for a cash purchase price of $38,000.
Asset Exchange
On December 12, 1997, the Partnership entered into an asset exchange agreement
with Comcast Cablevision of the South to exchange certain cable television
assets in the Southeast region. This asset exchange was consummated on March 12,
1998.
Dispositions
The Partnership has completed two dispositions from its inception through
December 1996.
On July 24, 1996, the Partnership sold certain cable television system assets
located primarily in Chatsworth, Georgia to an affiliate of Helicon Partners for
an aggregate sales price of approximately $7,900.
On September 30, 1996, the Partnership sold certain cable television system
assets located in Virginia to Shenandoah Cable Television Partnership, an
affiliate of Shenandoah Telephone Partnership, for an aggregate sales price of
approximately $7,100.
(5) DEBT
The Partnership's debt was comprised of the following:
<TABLE>
-------------------------------
December 31, December 31,
1997 1996
-------- --------
<S> <C> <C>
Bank Credit Facility (a) --
Term loans, interest based on various floating rate libor options (8.33% and
8.60% weighted averages at December 31, 1997 and
1996, respectively), payable monthly $432,000 $190,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
11 7/8% Senior Discount Notes due 2007 (c) 155,047 --
12% Senior Notes, due June 30, 2004 and 2007 (d) 141,642 105,632
14% Junior Notes, due June 30, 2004 and 2007 (d) 66,266 48,908
Subordinated promissory notes to UVC at 11.5% interest, repaid in December 1997 -- 8,124
Other -- 70
-------- --------
Total debt $994,955 $552,734
======== ========
</TABLE>
F-28
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(5) DEBT (continued)
(a) Bank Credit Facility.
As of December 31, 1996, the Partnership had entered into an amended
credit agreement (the "Senior Credit Facility") with a maximum
availability of $265.0 million of which $190.0 million was available in
term loans and $75.0 million was available as a revolving line of
credit. The Partnership had drawn $190.0 million in term loans as of
December 31, 1996.
On December 19, 1997, the Partnership entered into a Second Amended and
Restated Credit Agreement (the "Amended Credit Facility") increasing
the available senior debt by $535.0 million, for a total availability
of $800.0 million. The amount available under the Amended Credit
Facility includes two term loans of $250.0 million each ("Facility A
Term Loan" and "Facility B Term Loan") and a $300.0 million revolving
credit facility ("Revolving Credit Facility"). The Facility A Term Loan
and the Revolving Credit Facility both mature on September 30, 2005.
The entire outstanding principal amount of the Revolving Credit
Facility is due on September 30, 2005, with escalating principal
payments due quarterly beginning December 31, 1998 under the Facility A
Term Loan. The Facility B Term Loan matures March 31, 2006 with 95% of
the principal being repaid in the last two quarters of the term of the
facility.
Under the terms of the Amended Credit Facility, with certain
exceptions, the Partnership has a mandatory prepayment obligation upon
a change of control of the Partnership and the sale of any of its
operating systems. Further, beginning with the year ending December 31,
2001, the Partnership is required to make prepayments equal to 50% of
its excess cash flow, as defined in the Amended Credit Facility. The
Partnership also pays commitment fees ranging from 1/2% - 3/8% per
annum on the average unborrowed portion of the total amount available
under the Amended Credit Facility.
The Amended Credit Facility also requires the Partnership to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Partnership. As of December 31, 1997, the Partnership was in compliance
with the financial covenants of the Amended Credit Facility.
All partnership interests in the Partnership and all assets of the
Partnership and its subsidiary are pledged as collateral for the
Amended Credit Facility.
In order to convert certain of the interest payable at variable rates
under the Amended Credit Facility to interest at fixed rates, the
Partnership has entered into interest rate swap agreements for notional
amounts totaling $170,000, and maturing between November 15, 1999 and
October 7, 2000. According to these agreements, the Partnership pays or
receives the difference between (1) an average fixed rate of 5.932% and
(2) various available floating rate options applied to the same
$170,000 notional amount every three months during the term of the
interest rate swap agreement. For the years ended December 31, 1997 and
1996, the Partnership had recognized an increase in interest expense of
approximately $312 and $195, respectively, as a result of these
interest rate swap agreements.
F-29
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(5) DEBT (continued)
On October 3, 1997, in order to convert certain of the future interest
payable at various rates under future indebtedness, the Partnership
entered into a forward interest rate swap agreement, commencing October
15, 1998, for a notional amount totaling $150,000, maturing on October
15, 2001. According to this agreement, the Partnership will pay or
receive the difference between (1) a fixed rate of 6.115% and (2) a
floating rate based on three month libor applied to the same $150,000
notional amount every three months during the term of the interest rate
swap agreement.
(b) Senior Subordinated Notes
On October 7, 1996, FVOP issued, pursuant to a public offering (the
"Offering"), $200,000 aggregate principal amount of Senior Subordinated
Notes due 2006 (the "Notes"). Net proceeds from the Offering of
$192,500, after costs of approximately $7,500, were available to FVOP
on October 7, 1996.
In connection with the anticipated issuance of the Notes in connection
with the Offering, FVOP entered into deferred interest rate setting
agreements to reduce the FVOP's interest rate exposure in anticipation
of issuing the Notes. The cost of such agreements, amounting to $1,390,
will be recognized as a component of interest expense over the term of
the Notes.
The Notes are unsecured subordinated obligations of 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.
The Subordinated Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers,
asset sales and changes in control of FVOP.
(c) Senior Discount Notes
On September 19, 1997, Holdings issued, pursuant to a private offering,
the Discount Notes. The Discount Notes were sold at approximately 63.1%
of the stated principal amount at maturity and provided net proceeds of
$144,750, after underwriting fees of approximately $5,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital (collectively, the "Issuers"), ranking pari passu in right of
payment to all existing and future unsecured indebtedness of the
Issuers and will mature on September 15, 2007. The discount on the
Discount Notes is being accreted using the interest method over four
years until September 15, 2001, the date at which cash interest begins
to accrue. Cash interest will accrue at a rate of 11 7/8% per annum and
will be payable each March 15 and September 15, commencing March 15,
2002.
The Discount Notes are redeemable at the option of the Issuers, in
whole or in part, at any time on or after September 15, 2001, at
redemption prices set forth in the Indenture for the Discount Notes
(the "Discount Notes Indenture"), plus any unpaid interest, if any, at
the date of the redemption. The Issuers may redeem, prior to September
15, 2001, up to 35% of the principal amount at maturity of the Discount
Notes with the net cash proceeds received from one or more public
equity offerings or strategic equity investments at a redemption prices
set forth in the Discount Notes Indenture, plus any unpaid interest, if
any, at the date of the redemption.
F-30
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(5) DEBT (continued)
The Discount Notes Indenture has certain restrictions on incurrence of
indebtedness, distributions, mergers, asset sales and changes in
control of Holdings.
(d) Senior and Junior Notes
The Senior Notes bear interest at a rate of 12% per annum, compounded
annually, and are payable June 30, 2004 and 2007. The Junior Notes bear
interest at a rate of 14% per annum, compounded annually, and are
payable June 30, 2004 and 2007. Under the terms of the Senior Notes and
the Junior Notes, no cash interest payments are required.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes and received compensation in the aggregate of
approximately $3.1 million in connection with the issuance of the Discount
Notes.
The debt of the Partnership matures as follows:
Year Ended December 31 --
1998 $ 1,365
1999 8,254
2000 18,455
2001 25,735
2002 33,015
Thereafter 908,131
--------
$994,955
========
(6) DEFERRED FINANCING COSTS
The Partnership 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.
(7) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate their fair value
due to the nature and length of maturity of the investments.
The estimated fair value of the Partnership's Amended Credit Facility is based
on floating market rates at December 31, 1997; therefore, there is no material
difference in the fair market value and the carrying value of such debt
instruments. The Notes have an aggregate principal amount of $200,000 with a 11%
coupon rate. The current fair value for the Notes at December 31, 1997 is 111%.
The Discount Notes have an aggregate principal amount at maturity of $237,650
with a 11 7/8% coupon. The current fair value at December 31, 1997 for the
Discount Notes, including the impact of accretion of interest, is 73% of the
face value (the Discount Notes were issued at 63.118%).
F-31
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
(In thousands)
(8) COMMITMENTS AND CONTINGENCIES
The Partnership has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the years ended December 31, 1997, 1996 and
1995 was $4,065, $2,365 and $194, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1997 are as follows:
Year Ended December 31 --
1998 $ 873
1999 663
2000 412
2001 218
2002 159
Thereafter 279
------
$2,604
======
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. The Federal Communications
Commission ("FCC") adopted comprehensive regulations, effective September 1,
1993, governing rates charged to subscribers for basic cable and cable
programming services which allowed cable operators to justify regulated rates in
excess of the FCC benchmarks through cost of service showings at both the
franchising authority level for basic service and at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
As a result of such actions, the Partnership's basic and tier service rates and
its equipment and installation charges (the "Regulated Services") are subject to
the jurisdiction of local franchising authorities and the FCC. The Partnership
believes that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Partnership's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Partnership's agreements with franchise authorities require the payment of
annual fees which approximate 3% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
United Video Cablevision, Inc.:
We have audited the accompanying divisional balance sheet of United Video
Cablevision, Inc. -- Maine and Ohio Divisions as of November 8, 1995 and
December 31, 1994, and the related statements of divisional operations, cash
flows and equity for the period of January 1, 1995 through November 8, 1995, and
for the years ended December 31, 1994 and 1993. These financial statements are
the responsibility of the Divisions' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the divisional financial position of United Video
Cablevision, Inc. -- Maine and Ohio Divisions as of November 8, 1995 and
December 31, 1994, and the results of its divisional operations and its cash
flows for the period ending November 8, 1995, and the years ending December 31,
1994 and 1993 in conformity with generally accepted accounting principles.
PIAKER & LYONS, P.C.
May 7, 1996
Vestal, NY
F-33
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
DIVISIONAL BALANCE SHEETS
------------ ------------
November 8, December 31,
1995 1994
------------ ------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 75,100 $ 35,461
Accounts Receivable (1)
Accounts Receivable, Trade 143,673 206,576
Accounts Receivable, Other 25,980 31,034
Less: Allowance for Doubtful Accounts (53,994) (34,928)
------------ ------------
Net Accounts Receivable 115,659 202,682
------------ ------------
Prepaid Expenses 165,080 108,045
------------ ------------
Total Current Assets 355,839 346,188
------------ ------------
Property, Plant and Equipment-- At Cost
Land 61,556 61,223
Buildings and Improvements 1,586,150 1,570,888
Vehicles 2,608,730 2,628,936
Cable Television Distribution Systems 85,010,454 83,296,885
Office Furniture, Tools and Equipment 1,386,288 1,363,828
Less: Accumulated Depreciation (1) (68,243,467) (59,163,656)
------------ ------------
Net Property, Plant and Equipment 22,409,711 29,758,104
------------ ------------
Intangible Assets
Franchise Rights 1,994,336 1,984,349
Non Compete Agreements 71,753 71,753
Other Intangible Assets 1,943,836 1,943,836
Less: Accumulated Amortization (1) (2,930,019) (2,550,708)
------------ ------------
Net Intangible Assets 1,079,906 1,449,230
------------ ------------
Total Assets $ 23,845,456 $ 31,553,522
============ ============
LIABILITIES AND DIVISIONAL EQUITY
Liabilities
Accounts Payable $ -- $ 684,264
Subscriber Deposits and Unearned Income 341,263 401,606
Accrued Franchise Fees 424,312 469,578
Accrued Programming Fees 686,599 513,151
Other Accrued Expenses 1,596,134 1,154,024
------------ ------------
Total Current Liabilities 3,048,308 3,222,623
------------ ------------
Divisional Equity 20,797,148 28,330,899
------------ ------------
TOTAL LIABILITIES AND DIVISIONAL EQUITY $ 23,845,456 $ 31,553,522
============ ============
See the accompanying notes to divisional financial statements.
F-34
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL OPERATIONS
------------ ------------ ------------
Period from
January 1,
1995 For the For the
through Year Ended Year Ended
November 8, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
Revenues (1) $ 25,417,064 $ 27,964,550 $ 27,917,090
Operating Expenses
Programming 5,350,664 5,717,160 5,361,127
Plant and Operation 3,741,207 4,185,894 3,902,847
General and Administrative 3,754,474 4,415,919 4,628,442
Marketing and Advertising 276,712 248,572 409,890
Corporate Overhead (3) 1,270,072 1,327,127 1,470,702
Depreciation and Amortization (1) 9,625,116 11,225,978 9,960,536
------------ ------------ ------------
Total Expenses 24,018,245 27,120,650 25,733,544
------------ ------------ ------------
Operating Income 1,398,819 843,900 2,183,546
------------ ------------ ------------
Other (Income) Expense
Interest Expense (1) 4,086,738 4,892,250 4,960,032
Gain on Sale of Fixed Assets (25,034) (33,835) (33,810)
------------ ------------ ------------
Total Other (Income) Expense 4,061,704 4,858,415 4,926,222
------------ ------------ ------------
Net Loss $ (2,662,885) $ (4,014,515) $ (2,742,676)
============ ============ ============
See the accompanying notes to divisional financial statements.
F-35
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL EQUITY
------------ ------------ ------------
1995 1994 1993
------------ ------------ ------------
Balance, January 1, $ 28,330,899 $ 32,700,089 $ 37,526,944
Net Loss (2,662,885) (4,014,515) (2,742,676)
Payments to Corporate
Division, Net (4,870,866) (354,675) (2,084,179)
------------ ------------ ------------
Balance, November 8, 1995 $ 20,797,148
============
Balance, December 31, $ 28,330,899 $ 32,700,089
============ ============
See the accompanying notes to divisional financial statements.
F-36
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
STATEMENTS OF DIVISIONAL CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1,
1995 For the For the
through Year Ended Year Ended
November 8, December 31, December 31,
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities
Net Loss $(2,662,885) $(4,014,515) $(2,742,676)
---------- ----------- ----------
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation 9,245,805 10,771,263 9,497,062
Amortization of Intangibles 379,311 454,715 463,474
Allowance for Doubtful Accounts 19,066 6,124 (3,077)
Gain on Sale of Assets (25,034) (33,835) (33,810)
Changes in Operating Assets and Liabilities,
Net of Effects from Acquisition of Corporate
Entities:
Accounts Receivable and Other Receivables 67,957 (132,182) 122,248
Prepaid Expenses (57,035) 13,897 (158,603)
Accounts Payable and Accrued Expenses (113,972) (846,244) (52,046)
Subscriber Deposits and Unearned Income (60,343) (45,895) (72,253)
---------- ----------- ----------
Total Adjustments 9,455,755 10,187,843 9,762,995
---------- ----------- ----------
Net Cash Provided by Operating Activities 6,792,870 6,173,328 7,020,319
---------- ----------- ----------
Investing Activities
Purchase of Property, Plant and Equipment (2,037,144) (5,712,592) (5,024,998)
Acquisition of Intangible Assets (9,987) (216,154) (1,928)
Proceeds from Sale of Assets 164,766 41,789 37,660
---------- ----------- ----------
Net Cash Used in Investing Activities (1,882,365) (5,886,957) (4,989,266)
---------- ----------- ----------
Payments to Corporate Division, Net (4,870,866) (354,675) (2,084,179)
---------- ----------- ----------
Net Increase (Decrease) in Cash Equivalents 39,639 (68,304) (53,126)
Cash and Cash Equivalents at Beginning of
Period 35,461 103,765 156,891
---------- ----------- ----------
Cash and Cash Equivalents at End of Period $ 75,100 $ 35,461 $ 103,765
========== =========== ==========
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $ 4,086,738 $ 4,892,250 $ 4,960,032
Income Taxes Paid -- -- --
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the statement of cash flows, the Divisions consider all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
See the accompanying notes to divisional financial statements.
F-37
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
November 8, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING, POLICIES
BUSINESS ACTIVITY
The accompanying divisional financial statements include the Maine and Ohio
Divisions of United Video Cablevision, Inc. (the "Divisions"). The Divisions are
engaged in providing cable television programming services to subscribers in
their franchised areas. The Corporate division allocates debt to the operating
divisions based upon the respective acquisition and construction costs relative
to the debt incurred. Accordingly, interest has been allocated to the operating
divisions by the Corporate division in the same manner. For the purpose of the
divisional financial statements, debt has been reflected as division equity in
the accompanying financial statements under the terms of the agreement with
FrontierVision Operating Partners, L.P., as no such debt will be assumed.
CONCENTRATIONS OF CREDIT RISK
The Divisions' trade receivables are comprised of amounts due from subscribers
in varying regions throughout the states. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Divisions' customer base and geographic dispersion.
REVENUE RECOGNITION
The Divisions recognize service revenues on the accrual basis in the month in
which the service is to be provided. Payments received in advance are included
in deferred revenue until the month they become due at which time they are
recognized as income.
CAPITALIZATION AND DEPRECIATION
In accordance with Statement No. #51 of the Financial Accounting Standards
Board, the Divisions have adopted the policy of capitalizing certain expenses
applicable to the construction and operating of a cable television system during
the period while the cable television system is partially under construction and
partially in service. For the period ended November 8, 1995, the total
capitalized costs amounted to $314,347. During 1994 and 1993, the total
capitalized costs amounted to $244,276 and $300,429, respectively.
The Divisions, for financial reporting purposes, provide depreciation on the
straight-line method, which is considered adequate for the recovery of the cost
of the properties over their estimated useful lives. For income tax purposes,
however, the Divisions utilize both accelerated methods and the accelerated cost
recovery system. For the period ended November 8, 1995, the provision for
depreciation in the accompanying statements of operations amounted to
$9,245,805. For the years ended December 31, 1994 and 1993, the provision
amounted to $10,771,263 and $9,497,062, respectively.
F-38
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING, POLICIES (continued)
Depreciation lives for financial statement purposes are as follows:
Headend Equipment
Tower 12 Years
Antennae 7 Years
Other Headend Equipment 8 Years
Trunk and Distribution Equipment
Traps, Descramblers, Converters, Decoders 5 Years
Other Trunk and Distribution Equipment 8 Years
Test Equipment 5 Years
Local Origination Equipment 8 Years
Vehicles 3 Years
Furniture and Fixtures 10 Years
Leasehold Improvements 8 Years
Computer and EDP Equipment 5 Years
AMORTIZATION
The Divisions are amortizing various intangible assets acquired and incurred on
a straight-line basis, generally from 5 to 40 years. For the period ended
November 8, 1995, the provision for amortization in the accompanying statements
of operations amounted to $379,311. For the years ended December 31, 1994 and
1993, the provision amounted to $454,715 and $463,474, respectively.
INCOME TAXES
The Divisions are a part of United Video Cablevision, Inc. which has elected to
be taxed as a small business corporation under "Sub-Chapter S" of the Internal
Revenue Code effective January 1, 1987, wherein the stockholders of United Video
Cablevision, Inc. are taxed on any earnings or losses of the Company.
BAD DEBTS
The Divisions have adopted the reserve method for recognizing bad debts for
financial statement purposes and continue to utilize the direct write-off method
for tax purposes.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
(2) COMMITMENTS
The Divisions were committed to annual pole rentals of approximately $823,000 at
November 8, 1995 and $830,000 and $832,000 at December 31, 1994 and 1993,
respectively, to various utilities. These agreements are subject to termination
rights by both parties.
The Divisions lease in various systems the land upon which their towers and
antennae are constructed. The annual rental payments under these leases amounted
to approximately $37,000 at November 8, 1995, approximately $37,000 at December
31, 1994 and approximately $46,000 at December 31, 1993.
F-39
<PAGE>
UNITED VIDEO CABLEVISION, INC.
MAINE AND OHIO DIVISIONS
NOTES TO DIVISIONAL FINANCIAL STATEMENTS (continued)
(3) MANAGEMENT AGREEMENT WITH RELATED PARTY
The Divisions are being provided with certain management and technical services
by a related party by means of a management agreement. For the period ended
November 8, 1995, the allocated billings amounted to $1,270,072, and for the
years ended December 31, 1994 and 1993, billings amounted to $1,327,127 and
$1,470,702, respectively.
(4) SALE OF DIVISIONS
On November 9, 1995, United Video Cablevision, Inc. consummated an agreement by
which it sold substantially all of the net assets and associated current
liabilities in its Maine and Ohio franchise areas (the Divisions) for
approximately $120,500,000. Upon the completion of the transaction, United Video
Cablevision, Inc. realized a gain of approximately $100,000,000.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
Cox Communications, Inc.:
We have audited the accompanying combined statements of net assets of the
combined operations of Cox Communications, Inc.'s ("CCI") cable television
systems serving 57 communities in Ashland, Kentucky and Defiance, Ohio
(collectively referred to as the "Ashland and Defiance Clusters" or "Successor")
whose assets and certain liabilities were acquired by FrontierVision Operating
Partners, L.P. on April 9, 1996, as of December 31, 1994 ("Predecessor") and
1995 ("Successor"), and the related combined statements of operations, changes
in net assets, and cash flows for the years ended December 31, 1993 and 1994
(Predecessor), for the one-month period ended January 31, 1995 (Predecessor),
and for the eleven-month period ended December 31, 1995 (Successor). These
financial statements are the responsibility of the Ashland and Defiance
Clusters' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Ashland and
Defiance Clusters at December 31, 1994 (Predecessor) and 1995 (Successor), and
the combined results of its operations and its cash flows for years ended
December 31, 1993 and 1994 (Predecessor), for the one-month period ended January
31, 1995 (Predecessor), and for the eleven-month period ended December 31, 1995
(Successor), in conformity with generally accepted accounting principles.
As discussed in Note 1, effective February 1, 1995, CCI acquired the Ashland and
Defiance Clusters in connection with the acquisition of Times Mirror Cable
Television, Inc.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 10, 1996
F-41
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF NET ASSETS
In Thousands
<TABLE>
<CAPTION>
--------------------
Successor Predecessor
December 31, December 31,
1995 1994
-------- --------
ASSETS
<S> <C> <C>
Cash $ 188
Accounts Receivable-- Less allowance for doubtful accounts
of $43 and $37 $ 1,784 1,563
Amounts Due From Affiliate 5,848
Intercompany Income Taxes Receivable 1,182
Net Plant and Equipment 25,621 18,096
Intangible Assets 110,796 51,210
Other Assets 1,149 580
-------- --------
$146,380 $ 71,637
======== ========
LIABILITIES AND NET ASSETS
Accounts Payable $ 580 $ 692
Accrued Expenses 966 915
Intercompany Income Taxes Payable 2,160
Deferred Income 1,355 1,142
Deferred Income Taxes 7,644 3,147
Other Liabilities 146 99
Amounts Due to Affiliate 52,317
-------- --------
Total liabilities 10,691 60,472
NET ASSETS 135,689 11,165
-------- --------
$146,380 $ 71,637
======== ========
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF OPERATIONS
In Thousands
<TABLE>
<CAPTION>
-----------------------------------------------
Successor Predecessor
-------- ----------------------------------
Eleven Months One Month
Ended Ended Year Ended
December 31, January 31, December 31,
---------------------
1995 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 24,628 $ 2,096 $ 25,235 $ 24,679
Costs and Expenses
Operating 8,035 689 7,188 6,773
Selling, general, and administrative 4,919 503 5,507 5,398
Depreciation 5,480 214 3,293 3,413
Amortization 2,727 128 1,830 2,129
-------- -------- -------- --------
Total costs and expenses 21,161 1,534 17,818 17,713
-------- -------- -------- --------
Operating Income 3,467 562 7,417 6,966
Interest Income-- Net 79 434 133
Other-- Net (29) (3) (4)
-------- -------- -------- --------
Income Before Income Taxes 3,438 641 7,848 7,095
Income Taxes 3,749 248 3,982 3,559
-------- -------- -------- --------
NET INCOME (LOSS) $ (311) $ 393 $ 3,866 $ 3,536
======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
In Thousands
PREDECESSOR
Balance, January 1, 1993 $ 11,303
Net income for the year ended December 31, 1993 3,536
Dividends to Affiliate (1,570)
---------
Balance, December 31, 1993 13,269
Net income for the year ended December 31, 1994 3,866
Dividends to Affiliate (5,970)
---------
Balance, December 31, 1994 11,165
Net income for the one month ended January 31, 1995 393
---------
Balance, January 31, 1995 $ 11,558
=========
SUCCESSOR
Fair Value of Assets Acquired and Liabilities Assumed from
Times Mirror Cable Television, Inc. on February 1, 1995 $ 136,000
Net loss for the eleven months ended December 31, 1995 (311)
---------
BALANCE, DECEMBER 31, 1995 $ 135,689
=========
See notes to combined financial statements.
F-44
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
COMBINED STATEMENTS OF CASH FLOWS
In Thousands
<TABLE>
<CAPTION>
-----------------------------------------------------------
Successor Predecessor
-------- ------------------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, -------------------------
1995 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (311) $ 393 $ 3,866 $ 3,536
Adjustments to reconcile net income (loss)to net cash
provided by operating activities:
Depreciation and amortization 8,207 342 5,123 5,542
Deferred income taxes (142) (70) 298 293
(Increase) decrease in accounts receivable (287) 66 114 (45)
Increase (decrease) in accounts payable and
accrued expenses 467 (360) (214) (92)
Income taxes payable (1,182) 31 1,914 (906)
Other, net 274 45 162 (61)
-------- -------- -------- --------
Net cash provided by operating activities 7,026 447 11,263 8,267
INVESTING ACTIVITIES:
Capital expenditures (1,362) (65) (3,795) (6,075)
Advances to Affiliate (5,848)
-------- -------- -------- --------
Net cash used in investing activities (7,210) (65) (3,795) (6,075)
FINANCING ACTIVITIES:
Net change in amounts due to Affiliate (386) (1,466) (580)
Dividends paid (5,970) (1,570)
-------- -------- -------- --------
Net cash used in financing activities (386) (7,436) (2,150)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH (184) (4) 32 42
CASH AT BEGINNING OF PERIOD 184 188 156 114
-------- -------- -------- --------
CASH AT END OF PERIOD -- $ 184 188 $ 156
-------- -------- -------- --------
CASH PAID DURING THE PERIOD FOR:
interest $ -- $ 79 $ 434 $ 133
-------- -------- -------- --------
</TABLE>
See notes to combined financial statements.
F-45
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994,
ONE MONTH ENDED JANUARY 31, 1995, AND
ELEVEN MONTHS ENDED DECEMBER 31, 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION
These combined financial statements represent the combined operations of Cox
Communications, Inc.'s ("CCI") cable television systems serving 57 communities
in Ashland, Kentucky and Defiance, Ohio (collectively referred to as the
"Ashland and Defiance Clusters") whose assets and certain liabilities were
acquired by FrontierVision Operating Partners, L.P. on April 9, 1996. These
cable television systems were acquired by CCI, a majority owned subsidiary of
Cox Enterprises, Inc. ("CEI"), from The Times Mirror Company ("Times Mirror") in
connection with CCI's acquisition of Times Mirror Cable Television, Inc.
("TMCT") on February 1, 1995. The operations of the Ashland and Defiance
Clusters prior to February 1, 1995 are referred to as "Predecessor" and as
"Successor" after February 1, 1995.
All significant intercompany accounts and transactions have been eliminated in
combination. The acquisition of the Ashland and Defiance Clusters was accounted
for by the purchase method of accounting, whereby the allocable share of the
TMCT purchase price was pushed down to the assets acquired and liabilities
assumed based on their fair values at the date of acquisition as follows
(thousands of dollars):
Net working capital $ (2,836)
Plant and equipment 30,022
Deferred taxes related to plant and equipment write-up (4,709)
Intangible Assets 113,523
---------
$ 136,000
=========
The historical combined financial statements do not necessarily reflect the
results of operations or financial position that would have existed had the
Ashland and Defiance Clusters been an independent company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Ashland and Defiance Clusters bill their customers in advance; however,
revenue is recognized as cable television services are provided. Receivables are
generally collected within 30 days. Credit risk is managed by disconnecting
services to customers who are delinquent generally greater than 60 days. Other
revenues are recognized as services are provided. Revenues obtained from the
connection of customers to the cable television systems are less than related
direct selling costs; therefore, such revenues are recognized as received.
PLANT AND EQUIPMENT
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of 5 to 20 years for buildings and building
improvements, 5 to 12 years for cable television systems, and 3 to 10 years for
other plant and equipment.
The costs of initial cable television connections are capitalized as cable plant
at standard rates for the Ashland and Defiance Clusters' labor and at actual
costs for materials and outside labor. Expenditures for maintenance and repairs
are charged to operating expense as incurred. At the time of retirements, sales
or other dispositions of property, the original cost and related accumulated
depreciation are written off.
F-46
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and franchise costs recorded in
business combinations which is amortized on a straight-line basis over 40 years.
The Ashland and Defiance Clusters assess on an on-going basis the recoverability
of intangible assets based on estimates of future undiscounted cash flows for
the applicable business acquired compared to net book value.
INCOME TAXES
Through January 31, 1995, the accounts of the Ashland and Defiance Clusters were
included in the consolidated federal income tax returns and certain state income
tax returns of Times Mirror. Beginning on February 1, 1995, the accounts of the
Ashland and Defiance Clusters were included in the consolidated federal income
tax returns and certain state income tax returns of CEI. Current federal and
state income tax expenses and benefits are allocated on a separate return basis
to the Ashland and Defiance Clusters based on the current year tax effects of
the inclusion of their income, expenses, and credits in the consolidated income
tax returns of Times Mirror, CEI, or based on separate state income tax returns.
Deferred income taxes arise from temporary differences between income taxes and
financial reporting and principally relate to depreciation and amortization.
FEES AND TAXES
The Ashland and Defiance Clusters incur various fees and taxes in connection
with the operation of their cable television systems, including franchise fees
paid to various franchise authorities, copyright fees paid to the U.S. Copyright
Tribunal, and business and franchise taxes paid to the States of Ohio and
Kentucky. A portion of these fees and taxes are passed through to the Ashland
and Defiance Clusters' subscribers. Amounts collected from subscribers are
recorded as a reduction of operating expenses.
PENSION AND POSTRETIREMENT BENEFITS
CCI generally provides defined pension benefits to all employees based on years
of service and compensation during those years. CEI provides certain health care
and life insurance benefits to substantially all retirees and employees. For
employees and retirees of the Ashland and Defiance Clusters, these benefits are
provided through the CCI plans. Expense related to these plans is allocated to
the Ashland and Defiance Clusters through the intercompany account. The amount
of the allocations is generally based on actuarial determinations of the effects
of the Ashland and Defiance Clusters employees' participation in the plans.
Times Mirror Cable generally provides defined pension benefits to all employees
based on years of service and the employee's compensation during the last five
years of employment. Prior to December 31, 1992, these benefits were primarily
provided under the Times Mirror Cable Television, Inc. Pension Plan (the "Times
Mirror Cable Plan") in conjunction with the Times Mirror Employee Stock
Ownership Plan. On December 31, 1992, the Times Mirror Cable Plan was merged
with the Times Mirror Pension Plan.
Net periodic pension expense for 1993 and 1994 was estimated by an actuary under
the assumption that the Times Mirror Cable Plan continued to be a stand-alone
plan. This expense was allocated to the Ashland and Defiance Clusters based on
its salary expense as a percentage of total TMCT salary expense.
F-47
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed of," was issued. This Statement requires
that long-lived assets and certain intangibles be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, with any impairment losses being reported in the period
in which the recognition criteria are first applied based on the fair value of
the asset. Long-lived assets and certain intangibles to be disposed of are
required to be reported at the lower of carrying amount or fair value less cost
to sell. CCI, including the Ashland and Defiance Clusters, adopted SFAS No. 121
in the first quarter of 1996. The effect on the combined financial statements
upon adoption of SFAS No. 121 was not significant.
(3) CASH MANAGEMENT SYSTEM
The Ashland and Defiance Clusters participate in CEI's cash management system,
whereby the bank sends daily notification of checks presented for payment. CEI
transfers funds from other sources to cover the checks presented for payment.
Prior to February 1, 1995, the Ashland and Defiance Clusters participated in a
similar cash management system with Times Mirror.
(4) PLANT AND EQUIPMENT
Plant and equipment is summarized as follows (Thousands of Dollars):
-----------------------
Successor Predecessor
December 31, December 31,
1995 1994
-----------------------
Land $ 5 $ 10
Buildings and building improvements 207 646
Transmission and distribution plant 30,235 34,543
Miscellaneous equipment 343 472
Construction in progress 3 59
-------- --------
Plant and equipment, at cost 30,793 35,730
Less accumulated depreciation (5,172) (17,634)
-------- --------
Net plant and equipment $ 25,621 $ 18,096
======== ========
F-48
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(5) INTANGIBLE ASSETS
Intangible assets are summarized as follows (Thousands of Dollars):
----------------------------
Successor Predecessor
December 31, December 31,
1995 1994
--------- ---------
Goodwill $ 113,523 $ 60,907
Other 134
--------- ---------
Total 113,523 61,041
Less accumulated amortization (2,727) (9,831)
--------- ---------
Net intangible assets $ 110,796 $ 51,210
========= =========
(6) INCOME TAXES
Income tax expense (benefit) is summarized as follows (Thousands of Dollars):
------------------------------------------
Successor Predecessor
------- ------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, ------------------
1995 1995 1994 1993
------- ------- ------- -------
Current:
Federal $ 3,054 $ 248 $ 2,866 $ 2,614
State 837 70 818 652
------- ------- ------- -------
Total current 3,891 318 3,684 3,266
------- ------- ------- -------
Deferred:
Federal (113) (68) 183 250
State) (29 (2) 115 43
------- ------- ------- -------
Total deferred (142) (70) 298 293
------- ------- ------- -------
Total income taxes $ 3,749 $ 248 $ 3,982 $ 3,559
======= ======= ======= =======
The tax effects of significant temporary differences which comprise the net
deferred tax liabilities are as follows (Thousands of Dollars):
-----------------------
December 31,
-----------------------
1995 1994
------- -------
Plant and equipment $ 7,942 $ 3,408
Other (298) (261)
------- -------
Net deferred tax liability $ 7,644 $ 3,147
======= =======
F-49
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(6) INCOME TAXES (continued)
Income tax expense computed using the United States federal statutory rates is
reconciled to the reported income tax provisions as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Successor Predecessor
------- ---------------------------------
Eleven Months One Month Year Ended
Ended Ended December 31,
December 31, January 31, -------------------
1995 1995 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal statutory income tax rate 35% 35% 35% 35%
Computed tax expense at federal statutory rates on
income before income taxes $ 1,203 $ 224 $ 2,747 $ 2,483
State income taxes (net of federal tax benefit) 534 33 560 424
Acquisition adjustments 2,033 44 543 541
1% increase in enacted tax rate 76
Other, net (21) (53) 132 35
------- ------- ------- -------
Income tax provision $ 3,749 $ 248 $ 3,982 $ 3,559
======= ======= ======= =======
</TABLE>
(7) RETIREMENT PLANS
As a result of the acquisition of TMCT by CCI, effective January 1, 1996, CEI
established the Cox Communications, Inc. Pension Plan (the "CCI Plan"), a
noncontributory defined benefit plan for substantially all of CCI's employees
including Ashland and Defiance Clusters' employees. The Ashland and Defiance
Clusters employees will become participants in the CCI Plan retroactive to the
Merger date of February 1, 1995. The CCI Plan will be established with a
transfer of plan assets from CEI and Times Mirror. The CCI Plan assets are
expected to have an estimated fair value equal to or greater than the projected
benefit obligation attributable to substantially all of the Ashland and Defiance
Clusters employees. Prior to February 1, 1995, substantially all of the Ashland
and Defiance Clusters' employees participated in a similar defined benefit plan
provided by TMCT. Several of the Ashland and Defiance Clusters' employees were
covered under a separate defined benefit plan funded by the Communication
Workers of America.
Assumptions used in the actuarial computations were:
---------------------
December 31,
---------------------
1995 1994 1993
---- ---- ----
Discount rate 7.25% 8.25% 7.50%
Rate of increase in compensation levels 5.00 6.00 6.25
Expected long-term rate of return on assets 9.00 9.50 9.75
---- ---- ----
Total pension expense allocated to the Ashland and Defiance Clusters was
$53,000, $44,000, $0, and $64,000 for the years ended December 31, 1993 and
1994, for the one-month period ended January 31, 1995, and the eleven-month
period ended December 31, 1995, respectively.
Beginning February 1, 1995, CEI provides certain health care and life insurance
benefits to substantially all retirees of CEI and its subsidiaries,
Postretirement expense allocated to the Ashland and Defiance Clusters by CEI was
$14,000 for the eleven months ended December 31, 1995.
F-50
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(7) RETIREMENT PLANS (continued)
The funded status of the portion of the postretirement plan covering the
employees of the Ashland and Defiance Clusters is not determinable. The
accumulated postretirement benefit obligation for the postretirement plan of CEI
substantially exceeded the fair value of assets held in the plan at December 31,
1995.
Beginning February 1, 1995, substantially all of the Ashland and Defiance
Clusters employees were eligible to participate in the savings and investment
plan of CEI. Under the terms of the plan, the Ashland and Defiance Clusters
match 50% of employee contributions up to a maximum of 6% of the employee's base
salary. Prior to February 1, 1995, the Ashland and Defiance Clusters employees
were eligible to participate in a similar savings and investment plan with Times
Mirror. The Ashland and Defiance Clusters' expense under the plan was $39,000,
$43,000, $3,000, and $44,000 for the years ended December 31, 1993 and 1994, for
the one-month period ended January 31, 1995, and the eleven-month period ended
December 31, 1996, respectively.
(8) TRANSACTIONS WITH AFFILIATED COMPANIES
The Ashland and Defiance Clusters borrow funds for working capital and other
needs from CEI. Certain management services are provided to the Ashland and
Defiance Clusters by CCI and CEI. Such services include legal, corporate
secretarial, tax, treasury, internal audit, risk management, benefits
administration, and other support services. Prior to February 1, 1995, the
Ashland and Defiance Clusters had similar arrangements with Times Mirror. The
Ashland and Defiance Clusters were allocated expenses for the years ended
December 31, 1993 and 1994, for the one-month period ended January 31, 1995, and
the eleven-month period ended December 31, 1995 of approximately $1,040,000,
$1,298,000, $117,000, and $1,513,000, respectively, related to these services.
Such expenses are estimated by management and are generally allocated based on
the number of customers served. Management believes that these allocations were
made, on a reasonable basis. However, the allocations are not necessarily
indicative of the level of expenses that might have been incurred had the
Ashland and Defiance Clusters contracted directly with third parties. Management
has not made a study or any attempt to obtain quotes from third-parties to
determine what the cost of obtaining such services from third parties would have
been. The fees and expenses to be paid by the Ashland and Defiance Clusters are
subject to change.
The amounts due from affiliate represent the net of various transactions,
including those described above. Prior to February 1, 1995, amounts due from/to
Times Mirror bore interest at Times Mirror's estimated ten-year financing rate
and ranged between 6% and 8% between 1993 and 1994. Interest income for 1993 and
1994 was $133,000 and $434,000, respectively. Effective February 1, 1995,
advances to affiliate are noninterest-bearing.
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Ashland and Defiance Clusters have
estimated the fair value of its intercompany advances. Given the short-term
nature of these advances, the carrying amounts reported in the balance sheets
approximate fair value.
(9) COMMITMENTS AND CONTINGENCIES
The Ashland and Defiance Clusters lease office facilities and various items of
equipment under noncancelable operating leases. Rental expense under operating
leases amounted to $119,000 and $122,000 for the years ended December 31, 1993
and 1994 and $163,000 for the eleven-month period ended December 31, 1995.
Future minimum lease payments as of December 31, 1995 for all noncancelable
operating leases are as follows (Thousands of Dollars),
F-51
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(9) COMMITMENTS AND CONTINGENCIES (continued)
1996 $126
1997 103
1998 59
1999 50
2000 42
Thereafter 4
----
Total $384
====
At December 31, 1995, the Ashland and Defiance Clusters had outstanding purchase
commitments totaling approximately $2,000.
The Ashland and Defiance Clusters are a party to various legal proceedings that
are ordinary and incidental to its business. Management does not expect that any
legal proceedings currently pending will have a material adverse impact on the
Ashland and Defiance Clusters' combined financial position or combined results
of operations.
(10) RATE REGULATION AND OTHER DEVELOPMENTS
In 1993 and 1994, the FCC adopted rate regulations required by the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), which utilized a benchmark price cap system, or alternatively a
cost-of-service regime, for establishing the reasonableness of existing basic
and cable programming service rates. The regulations resulted in, among other
things, an overall reduction of up to 17% in basic rates and other charges in
effect on September 30, 1992, before inflationary and other allowable
adjustments, if those rates exceeded the revised per-channel benchmarks
established by the FCC and could not otherwise be justified under a
cost-of-service showing.
In September 1995, the FCC authorized a new, alternative method of implementing
rate adjustments which will allow cable operators to increase rates for
programming annually on the basis of projected increases in external costs
rather than on the basis of cost increases incurred in the preceding quarter.
Many franchising authorities have become certified by the FCC to regulate rates
charged by the Ashland and Defiance Clusters for basic cable service and
associated basic cable service equipment. Some local franchising authority
decisions have been rendered that were adverse to the Ashland and Defiance
Clusters. In addition, a number of such franchising authorities and customers of
the Ashland and Defiance Clusters filed complaints with the FCC regarding the
rates charged for cable programming services.
In September 1995, CCI and the Cable Services Bureau of the FCC reached a
settlement in the form of a resolution of all outstanding rate complaints
covering the CCI, the Ashland and Defiance Clusters, and the former Times Mirror
cable television systems. In December 1995, the FCC approved the Resolution
which, among other things, provided for refunds ($115,000 to the Ashland and
Defiance Clusters' customers) in January 1996, and the removal of additional
outlet charges for regulated services from all of the Times Mirror cable
television systems, which accounts for a majority of the refund amounts. The
resolution also finds that the Ashland and Defiance Clusters' cable programming
services tier rates as of June 30, 1995 are not unreasonable. At December 31,
1995, refunds under the resolution were fully provided for in the Ashland and
Defiance Clusters' financial statements.
F-52
<PAGE>
ASHLAND AND DEFIANCE CLUSTERS
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
(10) RATE REGULATION AND OTHER DEVELOPMENTS (continued)
On February 1, 1996, Congress passed the Telecommunications Competition and
Deregulation Act of 1996 ("the 1996 Act") which was signed into law by the
President on February 8, 1996, The 1996 Act is intended to promote substantial
competition in the delivery of video and other services by local telephone
companies (also known as local exchange carriers or "LECs") and other service
providers, and permits cable television operators to provide telephone services.
Among other provisions, the 1996 Act deregulates the Cable Programming Services
("CPS") tier of large cable television operators on March 31, 1999 and upon
enactment, the CPS rates of small cable television operators where a small cable
operator serves 50,000 or fewer subscribers, revises the procedures for filing a
CPS complaint, and adds a new effective competition test.
The 1996 Act establishes local exchange competition as a national policy by
preempting laws that prohibit competition in the telephone local exchange and by
establishing uniform requirements and standards for entry, competitive carrier
interconnection, and unbundling of LEC monopoly services. Both the FCC and state
commissions have substantial new responsibilities to promote the 1996 Act's
competition policy. Depending on the degree and form of regulatory flexibility
afforded the LECs as part of the 1996 Act's implementation, the Ashland and
Defiance Clusters' ability to offer competitive telephony services may be
adversely affected.
The 1996 Act repeals the cable television/telephone cross-ownership ban and
allows LECs and other common carriers, as well as cable systems providing local
exchange service, to provide video programming services as either cable
operators or as open video system ("OVS") operators within their service areas
upon certification from the FCC and pursuant to regulations which the FCC is
required to adopt. The 1996 Act exempts OVS operators from many of the
regulatory obligations that currently apply to cable operators such as rate
regulation and franchise fees, although other requirements are still applicable.
OVS operators, although not subject to franchise fees as defined by the 1992
Cable Act may be subject to fees charged by local franchising authorities or
other governmental entities in lieu of franchise fees.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
C4 Media Cable Southeast, Limited Partnership
Lockney, Texas 79241
We have audited the consolidated balance sheets of C4 Media Cable Southeast,
Limited Partnership and its subsidiary (the Partnership) as of December 31,
1995, and 1994, and the related consolidated statements of loss, partners'
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of C4 Media Cable
Southeast Limited Partnership and its subsidiary as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Partnership will continue as a going concern. As discussed in Note 7 to
the consolidated financial statements, the Partnership sold substantially all
assets on February 1, 1996. The sales price was not sufficient to satisfy the
liabilities of the Partnership. The remaining unpaid principal and interest on
Senior and Junior loans have been due and payable since September 30, 1990.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 7. The historical consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Williams, Rogers, Lewis & Co., P.C.
Plainview, Texas
March 11, 1996
F-54
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
---------------------------
1995 1994
---------------------------
ASSETS
CURRENT ASSETS
Cash $ 203,955 $ 204,255
Accounts Receivable, Net 168,823 141,025
Prepaid Expense and Other 211,289 201,952
------------ ------------
Total Current Assets 584,067 547,232
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Plant and Equipment 41,057,969 39,251,506
Less: Accumulated Depreciation (20,386,652) (16,172,050)
------------ ------------
Net Property, Plant and Equipment 20,671,317 23,079,456
------------ ------------
OTHER ASSETS
Deposits and Other 17,314 17,899
Franchises, Net 2,967,669 4,031,170
Acquisition Costs, Net 874,863 1,148,913
Covenant Not to Compete -0- -0-
------------ ------------
Total Other Assets 3,859,846 5,197,982
------------ ------------
Total Assets $ 25,115,230 $ 28,824,670
============ ============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 735,138 $ 691,305
Other Current Liabilities 393,423 568,455
Accrued Interest Payable 30,022,386 24,315,384
Notes Payable 60,165,844 60,165,844
------------ ------------
Total Current Liabilities 91,316,791 85,740,988
------------ ------------
MINORITY INTEREST (371,926) (268,729)
------------ ------------
PARTNERS' DEFICIT
General Partners (65,829,635) (56,647,589)
------------ ------------
Total Liabilities and Partners' Deficit $ 25,115,230 $ 28,824,670
============ ============
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF LOSS
December 31, 1995 AND 1994
-----------------------------
1995 1994
------------ ------------
REVENUE
Cable Service $ 11,755,860 $ 11,231,123
------------ ------------
EXPENSE
Programming Costs 3,003,682 2,602,692
Salaries 1,124,203 1,046,895
Other Operating Expenses 2,607,023 2,642,777
Management Fees 545,641 561,114
Depreciation 4,214,602 4,113,809
Amortization 1,337,551 1,575,551
Interest 8,208,401 7,447,251
------------ ------------
21,041,103 19,990,089
------------ ------------
Loss Before Minority Interest (9,285,243) (8,758,966)
Minority Interest in Loss of Subsidiary 103,197 116,472
------------ ------------
NET LOSS $ (9,182,046) $ (8,642,494)
============ ============
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNER'S DEFICIT
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
--------------------------------------------------------
Class A
General General Limited
Partners Partners Partners Total
----------- ----------- --- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ (539,910) $(47,465,185) $-0- $(48,005,095)
Loss, 1994 (86,425) (8,556,069) -0- (8,642,494)
----------- ----------- --- -----------
Balance, December 31, 1994 (626,335) (56,021,254) -0- (56,647,589)
Loss, 1995 (91,820) (9,090,226) -0- (9,182,046)
----------- ----------- --- -----------
BALANCE, DECEMBER 31, 1995 $ (718,155) $(65,111,480) $-0- $(65,829,635)
=========== =========== === ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $(9,182,046) $(8,642,494)
Adjustments to reconcile net loss to net cash:
Minority interest in loss of subsidiary (103,197) (116,472)
Depreciation 4,214,602 4,113,809
Amortization 1,337,551 1,575,551
Changes in Assets and Liabilities:
Accounts receivable (27,798) 2,330
Prepaid expenses and other (8,752) (7,701)
Accounts payable 43,833 20,388
Other liabilities (175,032) 51,392
Accrued interest 5,707,002 3,928,106
----------- -----------
Net cash provided by operating activities 1,806,163 924,909
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of plant, equipment and other assets (1,806,463) (854,999)
----------- -----------
Net cash used in investing activities (1,806,463) (854,999)
----------- -----------
Net Increase (Decrease) in Cash (300) 69,910
Cash, Beginning of Year 204,255 134,345
----------- -----------
Cash, End of Year $ 203,955 $ 204,255
=========== ===========
Supplemental Disclosure for Statements of Cash Flows:
Cash Paid for Interest 2,470,936 3,519,145
Non-Cash Investing Activities:
Deposit added to cost of plant and equipment -0- 39,622
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ENTITIES:
C4 Media Cable Southeast, Limited Partnership and its subsidiary (the
"Partnership") is a Delaware limited partnership organized to own and operate
cable television systems in various communities throughout Virginia, Tennessee,
and Georgia. The Partnership provides basic and pay cable television service to
approximately 40,500 subscribers in these states. General partners are C4 Media
Cable, Inc. and C4 Media Cable Employees Investment Corporation. C4 Media Cable,
Inc. also participates as a limited partner. Under a letter agreement dated May
9, 1992, Philips Credit Corporation ("Philips") has exercised its rights under
certain pledge agreements to exercise voting control over all partnership
interests. Accordingly, effective October 30, 1992, C4 Media Cable, Inc. was
replaced by Southeast Cable, Inc., a corporate affiliate of Philips, as the
managing general partner. The managing general partner utilized Doucette
Management Company ("DMC") as the business manager for the Partnership until
December 30, 1993 at which time the management agreement was assigned to
Cablevision of Texas III, LP ("CAB III"). See note 4.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of C4 Media Cable
Southeast, Limited Partnership and County Cable Company, Limited Partnership of
which the Partnership is an 80% owner and general partner. All significant
intercompany transactions have been eliminated.
REVENUE RECOGNITION:
The Partnership recognizes cable service revenue on the accrual basis in the
month the cable service is provided. Payments received in advance are included
in deferred revenue until the month the service is provided at which time they
are recognized as income.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:
Property, plant and equipment used in the business are stated at cost and
depreciated over estimated useful lives generally on the straight line method
for financial statement purposes. Expenditures which significantly increase
asset values or extend useful lives are capitalized, limited by projected
recoverability of such current year expenditures in the ordinary course of
business from expected future revenue.
The useful lives of property, plant and equipment for purposes of computing
depreciation range from 3 to 10 years.
FRANCHISES:
The company has been granted rights to operate within the locations wherein it
has cable television systems. Such franchises grant certain operating rights and
impose certain costs and restrictions. The Partnership pays its franchise fees
annually on most of its locations based upon either gross or basic service
revenues. Franchise fee expense for the years ended December 31, 1995 and 1994
was $327,088 and $303,375, respectively.
F-59
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Such franchises have varying lives and are renewable at the discretion of the
franchise's governing boards. For financial statement purposes, franchise costs
acquired in connection with the purchase of cable systems are being amortized
over the remaining average lives of the related cable television franchises at
the date of acquisition, which approximates 7 to 13 years. Franchise
amortization expense for the years ended December 31, 1995 and 1994 was
$1,063,501 in each year.
ACQUISITION COSTS:
Acquisition costs are those costs incurred related to the acquisition of new
systems. For financial statement purposes, such costs are amortized by using the
straight-line method over 10 years. Amortization expense for acquisition costs
for the years ended December 31, 1995 and 1994 was $274,050, and $274,050,
respectively.
COVENANTS NOT TO COMPETE:
The portion of the purchase price of systems allocated to non-competition
agreements with former owners is capitalized and amortized by using the
straight-line method over the life of the agreements. Amortization expense for
non-competition agreements for the year ended December 31, 1994 was $238,000.
INCOME TAXES:
The partnership does not pay federal income tax, but is a pass through entity so
that partners are taxed on their share of partnership earnings. Partnership net
income or loss is allocated to each partner under a formula established in the
partnership agreement.
CASH EQUIVALENTS:
For cash flow purposes, cash equivalents are cash and cash items with a maturity
of less than 90 days.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
(2) ACCOUNTS RECEIVABLE, NET
Following is a summary of accounts receivable at December 31, 1995 and 1994:
--------------------------
1995 1994
--------- ---------
Trade Accounts $ 175,671 $ 146,239
Other 281 642
Related Parties (4) -0- 194,873
Less: Allowance for Doubtful Accounts (4) (7,129) (200,729)
--------- ---------
$ 168,823 $ 141,025
========= =========
F-60
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) NOTES PAYABLE
Following is a summary of notes payable at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Senior loan payable to Philips, due September 30,
1990, interest due at prime + 2.25%, secured by
substantially all assets of the partnership and the
pledge of partnership interests. In addition, the loan
is collateralized by the pledge of all stock held in
C4 Media Cable, Inc. and C4 Media Cable,
Employees Investment Corporation by the President
and Chairman of C4 Media Cable, Inc. $44,185,831 $44,185,831
Junior Loan payable to Philips, due September 30,
1990 interest due at 20%, secured by substantially
all assets of the partnership and the pledge of
partnership interests. In addition, the loan is
collateralized by the pledge of all stock held in
C4 Media Cable, Inc. and C4 Media Cable Employees
Investment Corporation by the President and Chairman
of C4 Media Cable, Inc. 15,980,013 15,980,013
----------- -----------
Total $60,165,844 $60,165,844
=========== ===========
</TABLE>
The Philips notes contain performance covenants concerning homes passed,
subscriber levels, miles of plant, etc., some of which the Partnership had
violated as of December 31, 1995 and 1994. Philips has not waived compliance
with these provisions.
All notes payable and accrued interest to Philips were due September 30, 1990.
Philips has not extended the due date of the notes and has the right to demand
payment at any time. A significant amount of accrued interest and principle was
paid when substantially all operating assets of the Partnership were sold
February 1, 1996. See note 7.
(4) RELATED PARTY TRANSACTIONS
Effective October 30, 1992, C4 Media Cable, Inc. was replaced by Southeast
Cable, Inc., a corporate affiliate of Philips, as the managing general partner.
Effective May 10, 1992 under the provisions of an agreement with Philips, the
Partnership terminated its management agreement with C4 Media Cable, Inc. and
entered into a management agreement with DMC for a term extending to December
30, 1993. At December 30, 1993 the management agreement was assigned to CAB III.
The agreement provides for fixed fees and the reimbursement of direct expenses
incurred on behalf of the Partnership as defined in the agreement. Management
fees paid under these agreements for the years ended December 31, 1995 and 1994
were $545,641 and $550,214, respectively. Other fees and expense reimbursements
paid under the agreements for the years ended December 31, 1995 and 1994 were
$120,000 and are included in Other Operating Expenses.
Other related parties include Caribbean Cable TV ("CCTV") and MCT Cablevision
("MCT"). Related party lending was done without independent business judgment,
terms, collateral or a method of settlement. Due to the manner in which this
lending was done and questions surrounding the collectability of these accounts,
all the related party receivables were reserved in the allowance for doubtful
accounts prior to 1994 and were written off in 1995. See note 2. Related party
receivables at December 31, 1994 were as follows:
F-61
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) RELATED PARTY TRANSACTIONS (continued)
--------
1994
--------
CCTV $ 23,965
MCT 35,968
C4 Media Cable, Inc. 134,940
--------
$194,873
========
The Partnership purchased leasehold improvements from J-D Partnership, Ltd.
("J-D") for the Lockney, Texas office of $5,366 on April 24, 1995. J-D is a
limited partnership 99% owned by James and Denise Doucette (Doucette). Doucette
is also the managing general partner and owns 62% of CAB III, as well as being
the sole stockholder of DMC, an S-Corporation. The Partnership paid a management
fee to Doucette of $10,900 for the year ended December 31, 1994.
(5) COMMITMENTS
The Company has certain obligations under pole rental agreements, tower site
leases, etc. for assets utilized in the operation of the systems. These are
mostly short term agreements. Expenses charged to operations for the periods
ended December 31, 1995 and 1994 were $536,368 and $518,837, respectively, and
are included in Other Operating Expenses.
(6) CONTINGENCIES
The Company is to a significant degree self-insured for risks consisting
primarily of physical loss to property and plant. The headend equipment is
insured, but the plant itself is not and represents a potential exposure for the
Company. Management is of the opinion that the various systems' distance from
each other make the likelihood of a complete loss to the plant unlikely.
(7) SUBSEQUENT EVENT AND CONSIDERATION OF ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
On February 1, 1996 substantially all assets of the Partnership were sold to
FrontierVision Operating Partners, L.P. The agreement had a stated sales price
of $48,000,000 and a net payment amount of $46,237,708 after escrow holdback of
$1,375,200 and other adjustments. At the date of the auditors' report the
Partnership was still liable for the remaining balance of the note payable to
Philips with no significant assets to satisfy that liability, and the escrow
items remain open.
An unaudited pro forma consolidated balance sheet is presented below giving
effect to the sale as if it had occurred December 31, 1995 including escrowed
items. The pro forma information is presented for the purpose of additional
analysis and is not a required part of the basic consolidated financial
statements.
F-62
<PAGE>
C4 MEDIA CABLE SOUTHEAST, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SUBSEQUENT EVENT AND CONSIDERATION OF ABILITY TO CONTINUE AS A GOING CONCERN
(continued)
------------
Pro Forma
Unaudited
1995
------------
Current Assets $ 685,773
Other Assets 1,392,514
------------
Total Assets $ 2,078,287
============
Current Liabilities $ 45,303,939
Partners' Deficit (43,225,652)
------------
Total Liabilities and Partners' Deficit $ 2,078,287
============
The Partnership has been unable to pay all of its principle and interest as
required under its loan agreements since the loans matured September 30, 1990.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The historical consolidated financial statements do
not include any adjustments that might result from this sale of assets or this
uncertainty. Management has not fully evaluated the options for the Partnership
subsequent to the sale.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
American Cable Entertainment of Kentucky-Indiana, Inc.
We have audited the accompanying balance sheets of American Cable Entertainment
of Kentucky-Indiana, Inc. (the "Company") as of December 31, 1995 and 1994 and
the related statements of operations, shareholders' deficiency and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of American Cable Entertainment of
Kentucky-Indiana, Inc. as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that American
Cable Entertainment of Kentucky-Indiana, Inc. will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company is unable to
meet its scheduled debt maturity repayments which raises substantial doubt about
the Company's ability to continue as a going concern. Consequently, the Company
has entered into an agreement to sell substantially all of its assets, has
entered into agreements with its creditors who have consented, under certain
circumstances, to forbear taking any action against the Company pending the sale
of the Company's assets and has filed a prepackaged bankruptcy under Chapter 11
of the Federal Bankruptcy Code. Management's plans in regard to these matters
are described further in Note 1. The accompanying financial statements do not
purport to reflect or provide for the consequences of the sale of the Company or
the filing of the prepackaged bankruptcy. In particular, such financial
statements do not purport to show the realizable value of assets or liabilities
on a liquidation basis nor do they include any adjustments that might result
from the outcome of these uncertainties.
The accompanying balance sheet as of September 30, 1996, and the statements of
operations, cash flows and shareholders' deficiency for the nine-month period
ended September 30, 1996 were not audited by us and, accordingly, we do not
express an opinion on them. As described in Note 10, these unaudited financial
statements have not been prepared in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code,"
which is required under generally accepted accounting principles for entities
that have filed petitions with the Bankruptcy Court and expect to reorganize as
going concerns under Chapter 11. Pre-petition liabilities subject to compromise
by the Bankruptcy Court as of the bankruptcy filing date have not been
segregated on the September 30, 1996 balance sheet or reported based on the
expected amount of the allowed claims. Expenses directly related to the
reorganization of the Company since the filing of the prepackaged bankruptcy
have not been separately disclosed and interest on the Company's Step Coupon
Senior Subordinated Notes and Junior Subordinated Debentures continued to be
accrued during the bankruptcy period although such interest was not probable of
being paid in the future.
DELOITTE & TOUCHE LLP
Stamford, CT
March 15, 1996 (Except for Note 1, as to
which the date is August 1, 1996.)
F-64
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
------------- ------------- -------------
September 30, December 31, December 31,
1996 1995 1994
------------- ------------- -------------
Unaudited
ASSETS
<S> <C> <C> <C>
INVESTMENT IN CABLE TELEVISION SYSTEMS:
Land and land improvements $ 247,561 $ 247,561 $ 247,561
Vehicles 1,811,308 1,702,997 1,507,850
Buildings and improvements 1,007,624 998,414 967,794
Office furniture and equipment 812,985 802,377 733,465
CATV distribution systems and related
equipment 55,094,378 51,757,161 49,161,506
------------- ------------- -------------
Total Fixed Assets 58,973,856 55,508,510 52,618,176
Less accumulated depreciation 32,840,157 28,897,790 23,683,730
------------- ------------- -------------
Total Fixed Assets-- net 26,133,699 26,610,720 28,934,446
Franchise costs-- net 278,753 2,785,425 5,964,805
Subscriber lists-- net 154,331 1,543,307 3,531,021
Covenant not to compete-- net 8,068 80,682 242,045
------------- ------------- -------------
Investment in cable television systems-- net 26,574,851 31,020,134 38,672,317
GOODWILL-- net 3,499,898 3,579,784 3,686,299
DEFERRED CHARGES-- net 134,767 371,691 963,949
CASH AND CASH EQUIVALENTS 907,718 3,704,823 3,427,849
ACCOUNTS RECEIVABLE-- less allowance for
doubtful accounts of $313,661 in 1996, $240,212
in 1995 and $195,736 in 1994 859,836 304,734 276,709
PREPAID AND OTHER 387,763 197,802 194,514
------------- ------------- -------------
TOTAL ASSETS $ 32,364,833 $ 39,178,968 $ 47,221,637
============= ============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Notes and loans payable $ 187,404,112 $ 182,430,902 $ 167,707,411
Accrued interest-- Senior debt 0 1,314,032 329,004
Accrued interest -- Senior/Junior Subordinated
Debentures 10,537,714 3,068,862 4,345,047
Accounts payable and accrued expenses 5,019,665 4,244,348 3,973,224
Unearned income 146,702 124,109 124,344
Converter deposits 126,852 134,366 136,588
------------- ------------- -------------
Total Liabilities 203,235,045 191,316,619 176,615,618
------------- ------------- -------------
COMMITMENTS (See Note 7)
SHAREHOLDERS' DEFICIENCY:
Capital stock-- all series 10,000 10,000 26
Additional paid-in capital 1,490,000 1,490,000 1,499,974
Deficit (172,370,212) (153,637,651) (130,893,981)
------------- ------------- -------------
Total shareholders' deficiency (170,870,212) (152,137,651) (129,393,981)
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' $ 32,364,833 $ 39,178,968 $ 47,221,637
============= ============= =============
DEFICIENCY
</TABLE>
See notes to financial statements
F-65
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------ ------------ ------------ ------------
For the
Nine Months For the Year For the Year For the Year
Ended Ended Ended Ended
September 30, December 31, December 31, December 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
Revenue $ 22,911,386 $ 28,088,127 $ 25,879,525 $ 24,976,818
------------ ------------ ------------ ------------
Costs and expenses:
Operating expenses 8,681,583 10,880,854 9,388,813 8,699,878
Selling, general and administrative
expenses 3,884,865 4,948,493 4,912,150 4,743,783
Management fees 696,942 842,644 819,095 749,305
Depreciation and amortization 8,265,739 11,284,315 18,054,371 18,231,734
Expenses incurred in connection with
override and forbearance agreements 912,865 557,664 0 0
------------ ------------ ------------ ------------
Total costs and expenses 22,441,994 28,513,970 33,174,429 32,424,700
------------ ------------ ------------ ------------
Operating income (loss) 469,392 (425,843) (7,294,904) (7,447,882)
Interest expense-- net 19,201,953 22,366,189 20,241,202 18,410,503
Net gain on sale of cable television
system and marketable securities 0 48,362 1,266,020 0
------------ ------------ ------------ ------------
NET LOSS $(18,732,561) $(22,743,670) $(26,270,086) $(25,858,385)
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-66
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED September, 1996 Unaudited
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Common Stock
-------------------------------------------------
Number of
Shares Additional Total
Issued and Par Paid-in Shareholders'
Outstanding Value Capital Deficit Deficiency
---- ------- --- ------- ----------- ------------- -------------
Class Class
---- ------- --- -------
A D A D
---- ------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 255 $26 $ 1,499,974 $ (78,765,510) $ (77,265,510)
Net Loss (25,858,385) (25,858,385)
---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1993 255 26 1,499,974 (104,623,895) (103,123,895)
Net Loss (26,270,086) (26,270,086)
---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1994 255 26 1,499,974 (130,893,981) (129,393,981)
Net Loss (22,743,670) (22,743,670)
Recapitalization of Common Stock (254) 99,999 (26) $10,000 (9,974)
---- ------- --- ------- ----------- ------------- -------------
Balance at December 31, 1995 1 99,999 0 10,000 1,490,000 (153,637,651) (152,137,651)
Net Loss Unaudited (18,732,561) (18,732,561)
---- ------- --- ------- ----------- ------------- -------------
Balance at September 30, 1996
Unaudited 1 99,999 $ 0 $10,000 $ 1,490,000 $(172,370,212) $(170,870,212)
==== ======= === ======= =========== ============= =============
</TABLE>
See notes to financial statements
F-67
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------ ------------ ------------ ------------
For the
Nine Months For the Year For the Year For the Year
Ended Ended Ended Ended
September 30, December 31, December 31, December 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,732,561) $(22,743,670) $(26,270,086) $(25,858,385)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation 3,980,667 5,257,085 6,397,956 5,452,940
Amortization 4,285,072 6,027,230 11,656,415 12,778,794
Accretion of discount on step coupon
senior subordinated notes 8,583,143 10,171,124 9,519,095 8,189,478
Accretion of discount on junior
subordinated debentures 4,429,619 5,416,469 4,820,269 4,231,918
Net gain on sale of cable television
system, marketable securities, and other
assets 0 (48,362) (1,266,020)
Change in assets and liabilities:
Decrease (increase) in accounts
receivable (555,102) (28,025) (94,868) 23,917
Decrease (increase) in prepaid and other
assets (189,961) (3,288) 51,799 (59,414)
(Decrease) increase in accounts payable
and accrued expenses 775,317 271,124 (414,333) 169,808
(Decrease) increase in accrued
interest-senior debt (1,314,032) 985,028 129,505
Increase (decrease) in converter
deposits (7,514) (2,222) (237) (9,384)
Increase (decrease) in unearned income 22,593 (235) (91,827) 9,518
------------ ------------ ------------ ------------
Net cash provided by operating
activities 1,277,241 5,302,258 4,437,668 4,929,190
------------ ------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to reception and distribution
facilities and equipment (3,471,098) (2,933,359) (3,605,498) (5,083,401)
Net proceeds from sale of assets 0 48,362 1,523,137
------------ ------------ ------------ ------------
Net cash used in investing activities (3,471,098) (2,884,997) (2,082,361) (5,083,401)
------------ ------------ ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on senior bank loan (229,016) (1,262,542) (309,165)
Payments on senior revolving credit
facility (55,862) (131,616) (3,668)
Payments on senior secured notes (315,121) (742,447) (20,712)
Increase in deferred charges 0 (186,563) (598)
(Decrease) increase in obligations under
capital lease (3,249) (3,682) 7,281
------------ ------------ ------------ ------------
Net cash used in financing activities (603,248) (2,140,287) (512,827) (598)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (2,797,105) 276,974 1,842,480 (154,809)
Cash and cash equivalents at beginning of
period 3,704,823 3,427,849 1,585,369 1,740,178
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 907,718 $ 3,704,823 $ 3,427,849 $ 1,585,369
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,002,809 $ 6,900,613 $ 5,952,791 $ 6,038,557
============ ============ ============ ============
Cash paid for restructuring costs 912,865 0 0 0
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-68
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(1) DEBT MATURITIES AND THE SALE OF THE COMPANY
During the fourth quarter of 1995 the Company's senior debt obligations matured
without being paid. In addition, the Company failed to make the full payment of
interest on the Step Coupon Senior Subordinated Notes which became due in 1995.
Prompted by these payment defaults, effective December 31, 1995, the Company,
its shareholders, and Kentucky-Indiana Management Company, Inc. ("KYMC"), which
acts as manager for the Company, entered into two agreements: a "Forbearance
Agreement" with its senior lenders; and an "Override Agreement" with the holders
of its Senior Subordinated and Junior Subordinated Notes.
Under the terms of the Forbearance Agreement the senior lenders have agreed to
forebear in the exercise of their rights and remedies with respect to the
payment default described above as well as defaults with respect to certain
specified financial covenants, through September 30, 1996 which allows the
Company time to sell its assets in an orderly manner. It contains certain
financial covenants as well as procedures that the Company and KYMC have agreed
to follow during the sales process. Subsequent to September 30, 1996, certain
financial covenants, which the Company is currently in default upon, revert back
to the terms in the original agreements.
The Override Agreement requires that the Company undertake to sell substantially
all of its assets, and to enter into a contract for sale and to consummate that
sale in accordance with an agreed upon time schedule. It also contains certain
financial covenants and procedures to be followed.
Effective July 15, 1996, the Company entered into an asset purchase agreement
with FrontierVision Operating Partners, L.P. ("FrontierVision") for the sale of
substantially all of the assets of the Company for $146 million, subject to
certain purchase price adjustments. Due to the expected shortfall of payments to
existing creditors from the sale proceeds, the Company filed a prepackaged
bankruptcy under Chapter 11 of the Federal Bankruptcy code with the Federal
Bankruptcy court on August 1, 1996. Management anticipates the sale to
FrontierVision to be consummated in the fourth quarter of 1996, subject to the
required regulatory approvals and the approval of the bankruptcy court.
As a result of the matters discussed above, Management does not believe that it
is practical to estimate the fair value of the Company's debt facilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
reflect adjustments or provide for the potential consequences of the sale of the
Company's assets. In particular, the financial statements do not purport to show
the realizable value of assets on a liquidation basis or their availability to
satisfy liabilities.
The accompanying balance sheet as of September 30, 1996, the statements of
operations, and cash flows for the nine months ended September 30, 1996 and the
statement of shareholders' deficiency for the nine months ended September 30,
1996 are unaudited but, in the opinion of management, include all
F-69
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for these interim periods in accordance
with Generally Accepted Accounting Principles, except as disclosed in Note 10.
The interim financial information as of and for the years ended September 30,
1996 included within the notes to the financial statements is also unaudited.
FORMATION OF COMPANY
On November 7, 1989 cable systems were purchased from Centel Cable Television
Company to form Simmons Cable TV of Kentucky-Indiana, Inc. (the "Company"). The
Company owns and operates cable systems in Kentucky and Indiana. On April 12,
1994 the Company changed its name to American Cable Entertainment of
Kentucky-Indiana, Inc.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
INVESTMENT IN CABLE TELEVISION SYSTEMS
Reception and distribution facilities and equipment additions are stated at
cost. Depreciation is provided using the straight-line method over the useful
lives of the assets (four to ten years for CATV distribution facilities and
related equipment, vehicles, building improvements and office furniture and
equipment; forty years for buildings). Included in depreciation expense for the
year ended December 31, 1994 were write-offs related to a rebuilt cable system
of $942,850.
Franchise acquisition costs are amortized over the average remaining term of the
franchises as of November 7, 1989 of seven years using the straight-line method,
Accumulated amortization of franchise costs at September 30, 1996, December 31,
1995 and 1994 aggregated $21,976,905, $19,470,233 and $16,290,853, respectively.
Covenants not to compete are amortized over the life of the agreements (five
years). Accumulated amortization of such covenants at September 30, 1996,
December 31, 1995 and 1994 aggregated $798,749, $726,315 and $564,772,
respectively.
Subscriber lists are amortized over seven years. Accumulated amortization of
subscriber lists at September 30, 1996, December 31, 1995 and 1994 aggregated
$13,759,669, $12,370,693 and $10,382,979, respectively.
Deferred charges consist of $882,408 of organizational costs and $3,616,230 of
loan acquisition costs at September 30, 1996. The loan acquisition costs are
amortized over the average life of the related debt, and organizational costs
are amortized over five years. Accumulated amortization at September 30, 1996,
December 31, 1995 and 1994 was $4,363,871, $4,126,947 and $3,534,689,
respectively.
F-70
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill is amortized over forty years. Accumulated amortization of
goodwill at September 30, 1996, December 31, 1995 and 1994 aggregated $760,711,
$680,825 and $574,310, respectively.
VALUATION OF INTANGIBLE ASSETS
The Company, on an annual basis, undertakes a review and valuation of the net
carrying value, recoverability and write-off of all categories of its intangible
assets. The Company in its valuation considers current market values of its
properties, competition, prevailing economic conditions, government policy
including taxation, and the Company's and the industry's historical and current
growth patterns, as well as the recoverability of the cost of its intangible
assets based on a comparison of estimated undiscounted operating cash flows.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and liquid investments with a maturity
of three months or less from the date of purchase.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the Internal
Revenue Code and, accordingly, pays no federal income taxes. The income or loss
of the Company for its tax year is passed through to its shareholder(s) and
reported in the income tax returns of the shareholder(s).
SUBSCRIPTION REVENUES
Subscription revenues received in advance of services rendered are deferred and
recorded in income in the period in which the related services are provided.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations or
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate or short-term maturity of these
financial instruments. Management does not believe it is practicable to estimate
the fair value of the Company's debt facilities. (See Note 4).
(3) DISPOSITIONS
On June 30, 1994 the Company sold its cable television system serving Jackson
County, Kentucky. The carrying value of the assets sold at the date of sale, net
of accumulated depreciation and amortization was as follows:
F-71
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(3) DISPOSITIONS (continued)
Reception and distribution facilities and equipment $69,527
Franchise cost 55,714
Goodwill and other intangible assets 50,300
The net loss on this transaction was $157,630, recognized in 1994. Additional
proceeds of $48,362 were received in 1995 and recorded as a gain.
On October 17, 1994 the Company tendered all of its holding in QVC, Inc., which
resulted in a gain of $1,423,650.
These transactions are reflected in the statements of operations for the years
ended December 31, 1995 and 1994.
(4) NOTES AND LOANS PAYABLE
Notes and loans payable at September 30, 1996, December 31, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
------------ ------------ ------------
September 30, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Senior Debt
Bank Credit Agreement (a) $ 23,199,277 $ 23,428,293 $ 24,690,835
Revolving Credit Facility (b) 5,658,854 5,714,716 5,846,332
Senior Secured Notes (c) 31,921,720 32,236,841 32,979,288
Step Coupon Senior Subordinated Notes (d) 83,593,122 78,016,664 66,137,000
Junior Subordinated Debentures (e) 43,030,789 43,030,789 38,046,675
Capitalized lease obligation 350 3,599 7,281
------------ ------------ ------------
$187,404,112 $182,430,902 $167,707,411
============ ============ ============
</TABLE>
(a) The Company has a credit agreement with Crestar Bank providing for total
borrowings of $25,000,000. This agreement provided for interest up to 1.5
percentage points over the bank's prime rate (or from 1.0 to 2.5 percentage
points over LIBOR). Interest only was payable quarterly in arrears on the
last day of March, June, September and December, and at the end of any LIBOR
borrowing period. The total commitment terminated at its maturity date of
October 31, 1995. Upon the payment default at maturity, the default rate of
prime plus 4% was charged. Upon the effective date of the Override
Agreement, interest is payable monthly at the rate of 11.75% per annum.
(b) The Company has a revolving credit facility with Sanwa Business Credit
Corporation which originally provided for borrowings of up to $15,000,000.
The total commitment was reduced to $7,000,000 in early 1994, and in
December 1994, the balance of the unused commitment was terminated. The
agreement provided for interest of up to 1.5 points over the Sanwa's prime
rate (or from 1.0 to 2.5 percentage points over LIBOR). Interest was payable
quarterly in arrears on the last day of March, June, September and December,
and at the end of any LIBOR borrowing period. The total commitment
terminated at its maturity date of October 31, 1995. Upon the payment
default at maturity, the default rate of prime plus 4% was charged. Upon the
effective date of the Override Agreement, interest is payable monthly at the
rate of 11.75% per annum.
F-72
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(4) NOTES AND LOANS PAYABLE (continued)
(c) Senior Secured Notes were issued on November 7, 1989 bearing interest at
10.125% and matured November 7, 1995. The interest rate increased to 10.225%
effective January 1, 1991. Interest only was payable quarterly in arrears on
the last day of March, June, September and December. Upon the payment
default at maturity, interest was charged at 12.25%. Upon the effective date
of the Override Agreement, interest is payable monthly at the rate of 11.75%
per annum.
(d) Step Coupon Senior Subordinated Notes due April 30, 1996 were issued on
November 7, 1989 in the principal amount of $66,137,000 with a stated
interest rate of 15.7472%. Interest accreted and compounded semi- annually
through October 31, 1994. Although interest payments of $5,125,618 were
payable semi-annually beginning April 30, 1995 until maturity, only
$1,300,000 of interest has been paid. These notes were issued with warrants
to purchase up to 150 shares of Class C Non-voting Common Stock for an
aggregate exercise price of $330,000. As a result of the recapitalization
(See Note 5), the number of shares the warrant holders were entitled to
purchase was increased to 58,531 shares of the Class C stock. There are
certain restrictions as to when the warrants may be exercised, and they
expire on November 7, 2001. Total proceeds from the issuance of these
warrants amounted to $200,000. Accreted interest was $17,456,122,
$11,879,664 and $1,708,540 at September 30, 1996, December 31, 1995 and
December 31, 1994, respectively.
(e) Junior Subordinated Debentures due October 31, 1997, were issued on November
7, 1989 for $20,800,000, bearing interest at 13.1%. Interest is deferred and
compounds annually on September 30 of each year and is payable on the
maturity date. On the maturity date, the Company shall pay as additional
interest on the Notes, an amount equal to the greater of 4% of net operating
income of the Company from November 7, 1989 through and including the
maturity date, or 15% of the fair market value of the Company, but in no
event shall the amount exceed $2,153,000. Accreted and accrued interest was
$29,729,270, $25,299,651 and $19,883,183 at September 30, 1996, December 31,
1995 and December 31, 1994, respectively. These notes were issued with
warrants to purchase up to 595 shares of common stock and up to 1,000 shares
of 6% non-cumulative preferred stock. These warrants are exercisable in
whole or in part through November 7, 1999 for an aggregate exercise price of
$2,000,000. Upon exercise, the warrants can be converted into either Class A
Voting Stock or Class B Non-Voting Stock at the option of the warrant
holder. Shares will be issued in the ratio of .595 shares of common stock to
each share of preferred stock. As a result of the recapitalization (See Note
5), the number of shares the warrant holders were entitled to purchase was
increased to 233,359 shares of common stock, in the ratio of 233.359 shares
of common stock to each share of preferred stock. Total proceeds from the
issuance of these warrants amounted to $1,200,000.
The Senior Subordinated and Junior Subordinated Notes will continue to earn
interest at the rate of 15.5% and 13.1%, respectively, although, unless any of
certain specified defaults occur, net proceeds of a sale will be distributed as
provided for in the Override Agreement. The Company leased equipment under a
lease agreement which is classified as a capital lease. The lease term is 3
years and expires in December, 1996.
In 1989 the Company entered into an interest cap agreement and an interest floor
agreement covering $25,000,000 of borrowings which expired November 1, 1994.
Under the cap agreement, Fleet Bank, (as successor to Bank of New England), made
payments to the Company on a quarterly basis in an amount equal to $25,000,000
multiplied by the excess of the then current three month LIBOR rate over 9%.
Under the floor agreement, the Company made payments to Crestar Bank on a
quarterly basis in an amount equal to $25,000,000 multiplied by the difference
between the then current three month LIBOR rate and 8%, to the extent that the
three month LIBOR rate is less than 8%. Approximately $793,000 was charged to
interest expense and paid in 1994 relating to the floor agreement.
F-73
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(4) NOTES AND LOANS PAYABLE (continued)
The Senior Debt and Senior Subordinated Notes are secured by substantially all
the assets of the Company. The Company's debt agreements contain certain
restrictive covenants requiring the maintenance of minimum subscriber levels and
certain financial ratios. The Company has not been in compliance with certain
covenants in its debt agreements, including the timely payment of principal and
interest. (See Note 1).
DEBT MATURITIES
All of the Company's debt is due upon the consummation of the sale of the
Company in accordance with the Forbearance and Override Agreements. (see Note
1).
(5) CAPITAL STOCK
The Company's Board of Directors adopted a resolution on December 31, 1995
which, among other things, established a new class of common stock (Class D),
and authorized the exchange of the outstanding Class A shares for one share of
Class A and 99,999 shares of Class D. Additional shares of Class B and Class C
stock were authorized as well. The Company's Certificate of Incorporation was
amended on February 29, 1996 to reflect these changes.
Capital stock of the Company at December 31, 1994 and prior to the December 31,
1995 resolution noted above, consisted of the following:
Number of Shares
-------------------------
Issued and
Authorized Outstanding
---------- -----------
Common Stock
Class A-- $.10 par value 850 255
Class B-- $.10 par value 595
Class C-- $.10 par value 150
6% Non-cumulative Preferred
Stock $1,000 par value 1,000
Capital stock of the Company after the recapitalization consists of the
following at September 30, 1996 and December 31, 1995:
Number of Shares
-------------------------
Issued and
Authorized Outstanding
---------- -----------
Common Stock
Class A-- $.10 par value 233,360 1
Class B-- $.10 par value 231,940
Class C-- $.10 par value 58,531
Class D-- $.10 par value 99,999 99,999
6% Non-cumulative Preferred
Stock $1,000 par value 1,000
The Class A common stock is voting. The Class B, Class C and Class D shares are
non-voting. Class B shares are convertible into Class A shares at a rate of one
for one. See Note 4 for disclosure of warrants for unissued capital stock at
September 30, 1996, December 31, 1995 and 1994.
F-74
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(6) TRANSACTIONS WITH RELATED PARTIES
KYMC acts as manager for the Company. In accordance with the management
agreement, KYMC is paid a management fee equal to 3% of total revenue (as
defined in the management agreement) plus out-of-pocket expenses not to exceed
1% of total revenue. The management fee for the nine months ended September 30,
1996 and the years ended December 31, 1995, 1994 and 1993 was $696,942,
$842,644, $819,095 and $749,305 respectively.
Included in accounts payable and accrued expenses at December 31, 1994 is a
payable in the amount of $151,190 to Scott Cable Communications, Inc. ("Scott"),
an affiliated Company, for certain administrative costs paid by Scott on behalf
of the Company.
(7) COMMITMENTS
The Company rents pole space, office space and equipment under operating leases.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more are as follows:
1996 $132,081
1997 104,417
1998 59,412
1999 56,006
2000 45,182
Thereafter 53,675
--------
Total $450,773
========
Rent expense for the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was $165,497, $202,652, $204,164 and $207,901
respectively.
(8) 401K RETIREMENT/SAVINGS PLAN
The Company's employees are covered by a 401(k) retirement/savings plan covering
all employees who meet service requirements. Total plan expenses for the nine
months ended September 30, 1996 and the years ended December 31, 1995, 1994 and
1993 was $5,049, $7,660, $5,769 and $7,099, respectively.
(9) REGULATORY MATTERS
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act") which regulates the cable
television industry. Pursuant to the 1992 Cable Act, the Federal Communications
Commission (the "FCC") has issued numerous regulations which include provisions
regarding rates and other matters. As a result of these rules, the Company was
required to reduce many of its basic service rates effective September 1, 1993,
and again on August 1, 1994.
On June 5, 1995, the FCC extended regulatory relief to small cable operators.
All of the Company's cable systems qualified for this regulatory relief, which
allows for greater flexibility in establishing rates (including increases). On
February 8, 1996, Congress enacted the 1996 Telecommunications Act which, among
other things, immediately deregulated all levels of service except broadcast
basic service for small cable operators for which all of the Company's cable
systems qualified.
F-75
<PAGE>
AMERICAN CABLE ENTERTAINMENT OF KENTUCKY-INDIANA, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited as to September 30, 1996
(10) Sale of the Company's Cable Television Systems and Emergence from
Bankruptcy (Unaudited)
As described in Note 1, the Company filed a prepackaged bankruptcy under Chapter
11 of the Federal Bankruptcy Code on August 1, 1996. The prepackaged bankruptcy,
which was agreed to by the Company, the Company's Step Coupon Senior
Subordinated Noteholders and the Company's Junior Subordinated Noteholders,
called for, among other things: the sale of the Company's cable television
systems to FrontierVision; the payment in full of the Senior Debtholders from
the proceeds of the sale; the payment in full of trade creditors in the ordinary
course of business; and the allocation of the remaining sale proceeds among the
Step Coupon Senior Subordinated Noteholders, the Junior Subordinated Noteholders
and KYMC.
On October 9, 1996 the Company consummated the sale of its cable television
systems to FrontierVision for $146 million, subject to certain purchase price
adjustments and effectively emerged from the prepackaged bankruptcy. Senior
Debtholders and trade creditors were paid in full as a result of the prepackaged
bankruptcy. Step Coupon Senior Subordinated Noteholders, Junior Subordinated
Noteholders and KYMC, with aggregate debt of $137,161,625, at September 30, 1996
were paid $78,343,097, as a result of the prepackaged bankruptcy. During the
nine months ended September 30, 1996 the Company incurred expenses totaling
$912,865 in connection with the Forbearance Agreement, the Override Agreement
and in connection with the reorganization of the Company under Chapter 11.
Under Generally Accepted Accounting Principles, entities in reorganization under
the bankruptcy code are required to comply with the provisions of Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"), which requires, among other things: a segregation
of liabilities subject to compromise by the Bankruptcy Court as of the
bankruptcy filing date; the reporting of prepetition liabilities on the basis of
the expected amount of the allowed claims; and separate disclosure of expenses
directly related to the reorganization of the Company. Given the sale of the
Company's cable television systems and the Company's emergence from bankruptcy
on October 9, 1996, the Company's unaudited financial statements as of and for
the nine months ended September 30, 1996 have not been prepared in accordance
with SOP 90-7. These unaudited interim financial statements have been prepared
in accordance with the basis of presentation indicated in Note 2.
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Triax Southeast Associates, L.P.:
We have audited the accompanying balance sheets of Triax Southeast Associates,
L.P. (a Delaware limited partnership) as of December 31, 1995 and 1994, and the
related statements of operations, partners' capital and cash flows for the years
ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Triax Southeast Associates,
L.P. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1996.
F-77
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31,
September 30, ------------------------------------
1996 1995 1994
------------ ------------ ------------
Unaudited
ASSETS
<S> <C> <C> <C>
Cash $ 852,907 $ 3,380,723 $ 699,077
Receivables, net of allowance of $7,747, $29,985 and
$52,302 at September 30, 1996 and December 31, 1995 and
1994, respectively 703,356 600,866 542,832
Prepaid Expenses 100,628 167,908 174,821
Inventory -- 346,274 444,624
Property, Plant and Equipment, net 35,966,591 38,761,227 36,496,820
Purchased Intangibles, net 8,292,119 9,542,002 10,105,115
Other Assets, net 959,186 933,591 1,118,718
------------ ------------ ------------
TOTAL ASSETS $ 46,874,787 $ 53,732,591 $ 49,582,007
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accrued Interest Expense $ 24,924 $ 258,223 $ 168,559
Accounts Payable and Other Accrued Expenses 1,611,149 1,710,636 1,962,757
Subscriber Prepayments and Deposits 58,724 71,105 42,470
Payable to Affiliates 274,686 239,021 227,355
Debt 37,242,965 42,546,539 35,787,218
------------ ------------ ------------
Total Liabilities 39,212,448 44,825,524 38,188,359
Partners' Capital:
General Partner (63,376) (50,929) (26,063)
Limited Partners 7,725,715 8,957,996 11,419,711
------------ ------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 46,874,787 $ 53,732,591 $ 49,582,007
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-78
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Nine Months
Ended December 31,
September 30, -----------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -----------
Unaudited
<S> <C> <C> <C> <C>
REVENUES $ 14,520,733 $ 17,780,041 $ 15,057,652 $ 7,810,891
------------ ------------ ------------ -----------
EXPENSES:
Programming 2,892,862 3,400,604 2,661,058 1,128,730
Operating, selling, general
and administrative 3,953,135 5,104,803 4,489,003 2,268,325
Overhead expenses paid to
affiliate 221,847 211,993 176,705 74,393
Management fees paid to
affiliate 726,036 888,996 752,882 390,545
Depreciation and amortization 5,505,387 7,344,035 6,252,573 3,307,310
------------ ------------ ------------ -----------
13,299,267 16,950,431 14,332,221 7,169,303
Operating Income 1,221,466 829,610 725,431 641,588
Loss on sale of assets 244,180 -- -- --
Interest Expense, net 2,222,014 3,316,191 2,359,980 1,056,256
------------ ------------ ------------ -----------
NET LOSS $ (1,244,728) $ (2,486,581) $ (1,634,549) $ (414,668)
============ ============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-79
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
------------------------------------------------------
General Limited
Partner Partners Total
-------- ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1992 $ (5,571) $ 6,448,436 $ 6,442,865
Contributions -- 7,000,000 7,000,000
Net loss (4,147) (410,521) (414,668)
-------- ------------ ------------
Balances, December 31, 1993 (9,718) 13,037,915 13,028,197
Net loss (16,345) (1,618,204) (1,634,549)
-------- ------------ ------------
Balances, December 31, 1994 (26,063) 11,419,711 11,393,648
Net loss (24,866) (2,461,715) (2,486,581)
-------- ------------ ------------
Balances, December 31, 1995 (50,929) 8,957,996 8,907,067
Net loss unaudited (12,447) (1,232,281) (1,244,728)
-------- ------------ ------------
Balances, September 30, 1996 unaudited $(63,376) $ 7,725,715 $ 7,662,339
======== ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-80
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------
Nine Months
Ended Years Ended December 31,
September 30, --------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $(1,244,728) $(2,486,581) $(1,634,549) $ (414,668)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 5,505,387 7,344,035 6,252,573 3,307,310
Write-off of assets 9,111
(Increase) decrease in receivables, net (102,490) (58,034) 6,042 (345,197)
(Increase) decrease in prepaid expenses 67,280 6,913 (128,309) (20,657)
(Decrease) increase in accrued interest
expense (233,299) 89,664 26,923 (45,894)
(Decrease) increase in accounts payable
and other accrued expenses (99,487) (252,121) 803,714 274,125
(Decrease) increase in subscriber
prepayments and deposits (12,381) 28,635 (3,886) 17,495
(Decrease) increase in payable to
affiliates 35,665 11,666 72,286 30,849
----------- ----------- ----------- ------------
Net cash flows from operating activities 3,925,058 4,684,177 5,394,794 2,803,363
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties, including
purchased intangibles (184,000) (6,065,116) (74,203) (25,342,487)
Purchase of property, plant and equipment (1,420,160) (2,369,183) (3,643,894) (1,269,346)
Proceeds from sale of property, plant and 108,043
equipment -- -- -- --
(Increase) decrease in inventory 346,274 98,350 263,815 (610,502)
Increase in franchise costs and other assets (183,457) (10,387) (121,663) --
----------- ----------- ----------- ------------
Net cash flows from investing activities (1,333,300) (8,346,336) (3,575,945) (27,222,335)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 9,400,000 1,000,000 19,400,000
Repayment of borrowings (5,020,000) (2,880,000) (2,500,000) (1,400,000)
Partners' contributions -- -- -- 7,000,000
Cash paid for loan costs -- (66,520) (117,107) (340,789)
Repayment of capital lease obligations (99,574) (109,675) (60,007) (24,725)
----------- ----------- ----------- ------------
Net cash flows from financing activities (5,119,574) 6,343,805 (1,677,114) 24,634,486
----------- ----------- ----------- ------------
NET INCREASE IN CASH (2,527,816) 2,681,646 141,735 215,514
CASH, beginning of period 3,380,723 699,077 557,342 341,828
----------- ----------- ----------- ------------
CASH, end of period $ 852,907 $ 3,380,723 $ 699,077 $ 557,342
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 2,549,048 $ 3,268,546 $ 2,333,057 $ 1,102,150
=========== =========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisitions with capital leases $ -- $ 164,996 $ 233,047 $ 66,236
=========== =========== =========== ============
Note issued for acquisition of properties $ -- $ 184,000 $ -- $ --
=========== =========== =========== ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-81
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) THE PARTNERSHIP
ORGANIZATION AND CAPITALIZATION
Triax Southeast Associates, L.P. (the "Partnership") is a Delaware limited
partnership formed January 23, 1992 for the purpose of acquiring, constructing,
owning, and operating cable television systems, located primarily in Kentucky,
North Carolina, West Virginia and Ohio. The Partnership was capitalized and
commenced operations on July 28, 1992, with $7,000,000 of limited partner
contributions and a $70,000 demand non-interest bearing note from its general
partner, Triax Southeast General Partner, L.P. ("Southeast, G.P."). Triax
Investors Southeast, L.P. ("Investors"), a limited partnership in which Triax
Southeast Associates, Inc. ("Southeast Inc."), a Delaware corporation, is the
general partner, contributed $1,000,000 to the Partnership.
Southeast Inc. is a wholly owned subsidiary of Triax Communications Corporation
("TCC"), a Delaware corporation. Southeast Inc. contributed capital of
$1,000,000 and a $59,500 demand non-interest bearing note to Investors for a
general partnership interest. In addition, Southeast Inc. contributed a $700
demand non-interest bearing note to Southeast, G.P. for a general partnership
interest. Investors contributed a $59,500 demand non-interest bearing note for a
limited partner interest in Southeast, G.P.
On December 15, 1993, the Partnership Agreement was amended to reflect
additional capital contributions of $7,000,000 by certain limited partners.
Southeast Inc. contributed $1,250,000 to Investors, who in turn contributed an
additional $1,250,000 to the Partnership.
The Partnership Agreement, as amended, provides that at any time after April 30,
1997, upon notice from a majority of the limited partners that they desire to
cause a sale of the Partnership's assets and business (or all of the interests
in the Partnership), TCC may purchase all of the Partnership's assets and
business (or all of the interests in the Partnership), subject to the approval
of the majority of limited partners. In addition, after July 31, 1998, each
limited partner who has made capital contributions in excess of $1,000,000 may
cause the sale of the Partnership's assets and business and liquidation of the
Partnership. The above dates may be extended to 1998 or 1999 to coincide with
the revised termination date of one of the limited partner's partnership
agreement, if and when the limited partner extends the termination date.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS
Profits
The Partnership Agreement, as amended, provides that profits will be allocated
as follows: (i) 1% to the general partner and 99% to the limited partners until
profits allocated to them equal losses previously allocated; (ii) to the limited
partners until the limited partners have been allocated profits equal to a 12%
per annum cumulative preferred return on their capital contributions plus the
amount of losses previously allocated; then, (iii) 20% to the general partner
and 80% to the limited partners.
F-82
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) THE PARTNERSHIP (continued)
Losses
The Partnership Agreement, as amended, provides that losses will be allocated 1%
to the general partner and 99% to the limited partners, except no losses shall
be allocated to any limited partner which would cause the limited partner's
capital account to become negative by an amount greater than the limited
partner's share of the Partnership's "minimum gain" (the excess of the
Partnership's nonrecourse debt over its adjusted basis in the assets encumbered
by nonrecourse debt), as defined, plus any amount of Partnership debt assumed by
the limited partner or any amount the limited partner is obligated to contribute
to the Partnership; then 100% to the general partner.
Distributions
The Partnership Agreement, as amended, provides that Distributable Cash, as
defined, will be distributed as follows: (i) to the partners in proportion to
their Capital Contribution Accounts, as defined, until the balances are reduced
to zero; (ii) to the limited partners until the limited partners have received a
12% per annum cumulative preferred return on their capital contributions and
then, (iii) 20% to the general partner and 80% to the limited partners.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and related footnote disclosures as of September 30,
1996 and for the nine months ended September 30, 1996 are unaudited. In
management's opinion, the unaudited financial statements as of September 30,
1996 and for the nine months ended September 30, 1996 include all adjustments
necessary for a fair presentation. Such adjustments were of a normal recurring
nature.
REVENUE RECOGNITION
Revenues are recognized in the period the related services are provided to the
subscribers.
INCOME TAXES
No provision has been made for federal, state or local income taxes because they
are the responsibility of the individual partners. The principal difference
between net income or loss for income tax and financial reporting purposes
results from the use of accelerated depreciation for tax purposes.
F-83
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY
Inventory is carried at historical cost, which approximates market value, and
consists primarily of installation materials and addressable trap changers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Replacements, renewals and
improvements are capitalized and costs for repairs and maintenance are charged
directly to expense when incurred. The Partnership capitalized a portion of
technician and installer salaries to property , plant, and equipment which
amounted to approximately $299,692 for the nine months ended September 30, 1996
and $283,000 and $422,000 for the years ended December 31, 1995 and 1994,
respectively. Depreciation and amortization are computed using the straightline
method over the following estimated useful lives:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994 Life
------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
Property, plant and equipment $ 52,400,285 $ 51,188,466 $ 43,704,363 5-10 years
Less: Accumulated depreciation (16,433,694) (12,427,239) (7,207,543)
------------ ------------ ------------
$ 35,966,591 $ 38,761,227 $ 36,496,820
============ ============ ============
</TABLE>
PURCHASED INTANGIBLES
Purchased intangibles are being amortized using the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
----------------------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994 Life
------------ ------------ ------------ --------
Unaudited
<S> <C> <C> <C> <C>
Franchise costs $ 13,026,848 $ 13,026,720 $ 11,832,807 10 years
Noncompete agreements 850,000 850,000 1,700,000 3 years
------------ ------------ ------------
13,876,848 13,876,720 13,532,807
Less: Accumulated amortization (5,584,729) (4,334,718) (3,427,692)
------------ ------------ ------------
$ 8,292,119 $ 9,542,002 $ 10,105,115
============ ============ ============
</TABLE>
During 1995, the Partnership wrote-off approximately $1,000,000 of noncompete
agreements, and the associated accumulated amortization, as the noncompete
agreements had expired.
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of" ("SFAS 121"). SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is required to be adopted by the Company in fiscal 1996.
Management believes the adoption of SFAS 121 will not have a material impact on
the financial statements.
F-84
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
OTHER ASSETS
Other assets are being amortized using the straight-line method over the
following estimated useful lives:
-------------------------------------------------------
December 31,
September 30, ---------------------------
1996 1995 1994 Life
----------- ------------ ------------ --------
Unaudited
Loan costs $ 1,111,608 $ 1,111,608 $ 1,084,999 5 years
Organization costs 441,435 441,435 441,435 5 years
Other 187,204 3,875 -- 10 years
----------- ----------- ----------
1,740,247 1,556,918 1,526,434
Less: Accumulated
amortization (781,061) (623,327) (407,716)
----------- ----------- ----------
$ 959,186 $ 933,591 $1,118,718
=========== =========== ==========
(3) ACQUISITIONS
On February 28, 1995, the Partnership acquired certain cable television systems
and related assets of Rodgers Cable TV, Inc. ("Rodgers"). The purchase price of
approximately $5,700,000, including closing costs, was accounted for by the
purchase method of accounting and allocated as follows:
Property, plant and equipment $4,580,000
Franchise costs 1,019,400
Non-compete 100,600
----------
Total cash paid $5,700,000
==========
On March 31, 1995, the Partnership acquired cable television systems and related
assets of Green Tree Cable T.V., Inc. The purchase price of approximately
$570,000, including closing costs, was accounted for by the purchase method of
accounting.
On December 15, 1993, the Partnership acquired cable television systems and
related assets of C4 Media Cable South, L.P. for approximately $17 million, and
on December 21, 1993, acquired additional cable television system assets and
related liabilities of Charter Cable, Inc. for approximately $6.5 million.
Acquisition-related fees totaled approximately $700,000. The acquisitions were
financed by additional limited partners' contributions of $7 million, the
drawdown by the Partnership of $17.6 million under its amended Revolving Credit
and Term Loan and available cash of $750,000. The acquisitions were accounted
for by the purchase method of accounting and allocated as follows:
Property, plant and equipment $20,144,000
Franchise costs 2,756,000
Non-compete 600,000
-----------
Total cash paid $23,500,000
===========
F-85
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(4) DEBT
Debt consisted of the following at September 30, 1996, and December 31, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
----------------------------------------------
December 31,
September 30, -----------------------------
1996 1995 1994
------------ ------------ -----------
Unaudited
<S> <C> <C> <C>
Revolving Credit and Term Loan, interest
payable quarterly based on varying interest
rate options $37,000,000 $42,020,000 $35,500,000
Note Payable to seller -- 184,000 --
Vehicle leases 242,965 342,539 287,218
----------- ----------- -----------
$37,242,965 $42,546,539 $35,787,218
=========== =========== ===========
</TABLE>
The Revolving Credit and Term Loan Agreement, as amended through February 28,
1995 (the "Revolver"), is collateralized by all property, plant and equipment,
inventory and accounts receivable of the Partnership and all rights under
present and future permits, licenses and franchises. On September 30, 1995, the
outstanding principal was converted into a term loan with quarterly payments
from December 31, 1995 through June 30, 2002. Commencing in 1996, within 120
days after the close of the fiscal year, the Partnership must make a mandatory
prepayment in an amount equal to 50% of the excess cash flow, as defined, for
the prior year. A commitment fee of 1/2% per annum is charged on the daily
unused portion of the commitment amount.
The Partnership entered into LIBOR interest rate agreements with the banks
related to the Revolver. The Partnership fixed the interest rate on $40 million
at 7.21% for the period from June 4, 1996 to August 5, 1996. The remaining
outstanding balance bears interest at prime plus 1%.
On July 1, 1994 the Partnership paid $135,000 for an interest rate cap of 7% on
the LIBOR rate on $18 million effective July 1, 1994 through July 1, 1996, and
on March 27, 1995, paid $62,000 for an interest rate cap of 7.5% on the LIBOR
rate on $10 million effective March 27, 1995 through March 27, 1997.
The loan agreement contains certain covenants, the more significant of which
include leverage and interest coverage ratios and limitations on capital
expenditures.
Debt maturities required as of December 31, 1995 are as follows:
Year Amount
---------------------
1996 $ 3,174,759
1997 4,731,241
1998 5,578,235
1999 6,842,304
2000 7,920,000
Thereafter 14,300,000
-----------
$42,546,539
===========
(5) RELATED PARTY TRANSACTIONS
TCC provides management services to the Partnership for a fee equal to 5% of
gross revenues, as defined. The Partnership incurred management fees totaling
$726,036 for the nine months ended September 30, 1996, and $888,996, $752,882
and $390,545 in 1995, 1994 and 1993, respectively.
F-86
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(5) RELATED PARTY TRANSACTIONS (continued)
TCC also allocates certain overhead expenses to the Partnership, based on
proportionate subscriber revenues, which primarily relate to employment costs,
which expenses are limited to 1.25% of gross revenues. These overhead expenses
amounted to $168,609 for the nine months ended September 30, 1996, and $211,993,
$176,705 and $74,393 in 1995, 1994 and in 1993, respectively.
TCC was paid acquisition fees of $235,000 in 1993 related to the acquisition of
certain assets. Such fees are included in purchased intangibles in the
accompanying balance sheets. TCC may be paid a disposition fee of 1% of the
sales price of the Partnership after certain approvals of the limited partners,
and after certain other conditions are met.
The Partnership purchases programming from TCC at TCC's cost, which includes
volume discounts TCC might earn.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximates fair value
because of the nature of the investments and the length of maturity of the
investments.
The estimated fair value of the Partnership's debt instruments are based on
borrowing rates that would be equal to existing rates, therefore, there is no
material difference in the fair market value and the current value.
(7) REGULATORY MATTERS
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services (other than programming offered on a per-channel or
per-program basis). The FCC implemented regulation which allowed cable operators
to justify regulated rates in excess of the FCC benchmarks through cost of
service showings at both the franchising authority level for basic service and
to the FCC in response to complaints on rates for cable programming services.
On February 22, 1994, the FCC issued further regulations which modified the
FCC's previous benchmark approach, adopted interim rules to govern cost of
service proceedings initiated by cable operators, and lifted the stay of rate
regulations for small cable systems, which were defined as all systems serving
1,000 or fewer subscribers.
On November 10, 1994, the FCC adopted "going forward" rules that provided cable
operators with the ability to offer new product tiers priced as operators elect,
provided certain limited conditions are met, permit cable operators to add new
channels at reasonable prices to existing cable programming service tiers, and
created an additional option pursuant to which small cable operators may add
channels to cable programming service tiers.
In May 1995, the FCC adopted small company rules that provided small systems
regulatory relief by implementing an abbreviated cost of service rate
calculation method. Using this methodology, for small systems seeking to
establish rates no higher than $1.24 per channel, the rates are deemed to be
reasonable.
F-87
<PAGE>
TRIAX SOUTHEAST ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
(7) REGULATORY MATTERS (continued)
In February 1996, the Telecommunications Act of 1996 was enacted which, among
other things, deregulated cable rates for small systems on their programming
tiers.
To date, the FCC's regulations have not had a material adverse effect on the
Partnership due to the lack of certifications by the local franchising
authorities.
F-88
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Cox Communications, Inc.
We have audited the accompanying combined statement of net assets of Cox
Communications, Inc.'s ("CCI") Central Ohio Cluster as of December 31, 1996, and
the related combined statements of income, changes in net assets, and cash flows
for the year then ended. These financial statements are the responsibility of
CCI's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Cox
Communications, Inc.'s Central Ohio Cluster at December 31, 1996, and the
combined results of its operations and its cash flows for the year then ended,
in conformity with generally accepted accounting principles.
As discussed in Note 1, CCI sold the assets and certain liabilities of the
Central Ohio Cluster.
DELOITTE & TOUCHE LLP
August 29, 1997
(December 19, 1997 as to the second paragraph in Note 1)
Atlanta, Georgia
F-89
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF NET ASSETS
<TABLE>
-------------------------------------
September 30, December 31,
1997 1996
--------------------------------
(Unaudited)
(Thousands of Dollars)
ASSETS
<S> <C> <C>
Cash $ 28 $ 239
Accounts receivable, less allowance for doubtful
accounts of $87 and $66 2,511 2,310
Net plant and equipment 24,278 24,512
Intangible assets 148,284 151,263
Other assets 853 1,448
-------- --------
Total assets $175,954 $179,772
======== ========
LIABILITIES AND NET ASSETS
Accounts payable and accrued expenses $ 667 $ 1,245
Deferred income 1,416 1,430
Deferred income taxes 62,294 63,442
Other liabilities 399 191
Amounts due to Affiliates 29,571 35,107
-------- --------
Total liabilities 94,347 101,415
Net assets 81,607 78,357
-------- --------
Total liabilities and net assets $175,954 $179,772
======== ========
</TABLE>
See notes to combined financial statements.
F-90
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF INCOME
<TABLE>
----------------------------------------------------------
Nine Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
1997 1996 1996
---------- -------------- -------------
(Unaudited) (Unaudited)
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues $ 25,486 $ 23,389 $ 31,749
Costs and expenses:
Operating 8,387 7,371 10,132
Selling, general and administrative 3,408 3,772 5,143
Depreciation 3,735 3,579 4,846
Amortization 2,979 2,979 3,972
----- ----- -----
Operating income 6,977 5,688 7,656
Interest expense with affiliates (1,443) (1,851) (2,346)
Other, net (25) 6 5
----- ----- -----
Income before income taxes 5,509 3,843 5,315
Income taxes (2,259) (1,576) (2,176)
----- ----- -----
Net income $ 3,250 $ 2,267 $ 3,139
===== ===== =====
</TABLE>
See notes to combined financial statements.
F-91
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
---------------------
(Thousands of Dollars)
---------------------
Balance at December 31, 1995 $ 75,218
Net income 3,139
------
Balance at December 31, 1996 78,357
Net income (Unaudited) 3,250
------
Balance at September 30, 1997 (Unaudited) $ 81,607
======
See notes to combined financial statements.
F-92
<PAGE>
CENTRAL OHIO CLUSTER
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
----------------------------------------------------
Nine Months Nine Months
Ended Ended Year Ended
September 30, September 30, December 31,
1997 1996 1996
--------------- -------------- -----------
(Unaudited) (Unaudited)
(Thousands of Dollars)
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 3,250 $ 2,267 $ 3,139
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation 3,735 3,579 4,846
Amortization 2,979 2,979 3,972
Deferred income taxes (1,148) (1,245) (1,849)
(Increase) decrease in accounts receivable (201) 155 (120)
Decrease in other assets 595 348 206
Increase (decrease) in accounts payable and accrued expenses (592) 289 803
Other, net 208 (20) (42)
-------- -------- --------
Net cash provided by operating activities 8,826 8,352 10,955
-------- -------- --------
Cash flows from investing activities
Capital expenditures (3,501) (2,549) (2,939)
-------- -------- --------
Net cash used in investing activities (3,501) (2,549) (2,939)
-------- -------- --------
Cash flows from financing activities
Decrease in amounts due to Affiliates (5,536) (4,933) (7,777)
-------- -------- --------
Net cash provided by financing activities (5,536) (4,933) (7,777)
-------- -------- --------
Net increase (decrease) in cash (211) 870 239
Cash at beginning of period 239 -- --
-------- -------- --------
Cash at end of period $ 28 $ 870 $ 239
======== ======== ========
Cash paid during the period for:
Interest $ 17 $ 11 $ 14
Income taxes 788 852 905
</TABLE>
See notes to combined financial statements.
F-93
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements represent the combined operations of Cox
Communications, Inc.'s ("CCI") cable television systems serving eight
communities in Central Ohio (collectively referred to as the "Central Ohio
Cluster"). These cable television systems were acquired by CCI, an indirect
75.3% owned subsidiary of Cox Enterprises, Inc. ("CEI"), from the Times Mirror
Company ("Times Mirror") in connection with CCI's acquisition of Times Mirror
Cable Television, Inc. ("TMCT") on February 1, 1995. The historical combined
financial statements do not necessarily reflect the results of operations or
financial position that would have existed had the Central Ohio Cluster been an
independent company. All significant intercompany accounts and transactions have
been eliminated in the combined financial statements of the Central Ohio
Cluster.
On December 19, 1997, CCI sold the assets and certain liabilities of the Central
Ohio Cluster to FrontierVision Operating Partners, L.P. for approximately $204.0
million.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Central Ohio Cluster bills its customers in advance; however, revenue is
recognized as cable television services are provided. Receivables are generally
collected within 30 days. Credit risk is managed by disconnecting services to
customers who are delinquent generally greater than 75 days. Other revenues are
recognized as services are provided. Revenues obtained from the connection of
customers to the cable television systems are less than related direct selling
costs; therefore, such revenues are recognized as services are provided.
Plant and Equipment
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of five to 20 years for building and building
improvements, five to 12 years for cable television systems and three to 10
years for other plant and equipment.
The costs of initial cable television connections are capitalized as cable plant
at standard rates for the Central Ohio Cluster's labor and at actual cost for
materials and outside labor. Expenditures for maintenance and repairs are
charged to operating expense as incurred. At the time of retirement, sale or
other disposition of property, the original cost and related accumulated
depreciation are written off.
Intangible Assets
Intangible assets consist of goodwill and cable television franchise rights
recorded in connection with the acquisition of the Central Ohio Cluster from
TMCT and are amortized on a straight-line basis over 40 years. The Central Ohio
Cluster assesses on an on-going basis the recoverability of intangible assets
based on estimates of future undiscounted cash flows for the applicable business
acquired compared to net book value. The Central Ohio Cluster also evaluates the
amortization period of intangible assets to determine whether events or
circumstances warrant revised estimated of useful lives.
F-94
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
Effective January 1, 1996, the Central Ohio Cluster adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires that long-lived assets and certain intangibles be reviewed
for impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, with any impairment losses
being reported in the period in which the recognition criteria are first applied
based on the fair value of the asset. Long-lived assets and certain intangibles
to be disposed of are required to be reported at the lower of carrying amounts
or fair value less cost to sell.
Income Taxes
The accounts of the Central Ohio Cluster are included in the consolidated
federal income tax return and certain state income tax returns of CEI. Current
federal and state income tax expenses and benefits have been allocated on a
separate return basis to the Central Ohio Cluster based on the current year tax
effects of the inclusion of its income, expenses and credits in the consolidated
income tax returns of CEI or based on separate state income tax returns.
Deferred income tax assets and liabilities arise from temporary differences in
the financial reporting and income tax basis of assets and liabilities. These
differences primarily result from property and intangible assets.
Fees and Taxes
The Central Ohio Cluster incurs various fees and taxes in connection with the
operations of its cable television systems, including franchise fees paid to
various franchise authorities, copyright fees paid to the U.S. Copyright
Tribunal and business and franchise taxes paid to the State of Ohio. A portion
of these fees and taxes are passed through to the Central Ohio Cluster's
subscribers. Amounts collected from subscribers are recorded as a reduction of
operating expenses.
Pension, Postretirement and Postemployment Benefits
CCI generally provides defined pension benefits to substantially all employees
based on years of service and compensation during those years. CCI also provides
certain health care and life insurance benefits to substantially all retirees
and employees through certain CEI plans. Expense related to the CCI and CEI
plans is allocated to the Central Ohio Cluster through the intercompany account.
The amount of the allocations is generally based on actuarial determinations of
the effects of the Central Ohio Cluster employees' participation in the plans.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-95
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited combined financial statements as of and for the nine months ended
September 30, 1997 and 1996, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for this
period. Operating results for nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
(3) CASH MANAGEMENT SYSTEM
The Central Ohio Cluster participates in CEI's cash management system, whereby
the bank sends daily notification of checks presented for payment. CEI transfers
funds from other sources to cover the checks presented for payment.
(4) PLANT AND EQUIPMENT
----------------- -----------------
September 30, December 31,
1997 1996
-------- ---------
(In Thousands)
Land $ 313 $ 311
Buildings and building improvements 990 1,033
Transmission and distribution plant 43,531 41,329
Miscellaneous equipment 2,343 1,478
Construction in progress 531 825
-------- --------
Plant and equipment, at cost 47,708 44,976
Less accumulated depreciation (23,430) (20,464)
-------- --------
Net plant and equipment $ 24,278 $ 24,512
======== ========
(5) INTANGIBLE ASSETS
----------------------------------
September 30, December 31,
1997 1996
---------- ---------
(In Thousands)
Goodwill $ 158,876 $ 158,876
Less accumulated amortization (10,592) (7,613)
--------- ---------
Net intangible assets $ 148,284 $ 151,263
========= =========
F-96
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(6) INCOME TAXES
Current and deferred income tax expenses (benefits) are as follows:
------------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
------- -------
(In Thousands)
Current:
Federal $ 2,906 $ 3,289
State 520 736
------- -------
Total current 3,426 4,025
------- -------
Deferred:
Federal (1,119) (1,385)
State (48) (464)
------- -------
Total deferred (1,167) (1,849)
------- -------
Net income tax expense $ 2,259 $ 2,176
======= =======
Income tax expense differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to income (loss) before income taxes as
a result of the following items:
<TABLE>
-------------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
------ ------
(In Thousands)
Computed tax expense at federal statutory
<S> <C> <C>
rates on income before income taxes $1,928 $1,860
State income taxes, net of federal tax benefit 307 177
Other, net 24 139
------ ------
Net income tax expense $2,259 $2,176
====== ======
</TABLE>
Significant components of the net deferred tax liability consist of the
following:
---------------------------------------
Nine months ended Year ended
September 30, 1997 December 31, 1996
-------- --------
(Thousands of Dollars)
Plant and equipment $ (5,618) $ (5,787)
Franchise rights (57,569) (58,638)
Other 893 983
-------- --------
Net deferred tax liability $(62,294) $(63,442)
======== ========
(7) RETIREMENT PLANS
Qualified Pension Plan
Effective January 1, 1996, CCI established the Cox Communications, Inc. Pension
Plan (the "CCI Plan"), a qualified noncontributory defined benefit pension plan
for substantially all of CCI's employees including the Central Ohio Cluster's
employees. Plan assets consist primarily of common stock, investment-
F-97
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(7) RETIREMENT PLANS (CONTINUED)
grade corporate bonds, cash and cash equivalents and U.S. government
obligations. The CCI Plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with CCI and compensation rates
near retirement. The funded status of the portion of the CCI Plan covering the
employees of the Central Ohio Cluster is not determinable. The fair value of the
CCI Plan assets was greater than the projected benefit obligation as of December
31, 1996.
Total pension expense attributable to the Central Ohio Cluster employees'
participation in the CCI Plan was $33,000 for the nine month period ended
September 30, 1997 and $158,000 for the year ended December 31, 1996.
The assumptions used in the actuarial computations at December 31, 1996 were:
Discount rate 7.75%
Rate of increase in compensation levels 5.50%
Expected long-term rate of return on plan assets 9.00%
Other Retirement Plans
CEI provides certain health care and life insurance benefits to substantially
all retirees of CEI and its subsidiaries. Postretirement expense allocated to
the Central Ohio Cluster by CEI was $13,000 for the nine month period ended
September 30, 1997 and $15,000 for the year ended December 31, 1996. CEI has
been contributing additional amounts to the Cox Pension Plan Trust to fund
health care benefits pursuant to Section 401(h) of the Internal Revenue Code.
CEI is funding benefits to the extent contributions are tax deductible. In
general, retiree health benefits are paid as covered expenses are incurred. The
funded status of the postretirement plan covering the employees of the Central
Ohio Cluster is not determinable. The accumulated postretirement benefit
obligation for the postretirement plan of CEI substantially exceeded the fair
value of assets held in the Cox Pension Plan Trust at December 31, 1996.
In addition, substantially all of Central Ohio Cluster's employees are eligible
to participate in the savings and investment plan of CEI. Under the terms of the
plan, the Central Ohio Cluster matches 50% of employee contributions up to a
maximum of 6% of the employee's base salary. The Central Ohio Cluster's expense
under the plan was $57,000 for the nine-month period ended September 30, 1997
and $83,000 for the year ended December 31, 1996.
(8) TRANSACTIONS WITH AFFILIATED COMPANIES
The Central Ohio Cluster borrows funds for working capital and other needs from
CCI. Certain management services are provided to the Central Ohio Cluster by CCI
and CEI. Such services include legal, corporate secretarial, tax, treasury,
internal audit, risk management, benefits administration and other support
services. The Central Ohio Cluster was allocated expenses for the nine months
ended September 30, 1997 and for the year ended December 31, 1996 of
approximately of $604,000 and $1,320,000, respectively, related to these
services. Allocated expenses are based on management's estimate of expenses
related to the services provided to the Central Ohio Cluster in relation to
those provided to other divisions of CCI and CEI. Management believes that these
allocations were made on a reasonable basis. However, the allocations are not
necessarily indicative of the level of expenses that might have been incurred
had the Central Ohio Cluster contracted directly with third parties. Management
has not made a
F-98
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(8) TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)
study or any attempt to obtain quotes from third parties to determine what the
cost of obtaining such services from third parties would have been. The fees and
expenses to be paid by the Central Ohio Cluster various transactions, including
those described above. At December 31, 1996 and September 30, 1997, outstanding
amounts due to affiliates bear interest at fifty basis points above CCI's
commercial paper borrowings. This rate as of September 30, 1997 and December 31,
1996 was 6.32% and 6.6%, respectively.
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Central Ohio Cluster has estimated the fair
value of its intercompany advances and notes payable. Given the short-term
nature of these advances, the carrying amounts reported in the statements of net
assets approximate fair value.
(9) COMMITMENTS AND CONTINGENCIES
The Central Ohio Cluster leases office facilities and various items of equipment
under noncancelable operating leases. Rental expense under operating leases
amounted to $259,000 for the nine month period ended September 30, 1997 and
$331,000 for the year ended December 31, 1996. Future minimum lease payments as
of September 30, 1997 for all noncancelable operating leases are as follows:
1997 $ 18
1998 40
1999 31
2000 31
2001 31
2002 7
------
Total $ 158
======
The FCC has adopted rate regulations required by the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). Beginning in
September 1995, the FCC authorized a method of implementing rate adjustments
which allows cable operators to increase rates for programming annually on the
basis of proposed increases in external costs rather than on the basis of cost
increases incurred in the preceding quarter. Local franchising authorities have
the ability to obtain certification from the FCC to regulate rates charged by
the Central Ohio Cluster for basic cable services and associated basic cable
services equipment. In addition, the rates charged by the Central Ohio Cluster
for cable programming services ("CPS") can be regulated by the FCC should any
franchising authority of the Central Ohio Cluster file rate complaints with the
FCC. To date, the local franchising authorities for the Central Ohio Cluster
have not become certified by the FCC to regulate rates for basic cable service
and associated basic cable services equipment and no complaints have been filed
by customers with the FCC regarding rates charged for CPS. Though rates for
basic and CPS are presently not regulated, management of the Central Ohio
Cluster believes the rates charged for basic and CPS comply in all material
respects with the 1992 Cable Act and that should such rates become regulated in
the future the impact on the financial position and results of operation of the
Central Ohio Cluster would not be material.
F-99
<PAGE>
CENTRAL OHIO CLUSTER
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of and for the Nine Months
Ended September 30, 1997 is unaudited)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 1, 1996, Congress passed the Telecommunications Act of 1996 (the
"1996 Act"), which was signed into law by the President on February 8, 1996.
Among other provisions, the 1996 Act deregulates the CPS tier of large cable
television operators on March 31, 1999 and upon enactment, the CPS rates of
small cable television operators, where a small cable operator serves 50,000 or
fewer subscribers, revises the procedures for filing a CPS complaint and adds a
new effective competition test.
F-100
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses and Issuance and Distribution.
Set forth below is the fees and expenses, other than underwriting discounts and
commissions, paid by the Registrants in connection with the Offering. All
amounts are actual.
Securities and Exchange Commission Registration Fee $ 45,560
Printing and Engraving Fees 338,094
Blue Sky Fees and Expenses 5,051
Rating Agency Fees 81,250
Fees of Trustee 8,000
Legal Fees and Expenses 503,956
Accounting Fees and Expenses 348,603
Miscellaneous 89,999
----------
Total $1,420,513
==========
Item 14: Indemnification of Directors and Officers
Section 5.6 of the First Amended and Restated Agreement of Limited Partnership
of FVP, dated as of August 11, 1995 (the "FVP Partnership Agreement"), provides
that in the absence of fraud, breach of fiduciary duty, willful misconduct or
gross negligence, FVP GP, its partners, their respective officers, directors,
employees, agents or stockholders (including when any of the foregoing is
serving at the request of FVP GP on behalf of FVP as a partner, officer,
director, employee or agent of any other Person) (as such term is defined in the
FVP Partnership Agreement) (in each case, the "Indemnitee") shall not be liable
to any other partner of FVP or FVP (i) for any mistake in judgment, (ii) for any
action taken or omitted to be taken in good faith and in a manner reasonably
believed by such Person to be in the best interests of FVP and to be within the
scope of its authority under the FVP Partnership Agreement, or (iii) for any
loss due to the mistake, action, inaction, negligence, dishonesty, fraud or bad
faith or any broker or other agent, provided that such broker or other agent
shall have been selected and supervised by FVP GP or other Indemnitee with
reasonable care. In addition, Indemnitees will be indemnified and held harmless
by FVP against losses, damages and expenses for which such Person has not
otherwise been reimbursed actually and pending or completed action, suit or
proceeding (other than any action by or in the name of FVP), by reason of any
action taken or omitted to be taken in connection with or arising out of such
Person's activities on behalf of FVP or in furtherance of FVP, if such actions
were taken or omitted to be taken in good faith and in a manner reasonably
believed by such Person to be in the best interests of FVP and within the scope
of the FVP Partnership Agreement, provided, that any Person entitled to
indemnification shall obtain the written consent of FVP GP (which consent will
not be given without the approval of the Advisory Committee) prior to entering
into any compromise or settlement which would result in an obligation of FVP to
indemnify such Person.
Section 5.6 of the First Amended and Restated Agreement of Limited Partnership
of FVP GP, dated as of August 11, 1995 (the "FVP GP Partnership Agreement"),
provides that in the absence of fraud, breach of fiduciary duty, willful
misconduct or gross negligence, Frontier Vision Inc., its officers, directors,
employees, agents or stockholders (including when any of the foregoing is
serving at the request of FrontierVision Inc. on behalf of FVP GP or FVP as a
partner, officer, director, employee or agent of any other Person) (as such term
is defined in the FVP GP Partnership Agreement) (in each case, the "Indemnitee")
shall not be liable to any other partner of FVP GP or FVP GP (i) for any mistake
in judgment, (ii) for any action taken or omitted to be taken in good faith an
din a manner reasonably believed by such Person to be in the best interests of
FVP GP and to be within the scope of its authority under the FVP GP Partnership
Agreement, or (iii) for any loss due to the mistake, action, inaction,
negligence dishonesty, fraud or bad faith of any broker or other agent, provided
that such broker or other agent shall have been selected and supervised by
FrontierVision Inc. or other Indemnitee with reasonable care. In addition,
Indemnitees will be indemnified and held harmless by FVP GP against losses,
damages and expenses for which such person has not otherwise been reimbursed
actually and reasonably incurred by
II-1
<PAGE>
such Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than any
action by or in the name of FVP GP), by reason of any action taken or omitted to
be taken in connection with or arising out of such Person's activities on behalf
of FVP GP or in furtherance of FVP GP, if such actions were taken or omitted to
be taken in good faith and in a manner reasonably believed by such person to be
in the best interests of FVP GP and within the scope of the FVP GP Partnership
Agreement, provided, that any Person entitled to indemnification shall obtain
the written consent of FrontierVision Inc. (which consent will not be given
without the consent of a majority in interests of the Class X Limited Partners
(as such term is defined in the FVP GP Partnership Agreement)) prior to entering
into any compromise or settlement which would result in an obligation of FVP GP
to indemnify such person.
Section 102(b)(7) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation (in its original certificate of
incorporation or amendment thereto) may eliminate or limit the personal
liability of a director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise of perform duties conferred or
imposed upon directors by the DGCL) to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provisions shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
the director derived an improper personal benefit. Article Tenth of
FrontierVision Inc.'s Certificate of Incorporation and Article Eleventh of
Capital's Certificate of Incorporation each limit the liability of directors
thereof to the extent permitted by Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties to which they may be made parties by reason of their being or
having been directors, officers, employees or agents and shall so indemnify such
persons if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
Item 15 Recent Sales of Unregistered Securities
The following is a summary of securities sold by the Registrants during the past
three years without registration under the Securities Act:
1. On September 3, 1997, in connection with the formation of the
Holdings, Holdings issued to FVP a 99.9% general partner interest in
Holdings for cash consideration of $99.90. Simultaneously, Holdings
issued to FrontierVision Holdings, LLC a 0.1% limited partnership
interest for cash consideration of $.10.
2. On August 29, 1997, in connection with the formation of
Holdings Capital, Holdings Capital issued to Holdings 100 shares of the
voting common stock of Holdings Capital, one cent ($.01) par value per
share, for cash consideration of $100.00.
In the foregoing instances, the issuance of the general partner interest in the
Company and the initial limited partnership interest in the Company and the
issuance of the voting common stock of Holdings Capital were deemed to be exempt
from the registration requirements of the Securities Act as a transaction not
involving any public offering, pursuant to Section 4(2) of the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only an not with a view to
or for sale in connection with any distribution thereof. All recipients had
adequate access, through their relationships with the Company and Holdings
Capital, to information about the Company and Holdings Capital.
II-2
<PAGE>
Item 16 Exhibits and Financial Statement Schedules.
3.1 Amended and Restated Agreement of Limited Partnership
of FVOP. (1)
3.2 Certificate of Limited Partnership of FVOP. (2)
3.3 First Amended and Restated Agreement of Limited
Partnership of FVP. (2)
3.4 Amendment No. 1 to the First Amended and Restated
Agreement of Limited Partnership of FVP. (1)
3.5 Amendment No. 2 to the First Amended and Restated
Agreement of Limited Partnership of FVP. (1)
3.6 Amendment No. 3 to the First Amended and Restated
Agreement of Limited Partnership of FVP. (1)
3.7 Amendment No. 4 to the First Amended and Restated
Agreement of Limited Partnership of FVP. (1)
3.8 Amendment No. 5 to the First Amended and Restated
Agreement of Limited Partnership of FVP. (1)
3.9 Certificate of Limited Partnership of FVP. (2)
3.10 First Amended and Restated Agreement of Limited
Partnership of FVP GP. (2)
3.11 Amendment No. 1 to the First Amended and Restated
Agreement of Limited Partnership of FVP GP. (1)
3.12 Amendment No. 2 to the First Amended and Restated
Agreement of Limited Partnership of FVP GP. (1)
3.13 Certificate of Limited Partnership of FVP GP. (2)
3.14 Certificate of Incorporation of FrontierVision Inc. (2)
3.15 Bylaws of FrontierVision, Inc. (2)
3.16 Agreement of Limited Partnership of Holdings. (1)
3.17 Certificate of Limited Partnership of Holdings. (1)
3.18 Certificate of Incorporation of FrontierVision Holdings
Capital Corporation. (1)
3.19 Bylaws of FrontierVision Holdings Capital Corporation.
(1)
4.1 Indenture dated as of October 7, 1996, among
FrontierVision Operating Partners, L.P., FrontierVision
Capital Corporation and Colorado National Bank, as
Trustee. (4)
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 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)
4.4 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)
10.1 Senior 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)
II-3
<PAGE>
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 Senior Credit Facility. (2)
10.15 Consent and Amendment No. 2 to Senior Credit Facility.
(4)
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 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. (5)
10.19 Asset Purchase Agreement dated as of October 15, 1997
between Coxcom, Inc. and FrontierVision Operating
Partners, L.P. (1)
12.1 Statement of Computation of Ratios.
16.1 Report of change in accountants. (3)
23.10 Consent of KPMG Peat Marwick LLP (FrontierVision
Operating Partners, L.P.).
23.11 Consent of KPMG Peat Marwick LLP (FrontierVision
Capital Corporation).
23.12 Consent of KPMG Peat Marwick LLP (FrontierVision
Partners, L.P.).
23.13 Consent of Piaker & Lyons, P.C. (United Video
Cablevision, Inc.).
23.14 Consent of Williams, Rogers, Lewis, Kaufman & Co., I.C.
(C4 Media Cable Southeast, Limited Partnership).
23.15 Consent of Arthur Andersen LLP (Triax Southeast
Associates, L.P.).
23.16 Consent of Deloitte & Touche LLP (American Cable
Entertainment of Kentucky-Indiana, Inc.).
23.17 Consent of Deloitte & Touche LLP (Ashand and Defiance
Clusters).
23.18 Consent of Deloitte & Touche LLP (Central Ohio
Cluster).
27.1 Financial Data Schedule as of and for the period ended
December 31, 1997.
Footnote References
(1) Incorporated by reference to the exhibits to Holdings
and Holdings Capital's Registration Statement on Form
S-4, Registration No. 333-36519.
(2) Incorporated by reference to the exhibits to FVOP and
Capital's Registration Statement on Form S-1,
Registration No. 333-9535.
(3) Incorporated by reference to the exhibits to FVOP and
Capital's Current Report on Form 8-K, File No. 333-9535
dated October 29, 1996.
II-4
<PAGE>
(4) Incorporated by reference to the exhibits to FVOP and
Capital's Quarterly Report on Form 10-Q, File No.
333-9535 for the quarter ended September 30, 1996.
(5) Incorporated by reference to the exhibits to Holdings
and Holdings Capital's Annual Report on Form 10-K, File
No. 333-9535 for the year ended December 31, 1997.
Item 17 Undertakings
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company, FVP,
FVP GP, FrontierVision Inc. and Holdings Capital pursuant to the provisions
described under Item 14 above or otherwise, the Registrants have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore, unenforeceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisidiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities which remain unsold at the termination of the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
FrontierVision Operating Partners, L.P. has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 6, 1998.
FRONTIERVISION HOLDINGS, L.P.
By: FrontierVision Partners, L.P., its general partner,
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general partner
By: /s/ JAMES C. VAUGHN
--------------------
James C. Vaughn
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment has been signed below by the following persons on
behalf of the Registrants and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES C. VAUGHN President, Chief Executive Officer, April 6, 1998
- -------------------- and Director of FrontierVision Inc.
James C. Vaughn (Principal Executive Officer)
/s/ JOHN S. KOO Senior Vice President, Chief April 6, 1998
- -------------------- Financial Officer, Secretary and
John S. Koo Director of FrontierVision Inc.
(Principal Financial Officer)
/s/ ALBERT D. FOSBENNER Vice President and Treasurer of April 6, 1998
- ----------------------- FrontierVision Inc. (Principal
Albert D. Fosbenner Accounting Officer)
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
FrontierVision Capital Corporation has duly caused this Post-Effective Amendment
to be signed on its behalf by the undersigned, thereunto duly authorized, on
April 6, 1998.
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
By: /s/ JAMES C. VAUGHN
--------------------
James C. Vaughn
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment has been signed below by the following persons on
behalf of the Registrants and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES C. VAUGHN President and Director April 6, 1998
- ----------------------- (Principal Executive Officer)
James C. Vaughn
/s/ JOHN S. KOO Senior Vice President, Chief April 6, 1998
- ----------------------- Financial Officer, Secretary and
John S. Koo Director (Principal
Financial Officer)
/s/ ALBERT D. FOSBENNER Vice President and Treasurer April 6, 1998
- ------------------------- (Principal Accounting Officer)
Albert D. Fosbenner
II-7
<PAGE>
EXHIBIT 12.1
FrontierVision Holdings, L.P.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
<TABLE>
For the Period
From Inception
For the Year Ended For the Year Ended (April 17, 1995) to
December 31, 1997 December 31, 1996 December 31, 1996
-------- -------- -----
<S> <C> <C> <C>
Net Loss .......................... $(52,216) $(23,801) $(2,703)
Add (Deduct):
Income Tax Provision (Benefit) -- -- --
Less: Minority Interest
-------- -------- -----
Pre Tax Income (Loss) ............. (52,216) (23,801) (2,703)
Add: Fixed Charges
Interest ..................... 48,005 23,210 1,451
-------- -------- -----
48,005 23,210 1,451
-------- -------- -----
$ (4,211) $ (591) $(1,252)
======== ======== =====
Fixed Charges ..................... $ 48,005 $ 23,210 $ 1,451
======== ======== =====
Ratio of Earnings to Fixed
Charges ...................... N/A N/A N/A
Deficiency of Earnings to Fixed
Charges ...................... $ 52,216 $ 23,801 $ 2,703
</TABLE>
EXHIBIT 23.10
To the Partners of FrontierVision Holdings, L.P.
We consent to the use of our report dated March 16, 1998, relating to the
consolidated balance sheets of FrontierVision Holdings, L.P. and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, partners' capital and cash flows for the years ended December 31,
1997, 1996 and the period from inception (April 17, 1995) through December 31,
1995, included herein and to the reference to our firm under the headings
"Selected Financial Data" and "Experts" in the post-effective amendment No. 1 to
the Form S-4.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
April 2, 1998
EXHIBIT 23.11
To the Shareholder of FrontierVision
Holdings Capital Corporation:
We consent to the use of our report dated March 16, 1998, relating to the
balance sheet of FrontierVision Holdings Capital Corporation as of December 31,
1997, included herein and to the reference to our firm under the heading
"Experts" in the post-effective amendment No. 1 to the Form S-4.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
April 2, 1998
EXHIBIT 23.12
To the Partners of FrontierVision Partners, L.P.
We consent to the use of our report dated March 16, 1998, relating to the
consolidated balance sheets of FrontierVision Partners, L.P. and subsidiaries as
of December 31, 1997 and 1996, included herein and to the reference to our firm
under the heading "Experts" in the post-effective amendment No. 1 to the Form
S-4.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
April 2, 1998
EXHIBIT 23.13
[PIAKER & LYONS, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 7, 1996 on the financial statements of United Video
Cablevision, Inc. - Maine and Ohio Divisions included in or made part of
FrontierVision Holdings, L.P.'s Form S-4 registration statement.
/s/ Piaker & Lyons, P.C.
PIAKER & LYONS, P.C.
Vestal, New York
April 2, 1998
EXHIBIT 23.14
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 11, 1996 on the consolidated financial statements of C4 Media Cable
Southeast, Limited Partnership included in or made part of FrontierVision
Holdings, L.P.'s Post-Effective Amendment No. 1 to Form S-4 Registration
Statement.
/s/ WILLIAMS, ROGERS, LEWIS, KAUFMAN & CO., P.C.
Williams, Rogers, Lewis, Kaufman & Co., P.C.
Plainview, Texas
April 2, 1998
EXHIBIT 23.15
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 27, 1996 on the financial statements of Triax Southeast
Associates, L.P. included in or made part of FrontierVision Holdings, L.P.'s and
FrontierVision Holdings Capital Corporation Form S-4 registration statement Nos.
333-36519 and 333-36519-01.
AURTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Denver, Colorado,
March 31, 1998
EXHIBIT 23.16
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No.'s 333-36519 and 333-36519-01 of FrontierVision Holdings, L.P. and
FrontierVision Holdings Capital Corporation on Form S-4 of our report on
American Cable Entertainment of Kentucky-Indiana, Inc. (the "Company") dated
March 15, 1996 (August 1, 1996 as to Note 1)(which expresses an unqualified
opinion and includes an explanatory paragraph relating to the Company's ability
to continue as a going concern), appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/S/ Deloitte & Touche LLP
Stamford, Connecticut
April 2, 1998
EXHIBIT 23.17
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No.'s 333-36519 and 333-36519-01 of FrontierVision Holdings, L.P. and
FrontierVision Holdings Capital Corporation on Form S-4 of our report dated
April 10, 1996 (relating to the combined financial statements of the Ashland and
Defiance Clusters), appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
April 2, 1998
EXHIBIT 23.18
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No.'s 333-36519 and 333-36519-01 of FrontierVision Holdings, L.P. and
FrontierVision Holdings Capital Corporation on Form S-4 of our report dated
August 29, 1997 (December 19, 1997 as to the second paragraph in Note 1)
(relating to the financial statements of the Central Ohio Cluster), appearing in
the Prospectus, which is part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
April 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE FORM S-4.
</LEGEND>
<CIK> 0001045710
<NAME> FRONTIERVISION HOLDINGS, LP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,728
<SECURITIES> 0
<RECEIVABLES> 8,711
<ALLOWANCES> (640)
<INVENTORY> 0
<CURRENT-ASSETS> 15,441
<PP&E> 247,724<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 927,275
<CURRENT-LIABILITIES> 24,788
<BONDS> 787,047
0
0
<COMMON> 0
<OTHER-SE> 115,440
<TOTAL-LIABILITY-AND-EQUITY> 927,275
<SALES> 0
<TOTAL-REVENUES> 145,126
<CGS> 0
<TOTAL-COSTS> 74,314
<OTHER-EXPENSES> 4,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,005
<INCOME-PRETAX> (52,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,216)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
