<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (date of earliest event reported) September 9, 1999
------------
ADELPHIA COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 0-16014 23-2417713
(State or Other (Commission File Number) (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation)
One North Main Street
Coudersport, PA 16915-1141
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (814) 274-9830
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<PAGE>
Item 5. Other Events
Adelphia Communication Corporation ("Adelphia") has announced the following
transactions:
(i) The repurchase agreements with FPL Group, Inc. regarding Adelphia
stock and Olympus Communications, L.P. ("Olympus") partnership
interests held by FPL Group, Inc. (see Form 8-K filed on January 28,
1999).
(ii) The pending acquisition of FrontierVision Partners, L.P.
("FrontierVision") (see Form 8-K filed on February 23, 1999).
(iii) The pending acquisition of Century Communications Corp. ("Century")
(see Form 8-K filed on March 5, 1999).
(iv) The pending acquisition of Harron Communications Corp. ("Harron")
(see Form 8-K for event dated April 9, 1999).
Adelphia's Form 8-K dated April 19, 1999 reported these other events. This
Form 8-K updates Adelphia's unaudited pro forma condensed consolidated
financial information previously reported and includes unaudited financial
information for FrontierVision and Harron for the six month period ended June
30, 1999 and audited financial information for Century for the year ended May
31, 1999.
Adelphia is making available the separate company financial statements for
Century, FrontierVision and Harron, and unaudited pro forma condensed
financial information for Adelphia. These documents are incorporated by
reference herein and are being filed as Exhibits 99.01, 99.02, 99.03, 99.04
and 99.05 to this report.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in or
incorporated into this Form 8-K is forward-looking, such as information
relating to future capital raising or relating to the effects of future
mergers and acquisitions. These "forward-looking statements" can be identified
by the use of forward-looking terminology such as "believes", "expects",
"may", "will," "should," "intends" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology or by discussions of
strategy that involve risks and uncertainties. Another form of forward-looking
statement can be characterized by an assumption (using terminology such as "as
if" or "gives effect to") that an event occurs at the beginning of a financial
period presented, with a corresponding effect throughout the period, even
though the event had actually occurred after the beginning of such period or
has not yet actually occurred at all. Any such forward-looking information
involves important risks and uncertainties that could significantly affect
expected results in the future from those expressed in any forward-looking
statements made by, or on behalf of, Adelphia. These risks and uncertainties
include, but are not limited to, uncertainties relating to economic
conditions; the availability and cost of capital; acquisitions and
divestitures; government and regulatory policies; the pricing and availability
of equipment, materials, inventories and programming; technological
developments; the costs and other effects, such as expansion and integration
issues, of mergers and acquisitions; year 2000 issues; and changes in the
competitive environment in which the Company operates. Persons reading this
Form 8-K are cautioned that no assurance can be given that any particular
future results will be achieved, and that actual events or results may differ
materially as a result of the risks and uncertainties facing Adelphia.
1
<PAGE>
Item 7. Financial Statements and Exhibits
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
99.01 Independent Auditors' Report by Deloitte & Touche LLP to the Board
of Directors and Stockholders of Century Communications Corp.
dated July 29, 1999 (August 26, 1999 as to Note 17), and the
consolidated financial statements of Century Communications Corp.
and subsidiaries as of May 31, 1998 and 1999 and for each of the
three years in the period ended May 31, 1999, all of which were
also filed in the Century Communications Corp. Form 10-K for the
fiscal year ended May 31, 1999. (Filed Herewith)
99.02 Independent Auditors' Report by KPMG LLP to the Partners of
FrontierVision Partners, L.P., dated March 19, 1999, and the
consolidated financial statements of FrontierVision Partners, L.P.
and subsidiaries as of December 31, 1997 and 1998 and for each of
the years in the three year period ended December 31, 1998.
Unaudited financial information for FrontierVision Partners, L.P.
for the six month period ended June 30, 1999. (Filed Herewith)
99.03 Independent Auditors' Report by Deloitte & Touche LLP to the Board
of Directors and Stockholders of Harron Communications Corp. dated
March 19, 1999 (April 12, 1999 as to Note 16), and the
consolidated financial statements of Harron Communications Corp.
and subsidiaries as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998. (Filed
Herewith)
99.04 Unaudited financial information for Harron Communications Corp.
for the six month period ended June 30, 1999. (Filed Herewith)
99.05 Unaudited pro forma condensed consolidated financial information
for Adelphia Communications Corporation as of June 30, 1999 and
for the nine months ended December 31, 1998 and the six months
ended June 30, 1999. (Filed Herewith)
</TABLE>
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 9, 1999
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
/s/ Timothy J. Rigas
By: ______________________________________
Timothy J. Rigas
Executive Vice President, Treasurer
and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
99.01 Independent Auditors' Report by Deloitte & Touche LLP to the Board
of Directors and Stockholders of Century Communications Corp.
dated July 29, 1999 (August 26, 1999 as to Note 17), and the
consolidated financial statements of Century Communications Corp.
and subsidiaries as of May 31, 1998 and 1999 and for each of the
three years in the period ended May 31, 1999, all of which were
also filed in the Century Communications Corp. Form 10-K for the
fiscal year ended May 31, 1999. (Filed Herewith)
99.02 Independent Auditors' Report by KPMG LLP to the Partners of
FrontierVision Partners, L.P., dated March 19, 1999, and the
consolidated financial statements of FrontierVision Partners, L.P.
and subsidiaries as of December 31, 1997 and 1998 and for each of
the years in the three year period ended December 31, 1998.
Unaudited financial information for FrontierVision Partners, L.P.
for the six month period ended June 30, 1999. (Filed Herewith)
99.03 Independent Auditors' Report by Deloitte & Touche LLP to the Board
of Directors and Stockholders of Harron Communications Corp. dated
March 19, 1999 (April 12, 1999 as to Note 16), and the
consolidated financial statements of Harron Communications Corp.
and subsidiaries as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998. (Filed
Herewith)
99.04 Unaudited financial information for Harron Communications Corp.
for the six month period ended June 30, 1999. (Filed Herewith)
99.05 Unaudited pro forma condensed consolidated financial information
for Adelphia Communications Corporation as of June 30, 1999 and
the nine months ended December 31, 1998 and the six months ended
June 30, 1999. (Filed Herewith)
</TABLE>
4
<PAGE>
Exhibit 99.01
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Century Communications Corp.
New Canaan, Connecticut
We have audited the accompanying consolidated balance sheets of Century
Communications Corp. and subsidiaries as of May 31, 1999 and 1998, and the
related consolidated statements of operations and cash flows for each of the
three years in the period ended May 31, 1999. These consolidated financial
statements are the responsibility of the Company'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 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Century Communications Corp.
and subsidiaries as of May 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended May 31, 1999 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
July 29, 1999
(August 26, 1999 as to Note 17)
1
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in Thousands
<TABLE>
<CAPTION>
May 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments......................... $ 626,155 $ 285,498
Accounts receivable less allowance for doubtful accounts
of
$3,311 and $1,695, respectively........................ 16,775 16,109
Prepaid expenses and other current assets............... 3,705 3,465
Investment in marketable equity securities--current..... 49,143 --
Net assets of discontinued operations................... -- 37,323
---------- ----------
Total current assets.................................... 695,778 342,395
Property, plant and equipment--net........................ 585,693 565,965
Investment in marketable equity securities................ 25,756 52,451
Debt issuance costs, less accumulated amortization of
$22,464 and $16,013, respectively........................ 27,057 33,829
Cable television franchises, less accumulated amortization
of $361,498 and $324,835, respectively................... 296,280 344,612
Excess of purchase price over value of net assets
acquired, less accumulated amortization of $43,001 and
$40,612, respectively.................................... 158,869 166,570
Other assets.............................................. 10,866 9,360
---------- ----------
$1,800,299 $1,515,182
========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
Amounts in Thousands (Except Share Data)
<TABLE>
<CAPTION>
May 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current maturities of long-term debt................... $ 20,050 $ 20,050
Accounts payable....................................... 35,053 35,983
Accrued expenses and other current liabilities......... 102,260 97,499
---------- ----------
Total current liabilities............................ 157,363 153,532
Long-term debt........................................... 2,022,640 2,009,052
Deferred income taxes.................................... 5,290 5,170
Minority interest in subsidiaries........................ 74,915 67,030
Other deferred income.................................... 5,410 5,650
Commitments and contingencies (See Notes)
Common stockholders' deficiency:
Common stock, par value $.01 per share:
Class A, authorized 400,000,000 shares, issued,
67,232,335 and 65,684,888 shares, respectively, and
outstanding 33,423,167 and 31,954,085 shares,
respectively.......................................... 672 657
Class B, authorized 300,000,000 shares, issued and
outstanding 42,322,059 and 42,726,115 shares,
respectively.......................................... 423 427
Additional paid-in capital............................. 191,234 178,893
Other, including 33,809,168 and 33,730,803 treasury
shares, respectively.................................. (143,818) (135,215)
Accumulated deficit.................................... (513,830) (770,014)
---------- ----------
Total common stockholders' deficiency................ (465,319) (725,252)
---------- ----------
$1,800,299 $1,515,182
========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in Thousands (Except Share Data)
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue..................................... $ 519,584 $ 484,736 $ 459,646
---------- ---------- ----------
Costs and expenses:
Cost of services.......................... 111,603 103,932 100,789
Selling, general and administrative....... 115,790 122,307 111,467
Depreciation and amortization............. 158,153 154,029 159,547
Merger costs.............................. 7,922 -- --
---------- ---------- ----------
393,468 380,268 371,803
---------- ---------- ----------
Operating income............................ 126,116 104,468 87,843
Interest expense............................ 191,803 172,608 157,730
Gain on sale of assets...................... 5,646 -- --
Other income (expense)...................... 79 1,533 (171)
---------- ---------- ----------
Loss from continuing operations before
income tax benefit, minority interest and
extraordinary item......................... (59,962) (66,607) (70,058)
Income tax benefit.......................... (13,453) (624) (23,363)
---------- ---------- ----------
Loss from continuing operations before
minority interest and extraordinary item... (46,509) (65,983) (46,695)
Minority interest in income of
subsidiaries............................... (11,597) (11,899) (7,170)
---------- ---------- ----------
Loss from continuing operations............. (58,106) (77,882) (53,865)
---------- ---------- ----------
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $13,597 and $7,295
and minority interest in losses of
$21,193 and $22,584 for the years ended
May 31, 1998 and 1997, respectively...... -- (43,089) (80,428)
Gain on sale of discontinued operations
(less applicable income taxes of $25,739)
in 1999.................................. 314,290 -- --
---------- ---------- ----------
314,290 (43,089) (80,428)
---------- ---------- ----------
Income (loss) before extraordinary item..... 256,184 (120,971) (134,293)
Extraordinary item--loss on early retirement
of debt, net of income tax benefit of
$5,379..................................... -- -- (7,582)
---------- ---------- ----------
Net income (loss)......................... $ 256,184 $ (120,971) $ (141,875)
========== ========== ==========
Dividend on discontinued subsidiary
convertible redeemable preferred stock..... $ -- $ 5,225 $ 4,850
========== ========== ==========
Net income (loss) applicable to common
shares..................................... $ 256,184 $ (126,196) $ (146,725)
========== ========== ==========
Net income (loss) per common share--basic
and diluted:
Loss from continuing operations........... (.77) $ (1.11) $ (.78)
Loss from discontinued operations......... -- (.58) (1.08)
Gain on sale of discontinued operations... 4.18 -- --
Extraordinary item--loss on early
retirement of debt....................... -- -- (0.10)
---------- ---------- ----------
Net income (loss) per common share--basic
and diluted.............................. $ 3.41 $ (1.69) $ (1.96)
========== ========== ==========
Weighted average number of common shares
outstanding during the period--basic and
diluted.................................... 75,088,000 74,770,000 74,675,000
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in Thousands
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
Operating Activities:
Cash received from subscribers and
others.................................. $ 635,438 $ 616,043 $ 557,224
Cash paid to suppliers, employees and
governmental agencies................... (376,415) (327,271) (330,862)
Interest paid............................ (135,290) (129,148) (119,419)
--------- --------- -----------
Net Cash Provided by Operating
Activities............................ 123,733 159,624 106,943
--------- --------- -----------
Investing Activities:
Capital expenditures..................... (121,523) (113,222) (79,563)
Cable television franchise expenditures.. (1,307) (1,764) (2,105)
Acquisition of other assets.............. (2,668) (1,524) (885)
Acquisition of cable television systems.. (4,003) (70,994) (13,928)
Sale of discontinued operations.......... 360,115 -- --
Sale of radio stations................... 11,538 -- --
--------- --------- -----------
Net Cash Provided By (Used in)
Investing Activities.................. 242,152 (187,504) (96,481)
--------- --------- -----------
Financing Activities:
Proceeds from long-term borrowings....... -- 813,659 1,043,000
Principal payments on long-term debt..... (37,050) (575,550) (1,039,050)
Debt issuance costs...................... -- (18,307) (9,017)
Purchase of treasury stock............... (1,505) (12,576) (2,358)
Issuance of common stock................. 8,562 2,951 3,822
--------- --------- -----------
Net Cash (Used in) Provided by
Financing Activities.................. (29,993) 210,177 (3,603)
--------- --------- -----------
Net Increase in Cash and Short-Term
Investments--Continuing Operations........ 335,892 182,297 6,859
Cash Flows of Discontinued Operations--
Net....................................... 4,765 (48,746) (19,504)
Cash and Short-Term Investments--Beginning
of Year................................... 285,498 151,947 164,592
--------- --------- -----------
Cash and Short-Term Investments--End of
Year...................................... $ 626,155 $ 285,498 $ 151,947
========= ========= ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Amounts in Thousands
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Reconciliation of Net Income (Loss) to Net
Cash Provided by Operating Activities
Net Income (Loss).......................... $ 256,184 $(120,971) $(141,875)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization............ 158,153 154,029 159,547
Minority interest in income of
subsidiaries--continuing operations..... 11,597 11,899 7,170
Deferred income taxes.................... 121 (4,812) (32,905)
Non cash interest charges................ 57,393 39,138 30,006
Gain on sale of discontinued operations.. (340,029) -- --
Gain on sale of assets and other......... (7,237) -- --
Loss from discontinued operations--net... -- 43,089 80,428
Change in assets and liabilities net of
effects of acquired cable television
systems:
Accounts receivable--
(increase)/decrease................... (866) 5,189 (10,799)
Prepaid expenses and other current
assets--(increase)/decrease........... (268) 5,437 323
Accounts payable and accrued expenses--
(decrease)/increase................... (11,315) 26,626 15,048
--------- --------- ---------
Total adjustments.................... (132,451) 280,595 248,818
--------- --------- ---------
Net Cash Provided by Operating Activities.. $ 123,733 $ 159,624 $ 106,943
========= ========= =========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 1999, 1998 and 1997
(Amounts in thousands except subscriber and share data)
NOTE 1. Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Century
Communications Corp., all of its subsidiaries and certain partnership
interests (the "Company") from their respective dates of acquisition (see Note
5). Included in subsidiaries are the 50% indirectly-owned: Century Venture
Corp. and Subsidiary, Century-ML Cable Venture and Subsidiary, and Citizens
Century Cable Television Venture (see Note 12). All material intercompany
transactions and balances have been eliminated. As discussed more thoroughly
in Note 3, Centennial Cellular Corp. (the "Wireless Telephone Segment") and
the Company's Australian operations, including ECT, were sold during the
quarter ended February 28, 1999. Accordingly, the consolidated financial
statements reflect the sale of these segments during the year ended May 31,
1999 and reflect the operating results and cash flows of these segments as
discontinued operations for the years ended May 31, 1998 and 1997. The
consolidated balance sheet at May 31, 1998 segregates the net assets of these
discontinued operations.
Revenue recognition
Revenues includes earned subscriber service revenues and charges for
installation and connections, net of programmers' share of pay television
revenues. Such programmers' share netted against revenues amounted to
$152,236, $131,792 and $114,591 in 1999, 1998 and 1997, respectively. Also
included within revenues was investment income of $20,678, $8,187 and $3,880
in 1999, 1998 and 1997, respectively.
Charges for installations and connections, which are non-refundable, are
recognized into revenue upon completion of the installation or reconnection.
Subscriber services paid in advance are recognized as income when earned.
Investment in marketable equity securities
The Company classifies its investments in debt and equity securities as
available for sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities".
Unrealized holding gains and losses, net of the related income tax effect on
these securities are excluded from earnings and are reported as a component of
stockholders' deficiency (included within other comprehensive income) until
realized. Equity securities at May 31, 1999 and 1998 are stated at their fair
market values. The adjusted cost basis of these equity securities was $58,011
and $32,255 at May 31, 1999 and 1998, respectively. The May 31, 1999 adjusted
cost basis includes approximately $25,756 of equity securities received during
fiscal 1999 in relation to the sale of the Company's Australian Operations.
The Company recorded a decrease in the unrealized gain of $3,308 during the
year ended May 31, 1999, an increase in the unrealized gain of $7,333 during
the year ended May 31, 1998 and a decrease in the unrealized gain of $7,950
during the year ended May 31, 1997.
Debt issuance costs
Costs associated with the issuance of the Company's debt securities and
credit facilities (Note 8) have been capitalized and are being amortized on a
straight-line basis over the expected lives of the issues.
7
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the following estimated useful
lives of the assets:
<TABLE>
<S> <C>
Buildings....................................................... 15 - 25 years
Cable television transmission and distribution systems and
related equipment.............................................. 8 - 15 years
Miscellaneous equipment and furniture and fixtures.............. 3 - 15 years
</TABLE>
The cost of connections for new cable television subscribers are capitalized
at standard per subscriber rates for labor, materials and overhead.
Expenditures for maintenance and repairs are charged to operating expense as
incurred, and betterments, replacement equipment and additions are capitalized.
Cable television franchises
Cable television franchises principally consist of amounts allocated under
purchase accounting (see Note 5). Such amounts are amortized using the
straight-line method over the lives of the franchises (generally ranging from
10 to 15 years).
Excess of purchase price over value of net assets acquired
The excess of purchase price over value of net assets acquired ("goodwill")
is being amortized using the straight-line method over a period of 40 years.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
provides that the deferred tax provision is determined by the liability method.
Deferred tax assets and liabilities are recognized based on the differences
between the book and tax basis of assets and liabilities using presently
enacted tax rates.
Comprehensive income (loss)
The Company applies the provisions of the Financial Accounting Standards
Board's Statement of Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires the reporting and display of
comprehensive income, which is composed of net income (loss) and other
comprehensive income or loss items, in a full set of general purpose financial
statements. Other comprehensive income (loss) items for the Company include
unrealized appreciation of marketable securities and foreign currency
translation adjustments (1998 and 1997 only). Under generally accepted
accounting principles, these other comprehensive income (loss) items are
excluded from net income and reflected as a component of equity.
Segment Reporting
The Company applies the provisions of the Financial Accounting Standards
Board's Statement of Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for reporting information on operating segments in the financial statements. In
accordance with this standard, the Company has determined that it currently
operates in one business segment, the ownership and operation of cable
television systems in the United States.
8
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Loss per common share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128 Basic
Earnings Per Share is calculated by dividing income (loss) applicable to common
shares by weighted average common shares outstanding. Diluted Earnings Per
Share reflects the potential dilution that could occur if potential common
stock instruments of the Company were exercised, converted or issued.
The loss per common share reflects a charge for the dividends on subsidiary
convertible redeemable preferred stock of $5,225 and $4,850 for the years ended
May 31, 1998 and 1997, respectively. These dividends are related to the
Company's previously owned wireless telephone segment.
Statement of cash flows
Short-term investments classified as cash equivalents in the consolidated
financial statements consist principally of overnight deposits, government
securities and commercial paper with acquired maturities of three months or
less.
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Valuation of long lived assets
The Company, on a quarterly basis, undertakes a review and valuation of the
net carrying value, recoverability and write-off period of all categories of
its long lived 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. The Company also considers its
financial structure, including the underlying cost of securities which support
the Company's internal growth and acquisitions, as well as the recoverability
of the cost of its long lived assets based on a comparison of estimated
undiscounted operating cash flows for the systems which generated long lived
assets with the carrying value of the long lived assets. The Company's long
lived assets are stated at the lower of cost or market and are amortized over
their respective expected lives.
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 short-term maturity of these
financial instruments.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
9
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
New accounting pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in 1998, which will be effective for the Company in fiscal
2002. Additionally, during 1998 the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-5 "Reporting on the Cost of
Start-up Activities", which will be effective for the Company in fiscal 2000.
The Company believes these Statements will not have a material impact on the
Consolidated Financial Statements of the Company when adopted.
NOTE 2. Agreement and Plan of Merger
On March 5, 1999, the Company and Adelphia Communications Corporation
("Adelphia") jointly announced the signing of a definitive agreement (the
"Merger Agreement") for the merger (the "Merger") of the Company with and into
a newly formed direct, wholly-owned subsidiary of Adelphia (the "Merger Sub").
The Merger Sub will continue as the surviving company in the Merger. The Merger
is expected to close in the third calendar quarter of 1999. The consolidated
financial statements have been prepared on a historical basis and do not
include any adjustments that might result from the completion of the Merger.
Pursuant to the Merger Agreement, the Company's Class A Common stockholders
will have the right to elect, on a share-by-share basis to receive either
0.77269147 of a share of Adelphia Class A common stock or $44.14 in cash for
each share of the Company's Class A Common Stock that they own, and the
Company's Class B Common stockholders will have the right to elect, on a share-
by-share basis to receive either 0.84271335 of a share of Adelphia Class A
common stock or $48.14 in cash for each share of the Company's Class B Common
Stock that they own.
Notwithstanding an election made by one of the Company's stockholders, at the
effective time of the Merger (i) the aggregate number of shares of the
Company's Class A Common Stock that may be converted into the right to receive
cash in the Merger is equal to 20.76% of the number of shares of the Company's
Class A Common Stock outstanding immediately prior to the effective time of the
Merger (excluding shares held by dissenting stockholders), (ii) the aggregate
number of shares of the Company's Class A Common Stock which may be converted
into the right to receive shares of Adelphia Class A Common Stock in the Merger
is equal to 79.24% of the number of such shares of the Company's Class A Common
Stock outstanding immediately prior to the effective time of the Merger
(excluding shares held by dissenting stockholders), (iii) the aggregate number
of shares of the Company's Class B Common Stock that may be converted into the
right to receive cash in the Merger is equal to 24.54% of the number of shares
of the Company's Class B Common Stock outstanding immediately prior to the
effective time of the Merger (excluding shares held by dissenting stockholders)
and (iv) the aggregate number of shares of the Company's Class B Common Stock
which may be converted into the right to receive shares of Adelphia Class A
Common Stock in the Merger is equal to 75.46% of the number of shares of the
Company's Class B Common Stock outstanding immediately prior to the effective
time of the Merger (excluding shares held by dissenting stockholders).
If the aggregate number of shares of the Company's Class A Common Stock or
the Company's Class B Common Stock with respect to which elections have been
made exceeds the aggregate number of shares of the Company's common stock of
that class that may be converted into the right to receive a particular form of
consideration in the Merger, then each share of the Company's common stock
electing to receive the undersubscribed consideration will receive that
consideration; and each share of the Company's common stock electing to receive
the oversubscribed consideration will receive a portion of the Merger
consideration in cash and a portion of the Merger consideration in Adelphia
Class A Common Stock.
10
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement will be paid by the party incurring such
expenses. However, in the event the Company enters into or consummates a
merger, consolidation or other business combination with a third party within
twenty-four months after the date of termination of the Merger Agreement, the
Company shall reimburse Adelphia's costs and expenses in connection with the
Merger Agreement (subject to a maximum of $10,000) and pay Adelphia a
termination fee of $100,000.
On or about March 10, 1999, a lawsuit was commenced by the filing of a class
action complaint (the "Complaint") by one of the Company's Class A Common
stockholders on behalf of himself and all others similarly situated naming the
Company's Class B Common stockholders and all of the Company's Directors as
defendants for alleged breaches of fiduciary duty in connection with approval
of the Merger consideration. The Company and Adelphia were also named as
defendants for allegedly aiding and abetting in the foregoing breaches of
fiduciary duty. The Complaint seeks damages in an unspecified amount and such
other relief as may be appropriate. On July 21, 1999, the court granted the
Company's and the other defendants' motion for extension of time to answer or
otherwise respond to the complaint to the earlier of November 15, 1999 or
twenty days after the effective date of the Merger.
The closing of the Merger is subject to certain customary conditions,
including the approval of the Merger by the shareholders of the Company and
Adelphia, each party obtaining the required consents and all appropriate
regulatory and other approvals, including from the Federal Communications
Commission and local franchising authorities and under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). On April 20,
1999, the waiting period under the HSR Act for the Merger terminated. In
connection with the Merger, the Company has completed filing the material
applications seeking transfer of the Company's applicable franchise licenses
with the FCC and local franchising authorities. There is no assurance that the
Company will obtain such approvals or that the Merger will be consummated.
At the effective time of the Merger, Adelphia will purchase Citizens
Utilities Company's ("Citizens") 50% interest in the Century/Citizens Joint
Venture, one of the Company's 50% owned joint ventures, for a purchase price of
approximately $157,500, comprised of approximately $27,700 in cash,
approximately 1.85 million shares of Adelphia Class A common stock and the
assumption of indebtedness. This joint venture serves approximately 91,800
basic subscribers in California and is jointly owned by the Company and
Citizens Cable Company, a subsidiary of Citizens.
In addition, the Company, Adelphia and Dr. Leonard Tow, Chairman and Chief
Executive Officer of the Company, have agreed that the Company will sell its
shares of Class A Common Stock of Citizens to Dr. Tow at the effective time of
the Merger at fair market value, based on the closing market price of such
shares on the date the Merger Agreement was signed. Based on that closing
price, the aggregate purchase price will be approximately $39,800. As of May
31, 1999, these shares constituted approximately 2% of the outstanding stock of
Citizens.
NOTE 3. Merger/Sale of Business Segments
Centennial Cellular Corp.
On January 7, 1999, Centennial Cellular Corp. ("Centennial"), a former
subsidiary of the Company, completed the previously announced merger of CCW
Acquisition Corp., a company organized at the direction of Welsh, Carson,
Anderson & Stowe, with and into Centennial (the "Centennial Merger"). As of the
completion of the Centennial Merger, the Services Agreement between the Company
and Centennial was terminated. As a
11
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
holder of 8,561,819 shares of Class B Common Stock and 3,978 shares of Second
Series Convertible Preferred Stock of Centennial, the Company received for its
interest in Centennial approximately $360,100 in cash. The Company recorded a
pre-tax gain upon the sale of Centennial of approximately $322,000 during the
year ended May 31, 1999.
Australian Operations
The Company sold to UIH Asia/Pacific Communications Inc. ("UAP"), a unit of
United International Holdings, Inc. ("UIH"), the Company's 25% ownership
interest in XYZ Entertainment Pty. Limited ("XYZ") for approximately $24,600.
Approximately 95% of the sales price was paid in the form of UIH Series B
Convertible Preferred Stock ("UIH Convertible Stock") which is convertible at
any time into approximately ten shares of UIH Class A Common Stock for each
share of UIH Convertible Stock, at a conversion price of $21.25 per share. The
Company may not sell, assign, pledge, transfer or otherwise convey any of these
UIH securities prior to September 11, 1999.
In fiscal 1999, East Coast Pay Television Pty. Limited ("ECT") sold
substantially all of its operating assets to Austar Entertainment Pty Ltd.
("Austar"), a wholly owned subsidiary of UAP, for approximately $6,100 in the
form of UIH Convertible Stock. ECT has finalized the shutdown of its
operations, including the liquidation of its current liabilities. On December
16, 1998, the creditors of ECT (including the Company) entered into an
Intercreditor Agreement pursuant to which substantially all of the remaining
assets of ECT have been distributed among them and the Company has received
5,652 units of UIH Convertible Stock, of which 1,156 units are to be
transferred to the ECT minority interest shareholders. The Company may not
sell, assign, pledge, transfer or otherwise convey any of the remaining 4,496
units of UIH Convertible Stock prior to July 9, 1999. The Company will receive
92.4% of any additional remaining assets of ECT. Such amounts are not expected
to be material.
At July 26, 1999, the closing price of the UIH Class A Common Stock on the
Nasdaq National Market was $77 1/8.
The Company recorded a pre-tax gain of approximately $18,000 as a result of
the sale of its Australian business segment during the year ended May 31, 1999.
The Company reduced its valuation allowance applied against its deferred tax
assets by approximately $104,000 as a result of the sale of Centennial and the
Australian Operations.
The net assets of Centennial and the Australian Operations have been
classified in the accompanying May 31, 1998 consolidated balance sheet under
the caption "Net Assets of Discontinued Operations".
12
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Operating results of Centennial and the Australian Operations for the years
ended May 31, 1998 and 1997 are shown separately within the accompanying
consolidated statements of operations under the caption "Loss from Discontinued
Operations". The operating results of Centennial and the Australian Operations
for the years ended May 31, 1998 and 1997 consist of the following:
Centennial Cellular Corp.:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue.................................................. $ 237,501 $ 151,023
Costs and expenses....................................... (250,802) (177,080)
--------- ---------
Operating Loss......................................... (13,301) (26,057)
Income from equity investments........................... 13,069 15,180
Interest expense......................................... (45,155) (33,379)
Gain on sale of assets................................... 5 3,819
Income tax benefit....................................... 13,597 7,295
Minority interest in income of subsidiaries.............. (162) (153)
--------- ---------
Net Loss (a)........................................... $ (31,947) $ (33,295)
========= =========
</TABLE>
Australian Operations:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue................................................... $ 35,257 $ 33,248
Costs and expenses........................................ (54,672) (89,073)
--------- ---------
Operating Loss.......................................... (19,415) (55,825)
Interest expense.......................................... (10,547) (9,634)
Other loss................................................ (2,373) (4,258)
--------- ---------
Net Loss (a)............................................ $(32,335) $(69,717)
========= =========
</TABLE>
- --------
(a) Prior to minority interest share of losses.
NOTE 4. Supplemental Disclosure of Non-Cash Investing and Financing Activities
The table below summarizes non-cash reclassifications that occurred during
the years ended May 31, 1999, 1998 and 1997. The reclassifications result
primarily from the Company's acquisitions.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Marketable securities.............................. $(3,308) $ 7,333 $ (7,951)
Cable television franchises........................ -- 5,000 (14,828)
Goodwill........................................... -- -- 14,828
------- ------- --------
$(3,308) $12,333 $ (7,951)
======= ======= ========
Current liabilities................................ $ -- $ 8,067 $ 3,005
Minority interest.................................. -- (3,067) (3,005)
Other stockholders' deficiency..................... (3,308) 7,333 (7,951)
------- ------- --------
$(3,308) $12,333 $ (7,951)
======= ======= ========
</TABLE>
13
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 5. Acquisitions
During the three years ended May 31, 1999, the Company acquired the net
assets of cable television systems as follows:
<TABLE>
<CAPTION>
Amounts allocated to
--------------------
Number of Total Cable Property
Systems purchase television plant and
Acquired price franchises equipment
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended May 31, 1998................. 2 $69,650 $23,383 $24,647
</TABLE>
During the year ended May 31, 1999, the Company acquired approximately 2,280
subscribers for $3,985. This purchase price was substantially allocated to
cable television franchises ($2,331) and property, plant and equipment
($1,654).
These transactions have been accounted for as purchases and the results of
operations of the acquired systems have been included in the accompanying
consolidated financial statements from the dates of acquisition. The Company
has recorded the purchase price of the cable television systems at the fair
market value of acquired assets on the dates of acquisition with the excess
purchase price being recorded to cable television franchises.
Cable Television Acquisitions
On August 16, 1996, the Company entered into agreements to acquire two cable
television systems which served an aggregate of approximately 35,000 primary
basic subscribers, which agreements were subsequently assigned to a joint
venture in which each of the Company and Citizen Utilities Company have a 50%
interest (the "Century/Citizens Joint Venture"). These systems are primarily
located in Yorba Linda/Orange County and Diamond Bar, California. The aggregate
purchase price for these systems was approximately $69,650. On October 15,
1997, the Century/Citizens Joint Venture completed the acquisition of the
Diamond Bar system for a purchase price of approximately $34,160. The Diamond
Bar system serves approximately 20,000 primary basic subscribers. On April 30,
1998, the Century/Citizens Joint Venture completed the acquisition of the Yorba
Linda/Orange County systems for a purchase price of approximately $35,490. The
Yorba Linda/Orange County systems serve approximately 17,500 primary basic
subscribers. The Company funded its share of the purchase price for the Yorba
Linda/Orange County systems and the Diamond Bar system using available credit
facilities.
The pro forma effect of completed cable television acquisitions was not
material.
Pending Acquisition
In August 1998, the Company entered into an agreement to acquire a cable
television system which serves approximately 19,000 primary basic subscribers
in Moreno Valley and certain portions of Riverside County, California. The
purchase price for this system is approximately $33,000. The Company currently
expects to fund the acquisition using either cash on hand or available credit
facilities. The purchase of this system by the Company is subject to regulatory
approvals. There is no assurance that the Company will obtain such approvals or
that such acquisition will be consummated.
NOTE 6. Transactions with Related Parties
The Company purchased workers compensation and general liability insurance
from Sentry Insurance (a holder of approximately 1% of Class B Common stock
until June 1998) and its affiliated companies. The
14
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Company paid a total of $4,112, $4,665 and $7,083 for such insurance for the
fiscal years ended May 31, 1999, 1998 and 1997, respectively.
Leavy Rosensweig & Hyman of which David Z. Rosensweig is a member, serves as
General Counsel to the Company. Mr. Rosensweig is also a director and secretary
of the Company. The Company paid approximately $1,743, $1,165 and $1,352 to
Leavy Rosensweig & Hyman for the fiscal years ended May 31, 1999, 1998 and
1997, respectively.
The Company believes that all transactions between it, Sentry Insurance and
Leavy, Rosensweig & Hyman have been on terms no less favorable to the Company
than would have been available from nonaffiliated parties.
NOTE 7. Account Analysis
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
May 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Land.................................................... $ 6,017 $ 6,794
Buildings............................................... 33,381 33,175
Cable television and wireless telephone transmission
and distribution systems and related equipment......... 997,422 908,513
Miscellaneous equipment and furniture and fixtures...... 59,769 54,470
---------- ----------
1,096,589 1,002,952
Less accumulated depreciation........................... (510,896) (436,987)
---------- ----------
$ 585,693 $ 565,965
========== ==========
</TABLE>
Depreciation expense was approximately $101,370, $93,926 and $98,429 for the
fiscal years ended May 31, 1999, 1998, and 1997, respectively. During fiscal
1999, 1998 and 1997 the Company wrote-off approximately $25,212, $42,476 and
$117,855, respectively, of fully depreciated property, plant and equipment.
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
May 31,
----------------
1999 1998
-------- -------
<S> <C> <C>
Accrued interest.............................................. $ 32,369 $33,249
Accrued other................................................. 57,231 42,459
Customer deposits & prepaids.................................. 12,660 21,791
-------- -------
$102,260 $97,499
======== =======
</TABLE>
15
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 8. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
May 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Credit facility (a)...................................... $ -- $ --
Credit facility (b)...................................... -- --
9 1/2% Senior notes due 2000 (c)......................... 150,000 150,000
9 3/4% Senior notes due 2002 (d)......................... 200,000 200,000
Zero Coupon Senior discount notes due 2003 (e)........... 316,618 289,870
9 1/2% Senior notes due 2005 (f)......................... 250,000 250,000
8 7/8% Senior Notes due 2007 (g)......................... 250,000 250,000
8 3/4% Senior Notes due 2007 (h)......................... 225,000 225,000
8 3/8% Senior Notes due 2017 (i)......................... 100,000 100,000
8 3/8% Senior Notes due 2007 (j)......................... 100,000 100,000
Senior Discount Notes due 2008, Series B (k)............. 282,022 258,132
Subsidiary 9.47% Senior secured notes due 2002 (l)....... 80,000 100,000
Subsidiary revolving credit and term loan (m)............ 47,000 54,000
Subsidiary credit facility (n)........................... 42,000 52,000
Other.................................................... 50 100
---------- ----------
Total debt............................................. 2,042,690 2,029,102
Current maturities....................................... 20,050 20,050
---------- ----------
$2,022,640 $2,009,052
========== ==========
</TABLE>
- --------
(a) On August 4, 1995, as amended August 12, 1996, CCC-I, Inc. ("CCC-I"), a
subsidiary of the Company, entered into a three-year, $525,000 unsecured
revolving credit facility which converts to a five year term loan. The
interest rates payable on borrowings under the amended credit facility are
based on, at the election of CCC-I, (a) the base rate of interest
announced by Citibank, N.A. plus 0% to 0.625% per annum based upon certain
conditions, or (b) the London Interbank Offering Rate plus 0.75% to 1.625%
per annum based upon certain conditions. On August 31, 1999, the $525,000
of borrowing capacity terminates under the CCC-I credit facility. At May
31, 1999, no amounts were outstanding under the CCC-I credit facility.
The agreement expires on August 31, 2004 and provides for mandatory
principal repayments, among other possible reductions, in the following
percentages:
<TABLE>
<CAPTION>
Last day Last day Last day Last day
Year of February of May of August of November
---- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
1999............................. -- -- -- 4.00%
2000............................. 4.00% 4.00% 4.00% 4.50%
2001............................. 4.50% 4.50% 4.50% 5.25%
2002............................. 5.25% 5.25% 5.25% 5.75%
2003............................. 5.75% 5.75% 5.75% 5.50%
2004............................. 5.50% 5.50% 5.50% --
</TABLE>
(b) On June 30, 1994, as amended August 12, 1996, CCC-II, Inc. ("CCC-II"), a
subsidiary of the Company entered into a three-year $350,000 unsecured
revolving credit facility which converts to a five-year term loan with a
syndicate of banks led by Citibank, N.A. as agent for the syndicate. The
interest rates payable
16
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
on borrowings under the amended credit facility are based on, at the
election of CCC-II, (a) the base rate of interest announced by Citibank,
N.A. plus 0% to 0.5% per annum based upon certain conditions, or (b) the
London Interbank Offering Rate plus 0.75% to 1.375% per annum based upon
certain conditions. On August 31, 1999, the $350,000 of borrowing capacity
terminates under the CCC-II credit facility. At May 31, 1999, no amounts
were outstanding under the CCC-II credit facility.
The agreement expires on August 31, 2004 and provides for mandatory
principal repayments, among other possible reductions, in the following
percentages:
<TABLE>
<CAPTION>
Last day Last day Last day Last day
Year of February of May of August of November
---- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
1999............................. -- -- -- 2.50%
2000............................. 2.50% 2.50% 2.50% 5.00%
2001............................. 5.00% 5.00% 5.00% 5.00%
2002............................. 5.00% 5.00% 5.00% 6.25%
2003............................. 6.25% 6.25% 6.25% 6.25%
2004............................. 6.25% 6.25% 6.25% --
</TABLE>
(c) On August 21, 1992, the Company issued Senior Notes Due 2000 ("9 1/2%
Notes") in the principal amount of $150,000 which mature on August 15,
2000. The 9 1/2% Notes bear interest at 9 1/2% payable semiannually on
February 15 and August 15 of each year commencing February 15, 1993. At
May 31, 1999 and 1998 the 9 1/2% Notes were trading at 105.14% and 105% of
par or $157,710 and $157,500, respectively.
(d) On February 13, 1992, the Company issued Senior Notes Due 2002 ("the 9
3/4% Notes") in the principal amount of $200,000 which mature on February
15, 2002. The notes bear interest at 9 3/4% payable semiannually on
February 15 and August 15 of each year commencing August 15, 1992. At May
31, 1999 and 1998, the 9 3/4% Notes were trading at 107.56% and 107% of
par or $215,120 and $214,000, respectively.
(e) On April 1, 1993, the Company issued Zero Coupon Senior Discount Notes Due
2003 ("the Discount Notes") in the discounted amount of $183,678 yielding
8.875% annually to maturity. The Discount Notes mature on March 15, 2003
at $444,000. There will be no periodic payments of interest on the
Discount Notes, and they may not be redeemed prior to maturity. During the
years ended May 31, 1999 and 1998, approximately $26,748 and $24,489 of
interest, respectively was amortized in the consolidated financial
statements. At May 31, 1999 and 1998, the Notes were trading at 71.47% and
67% of par or $317,327 and $297,480 respectively. The accreted value of
the Discount Notes at May 31, 1999 was $316,618.
(f) On March 6, 1995, the Company issued unsecured Senior Notes due 2005 ("the
9 1/2% Notes") in the principal amount of $250,000 which mature March 1,
2005. The Notes bear interest at 9 1/2% payable semi-annually on March 1
and September 1 of each year commencing September 1, 1995. At May 31, 1999
and 1998, the Notes were trading at 106.66% and 106.75% of par or $266,650
and $266,875, respectively.
(g) On January 17, 1997, the Company issued Senior Notes Due 2007 ("8 7/8%
Notes") in the principal amount of $250,000 which mature on January 15,
2007. The 8 7/8% Notes bear interest at 8 7/8% payable semiannually on
January 15 and July 15. At May 31, 1999 and 1998 the Notes were trading at
101.14% and 104.25% of par or $252,850 and $260,625, respectively.
The net proceeds received by the Company from the sale of the 8 7/8% Notes,
of approximately $244,607, were used to temporarily repay a portion of the
long-term debt outstanding under two credit agreements
17
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
executed by subsidiaries of the Company. The net proceeds were used to
retire $204,000 aggregate principal amount of 11 7/8% Senior Subordinated
Debentures due 2003 issued by the Company in October 1991 (the "11 7/8%
Debentures"). The 11 7/8% Debentures were called by the Company on April
15, 1997 at a redemption price of 105% of the principal amount thereof.
Accordingly, the amount required to retire the 11 7/8% Debentures at such
time was $214,200 plus accrued interest of $12,113. The effect of the
redemption resulted in an extraordinary loss on early retirement of debt in
fiscal 1997 of approximately $7,582, net of income taxes of $5,379,
reflecting the call premium and write-off of deferred financing costs. The
balance of the net proceeds was used by the Company for general corporate
purposes, including but not limited to the financing of capital
expenditures, investments, purchases of the Company's securities and
acquisitions.
On April 4, 1997, the Company filed a registration statement with the SEC
relating to the shelf registration of $500,000 of the Company's debt
securities, augmenting the remaining $2,000 available under the July 1994
registration statement. The registration became effective July 15, 1997.
(h) On September 29, 1997, the Company issued 8 3/4% Senior Notes due 2007
(the "8 3/4% Notes") in the principal amount of $225,000, which mature on
October 1, 2007. The 8 3/4% Notes bear interest at 8 3/4% payable
semiannually on April 1 and October 1 of each year commencing April 1,
1998. At May 31, 1999 and 1998 the 8 3/4% Notes were trading at 101.125%
and 103.75% of par or $227,531 and $233,438.
(i) On November 13, 1997, the Company issued 8 3/8% Senior Notes due 2017 (the
"8 3/8% Notes") in the principal amount of $100,000, which mature on
November 15, 2017. The 8 3/8% Notes bear interest at 8 3/8% payable
semiannually on May 15 and November 15 of each year commencing May 15,
1998. At May 31, 1999 and 1998, the 8 3/8% Notes were trading at 99.50%
and 99.44% of par or $99,500 and $99,440.
(j) On December 10, 1997, the Company issued 8 3/8% Senior Notes due 2007 (the
"Senior Notes due 2007") in the principal amount of $100,000, which mature
on December 15, 2007. The Senior Notes due 2007 bear interest at 8 3/8%
payable semiannually on June 15 and December 15 of each year commencing
June 15, 1998. At May 31, 1999 and 1998, the Senior Notes due 2007 were
trading at 101.125% and 101.5% of par or $101,125 and $101,500.
The net proceeds received by the Company from the issuance of the 8 3/4%
Notes, the 8 3/8% Notes and the Senior Notes due 2007 of $410,449 were used
by the Company to temporarily repay portions of the long-term debt
outstanding under the Company's CCC-I and CCC-II credit agreements.
(k) On January 15, 1998, the Company issued $605,000 principal amount at
maturity of Senior Discount Notes due 2008, Series A ("Senior Discount
Notes") to a qualified institutional buyer under a private placement
offering pursuant to Rule 144A and Regulation S of the Securities Act of
1933, as amended (the "Private Placement Offering"). The Senior Discount
Notes were sold at a discount of 41.266% from the principal amount due at
maturity (the "Original Issue Discount"). The Original Issue Discount
began accruing on the Senior Discount Notes on January 15, 1998 and will
continue accruing during the period in which the Senior Discount Notes
remain outstanding. The Original Issue Discount represents an annual yield
to maturity of 9.05% based on the issue price of the Senior Discount
Notes. There will be no periodic payments of interest on the Senior
Discount Notes. The Senior Discount Notes are senior unsecured obligations
of the Company, may not be redeemed prior to maturity and will not be
entitled to the benefit of any sinking fund.
The net proceeds received by the Company from the sale of the Senior
Discount Notes were approximately $246,106. The Company used $96,000 of the
net proceeds from the sale of the Senior Discount Notes to
18
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
temporarily repay portions of the long-term debt outstanding under both the
CCC-I and CCC-II credit agreements. The remainder of the net proceeds have
been and continue to be used for capital expenditures, operations,
acquisitions and other investments. Further borrowings may be made under
the CCC-I and CCC-II Credit Agreements until August 31, 1999 for general
corporate purposes, including, but not limited to, the financing of capital
expenditures, investments, purchases of the Company's securities and
acquisitions.
On March 2, 1998, the Company filed a registration statement with the SEC
relating to the exchange of all outstanding Senior Discount Notes due 2008,
Series A for Senior Discount Notes, Series B (the "Senior Discount Notes,
Series B"). The terms of the Senior Discount Notes, Series B are identical
in all material respects to the Senior Discount Notes, except that the
Senior Discount Notes, Series B were registered under the Securities Act of
1933, as amended, and therefore the transfer of the Senior Discount Notes,
Series B are not restricted. This registration statement became effective
on March 17, 1998.
During the years ended May 31, 1999 and 1998, approximately $23,890 and
$8,473, respectively of interest was amortized in the consolidated
financial statements related to the Senior Discount Notes, Series B. At May
31, 1999 and 1998, the Senior Discount Notes, Series B were trading at
45.19% and 44% of par or $273,400 and $266,200.
On January 7, 1998, the Company filed a shelf registration statement with
the SEC for $500,000 of the Company's debt securities, augmenting the
remaining $77,000 under the shelf registration statement filed on April 4,
1997. The registration statement became effective on January 28, 1998. The
debt securities may be issued from time to time, in series, on terms to be
specified in one or more prospective supplements at the time of the
offering. If so specified with respect to any particular series, the debt
securities may be convertible into shares of the Company's Class A Common
Stock. As of May 31, 1999, there was $577,000 available for issuance under
this shelf registration.
The Company's public debt securities rank pari passu with all existing and
future Senior Indebtedness (as that term is defined in the respective
Indentures under which the public debt securities were issued) of the
Company, are senior in right of payment to all existing and future
subordinated indebtedness of the Company, and may not be redeemed prior to
maturity.
(l) On December 31, 1992, Century-ML Cable Corporation ("CML") and Century/ML
Cable Venture ("CCV"), subsidiaries of the Company through which the
Company owns a 50% interest in cable television systems in Puerto Rico,
entered into separate note agreements (the "Note Agreements") with a group
of institutional lenders providing for the issuance by CML of $100,000
aggregate principal amount of its 10-year 9.47% Senior Secured Notes Due
2002. Interest on the Notes is payable semiannually and principal will be
payable in installments of 20% of the original principal amount beginning
on September 30, 1998, with final maturity at September 30, 2002. The
Notes are subject to various other prepayment provisions, including
prepayment with premium at the option of CML at any time prior to their
expressed maturity and prepayment with premium at the option of the
holders thereof upon the occurrence of certain events involving changes in
control of CML and CCV. The Notes are entitled to the benefits of certain
security agreements and guarantees, including a guaranty by CCV of the
payment of all principal of, premium, if any, and interest on the notes.
The notes are secured by substantially all of the assets of CCV. The
estimated fair value of the notes at May 31, 1999 was approximately
$84,905.
(m) On July 31, 1995, a subsidiary of the Company, Century Venture Corp.
("CVC") entered into a three year, $80,000 revolving credit facility which
converts to a five year term loan. The proceeds of the facility were used
by CVC to repay existing indebtedness of CVC and will be used for working
capital and general
19
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
corporate purposes. The repayment by CVC of its existing indebtedness
discharged all of CVC's obligations under its then-existing credit agreement
and, as a result, such agreement was terminated. The interest rates payable
on borrowings under the new credit facility are based on, at the election of
CVC, (a) "C/D Base Rate" plus an applicable margin, as defined or (b)
"Eurodollar Base Rate" plus an applicable margin as defined or (c) "ABR"
rate as defined. At May 31, 1999, $47,000 was outstanding under the CVC
credit facility. The estimated fair value of the CVC credit facility
approximates its carrying value at May 31, 1999.
The agreement expires on February 28, 2004 and provides for a reduction in
the aggregate commitment, among other possible reductions, in the following
amounts:
<TABLE>
<CAPTION>
Last day Last day Last day Last day
Year of February of May of August of November
---- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
1998............................. $ -- $ -- $1,875 $1,875
1999............................. 1,875 1,875 2,500 2,500
2000............................. 2,500 2,500 3,125 3,125
2001............................. 3,125 3,125 3,750 3,750
2002............................. 3,750 3,750 3,750 3,750
2003............................. 3,750 3,750 6,667 6,667
2004............................. 6,666 -- -- --
</TABLE>
(n) On April 15, 1997, Citizens Century Cable Television Venture ("CCCTV")
entered into an agreement for the provision of a three-year, $200,000
revolving credit facility with Bank of America and Societe General, which
converts into a five-year term loan. The facility is secured by the assets
of CCCTV. The loan is non-recourse to both Citizens and the Company.
Borrowings under the facility are to be repaid in semi-annual installments
commencing June 30, 2000 and expiring on March 31, 2005. The agreement
provides for mandatory principal repayments, among other possible
reductions, in the following percentages:
<TABLE>
<CAPTION>
Last day Last day Last day Last day
Year of March of June of September of December
---- -------- -------- ------------- -----------
<S> <C> <C> <C> <C>
2000............................. -- 2.33% 2.33% 2.33%
2001............................. 4.00% 4.00% 4.00% 4.00%
2002............................. 5.00% 5.00% 5.00% 5.00%
2003............................. 5.25% 5.25% 5.25% 5.25%
2004............................. 7.13% 7.13% 7.13% 7.13%
2005............................. 7.50% -- -- --
</TABLE>
The facility requires mandatory prepayments of principal refinancing under
certain circumstances (as specified in the agreement). Borrowings under the
facility bear interest, at the option of CCCTV, at either the base rate or
the Eurodollar rate, plus the applicable margin (as defined in the
agreement). The principal use of proceeds will be to fund acquisitions as
well as general corporate purposes. As of May 31, 1999 $42,000 was
outstanding under the facility. The estimated fair value of the CCCTV
credit facility approximates its carrying value at May 31, 1999.
The subsidiaries' credit facilities and the Company's public debt
securities, among other things, require the maintenance of certain
financial and operating covenants, restrict the use of proceeds from such
borrowing, limit the incurrence of additional indebtedness, restrict the
purchase or redemption of its capital stock and limit the ability to pay
dividends and management fees and make capital expenditures. So long as
applicable financial and other covenants, including certain interest
expense ratio tests, are met in connection with the Merger, the Merger may
be accomplished without creating a default under the indentures applicable
to the
20
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Company's public debt securities. If any issue of the Company's public debt
securities is downgraded to designated levels at the time of the Merger,
the holders of such issue could require the Company to repurchase such debt
securities at a price equal to 101% of the principal amount thereof.
The Company entered into a five-year interest rate hedge agreement during
October 1997 in relation to certain of its fixed rate debt. The hedge
agreement is structured such that the Company pays a variable rate of
interest based on the higher of the U.S.D. six (6) month LIBOR or the
U.S.D. six (6) month LIBOR set in arrears and receives a fixed rate of
interest of 6.695% based on a notional amount of $35,000. Subject to the
terms of the hedge agreement, if the six month LIBOR is set at or below
4.75% at the beginning of any period, the hedge agreement would terminate
for that period alone and the Company would receive a 50 basis points
subsidy for that period alone. The net gain or loss, which has not been
material, is included in interest expense in the accompanying 1999 and 1998
consolidated statement of operations and interest paid in the 1999 and 1998
consolidated statement of cash flows. At May 31, 1999, the estimated fair
value of the hedge agreement represents an asset of approximately $40.
The aggregate annual principal payments related to continuing operations
for the next five years and thereafter are summarized as follows (amounts
in thousands):
<TABLE>
<S> <C>
2000............................................................. $ 20,050
2001............................................................. 174,620
2002............................................................. 239,140
2003............................................................. 487,505
2004............................................................. 29,607
2005............................................................. 1,542,128
----------
2,493,050
Less: unamortized discount....................................... (450,360)
----------
$2,042,690
==========
</TABLE>
At May 31, 1999, the Company and its subsidiaries were in compliance with
all covenants of the above noted agreements.
NOTE 9. Commitments and Contingencies
Leases
At May 31, 1999, the Company's approximate annual lease obligations and
expenses (under operating leases) were as follows:
<TABLE>
<S> <C>
Pole rentals............................................................ $3,377
Vehicles and equipment.................................................. 649
Antenna site and property access........................................ 507
Warehouse, studio and office............................................ 4,260
------
$8,793
======
</TABLE>
The above leases are substantially all short-term or cancelable by either
party upon notice.
21
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Letters of Credit
The Company is a party to several available letters of credit totaling
$8,148. No payments have been made under these agreements.
Cable Modem Services
The Company is presently in the initial deployment stage of high-speed cable
modem services. On May 1, 1998, the Company entered into an agreement with
@Home Network ("@Home"), a provider of high-speed internet services via cable
infrastructure, to deliver high-speed internet services in certain of the
Company's markets covering approximately 1,315,000 homes passed. The agreement
has a term of six years and contains mutual exclusivity provisions relating to
the provision of high-speed internet services in certain of the Company's
systems covering the same approximately 1,315,000 homes passed. In connection
with the agreement, the Company has received a warrant to purchase 5,260,000
shares of @Home's Series A Common Stock at an exercise price equal to $5.25 per
share, subject to adjustment. The warrant becomes exercisable on a schedule
based upon and subject to the commercial deployment (as defined) of the @Home
services by the Company, which must be certified by the Company and @Home on or
after March 31 of each year during the term of the warrant for the 12 month
period ending March 31. As of both March 31, 1999 and May 31, 1999 no portion
of the warrant had become exercisable, therefore no asset has been recorded.
From March 31, 1999 through May 31, 1999, the Company has passed approximately
110,000 homes or 8.4% of the commercial deployment specified in the Agreement.
As of May 31, 1999, the closing price of the @Home Series A Common Stock on the
Nasdaq National Market (adjusted for stock splits) was $63 3/8 per share.
Litigation
The Company and its subsidiaries are involved in litigation and regulatory
matters which involve certain claims which arise in the normal course of
business, none of which individually, or in the aggregate, in the opinion of
management, is expected to have a materially adverse effect on the Company's
consolidated financial position or results of operations.
Merger Related Costs
The Company has employment agreements with four executive officers including
Dr. Leonard Tow, Chairman and Chief Executive Officer of the Company. The terms
of these employment agreements expire on June 30, 2003, except that Dr. Tow's
agreement continues for an additional five-year advisory period. Each of these
employment agreements is terminable by the executive officer upon a "change of
control" or a "threatened change of control" of the Company. One of the events
that is considered to be a threatened change of control under each employment
agreement is the acquisition by any person of securities of the Company such
that the person files or is required to make a filing pursuant to Regulation
13D under the Securities Exchange Act of 1934, as amended. Such an event has
occurred and, therefore, for purposes of these employment agreements, a
"threatened change of control" has occurred. Subsequent to May 31, 1999, each
of these executive officers has exercised his right to terminate his employment
agreement but has agreed to continue working for the Company through the
closing of the Merger.
Pursuant to the employment agreement, upon such termination, each executive
officer is entitled to receive his base salary through the end of the term of
his employment agreement, an annual cash bonus for the remainder of the term
equal to his most recently awarded cash bonus, continuation of medical, dental,
life and disability insurance for the remainder of the term on the same basis
as provided while the agreement was in effect and the
22
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
use of office space for one year. In addition, upon termination, all of his
Company stock options vest and become exercisable and the restrictions on all
of his shares of restricted stock of the Company lapse. The total cost to the
Company of the termination of the executive employment agreements (excluding
the impact of stock options and tax reimbursements related thereto, which will
vary depending upon the price of the stock, timing of the exercise of the
options, and certain elections available to each officer with respect to the
receipt of Merger consideration) is currently estimated to be approximately
$150,000. Substantially all of these costs will be recorded by the Company
during the first quarter of fiscal 2000.
Additionally, the Company will incur certain employee severance related costs
related to the Merger and the continuance of the employment of key personnel
through the completion of the Merger. The total cost to the Company of these
employee severance related costs will be approximately $11,000. These costs
will be recorded by the Company upon completion of the Merger.
The Company also incurred incremental legal, consulting and compensation
costs of $7,922 through May 31, 1999 in connection with its proposed Merger.
NOTE 10. Common Stockholders' Deficiency
Common Stock
The voting rights with respect to the two classes of Common Stock are as
follows: Class A shares entitle the holder to one vote per share, Class B
shares entitle the holder to ten votes per share. Shares of Class B Common
Stock are convertible into shares of Class A Common Stock on a one-for-one
basis upon transfer from the current Class B stockholders. The Company is
restricted from paying cash dividends on its common stock by its credit
agreements (Note 8).
Treasury Stock
During fiscal 1998 and 1997, the Company purchased 1,959,000 and 171,500
shares, respectively, of the Company's Class A Common Stock in the open market.
These shares were accounted for as treasury shares in the respective fiscal
years. During the year ended May 31, 1999, the Company did not purchase any
shares in the open market pursuant to these authorizations.
23
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
The following table presents changes in the Company's stockholders' equity
for the years ended May 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Common Stock
--------------------------------------
Class A Class B Additional Total Comprehensive
------------------ ------------------- Paid-in Accumulated Stockholders' Income
Shares Dollars Shares Dollars Capital Deficit Other Deficiency (Loss)
---------- ------- ---------- ------- ---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1,
1996............. 59,946,280 $599 45,406,115 $454 $178,427 $(507,168) $(120,325) $(448,013)
Shares issued in
connection with
employee incentive
plans............ 711,490 7 25,000 4,294 (346) 3,955
Class A shares
purchased
by the Company... (2,359) (2,359)
Class B shares
converted to
Class A shares... 305,000 3 (305,000) (3) --
Class A shares
issued in
connection
with acquisitions.. 1,732,357 18 (18) --
Subsidiary
preferred stock
dividends........ (4,850) (4,850)
Foreign currency
translation
adjustment....... 462 462 $ 462
Change in
unrealized
appreciation of
marketable
securities....... (7,950) (7,950) (7,950)
Income tax
benefit--
subsidiary stock
options exercised.. 1,987 1,987
Net loss.......... (141,875) (141,875) (141,875)
---------- ---- ---------- ---- -------- --------- --------- --------- ---------
Balance at May 31,
1997............. 62,695,127 $627 45,126,115 $451 $179,840 $(649,043) $(130,518) $(598,643) $(149,363)
=========
Share issued in
connection with
employee incentive
plans............ 589,761 6 4,278 255 4,539
Class A Shares
purchased
by the Company... (12,576) (12,576)
Class B shares
converted to
Class A shares... 2,400,000 24 (2,400,000) (24) --
Subsidiary
preferred stock
dividends........ (5,225) (5,225)
Change in
unrealized
appreciation of
marketable
securities....... 7,333 7,333 $ 7,333
Foreign currency
translation
transferred
to discontinued
operations....... 291 291 291
Net loss.......... (120,971) (120,971) (120,971)
---------- ---- ---------- ---- -------- --------- --------- --------- ---------
Balance at May 31,
1998............. 65,684,888 $657 42,726,115 $427 $178,893 $(770,014) $(135,215) $(725,252) $(113,347)
=========
Shares issued in
connection with
employee
incentive plans.. 1,118,391 11 25,000 12,341 (3,790) 8,562
Class A Shares
purchased
by the Company
from employees... (1,505) (1,505)
Class B shares
converted to
Class A shares... 429,056 4 (429,056) (4) --
Change in
unrealized
appreciation of
marketable
securities....... (3,308) (3,308) $ (3,308)
Net income........ 256,184 256,184 256,184
---------- ---- ---------- ---- -------- --------- --------- --------- ---------
Balance at May 31,
1999............. 67,232,335 $672 42,322,059 $423 $191,234 $(513,830) $(143,818) $(465,319) $ 252,876
========== ==== ========== ==== ======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
May 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Other stockholders' deficiency items:
Treasury stock............................... $(154,202) $(152,697) $(140,121)
Unrealized appreciation of marketable
securities.................................. 16,888 20,196 12,863
Foreign currency translation adjustment...... -- -- (291)
Unearned compensation on restricted stock.... (6,504) (2,714) (2,969)
--------- --------- ---------
$(143,818) $(135,215) $(130,518)
========= ========= =========
Accumulated other comprehensive income:
Accumulated other comprehensive income--
beginning of year........................... $ 20,196 $ 12,572 $ 20,060
Foreign currency translation adjustment...... -- 291 462
Change in unrealized appreciation of
marketable securities....................... (3,308) 7,333 (7,950)
--------- --------- ---------
Accumulated other comprehensive income--end
year........................................ $ 16,888 $ 20,196 $ 12,572
========= ========= =========
</TABLE>
24
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 11. Income Taxes
The Company and its consolidated subsidiaries, except for Century Venture
Corporation and Subsidiaries, Century-ML Cable Venture and Subsidiary and
Citizens Century Cable Television Venture (collectively the "Unconsolidated
Tax Group"), file a consolidated federal income tax return. The Company sold
Centennial and the Company's Australian Operations during the fiscal year
ended May 31, 1999 and as a result, Centennial and ECT are no longer part of
the Unconsolidated Tax Group. The sale of these discontinued segments resulted
in a pre-tax gain of approximately $340,000. Consequently the Company was able
to recognize a tax benefit of $13,453 during the year ended May 31, 1999 for
the losses incurred from continuing operations during fiscal 1999. The
provisions (benefits) from continuing and discontinued operations for income
taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Current............................................. $12,165 $ 7,984 $ 7,486
Deferred............................................ 121 (22,205) (38,144)
------- -------- --------
$12,286 $(14,221) $(30,658)
======= ======== ========
</TABLE>
Income tax expense (benefit) is included in the Company's consolidated
financial statements as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Continuing operations............................ $(13,453) $ (624) $(23,363)
Discontinued operations.......................... 25,739 (13,597) (7,295)
-------- -------- --------
$ 12,286 $(14,221) $(30,658)
======== ======== ========
</TABLE>
Deferred income taxes result primarily from nondeductible depreciation and
amortization resulting from book and tax basis differences of certain acquired
subsidiaries.
The effective income tax rate of the Company's continuing operations differs
from the statutory rate as a result of the effect of the following items:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed tax benefit at federal statutory rate on
loss from continuing operations before income
taxes and minority interest..................... $(20,347) $(23,383) $(24,586)
Computed tax benefit of Unconsolidated Tax
Group........................................... (8,761) (7,006) (3,600)
Recognized tax benefit of Unconsolidated Tax
Group........................................... 9,197 2,014 2,155
Nondeductible amortization resulting from
acquired subsidiaries........................... 1,192 1,192 1,131
Non-deductible compensation and Merger costs..... 4,658 -- --
State and local income taxes, net of federal
income tax effect............................... (1,434) (4,622) (3,782)
Tax benefits related to net operating, capital
loss and tax credit carryforwards not recognized
and changes in valuation allowance.............. 1,971 30,998 5,284
Other............................................ 71 183 35
-------- -------- --------
$(13,453) $ (624) $(23,363)
======== ======== ========
</TABLE>
25
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------
1999 1998
-------- ---------
<S> <C> <C>
Deferred Tax Assets:
Tax loss and credit carryforward......................... $184,099 $ 224,083
Basis difference in investments.......................... -- 64,447
Valuation allowance...................................... (89,584) (193,626)
-------- ---------
$ 94,515 $ 94,904
======== =========
Deferred Tax Liabilities:
Amortization of intangible assets........................ $ 30,210 $ 32,099
Depreciation of fixed assets............................. 69,596 67,975
-------- ---------
$ 99,806 $ 100,074
======== =========
Net deferred tax liabilities............................... $ 5,291 $ 5,170
======== =========
</TABLE>
The Company and its subsidiaries, except for the Unconsolidated Tax Group,
have an investment tax credit carryover (after the 35% reduction mandated by
TRA 86) for federal income tax purposes of approximately $9,353 and net
operating loss carryforwards for federal income tax purposes of approximately
$439,041 expiring through 2002 and 2013, respectively.
Century Venture Corporation and Subsidiaries have an investment tax credit
carryover of approximately $873 and net operating loss carryforwards of
approximately $5,500 which will expire through 2002 and 2008, respectively.
The operations of Century ML Cable Venture and Subsidiary are subject to
Puerto Rico income taxes.
26
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 12. Joint Ventures
The combined operations and certain other information related to the 50%
indirectly owned Century Venture Corp. and Subsidiaries, Century-ML Cable
Venture and Subsidiary and Citizens Century Cable Television Venture included
in the consolidated financial statements of the Company are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Combined Statement of Operations Data
Revenues.................................................. $ 132,365 $ 122,543
Costs and expenses:
Costs of services....................................... 40,051 34,781
Selling, general and administrative..................... 21,327 21,272
Depreciation and amortization........................... 35,874 30,638
--------- ---------
97,252 86,691
--------- ---------
Operating Income.......................................... 35,113 35,852
Gain on sale of assets.................................... (5,497) --
Interest expense.......................................... 15,579 15,833
--------- ---------
Income before taxes....................................... 25,031 20,019
Income tax provision...................................... 9,257 2,356
--------- ---------
Net Income.............................................. $ 15,774 $ 17,663
========= =========
Combined Balance Sheet Data
Property, plant and equipment--net........................ $ 142,221 $ 136,866
Total assets.............................................. 371,003 389,495
Long-term debt............................................ 169,000 206,000
Total liabilities......................................... 221,675 255,940
</TABLE>
The Company's joint venture partner, ML Media Partners, L.P. ("Media
Partners") has the right to cause a sale of Century-ML Cable Venture and
Subsidiary. If Media Partners proposes such a sale, the Company will have the
right to purchase Media Partners' interest for the appraised fair market value
of Media Partners' 50% interest in Century-ML Cable Venture and Subsidiary.
NOTE 13. Employee Benefit Plans
Stock Option Plans
The Company's 1985 Stock Option Plan (the "1985 Option Plan"), adopted by
the Board of Directors and approved by the stockholders on December 5, 1985,
expired by its terms on May 31, 1995. Accordingly, the Board of Directors
adopted and the stockholders ratified the Company's 1994 Stock Option Plan
(the "1994 Option Plan") on October 26, 1994. Upon ratification of the 1994
Option Plan, no more grants are to be made under the 1985 Option Plan. The
1985 Stock Option Plan and the 1994 Stock Option Plan, collectively the
"Option Plans", permit the issuance of "incentive stock options," as defined
in Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-qualified options. The 1985 Option Plan and the 1994 Option Plan provide
for the grant of options to purchase up to 6,897,079 and 5,000,000 shares,
respectively, of Class A Common Stock to directors, officers and other key
employees of the Company and its subsidiaries. The Option Plans are
administered by a committee of the Board of Directors (the "Stock Option
Committee") that determines the recipients and provisions of options granted
under the Option Plans, including the option price,
27
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
term and number of shares subject to option. The Board of Directors may amend
the Option Plans, except that the approval of the stockholders is necessary to
increase the total number of shares which may be issued or shares subject to
options, to change the minimum purchase price for shares subject to options,
to change the maximum period during which options may be exercised, to extend
the period during which options may be granted under the Option Plans, or to
materially increase benefits to option recipients. Generally, the option price
of incentive and non-qualified stock options granted may be as determined by
the Stock Option Committee, but must be at least equal to 100% of the fair
market value of the shares on the date of the grant. The maximum term of each
option is ten years.
For any participant who owns shares possessing more than 10% of the voting
rights of the Company's outstanding common stock, the exercise price of any
incentive stock option must be at least equal to 110% of the fair market value
of the shares subject to such option on the date of grant and the term of the
option may be no longer than five years. Options become exercisable at such
time or times as the Stock Option Committee may determine when it grants
options. All options granted on or before December 31, 1985 must be exercised
in the sequence in which they were granted. The Option Plans permit the
exercise of options by the payment of cash or mature shares of Class A Common
Stock equal in value to the option price. Under the terms of the Option Plan
with respect to options granted on or before December 31, 1986, the aggregate
fair market value of the Class A Common Stock (determined at the date of the
option grant) for which any employee may be granted incentive stock options in
any calendar year may not exceed $100, plus certain carry-over allowances from
the previous three years. Options granted under the Option Plans are not
transferable by the holder other than by will or the laws of descent and
distribution.
As of May 31, 1999, approximately 174 employees were participating in the
Option Plans.
Director Option Plan
The Company's 1993 Non-Employee Directors' Stock Option Plan (the
"Directors' Option Plan") was adopted on October 26, 1994. The Directors'
Option Plan replaced the Non-Employee Director Option Plan adopted in 1989
(the "1989 Director Option Plan") which was terminated by the Board of
Directors. Under the Directors' 1993 Option Plan a total of 323,123 shares of
Class A Common Stock were reserved for issuance. Options for 1,000 shares of
Class A Common Stock will be automatically granted under the Directors' 1993
Option Plan to each person who is elected or re-elected a non-employee
Director on the date of the annual meeting of shareholders of the Company in
each of the years 1994 through 2003.
The Company's Board of Directors may amend the Directors' Option Plan and
amend the terms and conditions of any option granted under the Directors'
Option Plan, except that the approval of the stockholders is necessary to
increase the total number of shares which may be issued or transferred under
the Directors' Option Plan and to change the minimum purchase price for shares
subject to options.
Options granted under the Directors' Option Plan are nonqualified options
not qualifying as incentive stock options under Section 422 of the Code. The
option price that shares of the Company's Class A Common Stock may be
purchased upon exercise of any option granted under the Directors' Option
Plan, will be the fair market value of such shares on the last trading day
prior to the date of the grant of such option. The Directors' Option Plan
permits the exercise of options in cash, mature shares of Class A Common Stock
valued at the fair market value on the date of purchase or a combination
thereof. The maximum term of each option is five years and six months
immediately succeeding the date of grant. Options granted under the Directors'
Option Plan are not transferable by the holder other than by will or the laws
of descent and distribution. Under the 1993 Directors' Option Plan, options to
purchase 3,000 shares of Class A Common Stock were granted during each of the
fiscal
28
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
years ended May 31, 1999, 1998 and 1997 at an exercise price of $20.9375,
$7.75 and $7.00 per share, respectively. As of May 31, 1999, 9,000 options
were outstanding under the Directors' Option Plan, of which 2,400 were
exercisable.
A summary of the status of the Company's stock options as of May 31, 1997,
1998 and 1999 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
---------- --------
<C> <S> <C> <C>
1997 Outstanding at June 1, 1996........................ 2,646,514 $ 7.73
Granted............................................ 2,915,909 6.70
Exercised.......................................... (401,440) 5.46
Canceled........................................... (1,703,933) 8.69
----------
Outstanding at May 31, 1997........................ 3,457,050 6.66
1998 Granted............................................ 10,000 6.44
Exercised.......................................... (340,836) 6.34
Canceled........................................... (242,415) 6.66
----------
Outstanding at May 31, 1998........................ 2,883,799 6.70
1999 Granted............................................ 118,000 18.85
Exercised.......................................... (816,098) 6.39
Canceled........................................... (59,003) 9.75
----------
Outstanding at May 31, 1999........................ 2,126,698 7.41
==========
</TABLE>
At the effective time of the Merger, there will be an acceleration of
vesting under the Company's option plans. All unvested options under the
option plans will become fully vested and exercisable upon the completion of
the Merger. These options will then, like all other outstanding options,
either be exercised or assumed by Adelphia, at the option of the holder. At
May 31, 1999, there were 843,320 and 6,600 unvested options outstanding under
the 1994 Option Plan and the Directors' Option Plan, respectively.
The number of the Company's options which were exercisable at May 31, 1999,
1998 and 1997 were 1,276,878, 1,598,650, and 1,566,966 respectively. The
weighted average exercise prices of such options were $6.83, $6.62, and $6.55
at May 31, 1999, 1998 and 1997, respectively.
Of the Company's options granted during fiscal 1999, 1998 and 1997, 0, 0 and
1,175,072 options, respectively, had exercise prices that were at least equal
to 110% of the fair market value of the Company's Class A Common Stock at the
date of grant.
The following table summarizes information about the Company's options
outstanding at May 31, 1999:
<TABLE>
<CAPTION>
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 5/31/99 Contractual Life Exercise Price at 5/31/99 Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.00--
$ 5.375 21,220 7.91 Years $ 5.14 2,660 $ 4.99
$ 6.25--
$ 8.6875 2,012,478 4.27 Years $ 6.84 1,266,218 $ 6.79
$14.38 40,000 8.92 Years $14.38 8,000 $14.38
$20.94--
$24.875 53,000 8.96 Years $24.65 -- --
--------- --------- ---------- ------ --------- ------
$ 4.00--
$24.875 2,126,698 4.51 Years $ 7.41 1,276,878 $ 6.83
========= ========= ========== ====== ========= ======
</TABLE>
29
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
The estimated fair value of the Company's options granted during fiscal 1998
was immaterial. The fair value of options granted during fiscal 1999 and 1997
were $6.96 per share and $2.29 per share, respectively.
Employee Stock Purchase Plan
On December 5, 1985, the Company adopted the 1985 Employee Stock Purchase
Plan. On October 26, 1994, the Board of Directors and shareholders approved an
amendment to the Company's 1985 Employee Stock Purchase Plan (the "Amended
Purchase Plan"). Under the Amended Purchase Plan, eligible employees (which
generally includes all full-time employees of the Company) may subscribe for
shares of Class A Common Stock at a purchase price of 85% of the average
market price (as defined) of the Class A Common Stock on the first day or last
day of the purchase period, whichever is lower. Payment of the purchase price
of the shares will be made in installments through payroll deductions, with no
right of prepayment. The Company has reserved 1,125,767 shares of Class A
Common Stock for issuance under the Amended Purchase Plan. The Amended
Purchase Plan is administered by the Compensation Committee. As of May 31,
1999, 36,819 shares of Class A Common Stock were subscribed for under the
Amended Purchase Plan.
Equity Incentive Plan
The Company's 1992 Equity Incentive Plan (the "Equity Plan") was adopted by
the Board of Directors and approved by the stockholders on October 28, 1992
and amended on October 31, 1997. The plan permits the issuance of up to
1,613,945 shares of the Company's Class A Common Stock for high levels of
performance and productivity by officers and other management employees of the
Company. The Equity Plan is administered by the Company's Board of Directors.
The plan authorizes the Board of Directors to grant stock based awards that
include but are not limited to, restricted stock, performance shares and
deferred stock. The Board of Directors determines the recipients and
provisions of the grants under the Equity Plan, including the grant price,
term and number of shares subject to grant. These stock based awards vest over
the options' respective vesting periods. Recipients are not required to
provide consideration to the Company other than rendering service. Under SFAS
123, compensation cost is recognized over the vesting period of the shares
granted based upon the market value of the restricted stock at the date of
grant. The restricted stock awards are recorded at the market value of the
Company's stock on the date of grant. Initially, the total market value of the
restricted shares is treated as unearned compensation and is charged to
expense over the options'respective vesting periods.
Generally, an employee will realize compensation taxable as ordinary income,
and the Company will be entitled to a corresponding tax deduction in an amount
equal to the sum of any cash received by the employee plus the fair market
value of any shares of Class A Common Stock received by the employee.
During the years ended May 31, 1999, 1998 and 1997 the Company granted
270,000, 170,000 and 230,897 shares of restricted stock with weighted average
fair values at the date of grant of $19.21, $6.87 and $8.07 per share,
respectively. Through May 31, 1999, the Company had granted 1,238,027 shares
of restricted stock to 20 officers and employees of the Company. As of May 31,
1999, 581,200 shares of restricted stock were outstanding and 375,918 shares
were available for awards under the Equity Plan. Pursuant to the Merger
Agreement, all restricted shares will become fully vested and will cease to be
restricted upon the completion of the Merger. Restricted stock compensation
charged to expense during the years ended May 31, 1999, 1998 and 1997 was
$2,644, $896 and $1,168, respectively.
The Company also granted 25,000 shares of the Company's Class B Common Stock
during the year ended May 31, 1998 with a fair value of $5.50 at the date of
grant (based upon the fair value of the Company's Class A Common Stock on that
date) to one executive of the Company. These shares are subject to
substantially the same restrictions as set forth in the Equity Plan.
30
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized with respect to their stock option, and stock purchase plans. Had
compensation cost for the Company's stock option and stock purchase plans been
determined based on the fair value of the awards on the grant dates in
accordance with the accounting provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company's Consolidated net income (loss) and Consolidated net income (loss)
per common share for the years ended May 31, 1999, 1998 and 1997 would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Consolidated net income (loss) applicable to
common shares:
As reported:
Loss from continuing operations............. $(58,106) $ (83,107) $ (58,715)
Loss from discontinued operations........... -- (43,089) (80,428)
Gain on sale of discontinued operations..... 314,290 -- --
-------- --------- ---------
Income (loss) before extraordinary item..... 256,184 (126,196) (139,143)
Extraordinary item.......................... -- -- (7,582)
-------- --------- ---------
Net income (loss)........................... $256,184 $(126,196) $(146,725)
======== ========= =========
Pro forma:
Loss from continuing operations............. $(59,764) $ (84,540) $ (59,424)
Loss from discontinued operations........... -- (43,089) (80,428)
Gain on sale of discontinued operations..... 314,290 -- --
-------- --------- ---------
Income (loss) before extraordinary item..... 254,526 (127,629) (139,852)
Extraordinary item.......................... -- -- (7,582)
-------- --------- ---------
Net income (loss)........................... $254,526 $(127,629) $(147,434)
======== ========= =========
Consolidated net income (loss) per common
share--basic & diluted:
As reported:
Loss from continuing operations............. $ (.77) $ (1.11) $ (.78)
Loss from discontinued operations........... -- (.58) (1.08)
Gain on sale of discontinued operations..... 4.18 -- --
-------- --------- ---------
Income (loss) before extraordinary item..... 3.41 (1.69) (1.86)
Extraordinary item.......................... -- -- (.10)
-------- --------- ---------
Net income (loss) per common share.......... $ 3.41 $ (1.69) $ (1.96)
======== ========= =========
Pro forma:
Loss from continuing operations............. $ (.79) $ (1.13) $ (.79)
Loss from discontinued operations........... -- (.58) (1.08)
Gain on sale of discontinued operations..... 4.18 -- --
-------- --------- ---------
Income (loss) before extraordinary item..... 3.39 (1.71) (1.87)
Extraordinary item.......................... -- -- (0.10)
-------- --------- ---------
Net income (loss) per common share.......... $ 3.39 $ (1.71) $ (1.97)
======== ========= =========
</TABLE>
31
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
The fair values of options granted during fiscal 1999 and 1997 were
estimated on the dates of grant using the Black-Scholes options-pricing model
with the following weighted average assumptions used:
<TABLE>
<CAPTION>
May 31, May 31,
1999 1997
------- -------
<S> <C> <C>
Expected volatility............................................. 46.12% 40.82%
Risk free interest rate......................................... 5.75% 6%
Expected lives of option grants................................. 3 Years 3 Years
</TABLE>
Proforma compensation cost related to shares purchased under the Company's
Employee Stock Purchase Plan is measured based on the discount from market
value.
Incentive Award Plan
An Incentive Award Plan (the "Incentive Plan") was adopted by the Board of
Directors and approved by the stockholders of the Company on December 5, 1985.
The Incentive Plan permits the grant of awards to key employees of the Company
and its subsidiaries, which may include directors and officers, payable in
cash or shares of Class A Common Stock. The Company has reserved 559,529
shares of Class A Common Stock for issuance under the Incentive Plan. The
awards are payable in five to ten equal annual installments on January 1 of
the succeeding years after the grant of the award, provided that the recipient
is an employee on the installment payment date. The Incentive Plan is
administered by the Compensation Committee, which selects the recipients of
awards as well as the amount of such awards. The Board of Directors may amend
the Incentive Plan. Awards granted under the Incentive Plan may not be
transferred by the recipients and may be forfeited in the event of the
recipient's termination of employment. At May 31, 1999, no grants were
outstanding.
Stock Equivalent Plan
The Company's 1985 Stock Equivalent Plan (the "Equivalent Plan") was adopted
by the Board of Directors and approved by the stockholders on December 5,
1985. The Equivalent Plan permits the grants of units of Class A Common Stock
Equivalents ("units") to key employees of the Company and its subsidiaries,
including officers and directors. The Equivalent Plan is administered by the
Compensation Committee which selects the employees to be granted units,
determines the number of units covered by each grant, determines the time or
times when units will be granted and the conditions subject to which any
amount may become payable with respect to the units, and prescribes the form
of instruments evidencing units granted under the Plan. Payments for units may
be made by the Company in cash or in mature shares of Class A Common Stock at
the fair market value of the units on the date of payment. The Company has
reserved 566,155 shares of Class A Common Stock for issuance under the
Equivalent Plan. Under the terms of the Equivalent Plan, the total number of
units included in all grants to any participant may not exceed 10% of the
total number of units for which grants may be made under the Equivalent Plan.
Units granted under the Equivalent Plan are not transferable by the holder
other than by will or the laws of descent and distribution. As of May 31,
1999, no units have been granted under the Equivalent Plan.
Retirement Plans
Effective April 1, 1992, the Company adopted a 401(k) defined contribution
retirement plan covering employees of its wholly-owned cable subsidiaries who
are not covered by collective bargaining arrangements. Effective July 1, 1992,
the Company adopted a similar 401(k) plan covering employees of its wholly-
owned cable subsidiaries who are covered by collective bargaining agreements.
If a participant decides to contribute, a
32
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
portion of the contribution is matched by the Company. Total expense under the
plans was approximately $1,473, $1,367 and $1,168, for the years ended May 31,
1999, 1998 and 1997, respectively.
NOTE 14. Regulatory Matters
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 ("the 1992 Cable Act"). The 1992 Act substantially
reregulated the cable television industry and imposed numerous requirements,
including provisions regarding rates which may be regulated by the applicable
local franchising authority and those to be regulated by the FCC, exclusive
programming arrangements, the carriage of broadcast signals, customer service
standards, leased access channels, VCR compatibility and various other matters.
On February 8, 1996, "The Telecommunications Act of 1996" ("the 1996 Act"),
was signed into law. The new law alters federal, state and local laws and
regulations regarding telecommunications providers and services, including the
cable television industry. The 1996 Act deregulated (except for basic service)
cable service rates on March 31, 1999.
NOTE 15. Strategic Partnership
On November 18, 1998, the Company and TCI Communications, Inc. ("TCI")
entered into a definitive agreement to establish a strategic partnership (the
"Partnership"). TCI will contribute to the Partnership all the assets related
to the businesses of certain cable television systems owned and operated by TCI
serving approximately 243,400 primary basic subscribers in the area of southern
California. The Company will contribute to the Partnership all the assets
related to the businesses of certain cable television systems owned and
operated by the Company serving approximately 528,700 primary basic subscribers
in the area of southern California, including approximately 94,400 primary
basic subscribers to be acquired in an exchange of cable systems described
below as well as approximately 19,000 primary basic subscribers related to the
Company's pending acquisition of the cable television system serving Moreno
Valley and Riverside, California (See Note 5). The Company will manage the
newly combined cable systems and own approximately 69.5 percent of the
Partnership. The cable systems contributed by each party will be valued based
upon annualized cash flow of such contributed systems as of the closing date of
the transaction, subject to certain fees and expenses. These values will be
used in the process of determining the ownership percentages of the respective
parties at the closing date of the transaction.
The Company is expected to manage the Partnership in return for a management
fee payable by the Partnership calculated based on a percentage of the annual
total gross revenues of the Partnership, in addition to payment of certain fees
and expenses. However, under the Agreement of Limited Partnership, the
Partnership may not, among other things, without the approval of the TCI
partner or the unanimous vote of all the members of the Partnership committee,
enter into certain transactions with affiliates, issue any Partnership or other
equity interest, permit any subsidiary to issue any equity interest, effectuate
certain mergers or other business combinations or incur in excess of certain
levels of indebtedness.
As part of the Partnership Transaction, the Company and TCI have agreed to
exchange cable systems owned by the Company in certain communities in northern
California for certain cable systems owned by TCI in southern California,
allowing each of them to unify operations in existing service areas. TCI will
exchange its East San Fernando Valley cable system serving approximately 94,400
primary basic subscribers for the Company's northern California cable systems
(San Pablo, Benecia, Fairfield and Rohnert Park, California), serving
approximately 95,900 primary basic subscribers.
33
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
It is anticipated that the Partnership will be funded by approximately
$900,000 of indebtedness. There is no assurance that such financing will be
available to the Partnership or that the Partnership will be able to obtain
such financing on terms favorable to the Partnership.
The closing of the foregoing transactions is subject to, among other things,
each party obtaining the required consents and all appropriate regulatory and
other approvals, including from the Federal Communications Commission and local
franchising authorities and under the HSR Act. On February 18, 1999, the
waiting period under the HSR Act for the Partnership Transaction terminated. In
connection with the Partnership Transaction, the Company has completed filing
the material applications seeking transfer of the Company's applicable
franchise licenses with the FCC and local franchising authorities. There is no
assurance that the Company will obtain such approvals or that such transactions
will be consummated.
34
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 16. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
August 31, November 30, February 28, May 31,
1996 1996 1997 1997
---------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues....................... $112,728 $115,172 $113,542 $118,204
Operating income (loss)........ 24,648 22,668 24,332 16,195
Loss from continuing
operations.................... (10,004) (8,698) (13,963) (21,200)
Loss from discontinued
operations.................... (51,208) (8,559) (9,405) (11,256)
Loss from extraordinary item... -- -- -- (7,582)
Net loss....................... (61,212) (17,257) (23,368) (40,038)
Loss from continuing operations
per common share--basic....... (.15) (.13) (.20) (.30)
Loss from discontinued
operations per common share--
basic......................... (.69) (.12) (.13) (.14)
Loss from extraordinary item
per common share--basic....... -- -- -- (.10)
Net loss per common share--
basic (1)..................... (.84) (.25) (.33) (.54)
<CAPTION>
Three Months Ended
---------------------------------------------
August 31, November 30, February 28, May 31,
1997 1997 1998 1998
---------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues....................... $119,564 $121,322 $120,725 $123,125
Operating income............... 24,589 24,193 24,941 30,745
Loss from continuing
operations.................... (15,376) (19,784) (22,266) (20,456)
Loss from discontinued
operations.................... (9,193) (23,828) (6,852) (3,216)
Net loss....................... (24,569) (43,612) (29,118) (23,672)
Loss from continuing operations
per common share--basic....... (.22) (.28) (.32) (.29)
Loss from discontinued
operations per common share--
basic......................... (.12) (.32) (.09) (.05)
Net loss per common share--
basic(1)...................... (.34) (.60) (.41) (.34)
<CAPTION>
Three Months Ended
---------------------------------------------
August 31, November 30, February 28, May 31,
1998 1998 1999 1999
---------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues....................... $126,716 $129,732 $131,278 $131,858
Operating income............... 30,826 28,981 29,075 37,234
Income (loss) from continuing
operations.................... (20,838) (25,125) 5,971 (18,114)
Gain on sale of discontinued
operations.................... -- -- 312,142 2,148
Net income (loss).............. (20,838) (25,125) 318,113 (15,966)
Income (loss) from continuing
operations per common share--
basic......................... (.28) (.33) .08 (.24)
--diluted..................... (.28) (.33) .08 (.24)
Gain on sale of discontinued
operations per common share--
basic......................... -- -- 4.15 .03
--diluted..................... -- -- 4.08 .03
Net income (loss) per common
share--basic(1)............... (.28) (.33) 4.23 (.21)
--diluted (1)................. (.28) (.33) 4.16 (.21)
</TABLE>
- --------
(1) See Note 1 Loss per common share.
35
<PAGE>
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands except subscriber and share data)
NOTE 17. Subsequent Event
On August 26, 1999, CCC-I and CCC-II borrowed $525,000 and $350,000,
respectively, under the CCC-I and CCC-II credit facilities (See Note 8) and has
invested these proceeds in short-term time deposits.
36
<PAGE>
Exhibit 99.02
INDEPENDENT AUDITORS' REPORT
To the Partners of FrontierVision Partners, L.P.:
KPMG LLP
We have audited the accompanying consolidated balance sheets of
FrontierVision Partners, L.P. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, partners' deficit
and cash flows for each of the years in the three year period ended December
31, 1998. These consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FrontierVision Partners, L.P. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 19, 1999
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1999 1998 1997
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 10,300 $ 7,354 $ 6,873
Accounts receivable, net of allowance
for doubtful accounts of $825, $666
and $640.............................. 13,158 13,443 8,071
Prepaid expenses and other............. 3,407 4,046 2,785
Investment in cable television systems,
net:
Property and equipment............... 363,434 342,754 247,724
Franchise cost and other intangible
assets.............................. 801,959 820,524 637,725
---------- ---------- ----------
Total investment in cable
television systems, net........... 1,165,393 1,163,278 885,449
---------- ---------- ----------
Deferred financing costs, net.......... 24,278 25,812 26,283
Organization costs, net................ -- 280 377
Earnest money deposits................. -- 150 2,000
---------- ---------- ----------
Total assets....................... $1,216,536 $1,214,363 $ 931,838
========== ========== ==========
LIABILITIES
Accounts payable....................... $ 11,250 $ 18,233 $ 2,770
Accrued liabilities.................... 14,561 17,169 15,126
Due to Adelphia........................ 20,556 -- --
Subscriber prepayments and deposits.... 3,191 3,312 1,828
Accrued interest payable............... 9,590 9,547 5,064
Deferred income taxes.................. 10,469 11,856 --
Long term debt, including related
party................................. 1,401,955 1,355,144 994,955
---------- ---------- ----------
Total liabilities.................. 1,471,572 1,415,261 1,019,743
---------- ---------- ----------
Partners' deficit
General partner...................... (2,552) (2,010) (880)
Limited partners--
Special Class A..................... (196,022) (154,139) (66,723)
Class A............................. (56,462) (44,749) (20,302)
---------- ---------- ----------
Total partners' deficit............ (255,036) (200,898) (87,905)
---------- ---------- ----------
Commitments
Total liabilities and partners'
deficit........................... $1,216,536 $1,214,363 $ 931,838
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
For the Six For the Six For the Year For the Year For the Year
Months Ended Months Ended Ended Ended Ended
June 30, June 30, December 31, December 31, December 31,
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $146,713 $113,595 $ 245,134 $145,126 $ 76,464
Expenses:
Operating expenses.... 79,893 58,794 123,600 74,314 39,181
Corporate
administrative
expenses............. 3,369 3,511 6,965 4,418 2,930
Depreciation and
amortization......... 62,103 50,266 114,280 65,627 35,849
Storm costs........... -- 705 522 -- --
-------- -------- --------- -------- --------
Total expenses...... 145,365 113,276 245,367 144,359 77,960
-------- -------- --------- -------- --------
Operating
income/(loss).......... 1,348 319 (233) (767) (1,496)
Interest expense, net... (52,491) (41,320) (89,067) (48,166) (22,320)
Interest expense,
related party.......... (13,281) (13,202) (26,094) (22,264) (12,544)
Other income (expense).. 8,899 (2) (526) (57) (8)
-------- -------- --------- -------- --------
Loss before income tax
benefit and
extraordinary item..... (55,525) (54,205) (115,920) (69,720) (36,368)
Income tax benefit...... 1,387 -- 2,927 -- --
-------- -------- --------- -------- --------
Loss before
extraordinary item..... (54,138) (54,205) (112,993) (69,720) (36,368)
Extraordinary item--Loss
on early retirement of
debt................... -- -- -- (5,046) --
-------- -------- --------- -------- --------
Net loss................ $(54,138) $(54,205) $(112,993) $(74,766) $(36,368)
======== ======== ========= ======== ========
Net loss allocated to:
Special Class A Limited
Partners............... $(41,883) $(41,935) $ (87,416) $(57,842) $(27,072)
Class A Limited
Partners............... (11,713) (11,728) (24,447) (16,177) (8,932)
General Partner......... (542) (542) (1,130) (747) (364)
-------- -------- --------- -------- --------
$(54,138) $(54,205) $(112,993) $(74,766) $(36,368)
======== ======== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In Thousands)
<TABLE>
<CAPTION>
Limited Partners
----------------
Special
General Partner Class A Class A Total
--------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.... $ 128 $ 9,361 $ 3,405 $ 12,894
Net loss.................... (364) (27,072) (8,932) (36,368)
Capital contributions....... 54 4,648 738 5,440
------- --------- -------- ---------
Balance, December 31, 1996.... $ (182) $ (13,063) $ (4,789) $ (18,034)
Net loss.................... (747) (57,842) (16,177) (74,766)
Capital contributions....... 49 4,182 664 4,895
------- --------- -------- ---------
Balance, December 31, 1997.... $ (880) $ (66,723) $(20,302) $ (87,905)
Net loss.................... (1,130) (87,416) (24,447) (112,993)
------- --------- -------- ---------
Balance, December 31, 1998.... $(2,010) $(154,139) $(44,749) $(200,898)
Net loss.................... (542) (41,883) (11,713) (54,138)
------- --------- -------- ---------
Balance, June 30, 1999
(unaudited).................. $(2,552) $(196,022) $(56,462) $(255,036)
======= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Six For the Six For the Year For the Year For the Year
Months Ended Months Ended Ended Ended Ended
June 30, June 30, December 31, December 31, December 31,
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net loss.................. $(54,138) $(54,205) $(112,993) $ (74,766) $ (36,368)
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............ 62,103 50,971 114,280 65,627 35,849
Income tax benefit....... (1,387) -- (2,927) -- --
Write-off of organization
costs................... 280 -- -- -- --
Gain on disposal of
assets.................. (9,193) -- (2,362) -- --
Amortization of deferred
debt issuance costs..... 1,985 1,459 3,274 2,133 1,236
Accretion of interest on
Discount Notes.......... 12,769 9,363 19,485 5,768 924
Accretion of interest on
related
party indebtedness...... 13,127 13,047 26,094 22,264 12,544
Changes in operating
assets and liabilities,
net of effect of
acquisitions:
Accounts receivable..... (1,859) (50) (3,147) (582) (1,946)
Receivable from seller.. -- -- -- 846 1,377
Prepaid expenses and
other.................. 713 (11) (870) (249) (1,266)
Accounts payable and
accrued liabilities.... 11,636 7, 768 15,698 2,906 3,664
Subscriber prepayments
and deposits........... (116) 1,348 1,086 (1,523) (2,393)
Accrued interest
payable................ 43 334 4,483 (1,226) 5,870
-------- -------- --------- --------- ---------
Total adjustments...... 90,101 84,229 175,094 101,010 55,859
-------- -------- --------- --------- ---------
Net cash flows from
operating activities.. 35,963 30,024 62,101 26,244 19,491
-------- -------- --------- --------- ---------
Cash Flows From Investing
Activities:
Cash paid for capital
expenditures............. (46,930) (23,274) (65,570) (32,738) (9,304)
Pending acquisition
costs.................... -- (2) (22) (146) --
Cash paid for franchise
costs.................... (388) (31) (12) (406) (2,009)
Cash paid for organization
costs.................... -- -- (28) (23) --
Earnest money deposits.... -- (9,500) (200) (2,000) (500)
Proceeds from disposition
of cable
television systems....... 5,228 -- -- -- 15,065
Proceeds from disposition
of real estate........... 1,470 -- -- -- --
Cash paid in acquisition
of cable
television systems........ (12,861) (68,758) (307,595) (392,631) (421,467)
-------- -------- --------- --------- ---------
Net cash flows from
investing activities... (53,481) (101,565) (373,427) (427,944) (418,215)
-------- -------- --------- --------- ---------
Cash Flows From Financing
Activities:
Debt borrowings........... 24,982 78,000 316,485 523,000 137,700
Payments on debt
borrowings............... (3,750) -- (76,875) (289,845) (33,600)
Proceeds from issuance of
Subordinated Notes....... -- -- -- -- 200,000
Proceeds from issuance of
Discount Notes........... -- -- 75,000 150,000 --
Proceeds from related
party indebtedness....... -- -- -- 31,104 102,042
Principal payments on
capital lease
obligations.............. (317) -- -- (70) (16)
Increase in deferred
financing fees........... (64) (118) (395) (11,357) (3,771)
Offering costs related to
Subordinated Notes....... (22) (1) -- (129) (7,417)
Offering costs related to
Discount Notes........... (365) (149) (2,408) (6,585) --
Partner capital
contributions............ -- -- -- 4,895 5,440
-------- -------- --------- --------- ---------
Net cash flows from
financing activities... 20,464 77,732 311,807 401,013 400,378
-------- -------- --------- --------- ---------
Net Increase (Decrease) in
Cash and
Cash Equivalents......... 2,946 6,191 481 (687) 1,654
Cash and Cash Equivalents,
at beginning of period... 7,354 6,873 6,873 7,560 5,906
-------- -------- --------- --------- ---------
Cash and Cash Equivalents,
end of period............ $ 10,300 $ 13,064 $ 7,354 $ 6,873 $ 7,560
======== ======== ========= ========= =========
Supplemental Disclosure of
Cash Flow Information:
Cash paid for interest.... $ 37,817 $ 30,610 $ 62,789 $ 42,226 $ 15,195
======== ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 initially capitalized in August 1995 with
approximately $16,600 of limited partner contributions, and approximately $168
from its sole general partner, FVP GP, L.P., a Delaware partnership. FVP's
limited partners include individuals, corporations and partnerships. FVP'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, 1998, FVP had received all of these
commitments. Of the total capital contributed to FVP by December 31, 1998,
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 Limited Partnership Interest and Note Purchase
Agreement (the "FVP Partnership Agreement"), FVP agreed to issue partnership
interests, Senior Notes and Junior Notes to a limited partner, (less that
limited partner's debt and equity commitments) as a syndication fee. In 1995
and 1996, FVP credited the capital account of the limited partner with a total
of $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.
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 (collectively the "Discount Notes"). On December 2, 1998,
Holdings, acting as a co-issuer with its wholly-owned subsidiary,
FrontierVision Holdings Capital II Corporation, issued $91,298 aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes Series B due
2007. FVP contributed to Holdings 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.
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, 1998, the
Partnership had only issued Class A, Special Class A and Class C limited
partnership interests.
Net losses are allocated to the partners in proportion to their combined
debt and capital contributions until the limited partners have been allocated
amounts equal to their capital contributions, except no losses shall be
6
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(1) THE PARTNERSHIP (continued)
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, 83% to the Class
A and Class B limited partners and the general partner in proportion to their
capital contributions, 9% 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, 83% to the Class A and
Class B limited partners and the general partner in proportion to their
capital contributions, 9% 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 3% 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, 1998, the Partnership had
received total combined debt and capital contributions of $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. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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.
7
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
capitalizes direct labor and overhead related to installation and construction
activities. Depreciation is computed on a straight-line basis using an average
estimated useful life of 8 years.
Franchise Costs, Covenants not to Compete, Subscriber Lists and Goodwill
Franchise costs, covenants not to compete, subscriber lists and goodwill
result from the application of the purchase method of accounting to business
combinations. Such amounts are amortized on a straight-line basis over the
following periods: 15 years for franchise costs (which reflects the
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.
Impairment of Long-lived Assets
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 and Deferred Bond Issue Costs
Deferred financing costs and deferred bond issue costs are being amortized
using the straight line method over the life of the loans and the bonds.
Accumulated amortization at December 31, 1998 and 1997 is $5,106 and $1,808,
respectively.
Revenue Recognition
Revenues are recognized in the period in which the related services are
provided to the subscribers. Installation revenue is recognized in the period
that installation services are provided to the extent of direct selling costs.
Any remaining amount is deferred and recognized over the estimated average
period that customers are expected to remain connected to the cable television
system.
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.
8
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Partnership and its direct and indirect subsidiaries, except for
FrontierVision Cable New England, Inc., New England CableVision of
Massachusetts, Inc., Main Security Surveillance, Inc., FrontierVision
Operating Partners, Inc., Capital, Holdings Capital and Holdings II Capital,
are limited partnerships or limited liability companies and pay no income
taxes as entities. All of the income, gains, losses, deductions and credits of
the Partnership are passed through to its partners. Nominal taxes are assessed
by certain state and local jurisdictions.
The basis in the Partnership's assets and liabilities differs for financial
and tax reporting purposes. At December 31, 1998, the book basis of the
Partnership's net assets exceeded its tax basis by $20.4 million.
FrontierVision Cable New England, Inc., New England CableVision of
Massachusetts, Inc., Main Security Surveillance, Inc., FrontierVision
Operating Partners, Inc., Capital, Holdings Capital and Holdings II Capital
are corporations and are subject to federal and state income taxes which have
not been significant. Deferred taxes relate principally to the difference
between book and tax basis of the cable television assets owned by New England
Cablevision of Massachusetts, Inc., partially offset by the tax effect of
related net operating loss carryforwards.
New Accounting Standards
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"), which is effective for all fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities by requiring that
all derivative instruments be reported as assets or liabilities and measured
at their fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those instruments
qualify as hedges of the (1) fair values of existing assets, liabilities, or
firm commitments, (2) variability of cash flows of forecasted transactions, or
(3) foreign currency exposures of net investments in foreign operations.
Although management of the Company has not completed its assessment of the
impact of SFAS 133 on its consolidated results of operations and financial
position, management estimates that the impact of SFAS 133 will not be
material.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, Reporting the Costs of Start-up Activities, ("SOP
98-5"), which requires costs of start-up activities and organization costs to
be expensed as incurred. SOP 98-5 was adopted by the Partnership during the
six months ended June 30, 1999. The effect of such adoption was to increase
net loss by $280, which represented the write off of the remaining unamortized
organization costs previously recorded on the Partnership's Balance Sheet.
Reclassification
Certain amounts have been reclassified for comparability.
Interim Financial Statements
The following notes, insofar as they are applicable to the six months ended
June 30, 1999 and 1998, are not audited. In management's opinion, all
adjustments considered necessary for a fair presentation of such financial
statements are included and all such adjustments are of a normal and recurring
nature. The results for the six-months ended June 30, 1999 and 1998 are not
purported to be indicative of the results for the entire fiscal year.
9
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(3) STORM RELATED COSTS
During mid-January of 1998, certain of the communities served by the
Partnership in Maine experienced devastating ice storms. For the year ended
December 31, 1998, the Partnership has recognized a loss due to service
outages and increased labor costs of approximately $522 due to the ice storms.
Additionally, the Partnership has incurred approximately $540 of capital
expenditures to replace damaged subscriber drops. The Partnership received
$183 subsequent to December 31, 1998 related to a claim on its business
interruption insurance for the storm damage. Such claim was recognized as a
reduction of storm loss in the fourth-quarter of 1998.
(4) INVESTMENT IN CABLE TELEVISION SYSTEMS
The Partnership's investment in cable television systems is comprised of the
following:
<TABLE>
<CAPTION>
June 30 December 31, December 31,
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Property and equipment.................. $ 492,920 $ 435,531 $ 297,229
Less--accumulated depreciation.......... (129,486) (92,777) (49,505)
---------- ---------- ---------
Property and equipment, net............. 363,434 342,754 (247,724)
---------- ---------- ---------
Franchise costs......................... 721,506 717,614 523,096
Covenants not to compete................ 16,861 16,856 14,983
Subscriber lists........................ 146,558 146,411 106,270
Goodwill................................ 64,179 53,937 44,702
---------- ---------- ---------
949,104 924,818 689,051
Less--accumulated amortization.......... (147,145) (114,294) (51,326)
---------- ---------- ---------
Franchise costs and other intangible
assets, net............................ 801,959 820,524 637,725
---------- ---------- ---------
Total investment in cable television
systems, net........................... $1,165,393 $1,163,278 $ 885,449
========== ========== =========
</TABLE>
(5) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Partnership has completed several acquisitions since its inception
through June 30, 1999. All of the acquisitions have been accounted for using
the purchase method of accounting, and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based upon the
estimated fair values at the respective dates of acquisition. Such allocations
are subject to adjustments as final appraisal information is received by the
Partnership. Amounts allocated to property and equipment and to intangible
assets will be respectively depreciated and amortized, prospectively from the
date of acquisition based upon remaining useful lives and amortization
periods.
10
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
(5) ACQUISITIONS AND DISPOSITIONS (continued)
The following table lists the acquisitions and the purchase price for
transactions occurring in the most recent two years.
<TABLE>
<CAPTION>
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost (a)
- ----------------- ---------------------------- ------------------ --------------------
<S> <C> <C> <C>
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... Vermont and New Hampshire December 2, 1997 $ 34,800
Joint Venture ("TCI-
VT/NH") Cox
Communications, Inc.
("Cox-Central Ohio")... Ohio December 19, 1997 $204,100
TVC-Sumpter Limited
Partnership and North
Oakland Cablevision.... Michigan March 6, 1998 $ 14,400
Partners Limited
Partnership TCI
Cablevision of
Ohio, Inc.............. Ohio April 1, 1998 $ 10,000
New England Cablevision
of Massachusetts, Inc.
("NECMA").............. Massachusetts April 3, 1998 $ 44,900
Ohio Cablevision
Network, Inc. ("TCI-
Bryan")................ Ohio July 31, 1998 $ 37,400
Unity Cable Television,
Inc.................... Maine September 30, 1998 $ 800
Appalachian Cablevision
of Ohio................ Ohio September 1, 1998 $ 300
State Cable TV
Corporation ("State").. Maine, New Hampshire October 23, 1998 $190,600
Paint Valley Cable...... Ohio October 30, 1998 $ 1,900
CASCO................... Maine November 30, 1998 $ 3,400
Intermedia Partners,
IV..................... Kentucky June 1, 1999 $ 13,700*
</TABLE>
- --------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as
of June 30, 1999. * Subject to adjustment.
The combined purchase price of certain of these acquisitions has been
allocated to the acquired assets and liabilities as follows:
<TABLE>
<CAPTION>
Six Months
Ended
June 30 1999 1998 1997 1996
Acquisitions(a) Acquisitions(a) Acquisitions(a) Acquisitions(a)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Property and equipment.. $ 4,675 $ 79,526 $ 48,805 $169,240
Franchise costs and
other intangible
assets................. 9,622 244,492 344,490 268,836
------- -------- -------- --------
Subtotal................ 14,297 324,018 393,295 438,076
------- -------- -------- --------
Net working capital
(deficit).............. (1,386) 410 (164) (7,107)
Deferred income taxes... -- (14,783) -- --
Less--Earnest money
deposits applied....... (50) (2,050) (500) (9,502)
------- -------- -------- --------
Total cash paid for
acquisitions........... $12,861 $307,595 $392,631 $421,467
======= ======== ======== ========
</TABLE>
- --------
(a) The combined purchase price includes certain purchase price adjustments
for acquisitions consummated prior to the respective periods.
11
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(5) ACQUISITIONS AND DISPOSITIONS (continued)
The Partnership 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 Partnership,
assuming the Triax I, Cablevision, TCI-VT/NH, Cox-Central Ohio, NECMA, TCI-
Bryan and State Cable acquisitions (the "Acquisitions") had been consummated
on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ------------ ---------
<S> <C> <C> <C>
Revenue................................... $ 245,134 $ 31,842 $ 276,976
Operating, selling, general and
administrative expenses.................. (131,087) (20,245) (151,332)
Depreciation and amortization............. (114,280) (15,546) (129,826)
--------- -------- ---------
Operating loss............................ (233) (3,949) (4,182)
Interest and other expenses............... (112,760) (23,253) (136,013)
--------- -------- ---------
Net loss.................................. $(112,993) $(27,202) $(140,195)
========= ======== =========
<CAPTION>
Year Ended December 31, 1997
----------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ------------ ---------
<S> <C> <C> <C>
Revenue................................... $ 145,126 $105,533 $ 250,659
Operating, selling, general and
administrative expenses.................. (78,732) (56,312) (135,044)
Depreciation and amortization............. (65,627) (47,543) (113,170)
--------- -------- ---------
Operating income.......................... 767 1,678 2,445
Interest and other expenses............... (75,533) (51,026) (126,559)
--------- -------- ---------
Net loss.................................. $ (74,766) $(49,348) $(124,114)
========= ======== =========
</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.
Dispositions
On January 7, 1999, the Partnership sold certain cable television system
assets located in the Southeast region to Helicon Partners I, LP, for an
aggregate sales price of approximately $5,220.
Asset Exchanges
On June 1, 1999, the Company exchanged five systems located in the Kentucky
region for five systems owned by Intermedia Partners, LP IV. The Company
received 16,600 subscribers, gave up 11,300 subscribers and transferred
aggregate cash of approximately $13,300. The asset exchange was recorded at
fair value and purchase accounting was applied. In connection with the asset
exchange, the Company recognized a gain of $7,324.
12
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(6) DEBT
The Partnership's debt was comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Bank Credit Facility (a)
Revolving Credit Facility, interest
based on various floating rate options
(7.25% average at December 31, 1998),
payable monthly........................ $ 175,000 $ 172,000 $ --
Term loans, interest based on various
floating libor rate options (7.46% and
8.33% weighted average at December 31,
1998 and 1997, respectively), payable
monthly................................ 494,375 498,125 432,000
11% Senior Subordinated Notes due 2006
(b)....................................... 200,000 200,000 200,000
11 7/8% Senior Discount Notes due 2007
(c)....................................... 262,301 249,532 155,047
12% Senior Notes, due June 30, 2004 and
2007 (d).................................. 167,090 158,593 141,642
14% Junior Notes, due June 30, 2004 and
2007 (d).................................. 80,039 75,409 66,266
Term Note, due to Adelphia Communication
Corporation ("Adelphia") (e)............. 12,000 -- --
Other..................................... 11,150 1,485 --
---------- ---------- --------
Total debt.............................. $1,401,955 $1,355,144 $994,955
========== ========== ========
</TABLE>
- --------
(a) Bank Credit Facility.
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.
This obligation may be waived with the consent of the majority of the
lenders. 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.
All partnership interests in the Partnership and all assets of the
Partnership and its subsidiaries are pledged as collateral for the Amended
Credit Facility.
(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 "Subordinated Notes"). Net proceeds from the Offering
of $192,500, after costs of approximately $7,500, were available to FVOP on
October 7, 1996.
13
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(6) DEBT (continued)
In connection with the anticipated issuance of the Subordinated 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 Subordinated Notes. The cost of such
agreements, amounting to $1,390, are recognized as a component of interest
expense over the term of the Subordinated Notes.
The Subordinated 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.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Partnership, 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 Subordinated Notes.
(c) Senior Discount Notes
On September 19, 1997, Holdings issued, pursuant to a private offering,
the Discount Notes. The Discount Notes were sold at approximately 63.1% of
the stated principal amount at maturity of $237,650 and provided net
proceeds of $144,750, after underwriting fees of approximately $5,250.
On December 2, 1998, Holdings issued, pursuant to a private offering, the
Discount Notes, Series B. The Discount Notes were sold at approximately
82.149% of the stated principal amount at maturity of $91,298 and provided
net proceeds of $72,750, after underwriting fees of approximately $2,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital (collectively, the "Issuers"), ranking pari passu in right of
payment to all existing and future unsecured indebtedness of the Issuers
and will mature on September 15, 2007. The discount on the Discount Notes
is being accreted using the interest method 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.
Affiliates of the Equity Holders received compensation in the aggregate
of approximately $4.6 million in connection with the issuance of the
Discount Notes.
(d) Senior and Junior Notes
The Senior and Junior Notes are unsecured obligations of FVP, ranking
pari passu in right of payment to all existing and future indebtedness of
FVP. The Senior Notes bear interest at a rate of 12% per annum,
14
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(6) DEBT (continued)
compounded annually, and are payable June 30, 2004 and 2007 or, if earlier,
the last day of the term of the Partnership. The Junior Notes bear interest
at a rate of 14% per annum, compounded annually, and are payable June 30,
2004 and 2007 or, if earlier, the last day of the term of the Partnership.
Under the terms of the Senior Notes and the Junior Notes, no cash interest
payments are required.
(e) Term Note due to Adelphia
On May 31, 1999, the Partnership entered into two Promissory Notes with
Adelphia for a total of $12,000. Interest on the Promissory Notes accrues
at 5% per annum through the date of payment on the Promissory Notes.
Payment on the Promissory Notes and accrued interest is due and payable
sixty days after the expiration or termination of the Purchase Agreement
between the Partnership and Adelphia.
(f) Interest Rate Protection Agreements
In order to convert effectively certain of the interest payable at
variable rates under the Amended Credit Facility to interest at fixed
rates, the Partnership has entered into interest rate swap agreements for
notional amounts totaling $187,500, and maturing between November 15, 1999
and October 7, 2001. According to these agreements, the Partnership pays or
receives the difference between (1) an average fixed rate of 5.84% and (2)
a floating rate of the three month libor applied to the same $187,500
notional amount every three months during the term of the interest rate
swap agreement. On April 7, 1998, the Partnership terminated one of its
interest rate swap agreements for a notional amount of $82,500 and entered
into a new interest rate swap agreement for $100,000. There was no
termination fee associated with this transaction.
On January 8, 1999, the Partnership amended its collar interest rate swap
agreement that it had entered into on April 8, 1998 for a national amount
of $100,000. The amended collar agreement matures on April 8, 2001. The
collar agreement provides for different exchanges between the Partnership
and the counterparty depending on the level of the floating one month LIBOR
rate (5.24% at June 30, 1999). Such exchanges occur every month during the
term of the collar agreement. The different exchanges are as follows:
(1) When LIBOR is below 4.65%, the Partnership pays to the counterparty the
difference between the fixed rate of 5.95% and the LIBOR rate, applied
to the $100,000 national amount;
(2) When LIBOR is between 5.95% and 6.65%, the Partnership receives from
the counterparty the difference between the fixed rate of 5.95% and
LIBOR rate, applied to the $100,000 national amount;
(3) When LIBOR is in excess of 6.65% or between 5.95% and 4.65%, this
collar Agreement has no financial effect.
The Partnership terminated a previously existing collar agreement on June
21, 1999 for approximately $1,550. This cost is reflected in interest expense
in the accompanying statement of operations.
For the six months ended June 30, 1999 and 1998 and for the years ended
December 31, 1998 and 1997, the Partnership recognized an increase in interest
expense of approximately $2,081, $121, $585 and $312, respectively, as a
result of the interest rate swap agreements.
15
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(6) DEBT (continued)
Information concerning the Partnership's interest rate agreements at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Amount to be
Interest rate Notional paid upon
Expiration date to be received amount termination (i)
--------------- -------------- -------- ---------------
<S> <C> <C> <C>
November 15, 1999.................... 5.912% $ 65,000 $ 472.5
November 15, 1999.................... 5.188% 22,500 12.1
January 8, 2001...................... 5.650% 100,000 1,215.3
October 7, 2001...................... 5.940% 100,000 2,731.9
October 15, 2001..................... 6.115% 150,000 4,340.7
-------- --------
$437,500 $8,772.5
======== ========
</TABLE>
- --------
(i) The estimated amount that the Partnership would pay to terminate the
agreements on December 31, 1998. This amount takes into consideration
current interest rates, the current creditworthiness of the counterparties
and represents the fair value of the interest rate agreements.
The debt of the Partnership, excluding future interest accretion, matures as
follows:
<TABLE>
<CAPTION>
Year Ended December 31--
------------------------
<S> <C>
1999............................................................ $ 11,144
2000............................................................ 24,575
2001............................................................ 34,575
2002............................................................ 44,575
2003............................................................ 55,825
Thereafter...................................................... 1,184,450
----------
$1,355,144
==========
</TABLE>
(7) 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.
(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 Partnership's Amended Credit Facility is
based on floating market rates at December 31, 1998; therefore, there is no
material difference in the fair market value and the carrying value of such
debt instruments. The Subordinated Notes have an aggregate principal amount of
$200,000 with a 11% coupon rate. The fair value for the Subordinated Notes at
December 31, 1998 is $222,000. The Discount Notes have an aggregate principal
amount at maturity of $328,948 with a 11 7/8% coupon. At December 31, 1998,
the approximate fair value of the Partnership's Discount Notes was $273,030.
At June 30, 1999, the fair value of the Subordinated Notes and Discount Notes
was $214,000 and $286,000, respectively. The fair value of the Subordinated
Notes and the Discount Notes is estimated based on Portal Market quotations of
the issue. The fair
16
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands)
(8) FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
values of the Junior and Senior Notes, and the Term Note, due to Adelphia are
not determinable as a result of the related party nature of such instruments.
(9) 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, 1998,
1997 and 1996 and the six months ended June 30, 1999 and 1998 was $5,806,
$4,065, $2,365, $3,227 and $2,736, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31--
------------------------
<S> <C>
1999................................................................ $1,404
2000................................................................ 1,104
2001................................................................ 781
2002................................................................ 646
2003................................................................ 390
Thereafter.......................................................... 737
------
$5,062
======
</TABLE>
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.
17
<PAGE>
FRONTIERVISION PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(In Thousands)
(9) COMMITMENTS AND CONTINGENCIES (continued)
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.
(10) YEAR 2000 COMPLIANCE
The Partnership has under way a project to review and modify, as necessary,
its computer applications, hardware and other equipment to make them Year 2000
compliant. The Partnership has also initiated formal communications with third
parties having a substantial relationship to its business, including
significant suppliers and financial institutions, to determine the extent to
which the Partnership may be vulnerable to such third parties' failures to
achieve Year 2000 compliance.
Failure to achieve Year 2000 compliance by the Partnership, its principal
suppliers and certain financial institutions with which it has relationship
could negatively affect the Partnership's ability to conduct business for an
extended period. There can be no assurances that all Partnership information
technology systems and components will be fully Year 2000 compliant; in
addition, other companies on which the Partnership's systems and operations
rely may not be fully compliant on a timely basis, and any such failure could
have a material adverse effect on the Partnership's financial position,
results of operations or liquidity.
(11) PROPOSED SALE OF THE PARTNERSHIP
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
to sell all outstanding partnership interests of FVP in exchange for cash, the
assumption of certain liabilities and 7 million shares of Adelphia Class A
common stock. Subsequent to the definitive agreement, Adelphia assumed the
liability for payment to the Partnership's programming vendors. The
Partnership has continued to accrue programming costs at their existing
contractual rates. This liability is reflected as an obligation to Adelphia
and will be settled at the closing of the sale of the Partnership as a
purchase price adjustment.
18
<PAGE>
Exhibit 99.03
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Harron Communications Corp.:
We have audited the accompanying consolidated balance sheets of Harron
Communications Corp. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Harron Communications Corp.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 19, 1999 (April 12, 1999 as to Note 16)
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS ------------- -------------
<S> <C> <C>
Investment in communications systems:
Property, plant and equipment................. $ 263,403,285 $ 218,360,882
Accumulated depreciation and amortization..... (130,181,567) (118,670,257)
------------- -------------
Net property, plant and equipment......... 133,221,718 99,690,625
Intangible assets, net of accumulated
amortization of $42,835,456 in 1998 and
$37,200,132 in 1997.......................... 81,139,660 9,876,287
------------- -------------
Total investments......................... 214,361,378 109,566,912
Cash and cash equivalents....................... 3,645,097 6,114,388
Accounts receivable, net of allowance for
doubtful accounts of $302,713 in 1998 and
$485,075 in 1997............................... 5,645,661 5,522,614
Short-term investments and marketable
securities..................................... 96,775,048 97,241,555
Investment in and advances to affiliate......... 10,413,236
Notes receivable, stockholders and affiliates... 6,775,528 4,264,362
Prepaid expenses and other assets............... 13,353,302 21,123,779
------------- -------------
TOTAL..................................... $ 350,969,250 $ 243,833,610
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt.......................................... $ 284,179,226 $ 200,300,842
Accounts payable and accrued liabilities...... 23,857,491 19,463,373
Deferred tax liability........................ 9,626,200 19,206,300
------------- -------------
Total liabilities......................... 317,662,917 238,970,515
------------- -------------
Commitments and contingencies
Minority interest in consolidated subsidiary.... 1,000,000 1,000,000
Stockholders' equity:
Common stock--$10 par value; authorized
100,000 shares; issued and outstanding 48,168
shares in 1998 and 1997...................... 481,685 481,685
Retained earnings (accumulated deficit)....... 23,316,448 (5,178,324)
Accumulated other comprehensive income........ 8,508,200 8,559,734
------------- -------------
Total stockholders' equity................ 32,306,333 3,863,095
------------- -------------
TOTAL..................................... $ 350,969,250 $ 243,833,610
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES............................. $121,185,028 $112,127,149 $117,439,633
COSTS AND EXPENSES:
Operating expenses................. 50,829,303 46,120,293 47,440,942
General and administrative
expenses.......................... 26,742,456 22,905,504 27,655,757
Depreciation and amortization...... 20,692,390 19,852,074 22,212,065
------------ ------------ ------------
Total costs and expenses....... 98,264,149 88,877,871 97,308,764
------------ ------------ ------------
OPERATING INCOME..................... 22,920,879 23,249,278 20,130,869
------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Interest expense................... (17,380,916) (14,024,115) (15,189,223)
Interest income.................... 5,654,830 8,365,950 960,840
Loss on retirement of fixed
assets............................ (1,616,880) (2,746,224) (1,288,956)
Other, net......................... 1,394,581 478,339 (655,644)
Gains on businesses and assets
sold.............................. 1,336,500 14,718,639 30,847,265
Life insurance proceeds............ 9,423,311 -- --
Equity in net loss of affiliate.... (582,764) -- --
------------ ------------ ------------
Total other (expense) income... (1,771,338) 6,792,589 14,674,282
------------ ------------ ------------
INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION AND EXTRAORDINARY ITEM.... 21,149,541 30,041,867 34,805,151
INCOME TAX (BENEFIT) PROVISION....... (7,345,231) 12,214,687 10,791,633
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM..... 28,494,772 17,827,180 24,013,518
EXTRAORDINARY ITEM--Loss on early
extinguishment of debt, net of tax
benefit of $2,281,617............... -- 3,331,217 --
------------ ------------ ------------
NET INCOME........................... $ 28,494,772 $ 14,495,963 $ 24,013,518
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other Total
Number Par Comprehensive (Accumulated Treasury Comprehensive Stockholders'
of Shares Value Income Deficit) Stock Income Equity
--------- -------- ------------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996.................... 48,386 $483,865 -- $(43,192,403) -- -- $(42,708,538)
Comprehensive income
Net income............. -- -- $24,013,518 24,013,518 -- -- 24,013,518
Other comprehensive
income--unrealized gain
on marketable
securities, net of tax
of $2,969,000.......... -- -- 4,100,071 -- -- 4,100,071 4,100,071
-----------
Comprehensive Income.... -- -- $28,113,589 -- -- -- --
-----------
Purchase of 109 shares
of treasury stock....... -- -- -- -- $(248,791) -- (248,791)
Retirement of treasury
stock................... (109) (1,090) -- (247,701) 248,791 -- --
------ -------- ------------ --------- ---------- ------------
BALANCE, JANUARY 1,
1997.................... 48,277 $482,775 -- $(19,426,586) -- $4,100,071 $(14,843,740)
Comprehensive income
Net income............. -- -- $14,495,963 14,495,963 -- -- 14,495,963
Other comprehensive
income--unrealized gain
on marketable
securities, net of tax
of $3,147,337.......... -- -- 4,459,663 -- -- 4,459,663 4,459,663
-----------
Comprehensive Income.... -- -- $18,955,626 -- -- -- --
-----------
Purchase of 109 shares
of treasury stock....... -- -- -- -- $(248,791) -- (248,791)
Retirement of treasury
stock................... (109) (1,090) -- (247,701) 248,791 -- --
------ -------- ------------ --------- ---------- ------------
BALANCE, DECEMBER 31,
1997.................... 48,168 481,685 -- (5,178,324) -- 8,559,734 3,863,095
Comprehensive income
Net income.............. -- -- $28,494,772 28,494,772 -- -- 28,494,772
Other comprehensive
income--unrealized loss
on marketable
securities, net of tax
of $1,432,939........... -- -- (51,534) -- -- (51,534) (51,534)
-----------
Comprehensive Income.... -- -- $28,443,238 -- -- -- --
-----------
------ -------- ------------ --------- ---------- ------------
BALANCE, DECEMBER 31,
1998.................... 48,168 $481,685 $ 23,316,448 $ -- $8,508,200 $ 32,306,333
====== ======== ============ ========= ========== ============
</TABLE>
4
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................... $ 28,494,772 $ 14,495,963 $ 24,013,518
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in net loss of
affiliate.................. 582,764 -- --
Loss on retirement of fixed
assets..................... 1,616,880 2,746,224 1,288,956
Depreciation and
amortization............... 20,692,390 19,852,074 22,212,065
Other, net.................. 43,265 168,501 93,542
Gain on sale of businesses
and assets................. (1,336,500) (14,718,639) (30,847,264)
Write-off of deferred
financing costs............ -- 4,039,119 --
Reversal of deferred taxes.. (7,989,000) -- --
Changes in assets and
liabilities which provided
(used) cash:
Accounts receivable....... (123,047) 998,247 5,474,571
Receivables from
stockholders and
affiliates............... (2,511,166) 7,703,309 (1,109,678)
Prepaid expenses and other
assets................... 7,574,477 (10,169,142) 284,339
Deferred income taxes..... (24,853) 7,535,000 4,960,000
Accounts payable and
accrued liabilities...... 4,394,118 (3,046,362) (3,031,931)
------------- ------------- ------------
Net cash provided by
operating activities.... 51,414,100 29,604,294 23,338,118
------------- ------------- ------------
INVESTING ACTIVITIES:
Purchase of cable television
systems, net of cash
acquired................... (90,126,033) -- --
Investment in affiliate..... (3,800,000) -- --
Purchase of property, plant
and equipment, other than
purchase of cable
television systems......... (33,645,198) (26,654,376) (11,501,087)
Increase in intangible
assets, other than purchase
of cable television
systems.................... (3,375,770) (5,120,408) (211,659)
Proceeds from sale of
businesses and assets...... -- 35,822,638 27,969,319
Loan to affiliate........... (7,000,000) (3,000,000) --
Net purchases of available
for sale securities........ (1,151,274) (70,554,000) --
------------- ------------- ------------
Net cash used in
investing activities.... (139,098,275) (69,506,146) 16,256,573
------------- ------------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of
debt, net of issuance costs
and prepayment penalties... 85,500,000 195,000,000 5,668,837
Repayment of debt........... (285,116) (163,086,144) (35,326,321)
Purchase of treasury stock.. -- (248,791) (248,791)
Sale of minority interest... -- 1,000,000 --
------------- ------------- ------------
Net cash provided by
financing activities.... 85,214,884 32,665,065 (29,906,275)
------------- ------------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.......... (2,469,291) (7,236,787) 9,668,416
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR............. 6,114,388 13,351,175 3,662,759
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END
OF YEAR....................... $ 3,645,097 $ 6,114,388 $ 13,351,175
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during year for:
Interest.................... $ 16,485,137 $ 15,190,611 $ 16,448,605
============= ============= ============
Income taxes................ $ 435,150 $ 11,425,578 $ 3,857,822
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES--
During 1997, the Company entered into capital lease agreements for
equipment in the amount of $25,695.
During 1996, the Company entered into capital lease agreements for
equipment in the amount of $99,531.
During 1996, the Company received marketable equity securities valued
at $11,930,000 (see Note 3).
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Harron Communications Corp. and
subsidiaries (the "Company") include its cable and television broadcast
operations. All majority-owned subsidiaries which the Company controls are
included in consolidation and all significant intercompany transactions have
been eliminated. Certain reclassifications have been made of previously
reported amounts to conform with reclassifications used in the current year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to customers who are delinquent.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, including the cost of
material, labor and overhead incurred during periods of construction. Normal
maintenance and repairs are charged to operating expenses as incurred.
Expenditures which materially extend the useful life of an asset are
capitalized.
Intangible Assets
Intangible assets are made up of franchise costs, deferred charges and other
intangibles. Franchise costs include the cost of acquired cable television
franchises and subscriber lists and are amortized over 10 years. Deferred
charges relating to debt issues are being amortized over 8 years. Other
intangible assets include covenants not to compete and the aggregate excess of
purchase price over the value of net identifiable assets of cable television
systems acquired by the Company and are amortized computed using the straight-
line method ranging from 5 to 20 years.
Carrying Value of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets, including
goodwill and other intangible assets, based upon current anticipated
undiscounted cash flows, and recognizes impairment when it is probable that
such estimated cash flows will be less than the carrying value of the asset.
Measurement of the amount of the impairment, if any, is based upon the
difference between the carrying value and the fair value.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less when purchased.
6
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Marketable Securities
The Company values its investments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This statement requires that securities be
classified as trading, available for sale or held to maturity. The Company's
investments, which consist of short-term debt and marketable equity
securities, are classified as available for sale and are carried at fair
value. Changes in unrealized gains and losses are recorded as other
comprehensive income or loss and accumulated in stockholders' equity.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (see Note 9).
New Accounting Pronouncements
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and disclosing
comprehensive income. As this statement only required additional disclosures
in the Company's consolidated financial statements, its adoption did not have
any impact on the Company's consolidated financial position or results of
operations.
In 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information (see Note 15). As this statement only
required additional disclosures in the Company's consolidated financial
statements, its adoption did not have any impact on the Company's consolidated
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. This statement is effective for all
fiscal years beginning after June 15, 1999. The Company is evaluating the
effects that the adoption of SFAS No. 133 may have on its consolidated
position or results of operations.
(2) Acquisitions
In January 1998, the Company signed an asset purchase agreement to purchase
the assets of a cable television system that serves communities in New York
(the "New York Acquisition"). The New York Acquisition was completed in June
1998 for a price of $27.2 million. The Company accounted for the New York
Acquisition under the purchase method of accounting. As such, the Company
allocated the purchase price of the system based on the fair value of the
assets acquired and liabilities assumed as determined by an independent
appraisal. The excess consideration over the fair value of the net tangible
assets has been allocated to various intangible assets, which are being
amortized over periods of 10 to 15 years.
In January 1998, the Company signed an asset purchase agreement to purchase
the assets of a cable television system that serves communities in New
Hampshire (the "New Hampshire Acquisition"). The New Hampshire Acquisition was
completed in October 1998 for a price of $119.5 million. The purchase
agreement provided the Company the option to assign all or a portion of the
New Hampshire Acquisition to another entity.
7
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In October 1998, the Company assigned a portion of the New Hampshire
Acquisition to an affiliate, MetroCast Cablevision Holdings, LLC
("MetroCast"), and purchased its portion of the system for $63.5 million.
The Company accounted for the New Hampshire Acquisition under the purchase
method of accounting. As such, the Company allocated the purchase price of the
system based on the fair value of the assets acquired and liabilities assumed
as determined by an independent appraisal. The excess consideration over the
fair value of the net tangible assets has been assigned to franchise costs and
is being amortized over a period of 10 years.
The results of the New York and New Hampshire Acquisitions have been
included with those of the Company since the acquisition dates. The following
summarized unaudited pro forma information for the years ended December 31,
1998 and 1997 has been presented as if the New York and New Hampshire
Acquisitions had occurred on January 1, 1997. This unaudited pro forma
information is based on the historical results of operations adjusted for
certain acquisition costs. The unaudited pro forma information may not be
indicative of the results that actually would have occurred, or the results
that may be obtained in the future, if the acquisitions had occurred on
January 1, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues.............................................. $131,353,989 $127,500,123
Operating income...................................... 23,471,652 21,241,651
Income before extraordinary item...................... 24,473,994 8,833,739
Net income............................................ 24,473,994 5,502,522
</TABLE>
In October 1998, simultaneous with the New Hampshire Acquisition, a wholly
owned subsidiary of the Company acquired a 27.1% equity interest in MetroCast
for an investment of $3,800,000. Summarized consolidated financial information
for MetroCast is as follows:
<TABLE>
<CAPTION>
December 31,
1998
--------------
<S> <C>
Current assets................................................... $ 620,495
===========
Total assets..................................................... $56,746,372
===========
Current liabilities.............................................. $ 2,393,625
===========
Total liabilities................................................ $45,393,625
===========
Members' equity.................................................. $11,352,747
===========
<CAPTION>
For the Period
May 5, 1998
(Inception)
Through
December 31,
1998
--------------
<S> <C>
Net revenue...................................................... $ 2,594,160
===========
Net loss......................................................... $(2,147,253)
===========
</TABLE>
Total liabilities includes a note payable and accrued interest of $7,196,000
on a note payable to the Company. The note bears interest at a rate of 12% and
matures in 2007. The Company has recorded the related
8
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
note receivable and accrued interest in "Investment in and advances to
affiliate" on its consolidated balance sheet at December 31, 1998.
The Company, through a three year management agreement, manages the
operations of MetroCast. Compensation for these services is 4% of MetroCast's
gross revenues. Net loss above consists of management fees paid to the Company
which amounted to approximately $104,000 which were earned for the period from
October 1998 through December 1998. Management fee revenue is included in
revenues in the Company's consolidated statement of income for the year ended
December 31, 1998. Officers of the Company own approximately 1.4% of
MetroCast.
The Company is accounting for its investment in MetroCast under the equity
method of accounting. As of December 31, 1998, the Company's investment in
MetroCast, including advances, was $10,413,236.
(3) Businesses and Assets Sold
The Company recognized gains on businesses and assets sold during 1998, 1997
and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Harron Cablevision of Texas................ -- $ 9,575,000 --
Smith Television of New York--WKTV (see
Note 4)................................... -- 3,821,000 --
Harron Television of Monterey (KION)....... $1,337,000 1,323,000 $ 4,638,000
Direct Broadcast Satellite................. -- -- 23,722,000
Metrobase Cable Advertising................ -- -- 2,487,000
---------- ----------- -----------
Total...................................... $1,337,000 $14,719,000 $30,847,000
========== =========== ===========
</TABLE>
In July 1997, the Company sold the assets of Harron Cablevision of Texas
("Dallas") for $34,500,000 in cash. For the period ended June 30, 1997 and the
year ended December 31, 1996, Dallas had net revenues of $4,672,000 and
$8,746,000, respectively, and net losses of $1,221,000 and $3,009,000,
respectively. The sale resulted in a gain of $9,575,000.
In April 1996, Harron Television of Monterey ("HTM"), a partnership, whose
sole general partner is the Company, entered into a series of agreements (the
"Agreements") that established the terms of the transfer and use of certain of
the tangible and intangible assets of its television station (KION; formerly
KCCN) in Monterey, California. Under the Agreements, the buyer manages and is
responsible for the operations of KION; however, HTM maintains legal title to
the assets and remains the licensee of the station. At closing, HTM received a
non-refundable payment of $5,575,000 and obtained a bank loan of $4,825,000
(see below) as consideration for the rights to use of the station. HTM
recorded a gain of $4,638,000 representing the difference between the non-
refundable cash payment received and the net book value of the intangible
assets transferred. In addition, as part of the Agreements, the buyer has an
option to purchase the assets of the television station for $3,600,000,
expiring in April 1999. In October 1997, the buyer made an interim payment for
the option of $750,000. In January 1999, the buyer notified the Company of its
intention to exercise its option to purchase the assets of KION for
$2,850,000.
As noted above, HTM received a bank loan for $4,825,000. Although HTM is
obligated under the loan, the buyer has guaranteed payment of the loan and is
obligated to make monthly payments, commencing in January 1997, equal to the
principal and interest on the loan. HTM has recorded the debt outstanding and
is reducing the
9
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
debt and recognizing a gain as the payments are received from the buyer. The
gain recorded in 1998 and 1997 for payments received is $1,337,000 and
$1,323,000, respectively.
In October 1996, the Company sold the assets and business of its Direct
Broadcast Satellite ("DBS") operations to Pegasus Communications, Inc.
("Pegasus") concurrent with an initial public offering for Pegasus. The sales
price was $29,824,000, consisting of $17,894,000 in cash and 852,110 shares of
Pegasus common stock value at the initial public offering price of
$11,930,000. For the period ended September 30, 1996, DBS has net revenues of
$2,704,000 and a net loss of $1,448,000. The sale resulted in a gain of
$23,722,000.
In September 1996, the Company sold the assets and business of Metrobase
Cable Advertising ("Metrobase") for $4,500,000 in cash consideration and
retained net receivables. The Company has granted the buyer the exclusive
rights to air commercial advertising for certain cable systems in return for a
fee based on a percentage of revenues. For the period ended September 30,
1996, Metrobase had net revenues of $5,003,000 and net income of $259,000. The
sale resulted in a gain of $2,487,000.
(4) Television Broadcast Stations
WKTV and WETM
In 1992, the Company became a 40% stockholder in Smith Television of New
York (STNY), while Smith Broadcasting Group, Inc. ("Smith") and affiliates
became 60% stockholders in STNY. At the same time, an agreement was entered
into with STNY for the sale of the Company's television broadcast station
located in Utica, New York (WKTV). WKTV was sold for promissory notes due in
October 1997 in the amount of approximately $9,200,000 bearing interest at 8%.
Concurrent with the sale, STNY purchased from Smith, the assets of a
television broadcast station located in Elmira, New York (WETM). In January
1994, the Company increased its ownership interest in STNY to 49% by
purchasing the 9% interest held by Smith affiliates for $300,000.
In September 1997, the Company received $11,164,267 from Smith as payment
for the promissory notes plus accrued interest. Interest income on the notes
was recognized in the amount of $3,806,240. In addition, the Company
recognized the deferred gain on the sale of WKTV of $3,821,000.
KEYT
In January 1994, the Company, STNY and an affiliate of Smith entered into an
agreement to acquire the partnership interests of Smith Broadcasting of Santa
Barbara Limited Partnership (SBSBLP). The principal asset of SBSBLP is a
television broadcast station, KEYT-TV, located in Santa Barbara, California.
Pursuant to the agreement, the Company acquired a 21.6% limited partnership
interest through a wholly owned subsidiary of the Company and a 38.4% general
partnership interest through its investment in STNY (which owns a 78.4%
interest in SBSBLP). In addition, the Company had a $4,000,000 note receivable
from SBSBLP due November 1, 1997. The note accrued interest at 15% through
January 1995, and 20% thereafter. In 1997, the Company received $6,211,513
from Smith. This amount represented full payment on the $4,000,000 note
receivable plus interest income of $2,211,513 that was recognized in 1997.
10
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Summarized consolidated financial information for STNY (including KEYT) is
as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current assets...................... $ 6,665,000 $ 6,436,000 $ 5,160,000
============ ============ ============
Total assets........................ $ 21,856,000 $ 22,612,000 $ 21,453,000
============ ============ ============
Current liabilities................. $ 3,116,000 $ 2,773,000 $ 30,617,000
============ ============ ============
Total liabilities................... $ 33,811,000 $ 35,167,000 $ 32,803,000
============ ============ ============
Stockholders' and partners'
deficiency......................... $(11,955,000) $(12,555,000) $(11,350,000)
============ ============ ============
Net revenue......................... $ 20,789,000 $ 16,801,000 $ 16,493,000
============ ============ ============
Net income (loss)................... $ 600,000 $ (1,205,000) $ (1,671,000)
============ ============ ============
</TABLE>
Net income (loss) above includes interest expense of $0, $1,670,000 and
$2,505,000 in 1998, 1997 and 1996, respectively, on notes payable to the
Company.
The Company is accounting for its 49% ownership interest in STNY and its
21.6% limited partnership interest in SBSBLP using the equity method of
accounting. At December 31, 1998 and 1997, the Company's investment in these
entities had been reduced to $0.
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
Years of December 31,
----------- ----------------------------
Useful Life 1998 1997
----------- ------------- -------------
<S> <C> <C> <C>
Central reception facilities,
distribution systems and technical
equipment.......................... 10 to 15 $ 210,915,316 $ 180,486,552
Vehicles, office and other
equipment.......................... 3 to 10 18,778,548 16,016,918
Buildings and improvements.......... 10 to 25 14,599,208 14,167,063
Construction in progress............ 17,434,183 6,070,431
Other............................... 1,676,030 1,619,918
------------- -------------
263,403,285 218,360,882
Accumulated deprecation and
amortization....................... (130,181,567) (118,670,257)
------------- -------------
$ 133,221,718 $ 99,690,625
============= =============
</TABLE>
The Company's policy is to capitalize interest incurred on debt during the
course of rebuilding cable system plants that exceed one year in construction.
Interest capitalized was $689,005 and $409,785 in 1998 and 1997, respectively.
Depreciation expense was $14,967,716, $15,959,125 and $16,541,275 in 1998,
1997 and 1996, respectively.
11
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(6) Intangible Assets
At December 31, 1998 and 1997, intangible assets consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Franchise costs.................................... $103,813,280 $ 30,366,221
Deferred charges................................... 6,760,489 4,849,303
Other.............................................. 13,401,347 11,860,895
------------ ------------
Total............................................ 123,975,116 47,076,419
Accumulated amortization........................... (42,835,456) (37,200,132)
------------ ------------
$ 81,139,660 $ 9,876,287
============ ============
</TABLE>
(7) Short-Term Investments and Marketable Securities
In accordance with SFAS No. 115, the Company classified its investments as
available for sale. Securities available for sale at December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
- ----------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit........ $ 2,116,058 -- $ (415) $ 2,115,643
Commercial paper............... 2,363,247 -- -- 2,363,247
Money market and other short-
term investments.............. 28,822,586 -- -- 28,822,586
Asset backed securities........ 12,829,178 $ 7,496 -- 12,836,674
Corporate bonds................ 15,481,348 -- (16,282) 15,465,066
Equity securities.............. 12,023,519 13,059,242 -- 25,082,761
U.S. Government and Agency
Obligations................... 10,060,177 28,894 -- 10,089,071
----------- ----------- -------- -----------
$83,696,113 $13,095,632 $(16,697) $96,775,048
=========== =========== ======== ===========
<CAPTION>
Gross Gross
Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
- ----------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial paper............... $29,524,699 -- $ (338) $29,524,361
Corporate bonds................ 9,105,304 $ 477 (14,555) 9,091,226
Equity securities.............. 12,011,000 14,563,408 -- 26,574,408
U.S. Government and Agency
Obligations................... 21,499,932 138,352 (10,983) 21,627,301
Mutual funds and other......... 10,424,259 -- -- 10,424,259
----------- ----------- -------- -----------
$82,565,194 $14,702,237 $(25,876) $97,241,555
=========== =========== ======== ===========
</TABLE>
Differences between cost and market of approximately $13,079,000 (less
deferred taxes of approximately $4,517,000) and approximately $14,676,000
(less deferred taxes of approximately $6,117,000) were credited to a separate
component of shareholders' equity called Accumulated Other Comprehensive
Income as of December 31, 1998 and 1997, respectively.
12
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(8) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Term loan............................................. $ 75,000,000 $ 60,000,000
Revolving credit loan................................. 205,500,000 135,000,000
Other secured debt.................................... 3,679,226 5,300,842
------------ ------------
$284,179,226 $200,300,842
============ ============
</TABLE>
In June 1998, the Company amended its bank debt to increase commitments from
$250,000,000 to $375,000,000. The commitments are made up of a $75,000,000
term loan and a $300,000,000 revolving credit loan. The $75,000,000 term loan
commitment is payable in three equal installments of $25,000,000. Two payments
of $25,000,000 are due in 2006 and one payment of $25,000,000 is due in 2007.
The $300,000,000 revolving credit commitment expires in 2006. The unused
portion of this revolving credit commitment was $94,500,000 as of December 31,
1998. The Company pays a quarterly commitment fee of 0.5% on the unused
amount.
Interest on the term loan and revolving credit loan is based upon various
rates at the option of the Company and is also dependent on the leverage ratio
of the Company. The effective rate of interest for these borrowings at
December 31, 1998 was 7.7%.
In 1997, the Company refinanced certain bank debt by obtaining commitments
for $250,000,000 representing a $60,000,000 term loan and a $150,000,000
revolving credit line. In connection with the 1997 refinancing, the Company
recorded an extraordinary loss, net of taxes of $3,331,217 representing
prepayment penalties and the write-off of debt issuance costs associated with
original borrowings.
Other secured debt consists primarily of a note payable of $2,665,000 in
connection with the license management agreement (see Note 3) and a building
mortgage note.
The debt agreements are collateralized by substantially all assets of the
Company. These debt agreements require the Company to maintain certain
financial ratios and stipulate, among other things, limitations on additional
borrowings, investments, transactions with affiliates, payments of dividends
and repurchase of capital stock.
Future aggregate debt maturities for the five years subsequent to December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................. $2,865,998
2000................................................................. 154,337
2001................................................................. 21,217
2002................................................................. 20,479
2003................................................................. 22,482
</TABLE>
13
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(9) Income Taxes
In March 1998, the shareholders of the Company made an election under the
Internal Revenue Code to treat the Company as a qualified sub-chapter S
Corporation effective January 1, 1998. Accordingly, the Company recorded a
reversal of a portion of the deferred tax liabilities at December 31, 1997 in
the 1998 consolidated statement of income. However, the Company was subject to
a corporate level tax for certain built-in gains present at the date of
conversion which may be realized within a ten-year period following its
election to be treated as a sub-chapter S Corporation. A total of $7,989,000
related to the deferred tax liability at December 31, 1997 was reversed into
income in the consolidated statement of income for the year ended December 31,
1998.
Prior to January 1, 1998, the Company accounted for income taxes under the
provisions of SFAS No. 109, which requires an asset and liability approach for
financial accounting and reporting of income taxes. Under this approach,
deferred taxes are recognized for the estimated taxes ultimately payable or
recoverable based on enacted tax law. Changes in enacted tax rates will be
reflected in the tax provision as they occur. Deferred income taxes reflect
the net tax effects of (a) temporary differences between carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) operating loss and tax credit carryforwards.
The income tax (benefit) provision includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................. -- $ 4,133,000 $ 3,305,000
State................................... $ 643,769 547,000 2,527,000
----------- ----------- -----------
Total current......................... 643,769 4,680,000 5,832,000
----------- ----------- -----------
Deferred:
Federal................................. (6,210,000) 6,654,000 3,695,000
State................................... (1,779,000) 881,000 1,265,000
----------- ----------- -----------
Total deferred........................ (7,989,000) 7,535,000 4,960,000
----------- ----------- -----------
Income tax (benefit) provision............ $(7,345,231) $12,215,000 $10,792,000
=========== =========== ===========
</TABLE>
The Company's effective income tax rate is disproportionate from the
statutory rate, due primarily in 1998 to the sub-chapter S election discussed
above and in 1997 and 1996 to utilization of state net operating loss
carryforwards, state taxes and nondeductible expenses.
Total income tax expense was different from the amounts computed by applying
the statutory federal income tax rate to income before income taxes due to the
following:
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Income tax expense at statutory rate.............................. 35.0% 35.0%
Increase (reduction) in taxes resulting from:
State tax net of federal benefit................................ 3.1 8.7
Amortization.................................................... 0.6 0.8
Non-deductible expenses......................................... 0.6 0.6
Other........................................................... 1.4 --
Utilization of net operating loss and investment tax credit
carryforwards.................................................. -- (14.1)
---- -----
Income tax provision............................................ 40.7% 31.0%
==== =====
</TABLE>
14
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Significant items comprising the Company's deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax basis of property,
plant and equipment................................. $ 4,951,000 $15,110,500
State taxes.......................................... 1,023,400 4,293,000
Unrealized gain on marketable securities............. 4,570,800 6,117,000
Gain on sale of DBS operations....................... 2,337,000 2,337,000
Partnership investments/notes receivables............ 762,500
Other................................................ 123,900
----------- -----------
Total deferred tax liabilities..................... 13,006,100 28,620,000
----------- -----------
Deferred tax assets:
Partnership investments/note receivables............. 235,500
Accrued liabilities.................................. 502,000
State taxes.......................................... 61,300 1,552,200
Alternative minimum tax carryforward................. 1,085,000 825,000
Difference between book and tax basis of property and
intangible assets................................... 2,233,600 6,053,500
Other................................................ 245,500
----------- -----------
9,413,700
Net deferred tax assets............................ 3,379,900 9,413,700
----------- -----------
Net deferred tax liability............................. $ 9,626,200 $19,206,300
=========== ===========
</TABLE>
As of December 31, 1998, the Company has alternative minimum tax credit
carryforwards available of approximately $1,085,000 for federal income tax
purposes.
(10) Employee Savings Plan
The Company has a 401(k) savings plan which provides that employees of the
Company who have completed one year of service, as defined in the plan, and
who are not covered by a collective bargaining agreement may contribute from
1% to 15% of their earnings. The Company provides for matching of employee
contributions up to 6% of earnings. The Company's expense related to the
savings plan amounted to $428,987, $255,234 and $303,801 in 1998, 1997 and
1996, respectively.
15
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(11) Commitments and Contingencies
The Company is obligated under noncancellable operating leases, primarily
for vehicles and office space, that expire in various years through 2004.
Rental expense under these leases aggregated approximately $1,098,000,
$1,168,000 and $1,280,000 in 1998, 1997 and 1996, respectively. Future minimum
lease payments under such noncancellable operating leases for the five years
subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- ------------------------
<S> <C>
1999................................................................ $ 801,917
2000................................................................ 346,890
2001................................................................ 84,441
2002................................................................ 30,441
2003................................................................ 26,668
Thereafter.......................................................... 115,345
----------
Total............................................................... $1,405,702
==========
</TABLE>
The Company has cancellable operating leases for pole rent with utility
companies. Pole rent amounted to approximately $1,157,000, $1,176,000 and
$1,264,000 in 1998, 1997 and 1996, respectively.
The Company is obligated under certain license agreements for film contracts
not yet available for telecasting of approximately $1,673,000 at December 31,
1998.
(12) Related Party Transactions
A stockholder of the Company died in January 1998 and the Company received
approximately $9,423,000 representing life insurance proceeds.
The Company had committed to repurchase a total of 1,100 shares of stock
from the estate of a stockholder. In 1997 and 1996, the Company repurchased
109 shares for $248,791. No purchases were made in 1998. As of December 31,
1998, 280 shares remain under the commitment.
Stockholders owed the Company approximately $6,776,000 and $4,264,000 at
December 31, 1998 and 1997, respectively. These amounts, evidenced by
interest-bearing notes, are due in varying amounts through 2000 and are
secured by stockholders' shares in the Company.
One of the members of the Executive Committee of the Board of Directors is a
partner in the law firm that is the Company's general counsel. Legal fees
incurred with the law firm amounted to approximately $463,000, $515,000 and
$480,000 in 1998, 1997 and 1996, respectively. In addition, another member of
the Executive Committee is employed by a firm which represented the Company
resulting in consulting fees paid to this firm of approximately $137,000,
$1,281,000 and $347,000 in 1998, 1997 and 1996, respectively.
See Notes 2 and 4 for a discussion of transactions with equity method
investees.
In October 1997, the Company formed a subsidiary and contributed $2,000,000
in exchange for a 67% interest in the entity. In addition, a shareholder of
the Company contributed $1,000,000 in exchange for the remaining 33% interest.
This subsidiary in turn invested the $3,000,000 in a publicly traded
environmental company in exchange for notes secured by a first mortgage lien
on property owned by the publicly traded company. The notes receivable are
included in "Prepaid expenses and other assets" on the Company's consolidated
balance sheet.
16
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(13) Derivative Financial Instruments
The Company has derivative financial instruments which are used to manage
interest rate risks.
In June 1997, the Company entered into three-year interest rate protection
agreements on notional amounts totaling $180,000,000 which limit the LIBOR
interest rates at ranges from 5.55% and 5.61% to a cap rate of 8%.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate protection agreements but has no off-
balance sheet credit risk of accounting loss. The Company anticipates,
however, that counterparties will be able to fully satisfy their obligations
under the contracts. The Company does not obtain collateral or other security
to support financial instruments subject to credit risk but monitors the
credit standing of counterparties.
(14) Disclosures About Fair Value of Financial Instruments
The fair value of the Company's long-term debt is estimated based on the
discounted amount of future cash flows using an estimate of the Company's
current incremental borrowing rate. The carrying values approximate the fair
values at December 31, 1998 and 1997.
The fair values of the Company's interest rate protection agreements are
based on current interest rate conditions as well as an estimate of market
volatility. At December 31, 1998 and 1997, the fair value of the interest rate
protection agreements were ($3,228,000) and ($999,068), respectively.
17
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(15) Segment Information
The following represents the Company's significant business segments: Cable
and Broadcast Television. The components of net income (loss) below operating
income (loss) are not separately evaluated by the Company's management on a
segment basis (see the Company's consolidated statement of income).
<TABLE>
<CAPTION>
Broadcast Corporate &
Cable Television Other (1) Total
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
1998
Revenues................... $112,635,214 $8,446,040 $ 103,774 $121,185,028
Operating income before
depreciation and
amortization (2).......... 52,980,376 1,423,430 (10,790,537) 43,613,269
Depreciation and
amortization.............. 18,460,547 914,692 1,317,151 20,692,390
Total asssets.............. 142,807,766 17,138,736 191,022,748 350,969,250
Capital expenditures....... 32,830,873 436,375 377,950 33,645,198
1997
Revenues................... $103,325,810 $8,801,339 $ -- $ 112,127,14
Operating income before
depreciation and
amortization (2).......... 49,280,085 2,155,761 (8,334,494) 43,101,352
Depreciation and
amortization.............. 16,963,182 1,397,738 1,491,154 19,852,074
Total assets............... 133,387,559 17,529,276 92,916,775 243,833,610
Capital expenditures....... 25,800,318 690,390 163,668 26,654,376
1996
Revenues................... $100,008,344 $9,787,060 $ 7,644,229 $117,439,633
Operating income before
depreciation and
amortization (2).......... 46,865,502 2,416,399 (6,938,967) 42,342,934
Depreciation and
amortization.............. 17,824,718 1,514,561 2,872,786 22,212,065
Total assets............... 128,001,768 21,139,616 34,493,850 183,635,234
Capital expenditures....... 10,871,641 423,966 205,480 11,501,087
</TABLE>
- --------
(1) Other includes segments not meeting certain quantative guidelines for
reporting. Other includes the Company's DBS and advertising operations
(through December 31, 1996) and elimination entries related to the
segments presented. Corporate and other assets consist primarily of the
Company's investments.
(2) Operating income before depreciation and amortization in commonly
referred to in the Company's businesses as "operating cash flow".
Operating cash flow is a measure of a company's ability to generate cash
to service its obligations, including debt service obligations, and to
finance capital and other expenditures. In part due to the capital
intensive nature of the Company's businesses and the resulting
significant level of noncash depreciation and amortization expense,
operating cash flow is frequently used as one of the bases for comparing
businesses in the Company's industry, although the Company's measure of
operating cash flow may not be comparable to similarity titled measures
of other companies. Operating cash flow does not purport to represent net
income or net cash provided by operating activities, as those terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to such measurements as an indicator of the
Company's performance.
18
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(16) Subsequent Events
Cable Television Operations
In February 1999, the Company purchased the assets of a cable television
system that serves communities in Michigan for approximately $4.4 million.
In April 1999, the Company entered into an agreement with Adelphia
Communications Corporation to sell all of its cable operations for
approximately $1.17 billion, subject to certain customary conditions,
including regulatory and other approvals. The transaction is expected to close
in March 2000.
******
19
<PAGE>
Exhibit 99.04
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
ASSETS ------------- -------------
<S> <C> <C>
Investment in communication systems:
Property, plant and equipment.................. $ 280,275,138 $ 263,403,285
Less accumulated depreciation.................. (137,050,469) (130,181,567)
------------- -------------
Net property, plant and equipment.......... 143,224,669 133,221,718
Intangible assets, net of accumulated
amortization of $47,529,001 and $42,835,456 at
June 30, 1999 and December 31, 1998........... 80,196,971 81,139,660
------------- -------------
Total investments.......................... 223,421,640 214,361,378
Cash and cash equivalents........................ 10,779,151 3,645,097
Accounts receivable, net of allowance for
doubtful accounts of $333,190 and $302,713 at
June 30, 1999 and December 31, 1998............. 7,011,697 5,645,661
Short-term investments and marketable
securities...................................... 100,852,216 96,775,048
Investment in and advances to affiliate.......... 13,904,875 10,413,236
Notes receivable, stockholders and affiliates.... 18,992,040 6,775,528
Prepaid expenses and other assets................ 13,750,693 13,353,302
------------- -------------
TOTAL...................................... $ 388,712,312 $ 350,969,250
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt........................................... $ 305,468,701 $ 284,179,226
Accounts payable and accrued expenses.......... 19,228,325 23,857,491
Deferred taxes................................. 9,626,200 9,626,200
------------- -------------
Total liabilities.......................... 334,323,236 317,662,917
------------- -------------
Commitments and contingencies
Minority interest in consolidated subsidiary..... 1,000,000 1,000,000
Stockholders' equity:
Common stock--$10 par value; authorized 100,000
shares; issued and outstanding 48,168 shares
at June 30, 1999 and December 31, 1998........ 481,685 481,685
Retained earnings.............................. 24,584,386 23,316,448
Accumulated other comprehensive income......... 28,323,015 8,508,200
------------- -------------
Total stockholders' equity................. 53,389,086 32,306,333
------------- -------------
TOTAL...................................... $ 388,712,312 $ 350,969,250
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES.................. $36,645,145 $29,771,813 $ 71,409,326 $57,408,508
COSTS AND EXPENSES:
Operating expenses...... 13,480,045 11,493,233 27,166,884 22,342,857
General and
administrative
expenses............... 8,018,471 7,114,962 16,990,523 13,684,645
Depreciation and
amortization........... 5,021,874 4,035,215 12,815,156 8,025,635
----------- ----------- ------------ -----------
Total costs and
expenses........... 26,520,390 22,643,410 56,972,563 44,053,137
----------- ----------- ------------ -----------
OPERATING INCOME.......... 10,124,755 7,128,403 14,436,763 13,355,371
----------- ----------- ------------ -----------
OTHER (EXPENSE) INCOME:
Interest expense........ (4,702,697) (4,102,037) (10,122,620) (7,905,533)
Interest income......... 1,545,591 1,321,014 2,792,070 2,477,411
Gains on businesses and
assets sold............ 334,125 321,167 668,250 668,250
Life insurance
proceeds............... -- -- -- 4,423,445
Equity in net loss of
affiliate.............. (183,840) -- (446,597) --
Other................... (246,983) 1,800,605 (138,232) 1,630,605
----------- ----------- ------------ -----------
Total other
(expense) income... (3,253,804) (659,251) (7,247,129) 1,294,178
----------- ----------- ------------ -----------
INCOME BEFORE INCOME
TAX PROVISION............ 6,870,951 6,469,152 7,189,634 14,649,549
INCOME TAX PROVISION
(BENEFIT) ............... 211,671 203,470 221,694 (7,573,439)
----------- ----------- ------------ -----------
NET INCOME................ 6,659,280 6,265,682 6,967,940 22,222,988
OTHER COMPREHENSIVE
INCOME, NET OF TAX--
Unrealized gain
on marketable securities,
net of tax benefit of $0
during the three months
ended June 30, 1999 and
1998 and $0 and
$1,545,896 during the six
months ended June 30,
1999 and 1998,
respectively............. 4,509,221 (4,222,970) 19,814,815 1,713,424
----------- ----------- ------------ -----------
COMPREHENSIVE INCOME...... $11,168,501 $ 2,042,712 $ 26,782,755 $23,936,412
=========== =========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................... $ 6,967,940 $ 22,222,988
Adjustments to reconcile net income to net cash
provided by operating activities--depreciation
and amortization................................ 12,815,156 8,025,635
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable.......................... (1,366,036) (157,940)
Prepaid expenses and other assets............ (397,391) (28,046,217)
Investment in and notes receivable from
affiliates.................................. (15,708,151) (854,823)
Short-term investments and marketable
securities.................................. 15,737,647 629,926
Accounts payable, accrued expenses and
deferred taxes.............................. (4,629,166) (8,126,668)
------------ ------------
Net cash provided by operating activities...... 13,419,999 (6,307,099)
------------ ------------
INVESTING ACTIVITIES:
Purchases of cable systems....................... (3,750,856) (2,055,916)
Purchases of property, plant and equipment....... (18,124,564) (11,636,482)
------------ ------------
Net cash used in investing activities.......... (21,875,420) (13,692,398)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from issuance or repayment of debt.. 21,289,475 21,137,874
Distribution to shareholders..................... (5,700,000) --
------------ ------------
Net cash provided by (used in) financing
activities.................................... 15,589,475 21,137,874
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 7,134,054 1,138,377
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 3,645,097 6,114,388
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 10,779,151 $ 7,252,765
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six-Month Periods Ended June 30, 1999 and 1998 (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Harron Communications Corp. and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and
cash flows required by generally accepted accounting principles. The December
31, 1998 condensed consolidated balance sheet was derived from the Company's
audited consolidated financial statements. The information furnished reflects
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the financial position,
results of operations and cash flows. The condensed consolidated financial
statements should be read in conjunction with the audited historical
consolidated financial statements of the Company and notes thereto for the
year ended December 31, 1998.
2. Pending Sale of Cable Operations
In April 1999, the Company entered into an agreement with Adelphia
Communications Corporation to sell all of its cable operations for
approximately $1.2 billion, subject to certain purchase price adjustments and
certain customary conditions, including regulatory and other approvals. This
sale is expected to close on September 30, 1999.
3. Acquisitions
In February 1999, the Company purchased the assets of a cable television
system that serves communities in Michigan for approximately $4.4 million. The
Company accounted for this acquisition under the purchase method of
accounting. As such, the Company allocated the purchase price of the system
based on the fair value of the assets acquired and liabilities assumed as
determined by an independent appraisal. The excess consideration over the fair
value of the net tangible assets has been allocated to franchise costs, which
are being amortized over 10 years. The pro forma effects of this transaction
on the Company's operations were not significant.
4. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Term loans............................................ $ 75,000,000 $ 75,000,000
Revolving credit loan................................. 227,500,000 205,500,000
Other secured debt.................................... 2,968,700 3,679,226
------------ ------------
$305,468,700 $284,179,226
============ ============
</TABLE>
5. Income Taxes
In March 1998, the shareholders of the Company made an election under the
Internal Revenue Code to treat the Company as a qualified sub-chapter S
Corporation effective January 1, 1998. Accordingly, the Company recorded a
reversal of a portion of the deferred tax liabilities at December 31, 1997
during the first quarter of 1998. However, the Company was subject to a
corporate level tax for certain built-in gains present at the date of
conversion which may be realized within a ten-year period following its
election to be treated as a sub-chapter S Corporation. A total of $7,989,000
related to the deferred tax liability at December 31, 1997 was reversed into
income in the consolidated statement of income and comprehensive income for
the six-month period ended June 30, 1998.
4
<PAGE>
HARRON COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Six-Month Periods Ended June 30, 1999 and 1998 (Unaudited)
6. Related Parties
A stockholder of the Company died in January 1998 and the Company received
approximately $4,423,000 representing life insurance proceeds during the six-
month period ended March 31, 1998.
7. Distributions To Shareholders
The Company distributed $5.7 million to its shareholders in the second
quarter of 1999. Such distribution was made on a pro-rata basis to each
shareholder in proportion to their ownership interests. The distribution was
made in order for the shareholders to pay their individual tax liabilities now
that the Company operates as a S corporation.
8. Segment Information
The following represents the Company's significant business segments: Cable
and Broadcast Television. The components of net income below operating income
are not separately evaluated by the Company's management on a segment basis
(see the Company's unaudited condensed consolidated statements of income and
comprehensive income).
<TABLE>
<CAPTION>
Broadcast Corporate and
Cable Television Other (1) Total
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Six Months Ended June 30,
1999:
Revenues................... $66,925,699 $4,259,932 $ 223,695 $71,409,326
Operating income (loss)
before depreciation
and amortization (2)...... 31,985,794 (117,910) (4,615,965) 27,251,919
Depreciation and
amortization.............. 11,834,584 320,174 660,398 12,815,156
1998:
Revenues................... 53,144,625 4,263,883 57,408,508
Operating income (loss)
before depreciation
and amortization (2)...... 25,249,773 749,567 (4,618,334) 21,381,006
Depreciation and
amortization.............. 6,867,977 508,247 649,411 8,025,635
Three Months Ended June 30,
1999:
Revenues................... 34,217,008 2,306,714 121,423 36,645,145
Operating income (loss)
before depreciation
and amortization (2)...... 16,577,987 597,373 (2,028,731) 15,146,629
Depreciation and
amortization.............. 4,576,464 140,640 304,950 5,021,874
1998:
Revenues................... 27,369,247 2,402,566 -- 29,771,813
Operating income (loss)
before depreciation
and amortization (2)...... 13,088,188 574,116 (2,498,686) 11,163,618
Depreciation and
amortization.............. 3,452,747 255,724 326,744 4,035,215
</TABLE>
- --------
(1) Other includes segments not meeting certain quantitative guidelines for
reporting as well as elimination entries related to the segments
presented.
(2) Operating income before depreciation and amortization is commonly referred
to in the Company's businesses as "operating cash flow". Operating cash
flow is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital
and other expenditures. In part due to the capital intensive nature of the
Company's businesses and the resulting significant level of noncash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing businesses in the Company's
industry, although the Company's measure of operating cash flow may not be
comparable to similarly titled measures of other companies. Operating cash
flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to
such measurements as an indicator of the Company's performance.
5
<PAGE>
Exhibit 99.05
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma financial information presented on the following
pages is derived from the historical financial statements of Adelphia
Communications Corporation and subsidiaries ("Adelphia"), FrontierVision
Partners, L.P. and subsidiaries ("FrontierVision"), Century Communications
Corp. and subsidiaries ("Century"), Harron Communications Corp. and
subsidiaries ("Harron") and Olympus Communications, L.P. and subsidiaries
("Olympus"). The unaudited pro forma condensed consolidated balance sheet
information as of June 30, 1999 gives pro forma effect to: (i) the pending
acquisitions by Adelphia of FrontierVision, Century, Harron and the interests
in Olympus held by subsidiaries of FPL Group ("Telesat"), and (ii) the
intended sale by Adelphia of Class B common stock to Highland Holdings (an
entity controlled by members of the family of John J. Rigas, principal
shareholders of Adelphia) to be completed by January 23, 2000, as if all such
transactions had been consummated on June 30, 1999. The unaudited pro forma
condensed consolidated statements of continuing operations information for the
nine months ended December 31, 1998 and the six months ended June 30, 1999
have been presented as if: (i) the financing and securities offerings of
Adelphia and its majority owned subsidiary, Hyperion Telecommunications, Inc.
("Hyperion") completed after April 1, 1998, (ii) the pending acquisitions by
Adelphia of FrontierVision, Century, Harron and Telesat's interests in
Olympus, and (iii) the intended sale by Adelphia of Class B common stock to
Highland Holdings to be completed by January 23, 2000, had all been
consummated on April 1, 1998.
The unaudited pro forma financial information gives effect to the pending
acquisitions by Adelphia of FrontierVision, Century, Harron and Telesat's
interests in Olympus under the purchase method of accounting and is based upon
the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed consolidated financial information presented on
the following pages. The allocations of the purchase prices for the pending
acquisitions of FrontierVision, Century, Harron and Telesat's interests in
Olympus are based on preliminary estimates and are subject to final allocation
adjustments.
The pro forma adjustments do not reflect any operating efficiencies or cost
savings that may be achievable with respect to the combined companies. The pro
forma adjustments do not include any adjustments to historical revenues for
any future price changes or any adjustments to selling and marketing expenses
for any future operating changes.
The unaudited pro forma financial information is not necessarily indicative
of the financial position or operating results that would have occurred had
the pending acquisitions and the securities offerings been consummated on the
dates for which such transactions are being given effect. The pro forma
adjustments reflecting the consummation of the pending acquisitions and the
securities offerings are based upon the assumptions set forth in the notes to
the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial information
presented on the following pages should be read in conjunction with the
audited and unaudited historical financial statements (including the notes
thereto) of Adelphia and Olympus, which are contained in their respective
reports on Form 10-K and quarterly reports on Form 10-Q not included in this
current report on Form 8-K, and of FrontierVision, Century and Harron, which
are included elsewhere in this current report on Form 8-K.
1
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Adelphia Olympus FrontierVision
Pro Forma Pro Forma Pro Forma
Adelphia Olympus FrontierVision Century* Harron Adjustments Adjustments Adjustments
(a) (a) (a) (a) (a) (b) (c) (d)
----------- ---------- -------------- ---------- -------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Property, plant
and equipment--
net.............. $ 1,581,065 $ 379,346 $ 363,434 $ 585,693 $143,225 $ -- $ 17,713 $ --
Intangible
assets--net...... 1,167,479 568,044 801,959 455,149 80,197 -- 76,867 941,293
Cash and cash
equivalents...... 802,701 5,197 10,300 626,155 10,779 375,000 (108,000) (550,000)
Investment in and
amounts
due from Olympus.. 703,754 -- -- -- -- -- (703,754) --
Other assets--
net.............. 586,463 29,534 40,843 133,302 154,511 -- 12,410 23,300
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Total assets.... $ 4,841,462 $ 982,121 $1,216,536 $1,800,299 $388,712 $375,000 $(704,764) $ 414,593
=========== ========== ========== ========== ======== ======== ========= =========
Liabilities,
Redeemable
Preferred Stock
and
Stockholders'/
Partners' Equity
(Deficiency):
Subsidiary debt.. $ 1,388,412 $ 207,503 $1,401,955 $2,042,690 $305,469 $ -- $ -- $(247,129)
Parent debt...... 2,406,127 -- -- -- -- -- -- --
Deferred income
taxes............ 105,530 41,131 10,469 5,290 9,626 -- -- --
Other
liabilities...... 262,085 909,856 59,148 142,723 19,228 -- (859,081) --
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Total
liabilities..... 4,162,154 1,158,490 1,471,572 2,190,703 334,323 -- (859,081) (247,129)
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Minority
interests........ 19,146 -- -- 74,915 1,000 -- -- --
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Hyperion
Redeemable
Exchangeable
Preferred Stock.. 244,153 -- -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Series A
Cumulative
Redeemable
Exchangeable
Preferred Stock.. 148,277 -- -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Stockholders'/Partners'
equity
(deficiency):
Convertible
preferred stock.. 30 -- -- -- -- -- -- --
Common stock..... 622 -- -- 1,095 482 52 -- 70
Additional paid-
in capital....... 2,317,383 -- -- 191,234 28,323 316,849 (22,052) 406,616
Retained earnings
(accumulated
deficit)......... (1,842,991) -- -- (513,830) 24,584 -- -- --
Class A common
stock held in
escrow........... (58,099) -- -- -- -- 58,099 -- --
Treasury stock,
at cost and
other............ (149,213) -- -- (143,818) -- -- -- --
Partners'
deficiency....... -- (176,369) (255,036) -- -- -- 176,369 255,036
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Stockholders'/Partners'
equity
(deficiency).... 267,732 (176,369) (255,036) (465,319) 53,389 375,000 154,317 661,722
----------- ---------- ---------- ---------- -------- -------- --------- ---------
Total........... $ 4,841,462 $ 982,121 $1,216,536 $1,800,299 $388,712 $375,000 $(704,764) $ 414,593
=========== ========== ========== ========== ======== ======== ========= =========
<CAPTION>
Century Harron
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Adelphia
(e) (f) Consolidated
------------ ------------ -------------
<S> <C> <C> <C>
Assets:
Property, plant
and equipment--
net.............. $ 806,271 $ 184,110 $ 4,060,857
Intangible
assets--net...... 4,325,086 1,104,197 9,520,271
Cash and cash
equivalents...... (825,659) (81,129) 265,344
Investment in and
amounts
due from Olympus.. -- -- --
Other assets--
net.............. -- (145,921) 834,442
------------ ------------ -------------
Total assets.... $4,305,698 $1,061,257 $14,680,914
============ ============ =============
Liabilities,
Redeemable
Preferred Stock
and
Stockholders'/
Partners' Equity
(Deficiency):
Subsidiary debt.. $ -- $ 784,531 $ 5,883,431
Parent debt...... -- -- 2,406,127
Deferred income
taxes............ 1,100,000 336,176 1,608,222
Other
liabilities...... -- (5,061) 528,898
------------ ------------ -------------
Total
liabilities..... 1,100,000 1,115,646 10,426,678
------------ ------------ -------------
Minority
interests........ -- (1,000) 94,061
------------ ------------ -------------
Hyperion
Redeemable
Exchangeable
Preferred Stock.. -- -- 244,153
------------ ------------ -------------
Series A
Cumulative
Redeemable
Exchangeable
Preferred Stock.. -- -- 148,277
------------ ------------ -------------
Stockholders'/Partners'
equity
(deficiency):
Convertible
preferred stock.. -- -- 30
Common stock..... (608) (482) 1,231
Additional paid-
in capital....... 2,548,658 (28,323) 5,758,688
Retained earnings
(accumulated
deficit)......... 513,830 (24,584) (1,842,991)
Class A common
stock held in
escrow........... -- -- --
Treasury stock,
at cost and
other............ 143,818 -- (149,213)
Partners'
deficiency....... -- -- --
------------ ------------ -------------
Stockholders'/Partners'
equity
(deficiency).... 3,205,698 (53,389) 3,767,745
------------ ------------ -------------
Total........... $4,305,698 $1,061,257 $14,680,914
============ ============ =============
</TABLE>
- -----
*As of May 31, 1999.
2
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(Dollars in thousands, except per share amounts)
(a) Represents historical amounts.
(b) Represents the net effects of: (i) receipt of net proceeds from the
intended offering of $375,000 of Adelphia Class B common stock to Highland
Holdings (which is the maximum commitment) at an assumed price of $60.76
per share and (ii) the release of 1,000,000 shares of Class A common stock
held in escrow, as a deposit for the FrontierVision acquisition.
(c) Represents the net effects of Adelphia's purchase of Telesat's interests
in Olympus for $108,000 and the associated preliminary adjustments to the
historical balance sheet of Olympus recorded in conjunction with applying
purchase accounting including an initial allocation of $21,197 and $84,788
to Property, plant and equipment--net and Intangible assets--net,
respectively. The purchase by Adelphia of Telesat's interests in Olympus
will result in the consolidation of Olympus with Adelphia; accordingly,
this also includes elimination of all significant intercompany accounts
and transactions.
(d) Represents the net effects of: (i) issuance of 7,000,000 shares of
Adelphia Class A common stock at $58.10 per share (the average of the
closing prices of Adelphia Class A common stock for the three trading days
before and three trading days after the date of the acquisition
agreement), (ii) $550,000 cash portion of the acquisition,
(iii) preliminary adjustments recorded in conjunction with applying
purchase accounting including an initial allocation of $941,293 to
Intangible assets--net, (iv) the elimination of $247,129 of affiliate debt
not assumed in the acquisition and (v) certain other working capital
adjustments.
(e) Represents the net effects of: (i) issuance of approximately 48,700,000
shares of Adelphia Class A common stock at $56.30 per share (the average
of the closing prices of Adelphia Class A common stock for the three
trading days before and three trading days after the date of the merger
agreement), (ii) approximately $826,000 cash portion of the acquisition,
(iii) preliminary estimate of deferred tax liability impact due to
acquisition and (iv) preliminary adjustments recorded in conjunction with
applying purchase accounting including an initial allocation of $806,271
and $4,325,086 to Property, plant and equipment--net and Intangible
assets--net, respectively.
(f) Represents the net effects of: (i) approximately $1,170,000 acquisition
price funded with cash and through additional borrowings under Adelphia's
subsidiaries' credit facilities, net of repayment of existing Harron
subsidiary debt, (ii) non-cable television assets excluded from the
acquisition, (iii) preliminary adjustments recorded in conjunction with
applying purchase accounting including an initial allocation of $192,101
and $1,104,579 of the purchase price to Property, plant and equipment--net
and Intangible assets--net, respectively and (iv) preliminary estimate of
deferred tax liability impact due to acquisition.
3
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS
Nine Months Ended December 31, 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adelphia Olympus
Adelphia Olympus FrontierVision Century* Harron Pro Forma Pro Forma
(a) (a) (a) (a) (a) Adjustments Adjustments
--------- -------- -------------- --------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $ 507,155 $164,724 $191,315 $ 387,726 $93,548 $ -- $ --
--------- -------- -------- --------- ------- -------- --------
Operating
expenses:
Direct
operating and
programming.... 167,963 56,586 95,907 85,284 36,728 -- --
Selling,
general and
administrative.. 107,249 39,153 5,216 87,696 23,424 10,456(b) (10,456)(h)
Depreciation
and
amortization... 140,823 39,683 90,608 125,864 16,702 -- 3,180(i)
--------- -------- -------- --------- ------- -------- --------
Total.......... 416,035 135,422 191,731 298,844 76,854 10,456 (7,276)
--------- -------- -------- --------- ------- -------- --------
Operating income
(loss).......... 91,120 29,302 (416) 88,882 16,694 (10,456) 7,276
--------- -------- -------- --------- ------- -------- --------
Other income
(expense)
Priority
investment
income from
Olympus........ 36,000 -- -- -- -- (36,000)(c) --
Interest
expense--net... (191,593) (48,129) (88,667) (143,830) (9,079) (28,560)(d) 7,932(j)
Equity in
(loss) income
of Olympus
and other joint
ventures....... (48,891) -- -- -- -- 49,005(e) --
Equity in loss
of Hyperion
joint
ventures....... (9,580) -- -- -- -- -- --
Minority
interest in
losses (income)
of
subsidiaries... 25,772 -- -- (9,334) -- -- --
Hyperion
preferred stock
dividends...... (21,536) -- -- -- -- -- --
Gain on sale of
assets......... -- 7,215 -- 5,186 -- -- --
Other.......... 1,113 316 (398) -- 5,354 -- --
--------- -------- -------- --------- ------- -------- --------
Total.......... (208,715) (40,598) (89,065) (147,978) (3,725) (15,555) 7,932
--------- -------- -------- --------- ------- -------- --------
(Loss) income
before income
taxes
and extraordinary loss.. (117,595) (11,296) (89,481) (59,096) 12,969 (26,011) 15,208
Income tax
benefit
(expense)....... 6,802 (115) 2,927 19,104 7,345 74,034(f) --
--------- -------- -------- --------- ------- -------- --------
(Loss) income
from continuing
operations...... (110,793) (11,411) (86,554) (39,992) 20,314 48,023 15,208
Dividend
requirements
applicable
to preferred stock.. (20,718) -- -- -- -- (23,719)(g) --
--------- -------- -------- --------- ------- -------- --------
(Loss) income
applicable to
common
stockholders/partners
from continuing
operations...... $(131,511) $(11,411) $(86,554) $ (39,992) $20,314 $ 24,304 $ 15,208
========= ======== ======== ========= ======= ======== ========
Basic and
diluted loss
from continuing
operations per
weighted average
share of common stock
................ $ (3.63)
=========
Weighted average
shares of common
stock outstanding (in thousands).. 36,226
=========
<CAPTION>
FrontierVision Century Harron Pro Forma
Pro Forma Pro Forma Pro Forma Adelphia
Adjustments Adjustments Adjustments Consolidated
--------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues........ $ -- $ 98,208(n) $ (6,688)(p) $1,435,988
--------------- ------------- -------------- ---------------
Operating
expenses:
Direct
operating and
programming.... (35,242)(k) 111,445(n) (3,211)(p) 515,460
Selling,
general and
administrative.. 35,242(k) -- (2,950)(p) 295,030
Depreciation
and
amortization... (30,664)(l) 68,162(o) 34,357(q) 488,715
--------------- ------------- -------------- ---------------
Total.......... (30,664) 179,607 28,196 1,299,205
--------------- ------------- -------------- ---------------
Operating income
(loss).......... 30,664 (81,399) (34,884) 136,783
--------------- ------------- -------------- ---------------
Other income
(expense)
Priority
investment
income from
Olympus........ -- -- -- --
Interest
expense--net... 19,570(m) 13,237(n) (50,762)(p) (519,881)
Equity in
(loss) income
of Olympus
and other joint
ventures....... -- -- -- 114
Equity in loss
of Hyperion
joint
ventures....... -- -- -- (9,580)
Minority
interest in
losses (income)
of
subsidiaries... -- -- -- 16,438
Hyperion
preferred stock
dividends...... -- -- -- (21,536)
Gain on sale of
assets......... -- -- -- 12,401
Other.......... -- -- (7,018)(p) (633)
--------------- ------------- -------------- ---------------
Total.......... 19,570 13,237 (57,780) (522,677)
--------------- ------------- -------------- ---------------
(Loss) income
before income
taxes
and extraordinary loss.. 50,234 (68,162) (92,664) (385,894)
Income tax
benefit
(expense)....... -- -- (8,390)(p) 101,707
--------------- ------------- -------------- ---------------
(Loss) income
from continuing
operations...... 50,234 (68,162) (101,054) (284,187)
Dividend
requirements
applicable
to preferred stock.. -- -- -- (44,437)
--------------- ------------- -------------- ---------------
(Loss) income
applicable to
common
stockholders/partners
from continuing
operations...... $ 50,234 $(68,162) $(101,054) $ (328,624)
=============== ============= ============== ===============
Basic and
diluted loss
from continuing
operations per
weighted average
share of common stock
................ $ (2.79)(r)
===============
Weighted average
shares of common
stock outstanding (in thousands).. 117,615(r)
===============
</TABLE>
- -----
*Nine months ended February 28, 1999.
4
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS
Nine Months Ended December 31, 1998
(Dollars in thousands)
(a) Represents historical amounts.
(b) Represents the elimination of allocated overhead costs to Olympus.
(c) Represents the elimination of priority investment income from Olympus.
(d) Gives effect to the application of the net proceeds of: (i) approximately
$295,000 from the March 2, 1999 12% Senior Subordinated Notes issued by
Hyperion, (ii) approximately $345,000 from the April 28, 1999 7 7/8%
Senior Notes issued by Adelphia, (iii) approximately $371,450 from the
January 14, 1999 offering of 8,600,000 shares of Adelphia Class A common
stock, (iv) approximately $393,700 from the January 13, 1999 7 1/2% and 7
3/4% Senior Notes issued by Adelphia, (v) $330,000 from the December 30,
1998 financing of the Western New York Partnership and (vi) approximately
$268,000 from the 1998 offering of 8,805,315 shares of Adelphia Class A
common stock, as if such transactions had occurred on April 1, 1998. Also
gives effect to the elimination of $7,932 of interest income received from
Olympus.
(e) Represents the elimination of equity in loss of Olympus.
(f) Represents the estimated effect on the estimated income tax provision of
the pending acquisitions of FrontierVision, Century, Harron and Telesat's
interests in Olympus, and related pro forma adjustments.
(g) Gives effect to the April 30, 1999 and May 14, 1999 sales of an aggregate
$575,000 of Adelphia 5 1/2% Series D convertible preferred stock as if
such sales had occurred on April 1, 1998.
(h) Represents the elimination of overhead costs allocated from Adelphia.
(i) Represents the additional depreciation and amortization expense resulting
from the acquisition of Telesat's interests in Olympus. Pro forma
depreciation and amortization is calculated on a straight-line basis
consistent with Adelphia's accounting policy and with Adelphia's
depreciation and amortization periods. The cost basis of the purchased
assets utilized in these calculations is based on preliminary asset
allocations among property, plant and equipment (primarily operating plant
and equipment depreciated over 5 to 12 years) and intangible assets
(primarily purchased franchises and goodwill amortized over 40 years) and
is subject to final allocation adjustments.
(j) Represents the elimination of interest expense paid to Adelphia.
(k) Represents reclassification between direct operating and programming and
selling, general and administrative expenses to conform with Adelphia's
presentation.
(l) Represents pro forma reduction of FrontierVision historical depreciation
and amortization expense to conform to Adelphia's depreciation and
amortization periods, net of additional depreciation and amortization
expense resulting from the acquisition of FrontierVision. Pro forma
depreciation and amortization is calculated on a straight-line basis
consistent with Adelphia's accounting policy and with Adelphia's
depreciation and amortization periods. The cost basis of the purchased
assets utilized in these calculations is based on a preliminary asset
allocation to intangible assets (primarily purchased franchises and
goodwill amortized over 40 years) and is subject to final allocation
adjustments.
(m) Represents the elimination of affiliate interest expense paid by
FrontierVision on affiliate debt not assumed in the acquisition.
5
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS--(Continued)
Nine Months Ended December 31, 1998
(Dollars in thousands)
(n) Represents reclassification of programming expense from a reduction of
revenues to direct operating and programming expense and reclassification
of interest income from revenues to a decrease in interest expense--net to
conform to Adelphia's presentation.
(o) Represents the additional depreciation and amortization expense resulting
from the acquisition of Century. Pro forma depreciation and amortization
is calculated on a straight-line basis consistent with Adelphia's
accounting policy and with Adelphia's depreciation and amortization
periods. The cost basis of the purchased assets utilized in these
calculations is based on preliminary asset allocations among property,
plant and equipment (primarily operating plant and equipment depreciated
over 5 to 12 years) and intangible assets (primarily purchased franchises
and goodwill amortized over 40 years) and is subject to final allocation
adjustments.
(p) Represents amounts resulting from the non-cable television operations
excluded from the acquisition and the incremental interest expense
incurred from additional borrowings under Adelphia's subsidiaries' credit
facilities to fund the acquisition.
(q) Represents the net effect of depreciation and amortization expense of non-
cable television assets excluded from the acquisition of Harron and the
additional depreciation and amortization expense resulting from the
acquisition of Harron. Pro forma depreciation and amortization is
calculated on a straight-line basis consistent with Adelphia's accounting
policy and with Adelphia's depreciation and amortization periods. The cost
basis of the purchased assets utilized in these calculations is based on
preliminary asset allocations among property, plant and equipment
(primarily operating plant and equipment depreciated over 5 to 12 years)
and intangible assets (primarily purchased franchises and goodwill
amortized over 40 years) and is subject to final allocation adjustments.
(r) Gives effect to the repurchase and issuance of Adelphia Class A common
stock in connection with: (i) repurchase of approximately 1,091,524 shares
from Telesat, (ii) 8,600,000 shares issued January 14, 1999, (iii)
8,805,315 shares issued in the 1998 offering, (iv) 7,000,000 shares to be
issued in the FrontierVision acquisition, (v) approximately 48,700,000
shares to be issued in the Century acquisition, (vi) 8,000,000 shares
issued April 28, 1999, and (vii) intended sale of 6,171,824 shares of
Adelphia Class B common stock to Highland Holdings to be completed by
January 23, 2000, as if such transactions had been consummated on April 1,
1998. Diluted loss from continuing operations per common share is equal to
basic loss from continuing operations per common share because Adelphia's
convertible preferred stock had or would have an antidilutive effect;
however, the convertible preferred stock could have a dilutive effect on
earnings per share in future periods.
6
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS
Six Months Ended June 30, 1999
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adelphia Olympus FrontierVision
Adelphia Olympus FrontierVision Century* Harron Pro Forma Pro Forma Pro Forma
(a) (a) (a) (a) (a) Adjustments Adjustments Adjustments
--------- -------- -------------- --------- ------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $ 432,494 $128,217 $146,713 $ 263,136 $71,409 $ -- $ -- $ --
--------- -------- -------- --------- ------- -------- ------- --------
Operating
expenses:
Direct operating
and
programming..... 139,930 44,864 79,893 56,139 27,167 -- -- (34,192)(k)
Selling, general
and
administrative.. 110,727 32,453 3,369 65,109 16,990 9,275(b) (9,275)(h) 34,192(k)
Depreciation and
amortization.... 120,551 36,400 62,103 75,579 12,815 -- 2,120(i) (22,141)(l)
--------- -------- -------- --------- ------- -------- ------- --------
Total........... 371,208 113,717 145,365 196,827 56,972 9,275 (7,155) (22,141)
--------- -------- -------- --------- ------- -------- ------- --------
Operating
income........... 61,286 14,500 1,348 66,309 14,437 (9,275) 7,155 22,141
--------- -------- -------- --------- ------- -------- ------- --------
Other income
(expense)
Priority
investment
income from
Olympus......... 24,000 -- -- -- -- (24,000)(c) -- --
Interest
expense--net.... (131,783) (38,131) (65,772) (95,789) (7,330) (25,689)(d) 18,535(j) 13,127(m)
Equity in loss
of Olympus and
other joint ventures.. (37,935) -- -- -- -- 35,999(e) -- --
Equity in loss
of Hyperion
joint ventures.. (7,094) -- -- -- -- -- -- --
Minority
interest in
losses (income)
of
subsidiaries.... 26,060 -- -- (5,133) -- -- -- --
Hyperion
preferred stock
dividends....... (15,479) -- -- -- -- -- -- --
Gain (loss) on
sale of assets.. 2,354 -- -- 421 -- -- -- --
Other........... -- (120) 8,899 79 83 -- -- --
--------- -------- -------- --------- ------- -------- ------- --------
Total........... (139,877) (38,251) (56,873) (100,422) (7,247) (13,690) 18,535 13,127
--------- -------- -------- --------- ------- -------- ------- --------
(Loss) income
before income
taxes and
extraordinary loss.. (78,591) (23,751) (55,525) (34,113) 7,190 (22,965) 25,690 35,268
Income tax
benefit
(expense)........ 4,046 (180) 1,387 21,970 (222) 33,675(f) -- --
--------- -------- -------- --------- ------- -------- ------- --------
(Loss) income
from continuing
operations....... (74,545) (23,931) (54,138) (12,143) 6,968 10,710 25,690 35,268
Dividend
requirements
applicable to
preferred stock.. (13,000) -- -- -- -- (15,813)(g) -- --
--------- -------- -------- --------- ------- -------- ------- --------
(Loss) income
applicable to
common
stockholders/partners
from continuing
operations....... $ (87,545) $(23,931) $(54,138) $ (12,143) $ 6,968 $ (5,103) $25,690 $ 35,268
========= ======== ======== ========= ======= ======== ======= ========
Basic and diluted
loss from
continuing
operations per
weighted average
share
of common stock
................. $ (1.61)
=========
Weighted average
shares of common
stock outstanding
(in thousands)... 54,381
=========
<CAPTION>
Century Harron Pro Forma
Pro Forma Pro Forma Adelphia
Adjustments Adjustments Consolidated
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues......... $ 66,848(n) $ (4,484)(p) $1,104,333
-------------- -------------- --------------
Operating
expenses:
Direct operating
and
programming..... 80,101(n) (1,960)(p) 391,942
Selling, general
and
administrative.. -- (3,425)(p) 259,415
Depreciation and
amortization.... 53,773(o) 23,026(q) 364,226
-------------- -------------- --------------
Total........... 133,874 17,641 1,015,583
-------------- -------------- --------------
Operating
income........... (67,026) (22,125) 88,750
-------------- -------------- --------------
Other income
(expense)
Priority
investment
income from
Olympus......... -- -- --
Interest
expense--net.... 13,253(n) (32,564)(p) (352,143)
Equity in loss
of Olympus and
other joint ventures.. -- -- (1,936)
Equity in loss
of Hyperion
joint ventures.. -- -- (7,094)
Minority
interest in
losses (income)
of
subsidiaries.... -- -- 20,927
Hyperion
preferred stock
dividends....... -- -- (15,479)
Gain (loss) on
sale of assets.. -- -- 2,775
Other........... -- (702)(p) 8,239
-------------- -------------- --------------
Total........... 13,253 (33,266) (344,711)
-------------- -------------- --------------
(Loss) income
before income
taxes and
extraordinary loss.. (53,773) (55,391) (255,961)
Income tax
benefit
(expense)........ -- 22(p) 60,698
-------------- -------------- --------------
(Loss) income
from continuing
operations....... (53,773) (55,369) (195,263)
Dividend
requirements
applicable to
preferred stock.. -- -- (28,813)
-------------- -------------- --------------
(Loss) income
applicable to
common
stockholders/partners
from continuing
operations....... $(53,773) $(55,369) $ (224,076)
============== ============== ==============
Basic and diluted
loss from
continuing
operations per
weighted average
share
of common stock
................. $ (1.85)(r)
==============
Weighted average
shares of common
stock outstanding
(in thousands)... 121,384(r)
==============
</TABLE>
- -----
*Six Months Ended May 31, 1999.
7
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS
Six Months Ended June 30, 1999
(Dollars in thousands)
(a) Represents historical amounts.
(b) Represents the elimination of allocated overhead costs to Olympus.
(c) Represents the elimination of priority investment income from Olympus.
(d) Gives effect to the application of the net proceeds of: (i) approximately
$295,000 from the March 2, 1999 12% Senior Subordinated Notes issued by
Hyperion, (ii) approximately $345,000 from the April 28, 1999 7 7/8%
Senior Notes issued by Adelphia, (iii) approximately $371,450 from the
January 14, 1999 offering of 8,600,000 shares of Adelphia Class A common
stock and (iv) approximately $393,700 from the January 13, 1999 7 1/2% and
7 3/4% Senior Notes issued by Adelphia, as if such transactions had
occurred on April 1, 1998. Also gives effect to the elimination of $18,535
of interest income received from Olympus.
(e) Represents the elimination of equity in loss of Olympus.
(f) Represents the estimated effect on the estimated income tax provision of
the pending acquisitions of FrontierVision, Century, Harron and Telesat's
interests in Olympus, and related pro forma adjustments.
(g) Gives effect to the April 30, 1999 and May 14, 1999 sales of an aggregate
$575,000 of Adelphia 5 1/2% Series D convertible preferred stock as if
such sales had occurred on April 1, 1998.
(h) Represents the elimination of overhead costs allocated from Adelphia.
(i) Represents the additional depreciation and amortization expense resulting
from the acquisition of Telesat's interests in Olympus. Pro forma
depreciation and amortization is calculated on a straight-line basis
consistent with Adelphia's accounting policy and with Adelphia's
depreciation and amortization periods. The cost basis of the purchased
assets utilized in these calculations is based on preliminary asset
allocations among property, plant and equipment (primarily operating plant
and equipment depreciated over 5 to 12 years) and intangible assets
(primarily purchased franchises and goodwill amortized over 40 years) and
is subject to final allocation adjustments.
(j) Represents the elimination of interest expense paid to Adelphia.
(k) Represents reclassification between direct operating and programming and
selling, general and administrative expenses to conform with Adelphia's
presentation.
(l) Represents pro forma reduction of FrontierVision historical depreciation
and amortization expense to conform to Adelphia's depreciation and
amortization periods, net of additional depreciation and amortization
expense resulting from the acquisition of FrontierVision. Pro forma
depreciation and amortization is calculated on a straight-line basis
consistent with Adelphia's accounting policy and with Adelphia's
depreciation and amortization periods. The cost basis of the purchased
assets utilized in these calculations is based on a preliminary asset
allocation to intangible assets (primarily purchased franchises and
goodwill amortized over 40 years) and is subject to final allocation
adjustments.
(m) Represents the elimination of affiliate interest expense paid by
FrontierVision on affiliate debt not assumed in the acquisition.
(n) Represents reclassification of programming expense from a reduction of
revenues to direct operating and programming expense and reclassification
of interest income from revenues to a decrease in interest expense--net to
conform to Adelphia's presentation.
(o) Represents the additional depreciation and amortization expense resulting
from the acquisition of Century. Pro forma depreciation and amortization
is calculated on a straight-line basis consistent with Adelphia's
8
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS--(Continued)
Six Months Ended June 30, 1999
(Dollars in thousands)
accounting policy and with Adelphia's depreciation and amortization
periods. The cost basis of the purchased assets utilized in these
calculations is based on preliminary asset allocations among property,
plant and equipment (primarily operating plant and equipment depreciated
over 5 to 12 years) and intangible assets (primarily purchased franchises
and goodwill amortized over 40 years) and is subject to final allocation
adjustments.
(p) Represents amounts resulting from the non-cable television operations
excluded from the acquisition and the incremental interest expense
incurred from additional borrowings under Adelphia's subsidiaries' credit
facilities to fund the acquisition.
(q) Represents the net effect of depreciation and amortization expense of non-
cable television assets excluded from the acquisition of Harron and the
additional depreciation and amortization expense resulting from the
acquisition of Harron. Pro forma depreciation and amortization is
calculated on a straight-line basis consistent with Adelphia's accounting
policy and with Adelphia's depreciation and amortization periods. The cost
basis of the purchased assets utilized in these calculations is based on
preliminary asset allocations among property, plant and equipment
(primarily operating plant and equipment depreciated over 5 to 12 years)
and intangible assets (primarily purchased franchises and goodwill
amortized over 40 years) and is subject to final allocation adjustments.
(r) Gives effect to the repurchase and issuance of Adelphia Class A common
stock in connection with: (i) repurchase of approximately 1,091,524 shares
from Telesat, (ii) 8,600,000 shares issued January 14, 1999, (iii)
7,000,000 shares to be issued in the FrontierVision acquisition,
(iv) approximately 48,700,000 shares to be issued in the Century
acquisition, (v) 8,000,000 shares issued April 28, 1999, and (vi) the
intended sale of 6,171,824 shares of Adelphia Class B common stock to
Highland Holdings to be completed by January 23, 2000, as if such
transactions had been consummated on April 1, 1998. Diluted loss from
continuing operations per common share is equal to basic loss from
continuing operations per common share because Adelphia's convertible
preferred stock had or would have an antidilutive effect; however, the
convertible preferred stock could have a dilutive effect on earnings per
share in future periods.
9
