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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended March 31, 1995
Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transaction
period from to
.
Commission File Number: 0-16014
ADELPHIA COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2417713
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
5 West Third Street P.O. Box 472 Coudersport,
Pennsylvania 16915
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 814-274-9830
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and 2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of outstanding Class A Common Stock $.01
par value, held by non-affiliates of the Registrant at June 26,
1995 was $76,870,845 based on the closing sale price as
computed by the NASDAQ National Market System as of that date.
For purposes of this calculation only, affiliates are deemed to
be directors and executive officers of the Registrant.
Number of outstanding shares of Class A Common Stock, $.01 par
value, at June 26, 1995 was 15,364,009.
Number of outstanding shares of Class B Common Stock, $.01 par
value, at June 26, 1995 was 10,944,476.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1995 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS (Dollars in thousands)
Introduction
Adelphia Communications Corporation ("Adelphia" and, collectively with
its subsidiaries, the "Company") is the seventh largest cable television
operator in the United States. As of March 31, 1995, cable systems owned or
managed by the Company (the "Systems") in the aggregate passed 2,268,501
homes and served 1,579,437 basic subscribers who subscribed for 794,624
premium service units.
The Company's owned cable systems (the "Company Systems") are located
in ten states and are organized into seven regional clusters: Western New
York, Virginia, Western Pennsylvania, New England, Eastern Pennsylvania,
Ohio and Coastal New Jersey. The Company Systems are located primarily in
suburban areas of large and medium-sized cities within the 50 largest
television markets ("areas of dominant influence" or "ADIs," as measured by
The Arbitron Company). At March 31, 1995, the Company Systems passed
1,340,808 homes and served 975,066 basic subscribers.
The Company owns a 50% voting interest and non-voting preferred
limited partnership interests entitling the Company to a 16.5% priority
return in Olympus Communications, L.P. ("Olympus"). Olympus is a joint
venture which owns cable systems (the "Olympus Systems") primarily located
in some of the fastest growing areas of Florida. The Olympus Systems in
Florida form a substantial part of an eighth regional cluster, Southeastern
Florida. The Company is the managing general partner of Olympus. As of March
31, 1995, the Olympus Systems passed 512,052 homes and served 306,317 basic
subscribers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Olympus."
The Company also provides, for a fee, management and consulting
services to certain partnerships (the "Managed Partnerships"). John J. Rigas
and certain members of his immediate family, including entities they own or
control (collectively, the "Rigas Family") control or have substantial
ownership interests in the Managed Partnerships. As of March 31, 1995, cable
systems (the "Managed Systems") owned by the Managed Partnerships passed
415,641 homes and served 298,054 basic subscribers.
Unless otherwise stated, the information contained in this Annual
Report on Form 10-K is as of March 31, 1995.
Cable Television
Cable television systems receive a variety of television, radio and
data signals transmitted to receiving sites ("headends") by way of off-air
antennas, microwave relay systems and satellite earth stations. Signals are
then modulated, amplified and distributed primarily through coaxial and
fiber optic cable to subscribers, who pay fees for the service. Cable
television systems are generally constructed and operated pursuant to
non-exclusive franchises awarded by state or local government authorities
for specified periods of time.
Cable television systems typically offer subscribers a package of
basic video services consisting of local and distant television broadcast
signals, satellite-delivered non-broadcast channels (which offer programming
such as news, sports, family entertainment, music, weather, shopping, etc.)
and public, governmental and educational access channels. Cable television
systems may also offer certain non-video services, such as digital radio,
data transmission and telephony.
In addition, premium service channels, which provide movies, live and
taped concerts, sports events and other programming, are offered for an
extra monthly charge. At March 31, 1995, over 97% of subscribers of the
Company Systems were also offered pay-per-view programming, which allows the
subscriber to order special events or movies and to pay on a per event
basis. Local, regional and national advertising time is sold in the majority
of the Systems, with commercial advertisements inserted on certain
satellite-delivered non-broadcast channels.
John J. Rigas, the Chairman, President, Chief Executive Officer and
majority stockholder of Adelphia, is a pioneer in the cable television
industry, having built his first system in 1952 in Coudersport,
Pennsylvania. Adelphia was incorporated in Delaware on July 1, 1986 for the
purpose of reorganizing five cable television companies, then principally
owned by the Rigas Family, into a holding company structure in connection
with the initial public offering of its Class A Common Stock, $.01 par
value, and 13% Senior Subordinated Notes due 1996. Prior to 1982, the
Company grew principally by obtaining municipal cable television franchises
to construct new cable television systems. Since 1982, the Company has grown
principally by acquiring and developing existing cable systems. The
Company's business comprises one segment, the ownership, operation and
management of cable television systems. The Company did not have any foreign
operations or foreign sales in the year ended March 31, 1995.
Operating Strategy
The Company's strategy has been to provide superior customer service
while maximizing operating efficiencies. By acquiring and developing systems
in geographic proximity, the Company has been able to realize significant
operating efficiencies through the consolidation of many managerial,
administrative and technical functions. The Systems have consolidated
virtually all of their administrative operations, including customer
service, service call dispatching, marketing, human resources, advertising
sales and government relations into regional offices. Each regional office
has a related technical center which contains the facilities necessary for
the Systems' technical functions, including construction, installations and
system maintenance and monitoring. Consolidating customer service functions
into regional offices allows the Company to provide customer service through
better training and staffing of customer service representatives, and by
providing more advanced telecommunications and computer equipment and
software to its customer service representatives than would otherwise be
economically feasible in smaller systems.
The Company considers technological innovation to be an important
component of cost-effective improvement of its product and customer
satisfaction. Through the use of fiber optic cable and other technological
improvements, the Company has increased system reliability, channel capacity
and its ability to deliver advanced cable television services. These
improvements have enhanced customer service, reduced operating expenses and
allowed the Company to introduce additional services, such as
impulse-ordered pay-per-view programming, which expand customer choices and
increase Company revenues. The Company has developed new cable construction
architecture which allows it to readily deploy fiber optic cable in its
systems. The Company has replaced approximately 24% of the total installed
trunk cable for the Systems with fiber optic cable and has used fiber optic
cable in all of its rebuilding projects and principally all of the Systems'
line extensions. In addition, the Company has installed over 690 miles of
fiber optic plant for point-to-point applications such as connecting or
eliminating headends or microwave link sites. Management believes that the
Company is among the leaders of the cable industry in the deployment of
fiber optic cable.
Development of the Systems
The Company has focused on acquiring and developing systems in markets
which have favorable historical growth trends. The Company believes that the
strong household growth trends in its Systems' market areas are a key factor
in positioning itself for future growth in basic subscribers.
Since 1982, the Company has grown principally by acquiring new cable
systems and by developing existing cable systems. On June 16, 1994,
Adelphia invested $34,000 for a majority equity position in TMC Holdings
Corporation ("THC"), the parent of Tele-Media Company of Western
Connecticut. THC owns cable television systems serving approximately 43,000
subscribers in Western Connecticut. On June 30, 1994, Adelphia acquired
from Olympus 85% of the common stock of Northeast Cable, Inc. ("Northeast
Cable") for a purchase price of $31,875. Northeast Cable owns cable
television systems serving approximately 36,500 subscribers in Eastern
Pennsylvania. On January 10, 1995, Adelphia issued 399,087 shares of Class
A Common Stock in connection with the merger of a wholly-owned subsidiary of
Adelphia into Oxford Cablevision, Inc. ("Oxford"), one of the Benjamin Terry
family (the "Terry Family") cable systems. Oxford serves approximately
4,200 subscribers located in the North Carolina counties of Granville and
Warren. On January 31, 1995, the Company acquired Tele-Media of Martha's
Vineyard, L.P. for $11,775, a cable system serving approximately 7,000
subscribers in Martha's Vineyard, Massachusetts. On February 28, 1995, ACP
Holdings, Inc., a wholly owned subsidiary and managing general partner of
Olympus, certain shareholders of Adelphia, Olympus and various Telesat
Entities ("Telesat"), wholly-owned subsidiaries of FP&L Group, Inc., entered
into an investment agreement whereby Telesat agreed to contribute to Olympus
substantially all of the assets associated with certain cable television
systems, serving approximately 50,000 subscribers in southern Florida, in
exchange for general and limited partner interests and newly issued
preferred limited partner interests in Olympus.
The Company will continue to evaluate new opportunities that allow for
the expansion of its business through the acquisition of additional cable
television systems in geographic proximity to its existing regional market
areas or in locations that can serve as the basis for new market areas,
either directly or indirectly through joint ventures, where appropriate.
The following table indicates the growth of the Company Systems and
Olympus Systems by summarizing the number of homes passed by cable and the
number of basic subscribers for each of the five years in the period ended
March 31, 1995. The table also indicates the numerical growth in subscribers
attributable to acquisitions and the numerical and percentage growth
attributable to internal growth. For the period April 1, 1990 through March
31, 1995, 67% of aggregate internal basic subscriber growth for both the
Company Systems and the Olympus Systems was derived from internal growth in
homes passed, while the remaining 33% of such aggregate growth was derived
from penetration increases.
Year Ended March 31,
1991 1992 1993 1994 1995
Company Systems (a):
Homes Passed (b)
Beginning of Period.......... 1,075,137 1,117,401 1,145,308 1,172,755 1,207,425
Internal Growth (c).......... 42,264 27,907 20,507 10,623 39,012
% Internal Growth............ 3.9% 2.5% 1.8% 0.9% 3.2%
Acquired Homes Passed........ -- -- 6,940 24,047 94,371
End of Period................ 1,117,401 1,145,308 1,172,755 1,207,425 1,340,808
Basic Subscribers (d)
Beginning of Period.......... 764,651 800,551 825,553 852,335 888,167
Internal Growth (c).......... 35,900 25,002 21,216 17,355 31,651
% Internal Growth............ 4.7% 3.1% 2.6% 2.0% 3.6%
Acquired Subscribers......... -- -- 5,566 18,477 55,248
End of Period................ 800,551 825,553 852,335 888,167 975,066
Basic Penetration (e)........ 71.6% 72.1% 72.7% 73.6% 72.7%
Year Ended March 31,
1991 1992 1993 1994 1995
Olympus Systems (a):
Homes Passed (b)
Beginning of Period.......... 356,781 391,342 408,616 386,971 406,753
Internal Growth (c).......... 34,561 17,274 (21,645) 19,782 11,911
% Internal Growth............ 9.7% 4.4% (5.3%) 5.1% 2.9%
Acquired Homes Passed........ -- -- -- -- 93,388
End of Period................ 391,342 408,616 386,971 406,753 512,052
Basic Subscribers (d)
Beginning of Period.......... 202,082 224,488 237,766 211,025 239,357
Internal Growth (c).......... 22,406 13,278 (26,741) 28,332 19,198
% Internal Growth............ 11.1% 5.9% (11.2%) 13.4% 8.0%
Acquired Subscribers......... -- -- -- -- 47,762
End of Period................ 224,488 237,766 211,025 239,357 306,317
Basic Penetration (e)........ 57.4% 58.2% 54.5% 58.8% 59.8%
(a) Data included for the South Dade System at March 31, 1993, 1994 and 1995
reflects actual homes passed and basic subscribers. At July 31, 1992, prior
to Hurricane Andrew, the South Dade system had 157,992 homes passed by cable
and 71,193 basic subscribers, respectively. At March 31, 1993, 1994 and
1995, the South Dade system served 40,999, 65,398 and 74,601 basic
subscribers, respectively. See "Management's Discussion and Analysis -
Olympus."
Data for the Northeast System is included under Company Systems and excluded
from the Olympus Systems for all periods presented.
(b) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable distribution
plant.
(c) The number of additional homes passed or additional basic subscribers
not attributable to acquisitions of new cable systems.
(d) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis in which the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area.
(e) Basic subscribers as a percentage of homes passed by cable.
Market Areas
The Systems are "clustered" in eight market areas in the eastern
portion of the United States as follows:
MARKET AREA LOCATION OF SYSTEMS
Southeastern Florida Portions of southern Dade, Citrus, Orange,
Hillsborough, Palm Beach, Martin and St. Lucie Counties
and Hilton Head, South Carolina
Western New York Suburbs of Buffalo and the adjacent Niagara Falls
area, and Syracuse and adjacent communities
Virginia Winchester, Charlottesville, Staunton, Richland,
Martinsville and surrounding communities in
Virginia, and
South Boston and Elizabeth City, North Carolina
Western Pennsylvania Suburbs of Pittsburgh and several small communities
in
western Pennsylvania
MARKET AREA LOCATION OF SYSTEMS
New England Cape Cod communities, South Shore communities (the
area
between Boston and Cape Cod, Massachusetts),
Martha's Vineyard, Massachusetts; and
Bennington, Burlington, Rutland and Montpelier,
Vermont and surrounding communities in
Vermont and New York, and
Seymour, Connecticut
Eastern Pennsylvania Suburbs of Philadelphia and suburbs of Scranton
Ohio Suburbs of Cleveland and the city of Mansfield and
surrounding communities, Mt Vernon and portions of
Kalamazoo County, Michigan
Coastal New Jersey Ocean County, New Jersey
The following table summarizes by market area the homes passed by cable,
basic subscribers and premium service units for the Systems as of March 31,
1995.
HOMES BASIC BASIC PREMIUM PREMIUM
PASSED SUBSCRIBERS PENETRATION UNITS PENETRATION
COMPANY SYSTEMS:
Western New York........ 293,070 210,869 71.95% 113,585 53.87%
New England............. 250,884 181,194 72.22% 111,987 61.81%
Virginia................ 224,209 165,761 73.93% 74,832 45.14%
Ohio.................... 164,561 118,146 71.79% 63,002 53.33%
Western Pennsylvania.... 162,115 115,685 71.36% 48,958 42.32%
Coastal New Jersey...... 123,757 96,228 77.76% 49,303 51.24%
Eastern Pennsylvania.... 122,212 87,183 71.34% 59,443 68.18%
TOTAL................... 1,340,808 975,066 72.72% 521,110 53.44%
OLYMPUS SYSTEMS:
Southeastern Florida.... 512,052 306,317 59.82% 145,758 47.58%
MANAGED SYSTEMS:
Southeastern Florida.... 172,654 135,446 78.45% 35,369 26.11%
Virginia................ 105,325 71,157 67.56% 32,212 45.27%
Western New York........ 68,822 42,924 62.37% 29,460 68.63%
Western Pennsylvania.... 34,611 25,489 73.64% 8,487 33.30%
Eastern Pennsylvania.... 34,229 23,038 67.31% 22,228 96.48%
TOTAL................. 415,641 298,054 71.71% 127,756 42.86%
TOTAL SYSTEMS:
Southeastern Florida.... 684,706 441,763 64.52% 181,127 41.00%
Western New York........ 361,892 253,793 70.13% 143,045 56.36%
Virginia................ 329,534 236,918 71.89% 107,044 45.18%
New England............. 250,884 181,194 72.22% 111,987 61.81%
Western Pennsylvania.... 196,726 141,174 71.76% 57,445 40.69%
Ohio.................... 164,561 118,146 71.79% 63,002 53.33%
Eastern Pennsylvania.... 156,441 110,221 70.46% 81,671 74.10%
Coastal New Jersey...... 123,757 96,228 77.76% 49,303 51.24%
TOTAL................. 2,268,501 1,579,437 69.62% 794,624 50.31%
Financial Information
The financial data regarding the Company's revenues, results of
operations and identifiable assets for each of the Company's last three
fiscal years is set forth in, and incorporated herein by reference to, Item
8, Financial Statements and Supplementary Data of this Form 10-K.
Technological Developments
The Company has made a substantial commitment to the technological
development of the Company Systems and has actively sought to upgrade the
technical capabilities of its cable plant in order to increase channel
capacity for the delivery of additional programming and new services. All of
the Company Systems have a minimum of 35-channel capacity. By expanding
channel capacity, the Company expects that it will be able to provide
subscribers with a wider range of telecommunication services.
Over 97% of the subscribers to the Company Systems are served by
systems with "addressable capable" technology, which permits the cable
operator to remotely activate the cable television services to be delivered
to subscribers who are equipped with addressable converters. With
addressable converters, the Company can immediately add to or reduce the
services provided to a subscriber from the Company's headend site, without
the need to dispatch a service technician to the subscriber's home.
Addressable technology has allowed the Company to offer pay-per-view
programming. This technology has assisted the Company in reducing pay
service theft and, by allowing the Company to automatically cut off a
subscriber's service, has been effective in collecting delinquent subscriber
payments.
The following table indicates the deployment of fiber optic cable and
channel capacities for the Systems as of March 31, 1995:
Systems Channel
Fiber Fiber Capacity As a
Plant Route Strand Fiber % of Plant Miles
Miles Miles Miles Nodes lt53 54-77 gt78
COMPANY SYSTEMS:
Western New York............ 2,749 348 8,608 376 25.8% 30.9% 43.3%
Virginia.................... 4,579 263 5,016 122 31.8% 45.6% 22.6%
Western Pennsylvania........ 2,071 165 2,595 92 1.9% 66.8% 31.3%
New England................. 3,111 313 8,485 43 36.8% 44.5% 18.7%
Eastern Pennsylvania........ 1,624 218 4,986 192 47.8% 9.8% 42.4%
Ohio........................ 2,719 343 5,947 230 35.5% 18.2% 46.3%
Coastal New Jersey.......... 1,449 225 4,552 260 18.5% 8.0% 73.5%
TOTAL..................... 18,302 1,875 40,189 1,315 29.3% 35.4% 35.3%
OLYMPUS SYSTEMS:
Southeastern Florida........ 5,238 215 6,516 92 0.8% 84.0% 15.2%
MANAGED SYSTEMS:
Western New York............ 314 83 2,281 164 -- -- 100.0%
Virginia.................... 856 77 1,112 27 65.4% 0.8% 33.8%
Western Pennsylvania........ 668 27 718 23 31.2% 24.6% 44.2%
Eastern Pennsylvania........ 421 -- -- -- 19.6% 42.8% 37.6%
Southeastern Florida........ 1,243 23 350 4 35.8% 60.0% 4.2%
TOTAL..................... 3,502 210 4,461 218 37.0% 31.3% 31.7%
TOTAL SYSTEMS:
Western New York............ 3,063 431 10,889 540 23.1% 27.7% 49.2%
Virginia.................... 5,435 340 6,128 149 37.1% 38.5% 24.4%
Western Pennsylvania........ 2,739 192 3,313 115 9.1% 56.5% 34.4%
New England................. 3,111 313 8,485 43 36.8% 44.5% 18.7%
Eastern Pennsylvania........ 2,045 218 4,986 192 42.0% 16.6% 41.4%
Ohio........................ 2,719 343 5,947 230 35.5% 18.2% 46.3%
Coastal New Jersey.......... 1,449 225 4,552 260 18.5% 8.0% 73.5%
Southeastern Florida........ 6,481 238 6,866 96 7.5% 79.4% 13.1%
TOTAL..................... 27,042 2,300 51,166 1,625 24.7% 44.3% 31.0%
In all of
its recent system upgrades, the Company has utilized fiber optic cable as an
alternative to the coaxial cable that historically has been used to
distribute cable signals to the subscriber's home. Fiber optic cable is
capable of carrying hundreds of video, data and voice channels. The Company
has developed an innovative "fiber-to-feeder" network design, consisting of
a combination of fiber optic trunk and certain other distribution plant,
which has proven to be economical for the construction, rebuilding,
extension and upgrading of the Systems.
The Company expects that the continued use of
the fiber-to-feeder network design strategy will give the Company the
flexibility to exploit the expanded delivery capacity of fiber optic cable
in a cost-effective manner. The construction of fiber-to-feeder networks
will also position the Company to take advantage of alternative
communications delivery systems made possible by fiber optic technology
(such as mobile personal communications service ("PCS") and "alternate
access" voice and data communications that bypass local exchange telephone
carriers), to utilize the expanded bandwidth potential of digital
compression technology and to meet the anticipated transmission requirements
for high-definition television and digital television.
The Company is currently offering alternate
access telecommunications services through a subsidiary, Hyperion
Telecommunications, Inc. ("Hyperion"). Competitive access carriers can
provide businesses and other large telecommunications consumers with local
telecommunications services and access to long-distance service carriers via
competitive networks that bypass the local telephone company. Hyperion's
networks are constructed exclusively with fiber optics plant designed to
provide increased quality service and data integrity compared to the
existing local telephone company's network. As of March 31, 1995, Hyperion
leased 460 route miles of fiber optic plant from Adelphia (which is included
in fiber miles reflected in the preceding table) and 780 route miles from
others. These competitive access networks also can complement existing
networks by providing redundant telecommunications service backup and route
diversity for their customers.
Adelphia is a 49.9% owner of Page Call, Inc.
which was a successful bidder in November 1994 on three regional narrowband
PCS licenses, covering 62% of the country's population. Page Call, Inc.
intends to use its narrowband PCS licenses as the basis for a planned
nationwide paging service and expects to market its paging services to
consumers through a series of marketing affiliation agreements with cable
television operators.
In addition to the activities described above,
the Company has made a substantial commitment to technological development
as a member of Cable Television Laboratories, Inc., a not-for-profit
research and development company serving the cable industry. The Company has
also joined other industry members in a partnership venture in Digital Cable
Radio, a satellite-delivered, multichannel music service featuring "compact
disc" quality sound, which is marketed as a premium service.
Subscriber Services and Rates
The Company's revenues are derived principally
from monthly subscription fees
for basic, satellite and premium services. Rates to subscribers vary from
market to market and in accordance with the type of service selected.
Although services vary from system to system because of differences in
channel capacity and viewer interests, each of the Systems typically offers
a basic service package ranging from $8.00 to $12.00 per month. As described
herein, the Systems currently offer certain satellite services through
CableSelect, at monthly per channel rates ranging from $.10 to $1.25 per
channel, and in discounted packages. The Systems' monthly rates for premium
services range from $7.00 to $13.00 per service. An installation fee, which
the Company may wholly or partially waive during a promotional period, is
usually charged to new subscribers. Subscribers are free to terminate cable
service at any time without charge, but often are charged a fee for
reconnection or change of service.
The Cable Communications Policy Act of 1984
(the "1984 Cable Act," as amended by the 1992 Cable Act), deregulated basic
service rates for systems in communities meeting the FCC's definition of
effective competition. Pursuant to the FCC's definition of effective
competition adopted following enactment of the 1984 Cable Act, substantially
all of the Company's franchises were rate deregulated. However, in June
1991, the FCC amended its effective competition standard, which increased
the number of cable systems which could be subject to local rate regulation.
The 1992 Cable Act contains a new definition of effective competition under
which nearly all cable systems in the United States are subject to
regulation of basic service rates. Additionally, the legislation (i)
eliminated the 5% annual basic rate increase allowed by the 1984 Cable Act
without local approval; (ii) allows the FCC to adjudicate the reasonableness
of rates for non-basic service tiers other than premium services for cable
systems not subject to effective competition in response to complaints filed
by franchising authorities and/or cable subscribers; (iii) prohibits cable
systems from requiring subscribers to purchase service tiers above basic
service in order to purchase premium services if the system is technically
capable of doing so; (iv) allows the FCC to impose restrictions on the
retiering and rearrangement of cable services under certain circumstances;
and (v) permits the FCC and franchising authorities more latitude in
controlling rates and rejecting rate increase requests. See "Legislation and
Regulation".
For a discussion of the changes in the
Company's method of offering services to its subscribers implemented in
September 1993 and recent FCC rate regulation and related developments, see
"Legislation and Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Regulatory and Competitive
Matters."
Franchises
The 1984 Cable Act provides that cable
operators may not offer cable service to a particular community without a
franchise unless such operator was lawfully providing service to the
community on July 1, 1984 and the franchising authority does not require a
franchise. The Company Systems and the Olympus Systems operate pursuant to
franchises or other authorizations issued by governmental authorities,
substantially all of which are nonexclusive. Such franchises or
authorizations awarded by a governmental authority generally are not
transferable without the consent of the authority. Additionally, the 1992
Cable Act prohibits cable operators from selling or otherwise transferring
the ownership of any cable system within 36 months after acquisition or
initial construction, subject to certain limited exceptions. As of March 31,
1995, the Company held 439 franchises and Olympus held 82 franchises. Most
of these franchises can be terminated prior to their stated expiration by
the relevant governmental authority, after due process, for breach of
material provisions of the franchise.
Under the terms of most of the Company's
franchises, a franchise fee (ranging up to 5% of the gross revenues of the
cable system) is payable to the governmental
authority. For the past three years, franchise fee payments made by the
Company have averaged approximately 2.6% of gross system revenues.
The franchises issued by the governmental
authorities are subject to periodic renewal. In renewal hearings, the
authorities generally consider, among other things, whether the franchise
holder has provided adequate service and complied with the franchise terms.
In connection with a renewal, the authority may impose different and more
stringent terms, the impact of which cannot be predicted. To date, all of
the Company's material franchises have been renewed or extended, at or
effective upon their stated expiration, generally on modified terms. Such
modified terms have not been materially adverse to the Company.
The Company believes that all of its material
franchises are in good standing. From time to time, the Company notifies the
franchising authorities of the Company's intent to seek renewal of the
franchise in accordance with the procedures set forth in the 1984 Cable Act.
The 1984 Cable Act process requires that the governmental authority consider
the franchise holder's renewal proposal on its own merits in light of the
franchise holder's past performance and the community's needs and interests,
without regard to the presence of competing applications. See "Legislation
and Regulation." The 1992 Cable Act alters the administrative process by
which operators utilize their 1984 Cable Act franchise renewal rights. Such
changes could make it easier in some instances for a franchising authority
to deny renewal of a franchise.
Competition
Although the Company and the cable television
industry have historically faced modest competition, the competitive
landscape is changing, and competition will increase. The Company believes
that the increase in competition within its communities will occur gradually
over a period of time.
At the present time, cable television systems
compete with other communications and entertainment media, including off-air
television broadcast signals which a viewer is able to receive directly
using the viewer's own television set and antenna. The extent to which a
cable system competes with over-the-air broadcasting depends upon the
quality and quantity of the broadcast signals available by direct antenna
reception compared to the quality and quantity of such signals and
alternative services offered by a cable system. In many areas, television
signals which constitute a substantial part of basic service can be received
by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may
be aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving
television signals and from other sources of entertainment such as live
sporting events, movie theaters and home video products, including videotape
recorders and cassette players. In recent years, the FCC has adopted
policies providing for authorization of new technologies and more favorable
operating environment for certain existing technologies that provide, or may
provide, substantial additional competition for cable television systems.
The extent to which cable television service is competitive depends in
significant part upon the cable televisions system's ability to provide an
even greater variety of programming than that available off-air or through
competitive alternative delivery sources. In addition, certain provisions
of the 1992 Cable Act are expected to increase competition significantly in
the cable industry. See "Legislation and Regulation."
The 1992 Cable Act prohibits the award of
exclusive franchises, prohibits franchising authorities from unreasonably
refusing to award additional franchises and permits them to operate cable
systems themselves without franchises.
Individuals presently have the option to
purchase earth stations, which allow the direct reception of satellite-
delivered program services formerly available only to cable television
subscribers. Most satellite-distributed program signals are being
electronically scrambled to permit reception only with authorized decoding
equipment, generally at a cost to the viewer. From time to time,
legislation has been introduced in Congress which, if enacted into law,
would prohibit the scrambling of certain satellite-distributed programs or
would make satellite services available to private earth stations on terms
comparable to those offered to cable systems. Broadcast television signals
are being made available to owners of earth stations under the Satellite
Home View Copyright Act of 1988, which became effective January 1, 1989 for
a six-year period. This Act establishes a statutory compulsory license for
certain transmissions made by satellite owners to home satellite dishes for
which carriers are required to pay a royalty fee to the Copyright Office.
This Act has been extended by Congress until December 31, 1999. The 1992
Cable Act enhances the right of cable competitors to purchase nonbroadcast
satellite-delivered programming. See "Legislation and Regulation - Federal
Regulation."
In late 1993, the first satellite providing
high-power, direct broadcast satellite ("DBS") television service was
launched, and this service became available to consumers during 1994. This
technology has the capability of providing more than 100 channels of
programming over a single DBS satellite. This capacity can be further
increased by providing service from multiple satellites. DBS service can be
received virtually anywhere in the United States through the installation of
a small rooftop or side-mounted antenna, and it is more accessible than
cable television service where cable plant has not been constructed or where
it is not cost effective to construct cable television facilities. DBS
service is being heavily marketed on a nation-wide basis. The extent to
which DBS systems will be competitive with cable television systems will
depend upon, among other things, the availability of reception equipment,
and whether equipment and service can be made available to consumers at
reasonable prices.
Multi-channel multipoint distribution systems
("MMDS") deliver programming services over microwave channels licensed by
the FCC which are received by subscribers with special antennas. MMDS
systems are less capital intensive, are not required to obtain local
franchises or to pay franchise fees and are subject to fewer regulatory
requirements than cable television systems. To date, the ability of these
so-called "wireless" cable services to compete with cable television systems
has been limited by channel capacity constraints and the need for
unobstructed line-of-sight over-the-air transmission. Although relatively
few MMDS systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively
licensed. The FCC has taken a series of actions intended to facilitate the
development of MMDS and other wireless cable systems as alternative means of
distributing video programming, including reallocating certain frequencies
to these services and expanding the permissible use and eligibility
requirements for certain channels reserved for educational purposes. The
FCC's actions enable a single entity to develop an MMDS system with a
potential of up to 35 channels that could compete effectively with cable
television. MMDS systems qualify for the statutory compulsory copyright
licenses for the retransmission of television and radio broadcast stations.
FCC rules and the 1992 Cable Act prohibit the common ownership of cable
systems and MMDS facilities serving the same area.
Additional competition may come from private
cable television systems servicing condominiums, apartment complexes and
certain other multiple unit residential developments. The operators of
these private systems, known as satellite master antenna television
("SMATV") systems, often enter into exclusive agreements with apartment
building owners or homeowners' associations which preclude franchised cable
television operators from serving residents of such private complexes.
Although a number of states have enacted laws to afford operators of
franchised cable television systems access to such private complexes, the
U.S. Supreme Court has held that cable companies cannot have such access
without compensating the property owner. The access status of several
statutes have been challenged successfully in the courts, and other such
laws are under attack. However, the 1984 Cable Act gives franchised cable
operators the right to use existing compatible easements within their
franchise areas upon nondiscriminatory terms and conditions. Accordingly,
where there are pre-existing compatible easements, cable operators may not
be unfairly denied access or discriminated against with respect to the terms
and conditions of access to those easements. There have been conflicting
judicial decisions interpreting the scope of the access right granted by the
1984 Cable Act, particularly with respect to easements located entirely on
private property.
Due to the widespread availability of
reasonably-priced earth stations, SMATV systems can offer both improved
reception of local television stations and many of the same satellite-
delivered program services which are offered by franchised cable television
systems. Further, while a franchised cable television system typically is
obligated to extend service to all areas of a community regardless of
population density or economic risk, the SMATV system may confine its
operation to small areas that are easy to serve and more likely to be
profitable. The FCC recently issued a clarification of its rules
interpreting the 1984 Cable Act which has the effect of making it easier for
SMATV systems to interconnect non-commonly owned buildings without having to
comply with certain local, state and federal regulatory requirements that
are imposed upon cable systems providing similar services. The Supreme
Court has upheld this decision. However, a SMATV system is subject to the
1984 Cable Act's franchise requirement if it uses physically closed
transmission paths such as wires or cable to interconnect separately owned
and managed buildings if its lines use or cross any public right-of-way. In
a separate proceeding, the FCC has amended its rules to increase the number
of microwave frequencies a SMATV operator may use to interconnect several
buildings. The FCC's actions will make it easier for SMATV operators to
compete with cable systems for subscribers located in multiple unit
dwellings while allowing them to remain exempt from many burdensome
government regulations which apply to cable systems. In some cases, SMATV
operators may be able to charge a lower price than could a cable system
providing comparable services and the FCC's new regulations implementing the
1992 Cable Act limit a cable operator's ability to reduce its rates to meet
this competition. Furthermore, the U.S. Copyright Office has tentatively
concluded that SMATV systems are "cable systems" for purposes of qualifying
for the compulsory copyright license established for cable systems by
federal law. This decision may help make SMATV systems more competitive
with traditional cable systems. See "Legislation and Regulation - Federal
Regulation - Copyright." The 1992 Cable Act prohibits the common ownership
of cable systems and SMATV facilities serving the same area. However, a
cable operator can purchase a SMATV system serving the same area and
technically integrate it into the cable system.
The FCC has authorized a new interactive
television service which will permit non-video transmission of information
between an individual's home and entertainment and information service
providers. This service will provide an alternative means for DBS systems
and other video programming distributors, including television stations, to
initiate the new interactive television services. This service may also be
used as well by the cable television industry.
The FCC also has initiated a new rulemaking
proceeding looking toward the allocation of frequencies in the 28 Ghz range
for a new multi-channel wireless video service which could make 98 video
channels available in a single market. It cannot be predicted at this time
whether competitors will emerge utilizing such frequencies or whether such
competition would have a material impact on the operations of cable
television systems.
In the past, federal cross-ownership
restrictions have limited entry into the cable television business by
potentially strong competitors such as telephone companies. Proposals
recently adopted by the FCC, pending litigation and legislation, could make
it possible for companies with considerable resources and consequently a
potentially greater willingness or ability to overbuild, to enter the
business. The FCC recently amended its rules to permit local telephone
companies to offer "video dialtone" service for video programmers, including
channel capacity for the carriage of video programming and certain non-
common carrier activities such as video processing, billing and collection
and joint marketing agreements. Furthermore, several federal district and
two circuit courts have struck down as unconstitutional the provision in the
1984 Cable Act which prevents local telephone companies from offering video
programming on a non-common carrier basis directly to subscribers in their
local telephone service areas. Moreover, this cross-ownership restriction
does not apply in communities with a population of less than 2,500 persons.
Even in the absence of further changes in the cross-ownership restrictions,
the expansion of telephone companies' fiber optic systems may facilitate
entry by other video service providers in competition with cable systems.
See "Legislation and Regulation - Federal Regulation."
FCC rules permit local telephone companies to
offer "video dialtone" service for video programmers, including channel
capacity for the carriage of video programming and certain non-common
carrier activities such as video processing, billing and collection and
joint marketing agreements. On December 15, 1992, New Jersey Bell Telephone
Company filed an application with the FCC to operate a "video dialtone"
service in portions of Dover County, New Jersey, in which the Company serves
approximately 20,000 subscribers. The FCC approved the application on July
18, 1994. The Company has appealed this decision to the U.S. Court of
Appeals for the District of Columbia. This case is presently pending.
A number of telephone companies have filed suit
seeking to void as unconstitutional the provisions in the 1984 Cable Act
that prohibit telephone companies from owning cable television systems in
their telephone service areas. The U.S. Courts of Appeal for the Fourth and
Ninth Circuits have struck down the cross-ownership ban on First Amendment
grounds. Several federal district courts have also struck down the cross-
ownership ban on the same grounds. In addition, legislation which would
alter or eliminate the cross-ownership ban is under active consideration in
Congress.
Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative
environment, are constantly occurring. Thus, it is not possible to predict
the effect that ongoing or future developments might have on the cable
industry. The ability of cable systems to compete with present, emerging
and future distribution media will depend to a great extent on obtaining
attractive programming. The availability and exclusive use of a sufficient
amount of quality programming may in turn be affected by developments in
regulation or copyright law. See "Legislation and Regulation."
The cable television industry competes with
radio, television and print media for advertising revenues. As the cable
television industry continues to develop programming designed specifically
for distribution by cable, advertising revenues may increase. Premium
programming provided by cable systems is subject to the same competitive
factors which exist for other programming discussed above. The continued
profitability of premium services may depend largely upon the continued
availability of attractive programming at competitive prices.
Employees
At June 12, 1995, there were 2,564 full-time
employees of the Company, of which 103 employees were covered by collective
bargaining agreements at three locations. The Company considers its
relations with its employees to be good.
LEGISLATION AND REGULATION
The cable television industry is regulated by
the FCC, some state governments and most local governments. In addition,
various legislative and regulatory proposals under consideration from time
to time by Congress and various federal agencies may materially affect the
cable television industry. The following is a
summary of federal laws and regulations affecting the growth and operation
of the cable television industry and a description of certain state and
local laws.
Cable Communications Policy Act of 1984
The 1984 Cable Act became effective on December
29, 1984. This federal statute, which amended the Communications Act of 1934
(the "Communications Act"), created uniform national standards and
guidelines for the regulation of cable television systems. Violations by a
cable television system operator of provisions of the Communications Act, as
well as of FCC regulations, can subject the operator to substantial monetary
penalties and other sanctions. Among other things, the 1984 Cable Act
affirmed the right of franchising authorities (state or local, depending on
the practice in individual states) to award one or more franchises within
their jurisdictions. It also prohibited non-grandfathered cable television
systems from operating without a franchise in such jurisdictions. In
connection with new franchises, the 1984 Cable Act provides that in granting
or renewing franchises, franchising authorities may establish requirements
for cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in
broad categories. The 1984 Cable Act grandfathered, for the remaining term
of existing franchises, many but not all of the provisions in existing
franchises which would not be permitted in franchises entered into or
renewed after the effective date of the 1984 Cable Act.
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act")
On October 5, 1992, Congress enacted the 1992
Cable Act. This legislation effected significant changes to the legislative
and regulatory environment in which the cable industry operates. It amends
the 1984 Cable Act in many respects. The 1992 Cable Act became effective on
December 4, 1992, although certain provisions, most notably those dealing
with rate regulation and retransmission consent, became effective at later
dates. The legislation also required the FCC to initiate a number of
rulemaking proceedings to implement various provisions of the statute. The
1992 Cable Act allows for a greater degree of regulation on the cable
industry with respect to, among other things: (i) cable system rates for
both basic and certain nonbasic services; (ii) programming access and
exclusivity arrangements; (iii) access to cable channels by unaffiliated
programming services; (iv) leased access terms and conditions; (v)
horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x)
subscriber privacy; (xi) consumer protection issues; (xii) cable equipment
compatibility; (xiii) obscene or indecent programming; and (xiv) requiring
subscribers to subscribe to tiers of service other than basic service as a
condition of purchasing premium services. Additionally, the legislation
encourages competition with existing cable systems by: allowing
municipalities to own and operate their own cable systems without having to
obtain a franchise; preventing franchising authorities from granting
exclusive franchises or unreasonably refusing to award additional franchises
covering an existing cable system's service area; and prohibiting the common
ownership of cable systems and co-located MMDS or SMATV systems. The 1992
Cable Act also precludes video programmers affiliated with cable television
companies from favoring cable operators over competitors and requires such
programmers to sell their programming to other multichannel video
distributors. This provision may limit the ability of cable program
suppliers to offer exclusive programming arrangements to cable television
companies. A number of provisions in the 1992 Cable Act relating to, among
other things, rate regulation, have had a negative impact on the cable
industry and the Company's business.
Various cable operators have filed actions in
the United States District Court in the District of Columbia challenging the
constitutionality of several sections of the 1992 Cable Act. Pursuant to
special jurisdictional provisions in the 1992 Cable Act, a challenge to the
must-carry provisions of the Act was heard by a three-judge panel of the
District Court. On April 8, 1993, the three-judge court granted a summary
judgment for the government upholding the constitutional validity of the
must-carry provisions of the 1992 Cable Act. That decision was appealed
directly to the U.S. Supreme Court. The plaintiffs in that case
unsuccessfully sought an injunction pending appeal of the District Court's
decision. On June 27, 1994, the Supreme Court vacated the District Court
decision and remanded the case for further proceedings. Thus, the
constitutionality of the must carry provision has yet to be finally decided.
The cable operators' constitutional challenge
to the balance of the 1992 Cable Act provisions was heard by a single judge
of the District Court. On September 16, 1993, the court rendered its
decision upholding the constitutionality of all but three provisions of the
statute (multiple ownership limits for cable operators, advance notice of
free previews for certain programming services, and channel set-asides for
DBS operators). This decision has been appealed to the U.S. Court of Appeals
for the District of Columbia Circuit.
Appeals were also filed in the U.S. Court of
Appeals for the District of Columbia Circuit from the FCC's rate regulation
rulemaking decisions. On June 6, 1995, the court upheld all aspects of the
FCC's rate regulations except for certain minor matters.
Federal Regulation
The FCC, the principal federal regulatory
agency with jurisdiction over cable television, has promulgated regulations
covering such areas as the registration of cable systems, cross-ownership
between cable systems and other communications businesses, carriage of
television broadcast programming, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification,
children's programming, the regulation of basic cable service rates in areas
where cable systems are not subject to effective competition, signal leakage
and frequency use, technical performance, maintenance of various records,
equal employment opportunity, and antenna structure notification, marking
and lighting. The FCC has the authority to enforce these regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations. Furthermore, the 1992 Cable
Act required the FCC to adopt implementing regulations covering, among other
things, cable rates, signal carriage, consumer protection and customer
service, leased access, indecent programming, programmer access to cable
television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of direct
broadcast satellite system ownership and operation. A brief summary of the
most material federal regulations as adopted to date follows.
Rate Regulation. The 1984 Cable Act codified
existing FCC preemption of rate regulation for premium channels and optional
nonbasic program tiers. The 1984 Cable Act also deregulated basic cable
rates for cable television systems determined by the FCC to be subject to
effective competition. The 1992 Cable Act substantially changed the
statutory and FCC rate regulation standards. The 1992 Cable Act replaced the
FCC's old standard for determining effective competition, under which most
cable systems were not subject to local rate regulation, with a statutory
provision that has resulted in nearly all cable television systems becoming
subject to local rate regulation of basic service. Additionally, the
legislation eliminated the 5% annual rate increase for basic service
previously allowed by the 1984 Cable Act without local approval; required
the FCC to adopt a formula, for franchising authorities to enforce, to
assure that basic cable rates are reasonable; allows the FCC to review rates
for nonbasic service tiers (other than per-channel or per-program services)
in response to complaints filed by franchising authorities and/or cable
customers; prohibits cable television systems from requiring customers to
purchase service tiers above basic service in order to purchase premium
services if the system is technically capable of doing so; required the FCC
to adopt regulations to establish, on the basis of actual costs, the price
for installation of cable service, remote controls, converter boxes and
additional outlets; and allows the FCC to impose restrictions on the
retiering and rearrangement of cable services under certain limited
circumstances. The FCC adopted rules designed to implement these rate
regulation provisions on April 1, 1993, and then significantly amended them
on February 22, 1994, and November 10, 1994.
The FCC's regulations set standards for the
regulation of basic and nonbasic cable service rates (other than per-channel
or per-program services). The FCC initially ordered an interim 120-day
freeze on these rates effective April 5, 1993, a freeze which was extended
several times and finally expired on May 15, 1994. The FCC's original rules
became effective on September 1, 1993. The amendments thereto became
effective on May 15, 1994 and January 1, 1995, respectively. The rate
regulations adopt a benchmark price cap system for measuring the
reasonableness of existing basic and nonbasic service rates, and a formula
for evaluating future rate increases. Alternatively, cable operators have
the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The FCC has adopted interim
rules to be utilized in such cost-of-service showings. The rules also
require that charges for cable-related equipment (e.g., converter boxes and
remote control devices) and installation services be unbundled from the
provision of cable service and based upon actual costs plus a reasonable
profit. Local franchising authorities and/or the FCC are empowered to order
a reduction of existing rates which exceed the benchmark level for either
basic and/or nonbasic cable services and associated equipment, and refunds
could be required, measured from the date of a complaint to the FCC
challenging an existing nonbasic cable service rate or from September 1,
1993, for existing basic cable service rates under the original rate
regulations and from May 15, 1994, under the amended rate regulations. The
retroactive refund period for basic cable service rates is limited to one
year. In general, the reductions for basic and nonbasic cable service rates
under the original rate regulations were to be to the greater of the
applicable benchmark level or the rates in force as of September 30, 1992,
minus 10 percent, adjusted forward for inflation. The amended regulations
require an aggregate reduction of up to 17 percent, adjusted forward for
inflation and certain other factors, from the rates in force as of September
30, 1992. The regulations also provide that future rate increases may not
exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be
made in the event a cable operator adds or deletes programming channels.
The November 10, 1994 amendments incorporated an alternative method for
adjusting the rate charged for a regulated nonbasic service tier when new
services are added. This method will allow cable operators to increase
rates by as much as $1.50 over a two year period to reflect the addition of
up to seven new channels of service on regulated non basic tiers. In
addition, new product tiers consisting of services new to the cable system
can be created free of rate regulation as long as certain conditions are met
such as not moving services from the existing tiers to the new tier. A
significant number of franchising authorities have become certified by the
FCC to regulate the rates charged by the Company for basic cable service and
for associated equipment. Subscribers in some of the Company's cable
systems have sought FCC review regarding the rates charged for non-basic
cable service. The Company's ability to implement rate increases consistent
with its past practices will likely be limited by the regulations that the
FCC has adopted.
Commencing in August 1993, in accordance with
the 1992 Cable Act, the Company repackaged certain existing cable services
and twice adjusted the basic service rates and related equipment and
installation charges in substantially all of its
Systems so as to bring these rates and charges into compliance with the then
applicable benchmark or equipment and installation cost levels.
Effective September 1, 1993, the Company also
implemented a program in substantially all of its Systems under which a
number of the Company's satellite-delivered and premium services were
offered individually on a per channel (i.e., a la carte) basis, or as a
group at a discounted price. A la carte services were not subject to the
FCC's rate regulations under the rules originally issued to implement the
1992 Cable Act. The FCC, in its reconsideration of the original rate
regulations, stated that it was going to review the regulatory treatment of
such a la carte packages on an ad hoc basis. A la carte packages which are
determined to be evasions of rate regulation rather than true enhancements
of subscriber choice will be treated as regulated tiers, and therefore,
subject to rate regulations. One of Olympus' Systems, along with numerous
other cable operators, received a specific inquiry from the FCC regarding
its implementation of this new method of offering cable services. The FCC's
Cable Services Bureau has ruled that this system, and all other systems
which moved more than six existing services to an a la carte tier, have
engaged in an evasion of rate regulation and ordered this package to be
treated as a regulated tier. The Company has appealed this decision to the
full FCC. The November 10, 1994 amendments stated that, prospectively, any
new a la carte package created after this date will be treated as a
regulated tier, except for packages involving traditional premium services
(e.g., HBO). Because of these developments and other factors, including the
decisions of subscribers, the Company is currently unable to determine the
effect that this a la carte method of offering cable services will have on
its business and results of operations in future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory and Competitive Matters".
The FCC has adopted regulations pursuant to the
1992 Cable Act which require cable systems to permit customers to purchase
video programming on a per channel or a per program basis without the
necessity of subscribing to any tier of service, other than the basic
service tier, unless the cable system is technically incapable of doing so.
Generally, this exemption from compliance with the statute for cable systems
that do not have such technical capability is available until a cable system
obtains the capability, but not later than December, 2002.
Carriage of Broadcast Television Signals. The
1992 Cable Act contains new mandatory carriage requirements. These new rules
allow commercial television
broadcast stations which are "local" to a cable system (i.e., the system is
located in the station's Area of Dominant Influence), to elect every three
years whether to require the cable system to carry the station, subject to
certain exceptions, or whether the cable system will have to negotiate for
"retransmission consent" to carry the station. The first such election was
made on June 17, 1993. Local, non-commercial television stations are also
given mandatory carriage rights, subject to certain exceptions, within the
larger of (i) a 50 mile radius from the station's city of license or (ii)
the station's Grade B contour (a measure of signal strength). Unlike
commercial stations, noncommercial stations are not given the option to
negotiate retransmission consent for the carriage of their signal. In
addition, cable systems will have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations," i.e., commercial satellite-delivered independent stations
such as WTBS. The 1992 Cable Act also eliminated, effective December 4,
1992, the FCC's regulations requiring the provision of input selector
switches. The statutory must-carry provisions for non-commercial stations
became effective on December 4, 1992. Must-carry rules for both commercial
and non-commercial stations and retransmission consent rules for commercial
stations were adopted by the FCC on March 11, 1993. The must-carry
requirement for commercial stations went into effect on June 2, 1993, and
any stations for which retransmission consent had not been obtained (other
than must-carry stations, non-commercial stations and superstations) had to
be dropped as of October 6, 1993. A number of stations previously carried by
the Company's cable television systems elected retransmission consent. The
Company has thus far been able to reach agreements with broadcasters who
elected retransmission consent or to negotiate extensions to the October 6,
1993 deadline and has therefore not been required to pay cash compensation
to broadcasters for retransmission consent or been required by broadcasters
to remove broadcast stations from the cable television channel line-ups. The
Company has, however, agreed to carry some services (e.g., ESPN2 and a new
service by FOX) in specified markets pursuant to retransmission consent
arrangements which it believes are comparable to those entered into by most
other large cable operators.
Nonduplication of Network Programming. Cable
systems that have 1,000 or more subscribers must, upon the appropriate
request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an
exclusive basis.
Deletion of Syndicated Programming. FCC
regulations enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of
such deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial
and could lead the cable operator to drop a distant signal in its entirety.
The FCC also has commenced a proceeding to determine whether to relax or
abolish the geographic limitations on program exclusivity contained in its
rules, which would allow parties to set the geographic scope of exclusive
distribution rights entirely by contract, and to determine whether such
exclusivity rights should be extended to noncommercial educational stations.
It is possible that the outcome of these proceedings will increase the
amount of programming that cable operators are requested to black out.
Finally, the FCC has declined to impose equivalent syndicated exclusivity
rules on satellite carriers who provide services to the owners of home
satellite dishes similar to those provided by cable systems.
Franchise Fees. Although franchising
authorities may impose franchise fees under the 1984 Cable Act, such
payments cannot exceed 5% of a cable system's annual gross revenues. In
those communities in which franchise fees are required, the Company
currently pays franchise fees ranging up to 5% of gross revenues.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide
cable-related facilities and equipment and to enforce compliance with
voluntary commitments. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment
and services, whether or not cable-related. The 1984 Cable Act, under
certain limited circumstances, permits a cable operator to obtain
modifications of franchise obligations.
Renewal of Franchises. The 1984 Cable Act
established renewal procedures and criteria designed to protect incumbent
franchises against arbitrary denials of renewal. While these formal
procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain
free to negotiate a renewal outside the formal process. Nevertheless,
renewal is by no means assured, as the franchisee must meet certain
statutory standards. Even if a franchise is renewed, a franchising authority
may impose new and more onerous requirements such as upgrading facilities
and equipment, although the municipality must take into account the cost of
meeting such requirements.
The 1992 Cable Act makes several changes to the
process under which a cable operator seeks to enforce its renewal rights
which could make it easier in some cases for a franchising authority to deny
renewal. While a cable operator must still submit its request to commence
renewal proceedings within thirty to thirty-six months prior to franchise
expiration to invoke the formal renewal process, the request must be in
writing and the franchising authority must commence renewal proceedings not
later than six months after receipt of such notice. The four-month period
for the franchising authority to grant or deny the renewal now runs from the
submission of the renewal proposal, not the completion of the public
proceeding. Franchising authorities may consider the "level" of programming
service provided by a cable operator in deciding whether to renew. For
alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
comply substantially with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written
notice from the cable operator of its failure or inability to cure. Courts
may not reverse a renewal denial based on procedural regulations found to be
"harmless error."
Channel Set-Asides. The 1984 Cable Act permits
local franchising authorities to require cable operators to set aside
certain channels for public, educational and governmental access
programming. The Company believes that none of the Systems' franchises
contain unusually onerous access requirements. The 1984 Cable Act further
requires cable systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access
by unaffiliated third parties. While the 1984 Cable Act presently allows
cable operators substantial latitude in setting leased access rates, the
1992 Cable Act requires leased access rates to be set according to a formula
determined by the FCC. It is possible that such leased access will result in
competition to services offered by the Company on the other channels of its
cable systems.
Competing Franchises. Questions concerning the
ability of municipalities to award a single cable television franchise and
to impose certain franchise restrictions upon cable television companies
have been considered in several recent federal appellate and district court
decisions. These decisions have been somewhat inconsistent and, until the
U.S. Supreme Court rules definitively on the scope of cable television's
First Amendment protections, the legality of the franchising process and of
various specific franchise requirements is likely to be in a state of flux.
It is not possible at the present time to predict the constitutionally
permissible bounds of cable franchising and particular franchise
requirements. However, the 1992 Cable Act, among other things, prohibits
franchising authorities from unreasonably refusing to grant franchises to
competing cable systems and permits franchising authorities to operate their
own cable systems without franchises.
Ownership. The 1984 Cable Act codified existing
FCC crossownership regulations, which, in part, prohibit local exchange
telephone companies ("LECs"), including the Bell Operating Companies
("BOCs"), from providing video programming directly to subscribers within
their local exchange telephone service areas, except in rural areas or by
specific waiver of FCC rules. The Fourth and Ninth Circuit Courts of Appeal
and several district courts have struck down the 1984 Cable Act's
cable/telco cross-ownership prohibition as facially invalid and inconsistent
with the First Amendment. Similar litigation has been commenced in several
other district courts. The FCC has asked the Supreme Court to review the
circuit court decisions. The Company cannot predict the outcome of this
litigation, but believes that the provision of video programming by
telephone companies with considerable financial resources in competition
with the Company's existing operations could have an adverse effect on the
Company's financial condition and results of operation; the magnitude of any
such effect is not known or estimable. Separately, as part of a
comprehensive proceeding examining whether and under what circumstances
telephone companies should be allowed to provide cable television services,
including video programming to their customers, the FCC has concluded that
neither the 1984 Cable Act nor its rules apply to prohibit the interexchange
carriers (i.e., long distance telephone companies such as AT&T) from
providing such services to their customers. Additionally, the FCC has also
concluded, as part of its "video dialtone" decision, that where a LEC makes
its facilities available on a common carrier basis for the provision of
video programming to the public, the 1984 Cable Act does not require either
the LEC or its programmer customers to obtain a franchise to provide such
service. Because cable operators are required to bear the costs of complying
with local franchise requirements, the FCC's decision could place cable
operators at a competitive disadvantage vis-a-vis local telephone companies
seeking to offer competing services on a common carrier basis. Various
parties have sought judicial review of the FCC's conclusion that neither a
LEC or its programmer customers would be required to obtain a local
franchise. This appeal is currently pending.
As part of the same proceeding, the FCC
recommended that Congress amend the 1984 Cable Act to allow LECs to provide
their own video programming services over their facilities in competition
with their customers' services. The FCC also decided to loosen ownership and
affiliation restrictions currently applicable to telephone companies, and
has proposed to increase the numerical limit on the population of areas
qualifying as "rural" and in which LECs can provide cable service without
FCC waiver.
The BOCs have been released by the United
States District Court for the District of Columbia from restrictions on
their ability to provide information services, including broadband video
programming, which had been imposed as part of the 1984 AT&T divestiture
decree. They are, of course, still subject to the 1984 Cable Act cross-
ownership restriction discussed above.
The telephone industry has continued to lobby
Congress for legislation that will permit LECs to provide video programming
directly to consumers within their service areas. There are currently bills
pending in both houses of Congress that would permit the LECs to provide
cable television service over their own facilities conditioned on
establishing a video programming affiliate that will maintain separate
records to prevent cross-subsidization. These bills, among other provisions,
would also prohibit telephone companies from purchasing existing cable
television systems within their telephone service areas. The outcome of
these FCC, legislative or court proceedings and proposals or the effect of
such outcome on cable system operations cannot be predicted; however,
adoption of such proposals could intensify the competition which the Systems
might face from LECs in the areas in which the Systems operate.
The 1984 Cable Act and the FCC's rules also
prohibit the common ownership, operation, control or interest in a cable
system and a local television broadcast station whose predicted grade B
contour (a measure of significant signal strength as defined by the FCC's
rules) covers any portion of the community served by the cable system. As
part of a wide ranging inquiry on competition in the video marketplace, the
FCC has solicited comments to determine whether the policy prohibiting the
common ownership or control of co-located broadcast and cable facilities
continues to service the public interest. Common ownership or control has
historically also been prohibited by the FCC (but not by the 1984 Cable Act)
between a cable system and a national television network, although the FCC
has recently adopted an order which substantially relaxes the network/cable
cross-ownership prohibitions subject to certain national and local ownership
caps. In addition, the FCC's rules prohibit common ownership, affiliation,
control or interest in cable systems and MMDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act
codified this restriction and also extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992, were grandfathered.
The FCC also allows cable operators to purchase co-located SMATV systems so
long as they are then integrated into the cable system. Thus, the FCC's
cross-ownership rules could preclude the Company, its general partners, the
officers, directors of its general partners or holders of a cognizable
equity interest in the Company (as defined by the FCC) from serving
simultaneously as general partners, the officers or directors of, or from
holding a substantial ownership interest in, these other businesses. The
1992 Cable Act permits states or local franchising authorities to adopt
certain additional restrictions on the ownership of cable systems.
Pursuant to the 1992 Cable Act, the FCC has
imposed limits on the number of cable systems which a single cable operator
can own. In general, no cable operator can have an attributable interest in
cable systems which pass more than 30 percent of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or
more (unless there is another single holder of more than 50% of the voting
stock), officerships, directorships and general partnership interests. The
FCC has stayed the effectiveness of these rules pending the outcome of the
appeal from the U.S. District Court decision holding the multiple ownership
limit provision of the 1992 Cable Act unconstitutional.
The FCC has also adopted rules which limit the
number of channels on a cable system which can be occupied by programming in
which the cable system's owner has an attributable interest. The limit is
40% of all activated channels.
EEO. The 1984 Cable Act includes provisions to
ensure that minorities and women are provided equal employment opportunities
within the cable television industry. The statute requires the FCC to adopt
reporting and certification rules that apply to all cable system operators
with more than five full-time employees. Pursuant to the requirements of the
1992 Cable Act, the FCC has imposed more detailed annual EEO reporting
requirements on cable operators and has expanded those requirements to all
multichannel video service distributors. Failure to comply with the EEO
requirements can result in the imposition of fines and/or other
administrative sanctions, or may, in certain circumstances, be cited by a
franchising authority as a reason for denying a franchisee's renewal
request.
Privacy. The 1984 Cable Act imposes a number of
restrictions on the manner in which cable system operators can collect and
disclose data about individual system subscribers. The statute also requires
that the system operator periodically provide all subscribers with written
information about its policies regarding the collection and handling of data
about subscribers, their privacy rights under federal law and their
enforcement rights. In the event that a cable operator is found to have
violated the subscriber privacy provisions of the 1984 Cable Act, it could
be required to pay damages, attorney's fees and other costs. Under the 1992
Cable Act, the privacy requirements are strengthened to require that cable
operators take such actions as are necessary to prevent unauthorized access
to personally identifiable information.
Anti-Trafficking. The 1992 Cable Act precludes
cable operators from selling or otherwise transferring ownership of a cable
system within 36 months after acquisition or initial construction, except
for: resales required by the terms of a contract covering the acquisition of
multiple systems; tax free sales; governmentally required divestitures; or
internal transfers to a commonly controlled entity. The anti-trafficking
restriction applies to systems acquired prior to the effective date of the
new law (i.e., December 4, 1992) as well as subsequent acquisitions. The FCC
may waive the foregoing restrictions where generally consistent with the
public interest, unless the franchising authority has refused to grant any
required approval. The 1992 Cable Act also requires franchising authorities
to act on any franchise transfer request submitted after
December 4, 1992 within 120 days after receipt of all information required
by FCC
regulations and by the franchising authority. Approval is deemed to be
granted if the franchising authority fails to act within such period.
Registration Procedure and Reporting
Requirements. Prior to commencing operation in a particular community, all
cable television systems must file a registration statement with the FCC
listing the broadcast signals they will carry and certain other information.
Additionally, cable operators periodically are required to file various
informational reports with the FCC. Cable operators who operate in certain
frequency bands are required on an annual basis to file the results of their
periodic cumulative leakage testing measurements. Operators who fail to make
this filing or who exceed the FCC's allowable cumulative leakage index risk
being prohibited from operating in those frequency bands in addition to
other sanctions.
Technical Requirements. Historically, the FCC
has imposed technical standards applicable to the cable channels on which
broadcast stations are carried, and has prohibited franchising authorities
from adopting standards which were in conflict with or more restrictive than
those established by the FCC. The FCC has recently revised such standards
and made them applicable to all classes of channels which carry downstream
NTSC video programming. Local franchising authorities are permitted to
enforce the FCC's new technical standards. The FCC also has adopted
additional standards applicable to cable television systems using
frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to prevent
harmful interference with aeronautical navigation and safety radio services,
and has also established limits on cable system signal leakage. Periodic
testing by cable operators for compliance with these technical standards and
signal leakage limits is required. The Company believes that the Systems are
in compliance with these standards in all material respects. The 1992 Cable
Act requires the FCC to update periodically its technical standards to take
into account changes in technology and to entertain waiver requests from
franchising authorities who would seek to impose more stringent technical
standards upon their franchised cable systems. The FCC has adopted
regulations to implement the requirements of the 1992 Cable Act designed to
improve the compatibility of cable systems and consumer electronics
equipment. These regulations, inter alia, generally prohibit cable
operators from scrambling their basic service tier and from changing the
infrared codes used in their existing customer premises equipment. This
latter requirement could make it more difficult or costly for cable
operators to upgrade their customer premises equipment and the FCC has been
asked to reconsider its regulations. It is also anticipated that the FCC
will seek comment on additional proposed regulations designed to promote
equipment compatibility, including imposing further restrictions on the use
of scrambling by cable operators. Such proposals, if ultimately adopted,
could increase the capital and operating costs of providing cable service as
well as limit the ability of cable operators to offer new unregulated
services such as video on demand and multi-channel pay-per-view.
Pole Attachments. The FCC currently regulates
the rates and conditions imposed by certain public utilities for use of
their poles, unless under the Federal Pole Attachments Act state public
service commissions are able to demonstrate that they regulate rates, terms
and conditions of the cable television pole attachments. A number of states
(including Massachusetts, Michigan, New Jersey, New York, Ohio and Vermont)
and the District of Columbia have certified to the FCC that they regulate
the rates, terms and conditions for pole attachments. In the absence of
state regulation, the FCC administers such pole attachment rates through use
of a formula which it has devised and from time to time revises.
Other Matters. FCC regulation also includes
matters regarding a cable system's carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the fairness doctrine and rules governing political
broadcasts; customer service; home wiring; and limitations on advertising
contained in nonbroadcast children's programming.
Copyright. Cable television systems are subject
to federal copyright licensing covering carriage of broadcast signals. In
exchange for making semi-annual payments to a federal copyright royalty pool
and meeting certain other obligations, cable operators obtain a statutory
license to retransmit broadcast signals. The amount of this royalty payment
varies, depending on the amount of system revenues from certain sources, the
number of distant signals carried, and the location of the cable system with
respect to over-the-air television stations. Originally, the Federal
Copyright Royalty Tribunal was empowered to make and, in fact, did make
several adjustments in copyright royalty rates. This tribunal was
eliminated by Congress in 1993. Any future adjustment to the copyright
royalty rates will be done through an arbitration process to be supervised
by the U.S. Copyright office. Present rates remain in place until 1995
barring any changes in the FCC's signal carriage, syndicated exclusivity or
sports blackout rules. Cable operators are liable for interest on underpaid
and late paid royalty fees, but are not entitled to receive interest on
refunds due to overpayment of royalty fees.
The Copyright Office has commenced a proceeding
aimed at examining its policies governing the consolidated reporting of
commonly owned and contiguous cable systems. The present policies governing
the consolidated reporting of certain cable systems have often led to
substantial increases in the amount of copyright fees owed by the systems
affected. These situations have most frequently arisen in the context of
cable system mergers and acquisitions. While it is not possible to predict
the outcome of this proceeding, any changes adopted by the Copyright Office
in its current policies may have the effect of reducing the copyright impact
of certain transactions involving cable company mergers and cable system
acquisitions.
Various bills have been introduced into
Congress over the past several years that would eliminate or modify the
cable television compulsory license. The FCC has recommended to Congress
that it repeal the cable industry's compulsory copyright license. The FCC
determined that the statutory compulsory copyright license for local and
distant broadcast signals no longer serves the public interest and that
private negotiations between the applicable parties would better serve the
public. Without the compulsory license, cable operators might need to
negotiate rights from the copyright owners for each program carried on each
broadcast station in the channel lineup. Such negotiated agreements could
increase the cost to cable operators of carrying broadcast signals. The 1992
Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television broadcast stations and
cable operators do not obviate the need for cable operators to obtain a
copyright license for the programming carried on each broadcaster's signal.
Copyrighted music performed in programming
supplied to cable television systems by pay cable networks (such as HBO) and
basic cable networks (such as USA Network) has generally been licensed by
the networks through private agreements with the American Society of
Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"), the two major
performing rights organizations in the United States. As a result of
extensive litigation, ASCAP and BMI are both now required to offer "through
to the viewer" licenses to the cable networks which would cover the
retransmission of the cable networks' programming by cable systems to their
subscribers.
State and Local Regulation
Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to state and
local regulation, typically imposed through the franchising process. State
and/or local officials are usually involved in franchise selection, system
design and construction, safety, service rates, consumer relations, billing
practices and community related programming and services.
Cable television systems generally are operated
pursuant to nonexclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. Franchises generally
are granted for fixed terms and in many cases are terminable if the
franchise operator fails to comply with material provisions. Although the
1984 Cable Act provides for certain procedural protections, there can be no
assurance that renewals will be granted or that renewals will be made on
similar terms and conditions. Franchises usually call for the payment of
fees, often based on a percentage of the system's gross subscriber revenues,
to the granting authority. Upon receipt of a franchise, the cable system
owner usually is subject to a broad range of obligations to the issuing
authority directly affecting the business of the system. The terms and
conditions of franchises vary materially from jurisdiction to jurisdiction,
and even from city to city within the same state, historically ranging from
reasonable to highly restrictive or burdensome. The 1984 Cable Act places
certain limitations on a franchising authority's ability to control the
operation of a cable system operator and the courts have from time to time
reviewed the constitutionality of several general franchise requirements,
including franchise fees and access channel requirements, often with
inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the
area of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of
cable systems. Moreover, franchising authorities are immunized from monetary
damage awards arising from regulation of cable systems or decisions made on
franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a
franchise and the laws and regulations under which it was granted directly
affect the profitability of the cable television system. Cable franchises
generally contain provisions governing charges for basic cable television
services, fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy
of public streets and number and types of cable services provided.
Various proposals have been introduced at the
state and local levels with regard to the regulation of cable television
systems, and a number of states have adopted legislation subjecting cable
television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of
a public utility. Attempts in other states to regulate cable television
systems are continuing and can be expected to increase. Such proposals and
legislation may be preempted by federal statute and/or FCC regulation. To
date, the states in which the Company operates that have enacted such state
level regulation are New York, New Jersey, Massachusetts and Vermont. The
Company cannot predict whether other states in which it currently operates,
or in which it may acquire systems, will engage in such regulation in the
future.
The foregoing does not purport to describe all
present and proposed federal, state and local regulations and legislation
relating to the cable television industry. Other existing federal
regulations, copyright licensing and, in many jurisdictions, state and local
franchise requirements currently are the subject of a variety of judicial
proceedings, legislative hearings and administrative and legislative
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor
their impact upon the cable television industry or the Systems can be
predicted at this time.
ITEM 2. PROPERTIES
The Company's principal physical assets consist
of cable television operating plant and equipment, including signal
receiving, encoding and decoding devices, headends and distribution systems
and subscriber house drop equipment for each of its cable television
systems. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary
for the reception, amplification and modulation of signals, are located near
the receiving devices. The Company's distribution system consists primarily
of coaxial and fiber optic cables and related electronic equipment.
Subscriber devices consist of decoding converters. The physical components
of cable television systems require maintenance and periodic upgrading to
keep pace with technological advances.
The Company's cables and related equipment are
generally attached to utility poles under pole rental agreements with local
public utilities, although in some areas the distribution cable is buried in
underground ducts or trenches. See "Legislation and Regulation-Federal
Regulation."
The Company owns or leases parcels of real
property for signal reception sites (antenna towers and headends), microwave
facilities and business offices in each of its market areas, and owns most
of its service vehicles. The Company also leases certain cable, operating
and support equipment from a corporation owned by members of the Rigas
Family. All leasing transactions between the Company and its officers,
directors or principal stockholders, or any of their affiliates, are, in the
opinion of management, on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.
Substantially all of the assets of Adelphia's
subsidiaries are subject to encumbrances as collateral in connection with
the Company's credit arrangements, either directly with a security interest
or indirectly through a pledge of the stock in the respective subsidiaries.
See Note 3 to the Adelphia Communications Corporation Consolidated Financial
Statements. The Company believes that its properties, both owned and leased,
are in good operating condition and are suitable and adequate for the
Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal
proceedings, other than routine litigation incidental to the business, to
which the Company or any of its subsidiaries is a part of or to which any of
their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year 1995.
Executive Officers of the Registrant
The executive officers of the Company, first
elected to hold their respective positions on July 1, 1986 following the
reorganization of the Company as a holding company, serve at the discretion
of the Board of Directors. The executive officers of the Company are:
NAME AGE POSITION
John J. Rigas 70 Chairman, Chief Executive Officer,
President and Director
Michael J. Rigas 41 Senior Vice President, Operations and
Director
Timothy J. Rigas 39 Senior Vice President, Chief Financial
Chief Accounting Officer,
Treasurer and Director
James P. Rigas 37 Vice President, Strategic Planning
and Director
Daniel R. Milliard 47 Vice President, Secretary and
Director
John J. Rigas is the founder, Chairman,
President and Chief Executive Officer of Adelphia and is President of its
subsidiaries. Mr. Rigas has served as President or general partner of most
of the constituent entities which became wholly-owned subsidiaries of
Adelphia upon its formation in 1986, as well as the cable television
operating companies acquired by the Company which were wholly or partially
owned by members of the Rigas Family. Mr. Rigas has owned and operated cable
television systems since 1952. Among his business and community service
activities, Mr. Rigas is Chairman of the Board of Directors of Citizens
Bancorp., Inc., Coudersport, Pennsylvania, and a member of the Board of
Directors of Charles Cole Memorial Hospital. He is a director of the
National Cable Television Association and a past President of the
Pennsylvania Cable Television Association. He is also a member of the Board
of Directors of C-SPAN and the Cable Advertising Bureau, and is a Trustee of
St. Bonaventure University. He graduated from Rensselaer Polytechnic
Institute with a B.S. in Management Engineering in 1950.
John J. Rigas is the father of Michael J.
Rigas, Timothy J. Rigas and James P. Rigas, each of whom currently serves as
a director and executive officer of the Company.
Michael J. Rigas is Senior Vice President,
Operations of Adelphia and is a Vice President of its subsidiaries. Since
1981, Mr. Rigas has served as a Vice President, general partner or other
officer of the constituent entities which became wholly-owned subsidiaries
of Adelphia upon its formation in 1986, as well as the cable television
operating companies acquired by the Company which were wholly or partially
owned by members of the Rigas Family. From 1979 to 1981, he worked for
Webster, Chamberlain & Bean, a Washington, D.C. law firm. Mr. Rigas
graduated from Harvard University (magna cum laude) in 1976 and received his
Juris Doctor degree from Harvard Law School in 1979.
Timothy J. Rigas is Senior Vice President,
Chief Financial Officer, Chief Accounting Officer and Treasurer of Adelphia
and its subsidiaries. Since 1979, Mr. Rigas has served as Vice President,
general partner or other officer of the constituent entities which became
wholly-owned subsidiaries of Adelphia upon its formation in 1986, as well as
the cable television operating companies acquired by the Company which were
wholly or partially owned by members of the Rigas Family. Mr. Rigas
graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.
James P. Rigas is Vice President, Strategic
Planning of Adelphia and is a Vice President of its subsidiaries. Since
February 1986, Mr. Rigas has served as a Vice President or other officer of
the constituent entities which became wholly-owned subsidiaries of Adelphia
upon its formation in 1986, as well as the cable television operating
companies acquired by the Company which were wholly or partially owned by
members of the Rigas Family. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1980 and received a Juris Doctor degree and an M.A.
degree in Economics from Stanford University in 1984. From June 1984 to
February 1986, he was a consultant with Bain & Co., a management consulting
firm.
Daniel R. Milliard is Vice President and
Secretary of Adelphia and its subsidiaries, and also serves as President of
a subsidiary, Hyperion Telecommunications, Inc. From 1986 to 1992, Mr.
Milliard served as Vice President, Secretary and/or General Counsel of
Adelphia and the constituent entities which became wholly-owned subsidiaries
of Adelphia as well as the cable television operating companies acquired by
the Company which were wholly or partially owned by members of the Rigas
Family. He served as outside general counsel to the Company's predecessors
from 1979 to 1982. Mr. Milliard graduated from American University in 1970
with a Bachelor of Science degree in Business Administration. He received an
M.A. degree in Business from Central Missouri State University in 1971,
where he was an Instructor in the Department of Finance, School of Business
and Economics, from 1971-1973, and received a Juris Doctor degree from the
University of Tulsa School of Law in 1976. He is a Director of Citizens
Bancorp., Inc. in Coudersport, Pennsylvania and President of the Board of
Directors of Charles Cole Memorial Hospital.
Other Principal Employees
Orby G. Kelley, 63, joined the Company in 1986
as Vice President of Human Resources. Since 1981, Mr. Kelley served as Vice
President Human Resources-- Columbus Operations for Warner Amex Cable
Communications, Inc. Prior to that time he served in a similar capacity for
Colony Communications, Inc. and Landmark Communications, Inc. Mr. Kelley
received his B.A. degree from Old Dominion University in 1958 and his M.B.A.
from California Western University in 1980.
Daniel Liberatore, 44, has been Vice President
of Engineering since 1986. He is responsible for technical operations,
engineering and related supervisory and management functions for the Company
Systems. Mr. Liberatore received a B.S. degree in Electrical Engineering
from West Virginia University and served as director of engineering for
Warner Amex Cable Communications, Inc. from June 1982 until joining the
Company. From December 1980 to June 1982, Mr. Liberatore served as a Project
Administrator for Warner Amex Cable Communications, Inc.
James R. Brown, 32, joined the Company in 1984
and currently holds the position of Vice President of Finance. Mr. Brown
graduated with a B.S. degree in
Industrial and Management Engineering from Rensselaer Polytechnic Institute
in 1984.
Randall D. Fisher, 43, joined the Company in
1991 and is Vice President, General Counsel and Assistant Corporate
Secretary. Previously Mr. Fisher was in private practice with the
Washington, D.C. law firm of Baraff, Koerner, Olender & Hochberg, P.C. Mr.
Fisher earned his J.D. from Texas Tech University. He received a Masters
Degree in Public Administration from Midwestern University in Wichita Falls,
Texas, and a B.A. degree in Journalism from the University of Texas at
Austin.
Larry Brett, 42, joined the Company in May 1995
and currently holds the position of Corporate Director of Operations for the
Florida cluster. Mr. Brett was employed by TeleCable Corporation, a cable
television operator, from 1979 to 1995 and last served as Vice President,
Regional Operations, from 1982 to 1995. Mr. Brett received a B.B.A. degree
in finance and economics from Emory University in 1974 and an M.B.A. degree
from the University of Virginia's Darden School in 1979.
Colin H. Higgin, 34, joined the Company in
November 1992 as Deputy General Counsel and Assistant Secretary. Mr. Higgin
was an associate at Proskauer Rose Goetz & Mendelsohn from 1991 to 1992 and
Latham & Watkins from 1987 to 1991. Mr. Higgin graduated from the University
of Pennsylvania, Wharton School, with a B.S. degree in Economics in 1983 and
received his J.D. from Indiana University in 1987.
William C. Kent, 44, joined the Company in
August 1994 as Corporate Director of Operations for the New England, Ohio
and Virginia clusters. From 1993 to 1994, Mr. Kent served as a consultant
to the Multi-Media Services Group of Southern New England Telephone. From
1991 to 1992, he served as Director of Operations for the Providence, Rhode
Island cable system for Times Mirror. Mr. Kent was also employed by Viacom,
Inc., a worldwide entertainment and media concern, for seven years and last
served as General Manager of a cable system. He received a B.A. degree in
English from Wittenberg University in 1973 and an M.B.A. degree from
Cleveland State University in 1981.
Kathleen S. Mitchell, 47, joined the Company in
1989 and has held senior accounting and financial management positions.
From 1979 to 1988, Ms. Mitchell was employed by American Television and
Communications, Inc. Ms. Mitchell received her B.A. degree from Mount
Holyoke College in 1969 and her M.B.A. degree from the University of
Colorado in 1976.
Michael C. Mulcahey, CPA, 37, has been the
Director of Investor Relations since joining the Company in 1991. From 1987
to 1991, Mr. Mulcahey held accounting and tax positions with the Syracuse
office of Coopers & Lybrand. Mr. Mulcahey received his B.A. in Political
Science from State University of New York at Buffalo in 1980 and his M.B.A.
from Eastern Washington University in 1985.
James M. Kane, CPA, 32, joined the Company in
April 1992 and currently holds the position of Director of Finance. From
1989 to 1992, Mr. Kane served in accounting and consulting positions with
Price Waterhouse in Pittsburgh. From 1984 to 1987, Mr. Kane served in
accounting positions with Coopers & Lybrand in Pittsburgh. Mr. Kane received
his B.S. degree in Accounting from Pennsylvania State University in 1984 and
his M.B.A. from Carnegie Mellon's Graduate School of Industrial
Administration in 1989.
Robert G. Wahl, 53, joined the Company in May
1990 and was appointed to his present position of Corporate Director of
Operations for the Western New York, Eastern Pennsylvania, Western
Pennsylvania and New Jersey clusters in June 1994. From 1990 to 1994, Mr.
Wahl served as General Manager of the Company's Northeast system and, from
1992 to 1994, he also acted as Pittsburgh Regional Manager. Prior to his
employment with the Company, he served as Manager of the Horvitz Newspapers,
Inc., in Troy, New York. Mr. Wahl graduated from John Carroll University in
Cleveland with a B.S. degree in Business Administration in 1963.
LeMoyne T. Zacherl, 42, joined the Company in
November 1993 as Vice President Financial Operations and Administration.
Since 1987, Mr. Zacherl was a Corporate Controller and member of senior
management for Irvin Feld and Kenneth Feld Productions, Inc., a worldwide
entertainment conglomerate. From 1975 to 1987, Mr. Zacherl was with Coopers
& Lybrand and served in both the Pittsburgh, PA and Washington, D.C.
offices.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is listed
for trading on the National Association of Securities Dealers Automated
Quotations System National Market System (NASDAQ-NMS). Adelphia's NASDAQ-
NMS symbol is "ADLAC."
The following table sets forth the range of
high and low closing bid prices
of the Class A Common Stock on NASDAQ/NMS. Such bid prices represent
inter-dealer quotations, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
CLASS A COMMON STOCK
HIGH LOW
QUARTER ENDED:
June 30, 1993.................................. $ 18 $ 11 1/2
September 30, 1993............................. $ 20 5/8 $ 14
December 31, 1993.............................. $ 26 1/2 $ 16 3/4
March 31, 1994................................. $ 23 1/2 $ 12 3/4
June 30, 1994.................................. $ 14 1/2 $ 10
September 30, 1994............................. $ 15 1/2 $ 11 1/2
December 31, 1994.............................. $ 13 1/4 $ 8 1/4
March 31, 1995................................. $ 11 1/2 $ 8 3/4
As of June 26, 1995, there were approximately
147 holders of record of Adelphia's Class A Common Stock. As of June 26,
1995, three record holders were registered clearing agencies holding Class A
Common Stock on behalf of participants in such clearing agencies.
No established public trading market exists for
Adelphia's Class B Common Stock. As of the date hereof, the Class B Common
Stock was held of record by seven persons, principally members of the Rigas
Family, including a Pennsylvania general partnership all of whose partners
are members of the Rigas Family. The Class B Common Stock is convertible
into shares of Class A Common Stock on a one-to-one basis. As of June 26,
1995 the Rigas Family owned 99.1% of the outstanding Class B Common Stock.
Adelphia has never paid a cash dividend on its
common stock and anticipates that for the foreseeable future any earnings
will be retained for use in its business. The ability of Adelphia to pay
cash dividends on its common stock is limited by the provisions of its
indentures. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except
per share amounts)
The selected consolidated financial data as of
and for each of the five years in the period ended March 31, 1995 have been
derived from the audited consolidated financial statements of the Company.
YEAR ENDED MARCH 31,
1991 1992 1993 1994 1995
STATEMENT OF OPERATIONS DATA:
Revenues..................$ 248,586 $ 273,630 $ 305,222 $ 319,045 $ 361,505
Direct Operating and
Programming Expenses.. 66,007 74,787 82,377 90,547 106,993
Selling, General and
Administrative Expenses 41,421 44,427 49,468 52,801 63,487
Operating Income before
Depreciation and
Amortization......... 141,158 154,416 173,377 175,697 191,025
Depreciation and
Amortization......... 79,427 84,817 90,406 89,402 97,602
Operating Income..... 61,731 69,599 82,971 86,295 93,423
Interest Income from
Affiliates......... 1,596 3,085 5,216 9,188 11,112
Other Income (Expense). 1,750 968 1,447 (299) 1,453
Priority Investment In-
come (a).............. 19,175 22,300 22,300 22,300 22,300
Cash Interest Expense.. (132,025) (129,237) (164,695) (180,456) (180,942)
Noncash Interest
Expense............... (31,612) (35,602) (164) (1,680) (14,756)
Equity in Loss of
Joint Ventures........ (61,975) (52,718) (46,841) (30,054) (44,349)
Loss before Income
Taxes, Extraordinary
Loss and Cumulative
Effect of Change in
Accounting
Principle(b).......... (141,360) (121,605) (99,766) (94,706) (111,759)
Income Tax Expense..... -- -- (3,143) (2,742) 5,475
Loss before Extra-
ordinary Loss and
Cumulative Effect of
Change in Accounting
Principle............. (141,360) (121,605) (102,909) (97,448) (106,284)
Extraordinary Loss (b). -- -- (14,386) (752) --
Cumulative Effect of
Change in Accounting
for Income Taxes (b).. -- -- (59,500) (89,660) --
Net Loss............... $(141,360) $(121,605) $(176,795) $(187,860) $ (106,284)
Loss per Weighted Average
Share of Common Stock
before Extraordinary
Loss and Cumulative
Effect of Change in
Accounting Principle.. $ (10.03) $ (8.80) $ (6.80) $ (5.66) $ (4.32)
Net Loss per Weighted
Average Share of
Common Stock........... $ (10.23) $ (8.80) $ (11.68) $ (10.91) $ (4.32)
Cash Dividends Declared
per Common Share...... -- -- -- -- --
YEAR ENDED MARCH 31,
1991 1992 1993 1994 1995
BALANCE SHEET DATA:
Cash and Cash
Equivalents........... $ 18,592 $ 11,173 $ 38,671 $ 74,075 $ 5,054
Investment in and
Amounts Due from
Olympus (a)........... 79,030 64,972 7,692 9,977 11,943
Total Assets........... 981,960 925,791 949,593 1,073,846 1,267,291
Total Debt............. 1,495,025 1,554,270 1,731,099 1,793,711 2,021,610
Debt Net of Cash (c)... 1,476,433 1,543,097 1,692,428 1,719,636 2,016,565
Stockholders' Equity
(Deficiency).......... (591,939) (713,544) (868,614) (918,064) (1,011,575)
OTHER DATA:
EBITDA (d)........... $ 163,679 $ 180,769 $ 202,340 $ 207,936 $ 225,890
(a) On February 28, 1995, Olympus entered into a Liquidation Agreement
with the Gans Family ("Gans"), an Olympus limited partner, pursuant to which
the Gans Limited Partner Interests in Olympus were liquidated.
Concurrently, with the closing of the Liquidation Agreement, ACP Holdings,
Inc., a wholly-owned subsidiary of the Company and managing general partner
of Olympus, certain shareholders of Adelphia, Olympus and various Telesat
Entities ("Telesat"), wholly-owned subsidiaries of FP & L Group, Inc.
("FPL"), entered into an Investment Agreement, whereby Telesat contributed
to Olympus substantially all of the assets associated with certain cable
television systems, serving approximately 50,000 subscribers in southern
Florida, in exchange for general and limited partner interests and newly
issued preferred limited partner interests ("PLP interests") in Olympus. At
that time, Adelphia converted certain amounts owed to the Company by Olympus
for advances, PLP interests and unpaid priority return on the PLP interests,
to capital contributions. The Company's return on its priority investment
in Olympus is based on a 16.5% return on its nonvoting PLP interests,
although the Company recognizes priority investment income only to the
extent received. At March 31, 1995 $2,997 accumulated priority return
remained unpaid. Investment in and amounts due from Olympus at March 31,
1995 are comprised of the following:
Gross Investment in PLP Interests and General Partner's
Equity.................................................$ 298,402
Excess of Ascribed Value of Contributed
Property over Historical Cost.......................... (98,303)
Cumulative Equity in Net Loss of Olympus............... (318,707)
Additional investment in Olympus....................... 69,920
Investments in Olympus................................. (48,688)
Amounts due from Olympus............................... 60,631
Total.................................................. $ 11,943
(b) "Extraordinary loss" relates to loss on the early retirement of debt.
"Cumulative Effect of Change in Accounting Principle" refers to a change in
accounting principle for Olympus and the Company. Effective January 1, 1993
and April 1, 1993, respectively, Olympus and the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", which requires an asset and liability
approach for financial accounting and reporting for income taxes. SFAS No.
109 resulted in the cumulative recognition of an additional liability by
Olympus and the Company of $59,500 and $89,660,respectively.
(c) Represents total debt less cash and cash equivalents.
(d) Earnings before interest, income taxes, depreciation and amortization,
equity in net loss of Olympus, other noncash charges, extraordinary loss and
cumulative effect of change in accounting principle ("EBITDA"). EBITDA and
similar measurements of cash flow are commonly used in the cable television
industry to analyze and compare cable television companies on the basis of
operating performance, leverage and liquidity. While EBITDA is not an
alternative indicator of operating performance to operating income as
defined by generally accepted accounting principles, the Company's
management believes EBITDA is a meaningful measure of performance as
substantially all of the Company's financing agreements contain financial
covenants based on EBITDA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollars in thousands)
Results of Operations
General
Adelphia Communications Corporation ("Adelphia" or the "Company")
earned substantially all of its revenues in each of the last three fiscal
years from monthly subscriber fees for basic, satellite, premium and
ancillary services (such as installations and equipment rentals), local and
national advertising sales, pay-per-view programming, home shopping networks
and competitive access telecommunications services. Certain changes in the
way the Company offers and charges for subscriber services were implemented
as of September 1, 1993 under the 1992 Cable Act and under the Company's
revised method of offering certain services. See "Regulatory and
Competitive Matters" below.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the recent upgrading and
expansion of systems and interest costs associated with financing activities
will continue to have a negative impact on the reported results of
operations. Also, significant charges for depreciation, amortization and
interest are expected to be incurred in the future by the Olympus joint
venture, which will also adversely impact Adelphia's future results of
operations. Adelphia expects to report net losses for the next several
years.
The Company currently offers competitive access telecommunications
services through a subsidiary, Hyperion Telecommunications, Inc.
("Hyperion"). Since Hyperion's formation in October 1992, it has formed
operating companies or entered into joint venture partnerships to develop
and operate competitive access networks in twelve select metropolitan areas.
The investment in Hyperion has resulted in a reduction in the Company's
operating income before depreciation and amortization for fiscal years 1993,
1994 and 1995 of $900, $1,459 and $1,837, respectively. Included in these
amounts are the equity in net loss of Hyperion's joint venture partnerships,
which amounted to $0, $387 and $963 for the fiscal years 1993, 1994 and
1995, respectively.
The following table is derived from Adelphia Communications Corporation
Consolidated Financial Statements for the years presented that are included
in this Annual Report on Form 10-K and sets forth the historical percentage
relationship of the components of operating income contained in such
financial statements for the years indicated.
PERCENTAGE OF REVENUES
FOR YEAR ENDED MARCH 31,
1993 1994 1995
Revenues....................... 100.0% 100.0% 100.0%
Operating expenses:
Direct operating and
programming................... 27.0 28.4 29.6
Selling, general and
administrative................ 16.2 16.5 17.6
Operating income before
depreciation and amortization. 56.8 55.1 52.8
Depreciation and amortization.. 29.6 28.0 27.0
Operating income............... 27.2% 27.1% 25.8%
COMPARISON OF THE YEARS MARCH 31, 1993, 1994 AND 1995
Revenues. Revenues increased approximately 4.5% for the year ended March
31, 1994 compared with fiscal 1993. The majority of the increase was
attributable to basic subscriber growth and rate increases, with the
remainder primarily attributable to the expansion of advertising sales and
services. Revenues increased approximately 13.3% for the year ended March
31, 1995 compared with fiscal 1994. The increase was attributable to the
following:
Acquisitions......................................................... 87%
Basic subscriber growth.............................................. 10%
Rate increases....................................................... 0%
Advertising sales and other services................................. 3%
100%
Revenues for the year ended March 31, 1994 and 1995 fully reflected the
repackaging and adjustment of equipment and installation charges, effective
in July 1993, and rates for basic services and certain other satellite
programming services under CableSelect, the Company's method of offering
services that was implemented effective September 1, 1993. In addition,
fiscal 1994 and 1995 revenues were subject to the FCC rate freeze.
Increases in total revenues for fiscal year 1994 are partially offset by a
lower premium penetration rate, which caused premium service revenues to
remain relatively constant compared to the respective prior year.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs
and technical expenses, increased 9.9% for the year ended March 31, 1994
compared with the prior year primarily due to increased costs of providing
programming to subscribers and incremental costs associated with increased
subscribers and revenues. Direct operating and programming expenses
increased 18.2% for the year ended March 31, 1995 compared with fiscal 1994
primarily due to the increased operating expenses from acquired systems,
increased programming costs and incremental costs associated with increased
subscribers.
Selling, General and Administrative Expenses. These expenses, which are
mainly comprised of costs related to system offices, customer service
representatives and sales and administrative employees, increased 6.7% and
20.2% the years ended March 31, 1994 and 1995, respectively, compared with
the respective prior years. The increases were primarily due to incremental
costs associated with acquisitions, subscriber growth and implementation of
the 1992 Cable Act and regulations thereunder. As a percentage of revenues,
such expenses remained relatively constant for fiscal 1994 compared with the
prior year. Selling, general and administrative expenses increased as a
percentage of revenues for fiscal 1995, as compared with fiscal 1994
primarily due to wage and benefit increases without a corresponding increase
in revenues as a result of the rate freeze enacted by the 1992 Cable Act.
Operating Income Before Depreciation and Amortization. Operating income
before depreciation and amortization was $173,377, $175,697 and $191,025 for
the years ended March 31, 1993, 1994 and 1995, respectively, representing
operating margins of 56.8%, 55.1% and 52.8%, respectively. The increases in
operating income before depreciation and amortization for the years ended
March 31, 1994 and 1995 were due primarily to the impact of acquisitions,
offset by cost increases at a rate greater than increases in revenue due
largely to the above noted rate freeze.
Depreciation and Amortization, Depreciation and amortization expense
was higher for the years ended March 31, 1994 and 1995, compared with the
respective prior year, primarily due to increased depreciation and
amortization related to acquisitions consummated during fiscal 1994 and 1995
and capital expenditures made during fiscal 1993 and 1994.
Priority Investment Income. Priority investment income is comprised of
payments received from Olympus of accrued priority return on the Company's
investment in PLP Interests in Olympus. The Company recognizes priority
investment income only to the extent received. Priority investment income
remained unchanged for the years ended March 31, 1993, 1994 and 1995.
EBITDA. EBITDA (earnings before interest, income taxes, depreciation and
amortization, equity in net loss of joint ventures, other non-cash charges,
extraordinary loss and cumulative effect of change in accounting principle)
amounted to $202,340, $207,936 and $225,890 for the years ended March 31,
1993, 1994 and 1995, respectively. The increase of 2.8% for the year ended
March 31, 1994 compared with fiscal 1993 is primarily due to increased
revenues, partially offset by increased operating expenses. The increase of
8.6% for the year ended March 31, 1995 compared with fiscal 1994 is
primarily due to the acquisition of cable systems during fiscal 1995.
Increased revenues and operating expenses during fiscal 1995 compared with
the prior year primarily reflect the impact of acquisitions consummated
during fiscal 1995. While EBITDA is not an alternative to operating income
as defined by generally accepted accounting principles, the Company's
management believes EBITDA is a meaningful measure of performance as
substantially all of the Company's financing agreements contain financial
covenants based on EBITDA.
Interest Expense. Interest expense increased approximately 10.5% and
7.4% for the years ended March 31, 1994 and 1995, respectively, compared
with the respective prior year. Approximately 56% of the increase for
fiscal 1995 was due to additional interest cost associated with incremental
debt related to acquisitions. Interest expense increased during fiscal 1994
compared with the prior year due primarily to higher levels of debt
outstanding and the refinancing of short-term floating rate debt with long-
term fixed rate debt during fiscal 1993 and 1994. In the 18 months ending
March 31, 1994, the Company issued debt securities in four separate
transactions (see "Financing Activities"). Each issue of these securities
requires repayment of principal at maturity, the earliest of which is in
July 2000. The interest rate on these securities ranged from 9 1/2% to 11
7/8%. Some of the proceeds from the securities were used to repay bank debt
which had weighted average interest rates of 6.36% and 6.35% at March 31,
1993 and 1994, respectively. Interest expense includes $164, $1,680 and
$14,756 for the years ended March 31, 1993, 1994 and 1995, respectively, of
non-cash accretion of original issue discount and non-cash interest expense.
Equity in Loss of Joint Ventures. The equity in loss of joint ventures
represents primarily the Company's pro rata share of Olympus' losses and the
accretion requirements of Olympus' redeemable limited partner interests. The
decrease in fiscal 1994, compared with the prior year, is primarily
attributable to a decrease in the loss of Olympus during such period, as
compared with fiscal 1993, which operations were adversely impacted by
Hurricane Andrew. The increase in fiscal 1995, compared with the prior
year, is primarily attributable to the impact of the sale by Olympus of
Northeast and lower business interruption revenue.
Net Loss. The Company reported net losses of $176,795, $187,860, and
$106,284 for the years ended March 31, 1993, 1994 and 1995, respectively.
Included in net loss for fiscal 1993 is the cumulative effect of change in
accounting for income taxes by Olympus of $59,500 and the extraordinary loss
for the early extinguishment of debt of $14,386. Net loss for fiscal 1994
included the cumulative effect of the change in accounting of income taxes
by the Company of $89,660. In addition to the effect of these items, net
loss decreased by $5,461 from fiscal 1993 to 1994 and increased by $8,836
for fiscal 1994 to fiscal 1995. The decrease in net loss in fiscal 1994
when compared with the prior year was due primarily to the significant
decrease in the equity in net losses of joint ventures (primarily Olympus),
and higher operating income, offset by higher interest expense. The
increase in net loss in fiscal 1995 when compared with fiscal 1994 was
primarily due to an increase in the equity in net loss of joint venture
(primarily Olympus) and higher non-cash interest expense, partially offset
by higher operating income.
Liquidity and Capital Resources
The cable television business is capital intensive and typically
requires continual financing for the construction, modernization,
maintenance, expansion and acquisition of cable systems. During the three
fiscal years in the period ended March 31, 1995, the Company committed
substantial capital resources for these purposes and for investments in
Olympus and other affiliates and entities. These expenditures were funded
through long-term borrowings and, to a lesser extent, internally generated
funds. The Company's ability to generate cash to meet its future needs will
depend generally on its results of operations and the continued availability
of external financing.
Capital Expenditures. The Company has developed an innovative
fiber-to-feeder network architecture which is designed to increase channel
capacity and minimize future capital expenditures, while positioning the
Company to take advantage of future opportunities. Management believes its
capital expenditures program has resulted in higher levels of channel
capacity and addressability in comparison to other cable television
operators.
Capital expenditures for the years ended March 31, 1993, 1994 and 1995,
were $70,975, $75,894 and $92,082, respectively. The increase in capital
expenditures for fiscal 1993, 1994 and 1995, compared to each prior year,
was primarily due to the acceleration of the rebuilding of plant using
fiber-to-feeder technology, and expenditures related to faster than
expected growth of the Company's competitive access telecommunications
subsidiary, Hyperion Telecommunications, Inc. Management expects capital
expenditures for fiscal 1996 to be approximately equal to fiscal 1995.
Financing Activities. The Company's financing strategy has been to
maintain its public long-term debt at the parent holding company level while
the Company's consolidated subsidiaries have their own senior and
subordinated credit arrangements with banks and insurance companies. The
Company's ability to generate cash adequate to meet its future needs will
depend generally on its results of operations and the continued availability
of external financing. During the three-year period ended March 31, 1995,
the Company funded its working capital requirements, capital expenditures,
investments in Olympus and other affiliates and entities and the redemption
of the 16.5% Senior Discount Notes and 13% Senior Subordinated Notes through
long-term borrowings primarily from banks and insurance companies,
short-term borrowings, internally generated funds and the issuance of parent
company public debt and equity. The Company generally has funded the
principal and interest obligations on its long-term borrowings from banks
and insurance companies by refinancing the principal with new loans or
through the issuance of parent company debt securities, and by paying the
interest out of internally generated funds. Adelphia has funded the interest
obligations on its public borrowings from internally generated funds.
Most of Adelphia's directly-owned subsidiaries have their own senior
credit agreements with banks and/or insurance companies. Typically,
borrowings under these agreements are collateralized by the stock in and, in
some cases, by the assets of the borrowing subsidiary and its subsidiaries
and, in some cases, are guaranteed by such subsidiary's subsidiaries. At
March 31, 1995, an aggregate of $942,350 in borrowings was outstanding under
these agreements. These agreements contain certain provisions which, among
other things, provide for limitations on borrowings of and investments by
the borrowing subsidiaries, transactions between the borrowing subsidiaries
and Adelphia and its other subsidiaries and affiliates, and the payment of
dividends and fees by the borrowing subsidiaries. Several of these
agreements also contain certain cross-default provisions relating to
Adelphia or other subsidiaries. These agreements also require the
maintenance of certain financial ratios by the borrowing subsidiaries. In
addition, at March 31, 1995, an aggregate of $144,000 in subordinated and
unsecured borrowings by Adelphia's subsidiaries was outstanding under credit
agreements containing limitations and restrictions similar to those
mentioned above. See Note 3 to the Adelphia Communications Corporation
Consolidated Financial Statements. The Company is in compliance with the
financial covenants and related financial ratio requirements contained in
its various credit agreements, based on operating results for the period
ended March 31, 1995.
At March 31, 1995, Adelphia's subsidiaries had an aggregate of $117,000
in unused credit lines with banks, part of which is subject to achieving
certain levels of operating performance. In addition, the Company had an
aggregate $5,045 in cash and cash equivalents at March 31, 1995 which
combined with the Company's unused credit lines with banks aggregated to
$122,045. The Company has the ability to pay interest on its 9 1/2% PIK
Notes by issuing additional notes totalling approximately $66,630 in lieu of
cash interest payments through February 15, 1999. Based upon the results of
operations of subsidiaries for the quarter ended March 31, 1995,
approximately $141,000 of available assets could have been transferred to
Adelphia at March 31, 1995, under the most restrictive covenants of the
subsidiaries' credit agreements. The subsidiaries also have the ability to
sell, dividend or distribute certain assets to other subsidiaries or
Adelphia, which would have the net effect of increasing availability. At
March 31, 1995, the Company's unused credit lines were provided by reducing
revolving credit facilities whose revolver periods expire on April 1, 1995
through September 30, 2003. The Company's scheduled maturities of debt are
currently expected to total $114,921 for fiscal 1996.
At March 31, 1995, the Company's total outstanding debt aggregated
$2,021,610 which included $935,260 of parent debt and $1,086,350 of
subsidiary debt. Bank debt interest rates are based upon one or more of the
following rates at the option of ACC: prime rate plus 0% to 1.5%;
certificate of deposit rate plus 1.25% to 2.75%; or Eurodollar (or London
Interbank Offered) rate plus 1% to 2.5%. The Company's weighted average
interest rate of notes payable to banks and institutions was approximately
9.33% at March 31, 1995, compared to 8.91% at March 31, 1994. At March 31,
1995, approximately 55% of such debt was subject to fixed interest rates for
at least one year under the terms of such debt or applicable interest rate
swap agreements. Approximately 76% of the Company's total indebtedness is
at fixed interest rates as of March 31, 1995. Adelphia has entered into
interest rate swap agreements to mitigate its exposure to interest rate
fluctuations by attempting to achieve an appropriate balance between its
fixed and variable rate debt.
On May 14, 1992, Adelphia completed offerings of $400,000 aggregate
principal amount of unsecured 12 1/2% Senior Notes Due 2002 and of 1,500,000
shares of its Class A Common Stock. The shares of Class A Common Stock were
sold at a public offering price of $15.00 per share, including 750,000 of
such shares which were purchased at the public offering price by certain
members of the Rigas Family. The net proceeds from these offerings were
approximately $389,000 for the offering of the 12 1/2% Notes and $21,700 for
the offering of the Class A Common Stock. On July 1, 1992, $260,000 of such
net proceeds was used for the redemption of all outstanding 16 1/2% Senior
Discount Notes at 104% of par.
On September 10, 1992, Adelphia completed an offering of $125,000
aggregate principal amount of 11 7/8% Senior Debentures Due 2004. The net
proceeds from this offering were approximately $120,600.
On March 11, 1993, Adelphia completed the placement of $130,000
aggregate principal amount of 9 7/8% Senior Debentures Due 2005. The net
proceeds from this placement were approximately $125,307.
On July 28, 1993, Adelphia completed the placement of $110,000 aggregate
principal amount of 10 1/4% Senior Notes Due 2000, Series A. The net
proceeds from this placement were approximately $106,961.
On January 14, 1994, Adelphia completed a public offering of 9,132,604
shares of Class A Common Stock (the "Stock Offering"). Of the 9,132,604
shares of Class A Common Stock sold in the Stock Offering, 3,300,000 shares
were sold to the public at $18.00 per share and 5,832,604 shares were sold
directly by Adelphia to partnerships controlled by members of the Rigas
Family, at the public offering price less the underwriting discount.
Highland Holdings and Syracuse Hilton Head
Holdings, L.P., which purchased 4,374,453 and 1,458,151 of such 5,832,604
shares, respectively, hold and control the Managed Systems.
On February 22, 1994, the Company issued, in a private placement,
$150,000 aggregate principal amount of 9 1/2% Senior Pay-In-Kind ("PIK")
Notes Due 2004, Series A. The net proceeds from the 9 1/2% Notes of
approximately $147,000 were used to repay outstanding bank debt of
subsidiaries in order to extend the scheduled maturities of the Company's
long-term debt. The Company has the ability to pay interest on its 9 1/2 %
PIK Notes by issuing additional notes totalling approximately $66,630 in
lieu of cash interest payments through February 15, 1999.
In May 1994, Adelphia purchased on the open market $10,000 of its 10
1/4% Senior Notes due in 2000 at a price of 94.5% of face value plus accrued
interest.
On February 28, 1995, as a part of the Telesat Investment Agreement,
FP&L Group Inc. purchased 1,000,000 shares of newly issued Class A Common
Stock for $15,000.
On March 15, 1995, certain subsidiaries of the Company entered into a
$200,000 revolving credit facility, maturing September 30, 2003. Initial
borrowings under the revolving credit facility were used to repay existing
indebtedness of the Borrowers. The maximum available under the agreement is
reduced on June 30, 1997 by the lesser of $25,000 or 50% of the unused and
available commitment. Thereafter, the credit facility provides for
mandatory reductions in the revolving loan commitment, in increasing
quarterly amounts, commencing June 30, 1997 through September 30, 2003.
Acquisitions. On March 10, 1994, the Company purchased a 75% equity
interest in Three Rivers Cable Associates, L.P. ("TR") for $6,000. TR
serves approximately 15,000 subscribers in Ohio and approximately 3,000
subscribers in Pennsylvania, which are contiguous with existing Company
owned systems. Adelphia has also committed to provide a fully
collateralized $18,000 line of credit, similar to that which would be
available to TR had it borrowed such monies from a commercial bank. At
March 31, 1995, there were outstanding borrowings of $14,859 under this
agreement.
On March 31, 1994, Adelphia acquired from Olympus the rights to provide
alternate access in its respective franchise areas and an investment in the
Sunshine Network, L.P. for a purchase price of $15,500. The purchase price
of the assets resulted in a reduction of amounts due Adelphia of $15,500.
Also, on March 31, 1994, Adelphia acquired from certain Managed Partnerships
the rights to provide alternate access in their respective franchise areas
for a purchase price of $14,000. Additionally, on March 31, 1994, Adelphia
purchased real property from Dorellenic and Island Partners, L.P.,
partnerships owned by certain executive officers of the Company, for a total
of $14,312.
On April 12, 1994, Adelphia purchased for $15,000 (i) convertible
preferred units in Niagara Frontier Hockey, L.P., (the "Sabres Partnership")
which owns the Buffalo Sabres National Hockey League Franchise, convertible
to a 34% equity interest and (ii) warrants allowing Adelphia to increase its
interest to 40%. Adelphia believes this investment will be competitively
advantageous in the Buffalo cable television market. The Sabres Partnership
will control, through a wholly-owned subsidiary, the Crossroads Arena, a new
sports and entertainment facility expected to be completed in late 1996.
Adelphia's convertible preferred units will earn a 4% cumulative preferred
return beginning after the first National Hockey League game is played at
the Crossroads Arena.
On May 12, 1994, Adelphia invested $3,000 for a 20% interest in
SuperCable ALK International, a cable operator in Caracas, Venezuela. In
April 1994, Adelphia invested $4,200 in Commonwealth Security Systems, Inc.
in exchange for an 8.75% $4,200 convertible note and warrants. The note is
convertible into a 33% fully-diluted common equity interest on demand. The
warrants entitle Adelphia to acquire up to a 40% fully diluted common equity
interest for an additional $670.
On June 16, 1994, Adelphia invested $34,000 in TMC Holdings Corporation
("THC"), the parent of Tele-Media Company of Western Connecticut. THC owns
cable television systems serving approximately 43,000 subscribers in Western
Connecticut. The investment in THC provides Adelphia with a $30,000
preferred equity interest in THC and a 75% non-voting common equity
interest, with a liquidation preference to the remaining 25% common stock
ownership interest in THC. Adelphia has the right to convert such interest
to a 75% voting common equity interest, with a liquidation preference to the
remaining shareholders' 25% common stock ownership interest, on demand
subject to certain regulatory approvals. The acquisition of THC was
accounted for using the purchase method of accounting. The consolidated
statements of operations and cash flows include the operations of the
acquired system from June 16, 1994. Debt assumed, included in notes payable
of subsidiaries to banks and institutions, was $52,000 at closing.
On June 30, 1994, Adelphia acquired from Olympus 85% of the common stock
of Northeast Cable, Inc. ("Northeast") for a purchase price of $31,875.
Northeast owns cable television systems serving approximately 36,500
subscribers in eastern Pennsylvania. Of the purchase price, $16,000 was
paid in cash and the remainder resulted in a decrease in Adelphia's
receivable from Olympus. The acquisition of Northeast was accounted for
using the purchase method of accounting. The consolidated statements of
operations and cash flows include the operations of the acquired system
since June 30, 1994. Debt assumed, included in notes payable of
subsidiaries to banks and institutions, was $42,300 at closing.
On November 8, 1994, Page Call, Inc., a company 49.9% owned by Adelphia,
was a successful bidder for three regional narrowband PCS licenses,
covering 62% of the country's population. Page Call, Inc., was recently
established to develop a nationwide paging service. Page Call, Inc.'s
aggregate final bid for the three licenses was $52,900, an amount reduced to
$31,800 due to its "designated entity" status.
On December 27, 1994, Adelphia exchanged its existing investment in TMIP
with a Managed System for a note in the amount of $13,000.
On January 10, 1995, Adelphia issued 399,087 shares of Class A Common
Stock in connection with the merger of a wholly-owned subsidiary of Adelphia
into Oxford Cablevision, Inc. ("Oxford"), one of the Terry Family cable
systems. Oxford serves approximately 4,200 subscribers located in the North
Carolina counties of Granville and Warren. The acquisition of Oxford was
accounted for using the purchase method of accounting. The consolidated
statements of operations and cash flows include the operations of the
acquired systems since January 10, 1995. Adelphia assigned the rights to
purchase the stock of the other Terry Family cable systems to a Managed
System.
On January 31, 1995, Adelphia acquired Tele-Media Company of Martha's
Vineyard, L.P. ("Martha's Vineyard") for $11,775, a cable system serving
approximately 7,000 subscribers located in Martha's Vineyard, Massachusetts.
This system is part of Adelphia's New England cluster. The acquisition of
Martha's Vineyard was accounted for using the purchase method of accounting.
The consolidated statements of operations and cash flows include the
operations of the acquired system since January 31, 1995.
On June 12, 1995, Adelphia announced the signing of definitive
agreements for the purchase of all of the cable systems of Eastern Telecom
Corporation, Robinson Cable TV, Inc. and First Carolina Cable TV, L.P.
These systems together serve approximately 58,000 subscribers and are being
purchased for an aggregate price of $92,000.
On June 28, 1995, Adelphia and other relevant parties terminated their
previously announced November 1994 letter of intent to increase by $63,000
to $75,000 the overall investment of Adelphia and the companies it manages
(the "Adelphia Group") in cable systems held by Tele-Media Investment
Partnership, L.P. and certain other Tele-Media controlled entities
(collectively, "Tele-Media"). The Adelphia Group will continue to hold its
existing investments in and recent acquisitions of Tele-Media cable systems,
some of which are held by Adelphia as described herein.
Olympus. During the years ended March 31, 1993 and 1994 the Company made
advances of $49,061 and $16,554, respectively, to Olympus. Such advances
provided funds for capital expenditures, the repayment of debt and working
capital. In addition, the Company's investment in Olympus increased by
$15,400 in fiscal 1994 in connection with the purchase by the Company from
Olympus of rights to provide alternate access services in Olympus' franchise
areas and an investment in an unaffiliated partnership. During each of the
years ended March 31, 1993, 1994 and 1995, the Company received priority
investment income from Olympus of $22,300.
On February 28, 1995, Olympus entered into a Liquidation Agreement with
the Gans Family ("Gans"), an Olympus limited partner. Concurrently, with the
closing of the Liquidation Agreement, ACP Holdings, Inc., a wholly-owned
subsidiary of the Company and managing general partner of Olympus, certain
shareholders of Adelphia, Olympus and various Telesat Entities ("Telesat"),
wholly-owned subsidiaries of Florida Power and Light Company ("FPL"),
entered into an Investment Agreement, whereby Telesat contributed to Olympus
substantially all of the assets associated with certain cable television
systems, serving approximately 50,000 subscribers in southern Florida, in
exchange for general and limited partner interests and newly issued
preferred limited partner interests ("PLP interests") in Olympus. At that
time, Adelphia converted certain amounts owed the Company by Olympus for
advances, PLP interests and unpaid priority return on the PLP interests, to
capital contributions. This transaction, net of advances made to Olympus
during the year ended March 31, 1995, resulted in a net reduction of the
amount due from Olympus for advances of $25,307. After this transaction
Adelphia's ownership in Olympus is 50% voting interest, with FPL as its only
other partner in Olympus.
Managed Partnerships. On September 29, 1993, the Board of Directors of
the Company authorized the Company to make loans in the future to Highland
Video Associates, L.P. ("Highland") and Syracuse Hilton Head Holdings, L.P.
("SHHH") up to an amount of $25,000 for each. During the years ended March
31, 1994 and 1995, the Company made advances in the net amount of $7,828 and
$10,028, respectively, to these and other related parties, primarily for
capital expenditures and working capital purposes.
On October 6, 1993, Adelphia purchased the 14% preferred Class B Limited
Partnership Interest in SHHH for $18,338 from Robin Media Group, an
unrelated party. SHHH is a joint venture of the Rigas Family and Tele-
Communications, Inc., whose interests in SHHH are junior to Adelphia's.
During the year ended March 31, 1994, the Company made loans in the net
amount of $15,000 to SHHH, to facilitate the acquisition of cable television
systems serving Palm Beach County, Florida from unrelated parties. During
fiscal 1995, the Company sold its investment in TMIP to SHHH for $13,000.
On January 31, 1995, a wholly owned subsidiary of Adelphia received a
$20,000 preferred investment from SHHH to facilitate the acquisition of
cable properties from Tele-Media of Delaware.
Resources. The Company plans to continue to explore and consider new
commitments, arrangements or transactions to refinance existing debt,
increase the Company's liquidity or decrease the Company's leverage. These
could include, among other things, the future issuance by Adelphia of public
or private equity or debt and the negotiation of new or amended credit
facilities. These could also include entering into acquisitions, joint
ventures or other investment or financing activities, although no assurance
can be given that any such transactions will be consummated. The Company's
ability to borrow under current credit facilities and to enter into
refinancings and new financings is limited by covenants contained in
Adelphia's indentures and its subsidiaries' credit agreements, including
covenants under which the ability to incur indebtedness is in part a
function of applicable ratios of total debt to cash flow.
During the year ended March 31, 1995, the increase in capital
expenditures and accounts payable was primarily attributed to the companies
acquired and an increase in the level of expenditures for new technology and
rebuild activity. The increase in accrued interest and other liabilities
resulted from the timing of the payment of interest due on the Company's
indebtedness. Deferred taxes increased as of March 31, 1995 compared with
the balance as of March 31, 1994 primarily due to the impact of acquired
companies.
The Company believes that cash and cash equivalents, internally
generated funds, borrowings under existing credit facilities, and future
financing sources will be sufficient to meet its short-term and long-term
liquidity and capital requirements. Although in the past the Company has
been able to refinance its indebtedness or obtain new financing, there can
be no assurance that the Company will be able to do so in the future or that
the terms of such financings would be favorable.
Management believes that the telecommunications industry, including the
cable television and telephone industries, is in a period of consolidation
characterized by mergers, joint ventures, acquisitions, sales of all or part
of cable companies or their assets, and other partnering and investment
transactions of various structures and sizes involving cable or other
telecommunications companies. The Company continues to evaluate new
opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity
to its existing regional markets or in locations that can serve as a basis
for new market areas. The Company, like other cable television companies,
has participated from time to time and is participating in preliminary
discussions with third parties regarding a variety of potential
transactions, and the Company has considered and expects to continue to
consider and explore potential transactions of various types with other
cable and telecommunications companies. However, except as otherwise stated
herein, the Company has not reached any agreements, in principal or
otherwise, with respect to any material transaction and no assurances can be
given as to whether any such transaction may be consummated or, if so, when.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires an asset
and liability approach for financial accounting and reporting for income
taxes. Effective January 1, 1993 and April 1, 1993, respectively, Olympus
and the Company adopted the provisions of SFAS No. 109. The adoption of SFAS
No. 109 resulted in the cumulative recognition of an additional liability by
Olympus and the Company of $59,500 and $89,660, respectively.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," establishes accounting standards
for assessing the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and
for long-lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995 although earlier application is
encouraged. Effective January 1, 1994 and April 1, 1994, respectively, both
Olympus and the Company early-adopted the provisions of SFAS No. 121. The
adoption of SFAS No. 121 did not materially affect the financial statements
of Olympus or the Company.
Inflation
In the three fiscal years ended March 31, 1995, inflation did not have a
significant effect on the Company. Periods of high inflation could have an
adverse effect to the extent that increased borrowing costs for
floating-rate debt may not be offset by increases in subscriber rates. At
March 31, 1995, after giving effect to interest rate hedging agreements,
approximately $484,250 of the Company's total debt was subject to floating
interest rates.
Olympus
The Company serves as the managing general partner of Olympus and, as of
December 31, 1994, held $10,000 of voting general partnership interests
representing, in the aggregate, 50% of the voting interests of Olympus. The
Company also held, as of December 31, 1994, $276,101 aggregate principal
amount of nonvoting PLP Interests in Olympus, which entitle the Company to a
16.5% per annum priority return, and nonvoting special limited partnership
interests. The remaining equity in Olympus consists of voting limited
partnership interests held by unaffiliated third parties. At December 31,
1992, these interests included $10,000 of redeemable limited partnership
interests held by certain members of the Joseph Gans family ("Gans"). On
January 3, 1993, Olympus redeemed certain other limited partner interests
for $9,795 and the Company converted $6,500 of its voting general
partnership interests to nonvoting PLP Interests, thereby maintaining 50% of
the outstanding general partner and limited partner voting units of Olympus.
On February 28, 1995, Olympus entered into a Liquidation Agreement with
Gans. Under this Liquidation Agreement, Gans agreed to exchange their
redeemable limited partner interests in Olympus for the remaining 15% of the
common stock of Northeast held by Olympus. Concurrently with the closing of
the Liquidation Agreement, ACP Holdings, Inc. ("ACP"), a wholly-owned
subsidiary of the Company and managing general partner of Olympus, certain
shareholders of Adelphia, Olympus and various Telesat entities entered into
an Investment Agreement whereby Telesat contributed to Olympus substantially
all of the assets associated with certain cable television systems, serving
approximately 50,000 subscribers in southern Florida, in exchange for a
general and limited partner interests and newly issued preferred limited
partner interests ("PLP interests") in Olympus. As a result of the Telesat
Investment Agreement, Telesat contributed its Florida cable systems and
$20,000 and, in exchange, received $112,500 of 16.5% preferred limited
partnership interests. Prior to the Telesat Investment Agreement, Olympus
had obligations to Adelphia for intercompany advances, PLP interests and
priority return on PLP interests. In conjunction with the Telesat
Investment Agreement, Adelphia converted a portion of the intercompany
advances, a portion of the existing PLP interests and all of the existing
accrued priority return on the PLP interests, to capital contributions.
The Olympus limited partnership agreement requires approval by the
holders of 85% of the voting interests for, among other things, significant
acquisitions and dispositions of assets, and the issuance of certain
partnership interests, and also requires approval by the holders of 75% of
the voting interests for, among other things, material amendments to the
Olympus partnership agreement, certain financings and refinancings, certain
issuances of PLP interests, certain transactions with related parties and
the adoption of annual budgets.
On August 24, 1992 service in Olympus' South Dade system in the southern
portion of Florida's Dade County was interrupted by Hurricane Andrew. Other
Olympus subscribers were unaffected by the storm. Prior to the hurricane, as
of July 31, 1992, the South Dade system passed 157,922 homes and served
71,193 basic subscribers. The rebuilding of the cable plant has been
completed with state-of-the-art fiber to feeder technology which has an 80
channel capacity. At March 31, 1995 the South Dade System served 74,601
basic subscribers.
On April 3, 1995, Olympus acquired all of the cable and security systems
of WB Cable Associates, Ltd. ("WB Cable") serving approximately 44,000
subscribers for a purchase price of $82,000. WB Cable provides cable
services from one headend and security monitoring services from one location
in West Boca Raton, Florida. Of the purchase price, $77,000 was paid in
cash and $5,000 was paid in Adelphia Class A Common Stock. The acquisition,
was accounted for under the purchase method of accounting, was financed
principally through borrowings under the ACP credit agreement.
On June 12, 1995, Olympus announced the signing of a definitive
agreement for the purchase of all of the southeast Florida cable systems of
the Leadership cable division of Fairbanks Communications, Inc. which serves
approximately 50,000 subscribers for a purchase price of $94,000.
The following table is derived from the Olympus Communications, L.P.
Consolidated Financial Statements included in this Form 10-K.
SUPPLEMENTAL FINANCIAL DATA FOR OLYMPUS
YEAR ENDED
DECEMBER 31,
1992 1993 1994
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 86,255 $ 89,099 $ 93,421
Business Interruption Revenue.............. 7,146 9,547 1,037
Total...................................... 93,401 98,646 94,458
Operating Income Before
Depreciation and
Amortization.............................. 47,280 55,195 47,079
Depreciation and
Amortization.............................. 39,407 37,240 36,703
Operating Income........................... 7,873 17,955 10,376
Interest Expense........................... (30,272) (29,470) (32,262)
Net Loss................................... (16,617) (70,744) (21,025)
BALANCE SHEET DATA:
Total Assets............................... $ 467,279 $ 458,663 $ 375,985
Total Long-Term Debt....................... 362,428 368,263 314,069
PLP Interests.............................. 269,601 276,101 276,101
OTHER FINANCIAL DATA:
Capital Expenditures....................... $ 26,827 $ 23,164 $ 23,916
Operating Margin (a)....................... 50.6% 56.0% 49.8%
(a) Percentage representing operating income before depreciation and
amortization divided by total revenues.
Comparison of Years Ended December 31, 1992, 1993 and 1994
Revenues. Total revenues for the year ended December 31, 1993 increased
5.6% over the prior year. Total revenues for the year ended December 31,
1994 declined 4.2% from the prior year. The 1993 increase in revenues as
compared with 1992 was primarily attributable to basic subscriber growth and
rate increases, which were partially offset by the effects of Hurricane
Andrew on the South Dade System, net of business interruption insurance
proceeds. See Note 3 to the Olympus Communications, L.P. Consolidated
Financial Statements. The 1994 decrease as compared with 1993 was due to
the sale of Northeast in June 1994, partially offset by the positive impact
of the South Dade rebuild from the effects of Hurricane Andrew and
subscriber growth.
Operating Income Before Depreciation and Amortization. For the year
ended December 31, 1993, operating income before depreciation and
amortization increased 16.7% as compared with the prior year. This increase
was primarily attributable to higher levels of total revenues, including
business interruption revenue related to the effects of Hurricane Andrew,
that were not offset by corresponding increases in operating expenses. For
the year ended December 31, 1994, operating income before depreciation and
amortization decreased 14.7% as compared with the prior year. The decrease
was due to increased operating costs with no corresponding increase in rates
due to the FCC rate freeze, the impact of the sale of Northeast and the
decline in business interruption insurance revenue.
Operating Income. For the year ended December 31, 1993, operating income
increased by $10,082 to $17,955. This increase was primarily due to the
increase in total revenues, including business interruption revenue, and
relatively constant depreciation and amortization and operating expenses.
For the year ended December 31, 1994, operating income decreased by $7,579
to $10,376. The decrease was due to reduced business interruption insurance
revenue in the current year, the above noted FCC rate freeze impact and the
effect of the Northeast sale.
Interest Expense. For the year ended December 31, 1993, interest expense
decreased 2.6% primarily due to reduced interest rates. For the year ended
December 31, 1994, interest expense increased 9.5% primarily due to higher
average rates outstanding on debt offset somewhat by the reduction of debt
from the sale of Northeast.
Net Loss. Olympus reported net losses of $16,617, $70,744 and $21,025
for the years ended December 31, 1992, 1993 and 1994, respectively. The
increase in 1993 was mainly due to the cumulative effect of a change in
accounting for income taxes of $59,500 resulting from the adoption of SFAS
No. 109 by Olympus, partially offset by increased operating income. The
decrease in net loss in 1994 was attributable to the absence in 1994 of the
impact of the change in accounting for income taxes, offset by lower
operating income for the period.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely affected
by changes and developments in governmental regulation, competitive forces
and technology. The cable television industry and the Company are subject
to extensive regulation at the federal, state and local levels. Many
aspects of such regulation are currently the subject of judicial proceedings
and administrative or legislative proceedings or proposals. On October 5,
1992, Congress passed the 1992 Cable Act, which significantly expands the
scope of regulation of certain subscriber rates and a number of other
matters in the cable industry, such as mandatory carriage of local broadcast
stations and retransmission consent, and which will increase the
administrative costs of complying with such regulations. The FCC has
adopted rate regulations that establish, on a system-by-system basis,
maximum allowable rates for (i) basic and cable programming services (other
than programming offered on a per-channel or per-program basis), based upon
a benchmark methodology, and (ii) associated equipment and installation
services based upon cost plus a reasonable profit. Under the FCC rules,
franchising authorities are authorized to regulate rates for basic services
and associated equipment and installation services, and the FCC will
regulate rates for regulated cable programming services in response to
complaints filed with the agency. The original rate regulations became
effective on September 1, 1993. Amendments to the rate regulations became
effective May 15, 1994. Further amendments were adopted on November 10,
1994. The FCC ordered an interim rate freeze effective April 5, 1993 which
was extended through May 15, 1994.
The original rate regulations required a reduction of existing rates
charged for basic services and regulated cable programming services to the
greater of (i) the applicable benchmark level or (ii) the rates in force as
of September 30,
1992, reduced by 10%, adjusted forward for inflation. The amended
regulations generally require a reduction of up to 17 percent from the
rates for regulated services in force as of September 30, 1992, adjusted
forward for inflation and
certain other factors. Rate reductions are not required to the extent that
a cable operator at its option elects to use an alternative cost-of-service
methodology and shows that rates for basic and cable programming services
are reasonable. The FCC has adopted interim rules to govern cost-of-service
showings by cable operators. Refunds with interest will be required to be
paid by cable operators who are required to reduce regulated rates after
September 1, 1993, calculated retroactively from the date of a local
franchising authority's decision with regard to basic rates, and from the
date a complaint is filed with the FCC with regard to the rates charged for
regulated programming services. The FCC has reserved the right to reduce or
increase the benchmarks it has established. The rate regulations will also
limit future increases in regulated rates to an inflation indexed amount
plus increases in certain costs such as taxes, franchise fees, costs
associated with specific franchise requirements and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable operator adds or deletes channels. On November 10, 1994, the
FCC adopted an alternative method for adjusting the rates charged for a
cable programming services tier when new services are added. This will
allow cable operators to increase rates by as much as $1.50 over a two year
period to reflect the addition of up to six new channels of service on cable
programming service tiers. In addition, a new programming tier can be
created, the rate for which would not be regulated as long as certain
conditions are met, such as not moving services from existing tiers to the
new one. Because of the limitation on rate increases for regulated services,
future revenue growth from cable services will rely to a much greater extent
than has been true in the past on increased revenues from unregulated
services and new subscribers than from increases in previously unregulated
rates.
The FCC has adopted regulations implementing virtually all of the
requirements of the 1992 Cable Act. As noted above, amendments to the rate
regulations were recently announced and the FCC is also likely to continue
to modify, clarify or refine the rate regulations. In addition, litigation
has been instituted challenging various portions of the 1992 Cable Act and
the rulemaking proceedings including the rate regulations. The Company
cannot predict the effect or outcome of future rulemaking proceedings,
changes to the rate regulations, or litigation. Further, because the FCC
has only issued its interim rules and has not adopted final cost-of-service
rules, the Company has not determined to what extent it will be able to
utilize cost-of-service showings to justify rates.
Effective as of September 1, 1993, in accordance with the 1992 Cable
Act, the Company adjusted the basic service rates and related equipment and
installation rates in all of its systems in order for such rates to be in
compliance with the applicable benchmark or equipment and installation cost
levels. The Company also implemented a program in all of its systems called
"CableSelect" under which most of the Company's satellite-delivered
programming services are now offered individually on a per channel basis, or
as a group at a price of approximately 15% to 20% below the sum of the per
channel prices of all such services. For subscribers who elect to customize
their channel lineup, the Company will provide, for a monthly rental fee, an
electronic device located on the cable line outside the home, enabling a
subscriber's television to receive only those channels selected by the
subscriber. These basic service rate adjustments and the CableSelect
program have also been implemented in all systems managed by the Company.
The Company believes CableSelect provides increased programming choices to
the Company's subscribers while providing flexibility to the Company to
respond to future changes in areas such as customer demand and programming.
A letter of inquiry, one of at least 63 sent by the FCC to numerous
cable operators, was received by an Olympus System regarding the
implementation of this new method of offering services. Olympus responded
in writing to the FCC's inquiry. On November 18, 1994, the Cable Services
Bureau of the FCC issued a decision holding that the "CableSelect" program
was an evasion of the rate regulations and ordered this package to be
treated as a regulated tier. This decision, and all other letter of inquiry
decisions, were principally decided on the number of programming services
moved from regulated tiers to a la carte packages. Adelphia has appealed
this decision to the full Commission. The Company cannot predict the
outcome or effect of this proceeding.
On November 10, 1994 the FCC ruled that, prospectively, any a la carte
package will be treated as a regulated tier, except for packages involving
premium services. The Company is currently unable to predict the effect
that the amended regulations, future FCC treatment of "a la carte" packages
or other future FCC rulemaking
proceedings will have on its business and results of operations in future
periods. No assurance can be given at this time that such matters will not
have a material negative financial impact on the Company's business and
results of operations in the future. Also, no assurance can be given as to
what other future actions Congress, the FCC or other regulatory authorities
may take or the effects thereof on the Company.
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to
time. Because such franchises are generally non-exclusive, there is a
potential for competition with the Systems from other operators of cable
television systems, including public systems operated by municipal
franchising authorities themselves, and from other distribution systems
capable of delivering television programming to homes. The 1992 Cable Act
contains provisions which encourage competition from such other sources.
Additionally, recent court and administrative decisions have removed certain
of the restrictions that have limited entry into the cable television
business by potential competitors such as telephone companies, and proposals
now under consideration by the FCC, and which are being and from time to
time have been considered by Congress, could result in the elimination of
other such restrictions. The Company cannot predict the extent to which
competition will materialize from other cable television operators, other
distribution systems for delivering television programming to the home, or
other potential competitors, or, if such competition materializes, the
extent of its effect on the Company.
FCC rules permit local telephone companies to offer "video dialtone"
service for video programmers, including channel capacity for the carriage
of video programming and certain non-common carrier activities such as video
processing, billing and collection and joint marketing agreements. On
December 15, 1992, New Jersey Bell Telephone Company filed an application
with the FCC to operate a "video dialtone" service in portions of Dover
County, New Jersey, in which the Company serves approximately 20,000
subscribers. The FCC approved the application on July 18, 1994. The
Company has appealed this decision to the U.S. Court of Appeals for the
District of Columbia. This case is presently pending.
A number of telephone companies have filed suit seeking to void as
unconstitutional the provisions in the 1984 Cable Act that prohibit
telephone companies from owning cable television systems in their telephone
service areas. The U.S. Courts of Appeal for the Fourth and Ninth Circuits
have struck down the cross-ownership ban on first amendment grounds. Several
federal district courts have also struck down the cross-ownership ban on the
same grounds. In addition, legislation which would alter or eliminate the
cross-ownership ban is under active consideration in Congress.
Direct broadcast satellite ("DBS") service became available to consumers
during 1994. A single DBS satellite can provide more than 100 channels of
programming. DBS service can be received virtually anywhere in the United
States through the installation of a small outdoor antenna. DBS service is
being heavily marketed on a nation-wide basis. The extent to which DBS will
be competitive with cable systems will depend on the continued availability
of reception equipment and programming at reasonable prices to the consumer.
The Company cannot predict the ultimate outcome of the video dialtone
proceeding or the cross-ownership ban litigation. However, the Company
believes that the provision of video programming by telephone companies in
competition with the Company's existing operations could have an adverse
effect on the Company's financial condition and results of operations. At
this time, the impact of any such effect is not known or estimable. See
Item 1 - "Business Competition" and "Legislation and Regulation".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and
independent auditors report follow.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report..............................................
Consolidated Balance Sheets, March 31, 1994 and 1995......................
Consolidated Statements of Operations,
Years Ended March 31, 1993, 1994 and 1995...............................
Consolidated Statements of Stockholders' Equity (Deficiency),
Years Ended March 31, 1993, 1994 and 1995...............................
Consolidated Statements of Cash Flows,
Years Ended March 31, 1993, 1994 and 1995...............................
Notes to Consolidated Financial Statements................................
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
Independent Auditors' Report..............................................
Consolidated Balance Sheets, December 31, 1993 and 1994...................
Consolidated Statements of Operations,
Years Ended December 31, 1992, 1993, and 1994...........................
Consolidated Statements of General Partner's Equity (Deficiency),
Years Ended December 31, 1992, 1993 and 1994............................
Consolidated Statements of Cash Flows,
Years Ended December 31, 1992, 1993 and 1994............................
Notes to Consolidated Financial Statements................................
INDEPENDENT AUDITORS' REPORT
Adelphia Communications Corporation:
We have audited the accompanying consolidated balance sheets of Adelphia
Communications Corporation and subsidiaries as of March 31, 1994 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
March 31, 1995. Our audits also included the financial statement schedules
listed in the Index at Item 14. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules 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 Adelphia Communications
Corporation and subsidiaries at March 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set
forth therein.
As discussed in Note 7 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for income
taxes. Also, as discussed in Note 2 to the consolidated financial
statements, as of January 1, 1993, an unconsolidated subsidiary accounted
for on the equity method changed its method of accounting for income taxes.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 28, 1995
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
March 31,
1994 1995
ASSETS:
Cable television systems, at cost, net of
accumulated depreciation and amortization:
Property, plant and equipment.......................... $ 446,290 $ 518,405
Intangible assets...................................... 417,788 546,116
Total.......................................... 864,078 1,064,521
Cash and cash equivalents................................ 74,075 5,045
Investments.............................................. 23,922 48,968
Preferred equity investment in Managed Partnership....... 18,338 18,338
Subscriber receivables - net............................. 18,021 20,433
Prepaid expenses and other assets - net.................. 38,772 48,352
Related party investments and receivables - net.......... 36,640 61,634
Total.......................................... $1,073,846 $1,267,291
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Notes payable of subsidiaries to banks and institutions.. $ 870,875 $1,086,350
12 1/2% Senior Notes due 2002............................ 400,000 400,000
10 1/4% Senior Notes due 2000 ........................... 108,765 99,011
11 7/8% Senior Debentures due 2004 ...................... 124,442 124,470
9 7/8% Senior Debentures due 2005 ....................... 127,882 127,994
9 1/2% Senior Pay-In-Kind Notes due 2004................. 150,000 164,370
Other debt............................................... 11,747 19,415
Accounts payable......................................... 27,016 42,872
Subscriber advance payments and deposits................. 13,385 16,494
Accrued interest and other liabilities................... 66,077 87,751
Deferred income taxes.................................... 91,721 110,139
Total liabilities.............................. 1,991,910 2,278,866
Commitments and contingencies (Note 4)
Stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 50,000,000 shares
authorized, 13,507,604 and 14,906,691 shares
outstanding, respectively.............................. 135 149
Class B Common Stock, $.01 par value, 25,000,000 shares
authorized, 10,944,476 shares outstanding.............. 109 109
Additional paid-in capital.............................. 198,431 211,190
Accumulated deficit..................................... (1,116,739) (1,223,023)
Total stockholders' equity (deficiency)........ (918,064) (1,011,575)
Total.......................................... $1,073,846 $1,267,291
See notes to consolidated financial statements.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Year Ended March 31,
1993 1994 1995
Revenues.................................. $ 305,222 $ 319,045 $ 361,505
Operating expenses:
Direct operating and programming......... 82,377 90,547 106,993
Selling, general and administrative...... 49,468 52,801 63,487
Depreciation and amortization............ 90,406 89,402 97,602
Total........................... 222,251 232,750 268,082
Operating income.......................... 82,971 86,295 93,423
Other income (expense):
Interest income from affiliates.......... 5,216 9,188 11,112
Other income (expense)................... 1,447 (299) 1,453
Priority investment income from Olympus.. 22,300 22,300 22,300
Interest expense......................... (164,859) (182,136) (195,698)
Equity in loss of joint
ventures before cumulative effect of
change in accounting principle.......... (46,841) (30,054) (44,349)
Total........................... (182,737) (181,001) (205,182)
Loss before income taxes, extraordinary
loss and cumulative effect of change
in accounting principle.................. (99,766) (94,706) (111,759)
Income tax (expense) benefit.............. (3,143) (2,742) 5,475
Loss before extraordinary loss and
cumulative effect of change in
accounting principle..................... (102,909) (97,448) (106,284)
Extraordinary loss on early retirement of
debt..................................... (14,386) (752) --
Cumulative effect of change in accounting
for income taxes......................... -- (89,660) --
Cumulative effect of Olympus change in
accounting for income taxes.............. (59,500) -- --
Net loss.................................. $ (176,795) $ (187,860) $ (106,284)
Loss per weighted average share of common
stock before extraordinary loss and
cumulative effect of change in
accounting principle..................... $ (6.80) $ (5.66) $ (4.32)
Extraordinary loss per weighted average
share of common stock on early retirement
of debt.................................. (.95) (.04) --
Cumulative effect per weighted average
share of common stock of change in
accounting for income taxes.............. -- (5.21) --
Cumulative effect per weighted average
share of common stock of Olympus change
in accounting for income taxes........... (3.93) -- --
Net loss per weighted average share of
common stock............................. $ (11.68) $ (10.91) $ (4.32)
Weighted average shares of common stock
outstanding.............................. 15,138,654 17,221,059 24,628,316
See notes to consolidated financial statements.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)
Class A Class B Additional Stockholders'
Common Common Paid-in Accumulated Equity
Stock Stock Capital Deficit (Deficiency)
Balance, March 31, 1992... $ 29 $ 109 $ 38,402 $ (752,084) $ (713,544)
Issuance of Class A Common
Stock on May 14, 1992.... 15 -- 21,710 -- 21,725
Net loss.................. -- -- -- (176,795) (176,795)
Balance, March 31, 1993... 44 109 60,112 (928,879) (868,614)
Issuance of Class A Common
Stock on January 14, 1994 91 -- 155,872 -- 155,963
Excess of purchase price
of acquired assets over
predecessor owner book
value.................... -- -- (17,553) -- (17,553)
Net loss.................. -- -- -- (187,860) (187,860)
Balance, March 31, 1994... 135 109 198,431 (1,116,739) (918,064)
Issuance of Class A Common
Stock on January 10, 1995 4 -- 3,588 -- 3,592
Issuance of Class A Common
Stock on February 28, 1995 10 -- 14,851 -- 14,861
Excess of purchase price
of acquired assets over
predecessor owner book
value.................... -- -- (5,680) -- (5,680)
Net loss.................. -- -- -- (106,284) (106,284)
Balance, March 31, 1995... $ 149 $ 109 $ 211,190 $(1,223,023) $(1,011,575)
See notes to consolidated financial statements.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended March 31,
1993 1994 1995
Cash flows from operating activities:
Net loss................................. $ (176,795) $ (187,860) $ (106,284)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation........................... 54,129 56,370 66,064
Amortization........................... 36,277 33,032 31,538
Noncash interest expense............... 164 1,680 14,756
Equity in loss of joint ventures
before cumulative effect of accounting
change................................ 46,841 30,054 44,349
Extraordinary loss on debt retirement.. 14,386 752 --
Costs associated with debt financing... (17,791) (4,961) (2,759)
Redemption premium on debt retirement.. (10,000) -- --
Loss on disposal of property........... -- 1,051 --
Cumulative effect of accounting change. 59,500 89,660 --
Increase (decrease) in deferred income
taxes, net of effects of acquisitions. -- 2,061 (5,975)
Changes in operating assets and
liabilities net of effects of
acquisitions:
Subscriber receivables.............. (2,596) (155) (478)
Prepaid expenses and other assets... (4,883) (16,288) (21,152)
Accounts payable.................... (9,900) 5,871 14,789
Subscriber advance payments ........ 223 (1,134) 699
Accrued interest and other
liabilities........................ 11,720 11,858 10,630
Net cash provided by operating activities. 1,275 21,991 46,177
Cash flows from investing activities:
Cable television systems acquired........ (14,501) (21,681) (70,256)
Expenditures for property, plant and
equipment............................... (70,975) (75,894) (92,082)
Investments in other joint ventures...... (14,989) (8,890) (38,891)
Preferred equity investment in Managed
Partnership............................. -- (18,338) --
Amounts invested in and advanced to
Olympus and related parties............. (62,960) (45,285) (46,046)
Alternate access rights acquired......... -- (27,000) --
Net cash used for investing activities.... (163,425) (197,088) (247,275)
Cash flows from financing activities:
Proceeds from debt....................... 1,277,847 744,770 155,314
Repayments of debt....................... (1,109,924) (690,232) (38,107)
Issuance of Class A Common Stock......... 21,725 155,963 14,861
Net cash provided by financing activities. 189,648 210,501 132,068
Increase (decrease) in cash and cash
equivalents.............................. 27,498 35,404 (69,030)
Cash and cash equivalents, beginning of
year..................................... 11,173 38,671 74,075
Cash and cash equivalents, end of year.... $ 38,671 $ 74,075 $ 5,045
Supplemental disclosure of cash flow
activity - Cash payments for interest.... $ 151,653 $ 178,840 $ 193,206
See notes to consolidated financial statements.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. The Company and Summary of Significant Accounting Policies:
The Company and Basis for Consolidation
Adelphia Communications Corporation and subsidiaries ("ACC") owns, operates
and manages cable television systems. ACC's operations consist primarily of
selling video programming which is distributed to subscribers for a monthly
fee through a network of fiber optic and coaxial cables. These services are
offered in the respective franchise areas under the name Adelphia Cable
Communications.
The consolidated financial statements include the accounts of ACC and its
more than 50% owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
During the year ended March 31, 1995, ACC consummated several acquisitions,
each of which was accounted for using the purchase method. Accordingly, the
financial results of each acquisition have been included in the consolidated
results of ACC effective with the date acquired. A description of the
acquisitions is provided below.
On June 16, 1994, ACC invested $34,000 in TMC Holdings Corporation ("THC"),
the parent of Tele-Media Company of Western Connecticut. THC owns cable
television systems serving approximately 43,000 subscribers in western
Connecticut. The investment in THC provides ACC with a $30,000 preferred
equity interest in THC and a 75% non-voting common equity interest, with a
liquidation preference to the remaining 25% common stock ownership interest
in THC. ACC has the right to convert such interest to a 75% voting common
equity interest, with a liquidation preference to the remaining
shareholders' 25% common stock ownership interest, on demand subject to
certain regulatory approvals. Debt assumed, included in notes payable of
subsidiaries to banks and institutions, was $52,000 at closing.
On June 30, 1994, ACC acquired from Olympus 85% of the common stock of
Northeast Cable, Inc. ("Northeast") for a purchase price of $31,875.
Northeast owns cable television systems serving approximately 36,500
subscribers in eastern Pennsylvania. Of the purchase price, $16,000 was
paid in cash and the remainder resulted in a decrease in ACC's receivable
from Olympus. Debt assumed, included in notes payable of subsidiaries to
banks and institutions, was $42,300 at closing.
On January 10, 1995, ACC issued 399,087 shares of Class A Common Stock in
connection with the merger of a wholly-owned subsidiary of Adelphia into
Oxford Cablevision, Inc. ("Oxford"), one of the Terry Family cable systems.
Oxford serves approximately 4,200 subscribers located in the North Carolina
counties of Granville and Warren.
On January 31, 1995, ACC acquired a majority equity position in Tele-Media
Company of Martha's Vineyard, L.P. for $11,775, a cable system serving
approximately 7,000 subscribers located in Martha's Vineyard, Massachusetts.
This system will become part of ACC's New England cluster.
Investment in Olympus Joint Venture Partnership
The investment in the Olympus joint venture partnership comprises both
limited and general partner interests. The general partner interest
represents a 50% voting interest in Olympus Communications, L.P. ("Olympus")
and is being accounted for using the equity method. Under this method,
ACC's investment, initially recorded at the historical cost of contributed
property, is adjusted for subsequent capital contributions and its share of
the losses of the partnership as well as its share of the accretion
requirements of the partnership's interests. The limited partner interest
represents a preferred interest ("PLP interests") entitled to a 16.5%
annual return. The PLP interests are nonvoting, are
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
1. The Company and Summary of Significant Accounting Policies, continued:
senior to claims of certain other partner interests, and provide for an
annual priority return of 16.5%. Olympus is not required to pay the entire
16.5% return currently and priority return on PLP interests is recognized as
income by ACC when received. Correspondingly, equity in net loss of Olympus
excludes accumulated unpaid priority return. (See Note 2)
Subscriber Revenues
Subscriber revenues are recorded in the month the service is provided.
Property, Plant and Equipment
Property, plant and equipment are comprised of the following:
March 31,
1994 1995
Operating plant and equipment........................$ 673,451 $ 786,917
Real estate and improvements......................... 41,150 46,453
Support equipment.................................... 25,132 28,242
Construction in progress............................. 48,118 77,026
787,851 938,638
Accumulated depreciation............................. (341,561) (420,233)
$ 446,290 $ 518,405
Depreciation is computed on the straight-line method using estimated useful
lives of 5 to 12 years for operating plant and equipment and 3 to 20 years
for support equipment and buildings. Additions to property, plant and
equipment are recorded at cost which includes amounts for material,
applicable labor and overhead, and interest. Capitalized interest amounted
to $1,009, $1,345 and $1,736 for the years ended March 31, 1993, 1994 and
1995, respectively.
Intangible Assets
Intangible assets, net of accumulated amortization, are comprised of the
following:
March 31,
1994 1995
Purchased franchises.....................................$368,938 $493,249
Purchased subscriber lists............................... 4,365 567
Goodwill................................................. 41,691 38,805
Non-compete agreements................................... 2,794 13,495
$417,788 $546,116
A portion of the aggregate purchase price of cable television systems
acquired has been allocated to purchased franchises, purchased subscriber
lists, goodwill and non-compete agreements. Purchased franchises and
goodwill are amortized on the straight-line method over 40 years. Purchased
subscriber lists are amortized on the straight-line method over periods
which range from 5 to 10 years. Non-compete agreements are amortized on the
straight-line method over their contractual lives which range from 4 to 12
years. Accumulated amortization of intangible assets amounted to $76,812
and $107,914 at March 31, 1994 and 1995, respectively.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
1. The Company and Summary of Significant Accounting Policies, continued:
Cash and Cash Equivalents
ACC considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Interest on liquid investments
was $1,076, $2,020, and $1,230 for the years ended March 31, 1993, 1994, and
1995, respectively.
Investments
The equity method of accounting is generally used to account for investments
in affiliates which are greater than 20% but not more than 50% owned. Under
this method, ACC's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or losses of its
affiliates. Dividends or other distributions are recorded as a reduction of
ACC's investment. Investments in affiliates accounted for using the equity
method generally reflect ACC's equity in their underlying assets.
Investments in entities in which ACC's ownership is less than 20% and
investments greater than 20% in which ACC does not influence the operating
or financial decisions of the entity are accounted for using the cost
method. Under the cost method, ACC's initial investment is recorded at cost
and subsequently adjusted for the amount of its equity in net income or
losses of the investee only to the extent distributed by the investee as
dividends or other distributions. Dividends received in excess of earnings
subsequent to the date the investment was made are recorded as reductions of
the cost of the investment.
The balance of ACC's investments is as follows:
March 31,
1994 1995
Investments accounted for using the equity method:
Gross investment:
Alternate access ventures............................$ 9,068 $12,840
Page Call, Inc....................................... -- 6,915
Other................................................ -- 2,847
Cumulative equity in net losses.......................... (494) (1,458)
Total.......................................... 8,574 21,144
Investments accounted for using the cost method:
Tele-Media Investment Partnership, L.P. (see Note 2)..... 13,000 --
Niagara Frontier Hockey, L.P............................. -- 15,000
Alternate access ventures................................ 1,379 2,924
Commonwealth Security, Inc............................... -- 4,200
SuperCable............................................... -- 3,000
Other.................................................... 969 2,700
Total.......................................... 15,348 27,824
Total investments........................................$23,922 $48,968
On April 12, 1994, ACC purchased (i) convertible preferred units in Niagara
Frontier Hockey, L.P., (the "Sabres Partnership") which owns the Buffalo
Sabres National Hockey League Franchise, convertible to a 34% equity
interest and (ii) warrants allowing ACC to increase its interest to 40% for
$15,000. ACC believes this investment will be competitively advantageous in
the Buffalo cable television market. The Sabres Partnership will control,
through a wholly-owned subsidiary, the Crossroads Arena, a new sports and
entertainment facility expected to be completed
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
1. The Company and Summary of Significant Accounting Policies, continued:
in late 1996. ACC's convertible preferred units will earn a 4% cumulative
preferred return beginning after the first National Hockey League game is
played at the Crossroads Arena.
Subscriber Receivables
An allowance for doubtful accounts of $3,603 and $3,503 has been deducted
from subscriber receivables at March 31, 1994 and 1995, respectively.
Amortization of Other Assets and Debt Discounts
Deferred debt financing costs, included in prepaid expenses and other
assets, and debt discounts, a reduction of the carrying amount of the debt,
are amortized over the term of the related debt. The unamortized amounts
included in prepaid expenses and other assets were $22,328 and $23,355 at
March 31, 1994 and 1995, respectively.
Asset Impairments
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." In accordance with SFAS No. 121, ACC periodically reviews the carrying
value of its long-lived assets, identifiable intangibles and goodwill in
relation to historical financial results, current business conditions and
trends (including the impact of existing legislation and regulation) to
identify potential situations in which the carrying value of assets may not
be recoverable. If a review indicates that the carrying value of such
assets may not be recoverable, the carrying value of such assets in excess
of their fair value would be recorded as a reduction of the assets cost as
if a permanent impairment has occurred. The adoption of SFAS No. 121 did
not materially affect the financial statements of ACC.
Noncash Financing and Investing Activities
Capital leases entered into during years ended March 31, 1993 and 1994
totaled $8,742 and $7,186, respectively. There were no material capital
leases entered into during fiscal 1995. Reference is made to Notes 1, 2 and
9 for descriptions of additional non-cash financing and investing
activities.
Reclassification
Certain 1993 and 1994 amounts have been reclassified for comparability with
the 1995 presentation.
2. Related Party Investments and Receivables:
The following table summarizes the investments in and receivables from
Olympus and related parties:
March 31,
1994 1995
Investment in Olympus..................................$(75,961) $(48,688)
Amounts due from Olympus............................... 85,938 60,631
Amounts due from other related parties - net........... 26,663 49,691
$ 36,640 $ 61,634
Amounts due from other related parties - net represent advances to (from)
Managed Partnerships (see Note 9), the Rigas family (principal shareholders
and officers of ACC) and Rigas family controlled entities. No related party
advances are collateralized.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
2. Related Party Investments and Receivables, continued:
During the year ended March 31, 1993, concurrent with Olympus's redemption
of $6,500 in limited partner interests, ACC converted 6.5 general partner
units to PLP interests, thereby maintaining 50% of the outstanding general
partner and limited partner voting units of Olympus.
On February 28, 1995, ACP Holdings, Inc., a wholly-owned subsidiary of ACC,
and the managing general partner of Olympus, certain shareholders of ACC,
Olympus and various Telesat Entities ("Telesat"), wholly-owned subsidiaries
of FP & L Group, Inc., entered into an investment agreement whereby Telesat
contributed to Olympus substantially all of the assets associated with
certain cable television systems, serving approximately 50,000 subscribers
in southern Florida, in exchange for general and limited partner interests
and newly issued preferred limited partner interests in Olympus. Prior to
the Telesat Investment Agreement, Olympus had obligations to ACC for
intercompany advances, preferred limited partner ("PLP") interests, and
priority return on PLP interests. In conjunction with the Telesat
Investment Agreement, ACC converted a portion of the intercompany advances,
a portion of the existing PLP interests and all of the existing accrued
priority return on the PLP interests, to capital contributions. At March
31, 1993, 1994 and 1995, ACC owned $276,101, $276,101 and $225,000 in
Olympus PLP Interests, respectively.
On March 31, 1994, ACC acquired from Olympus the rights to provide alternate
access in its respective franchise areas and an investment in an
unaffiliated partnership for a purchase price of $15,500. The purchase
price of the assets resulted in a corresponding reduction of amounts due
ACC. The $15,400 excess of the purchase price over Olympus' book value has
been recorded by ACC as an additional investment in Olympus.
The major components of the financial position of Olympus as of March 31,
1994 and 1995, and December 31, 1993 and 1994, and the results of operations
for the three months ended March 31, 1994 and 1995, and the years ended
December 31, 1993 and 1994 were as follows:
March 31, December 31,
1994 1995 1993 1994
(Unaudited)
Balance Sheet Data
Property, plant and equipment - net. $ 165,455 $ 181,705 $ 163,689 $ 154,298
Total assets........................ 445,623 425,813 458,663 375,985
Notes payable to banks.............. 367,100 298,309 368,000 314,010
Total liabilities................... 621,794 411,299 629,677 588,104
PLP Interests....................... 276,101 337,500 276,101 276,101
Redeemable limited partner interests 5,000 -- 5,000 5,885
General partners' equity
(deficiency)....................... (457,274) (342,991) (452,115) (494,105)
Income Statement Data
Revenues............................ $ 25,450 $ 23,920 $ 98,646 $ 94,458
Operating income.................... 3,480 3,449 17,955 10,376
Loss before cumulative effect
of change in accounting principle.. (5,751) (5,497) (11,244) (21,025)
Cumulative effect of change in
accounting for income taxes........ -- -- (59,500) --
Net loss............................ (5,751) (5,497) (70,744) (21,025)
Net loss of general partners after
priority return and accretion
requirements....................... (20,608) (22,224) (123,460) (83,833)
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
2. Related Party Investments and Receivables, continued:
The following reconciles ACC's investment in Olympus to the related equity
accounts of Olympus:
March 31,
1994 1995
Investment in Olympus joint venture partnership......$ (75,961) $ (48,688)
Accumulated unpaid priority return requirements...... (105,212) (2,997)
Other................................................ -- 12,793
Olympus' combined PLP Interests and general partners'
equity (deficiency)................................ $(181,173) $ (38,892)
Effective January 1, 1993, Olympus adopted SFAS No. 109, "Accounting for
Income Taxes" which requires an asset and liability approach for financial
accounting and reporting for income taxes. SFAS No. 109 resulted in the
cumulative recognition of an additional liability of approximately $59,500
on January 1, 1993. Olympus did not restate prior years' financial
statements to reflect the provisions of SFAS No. 109.
On October 6, 1993, ACC purchased the preferred Class B Limited Partnership
Interest in Syracuse Hilton Head Holdings, L.P. ("SHHH"), for a price of
$18,338 from Robin Media Group, an unrelated party. SHHH is a joint venture
of the Rigas Family and Tele-Communications, Inc. ("TCI") and owns systems
managed by ACC. The Class B Limited Partnership Interest has a preferred
return of 14% annually which is payable on a current basis at the option of
SHHH, and is senior in priority to the partnership interests of the Rigas
family and TCI. Priority return on the preferred Class B Limited Partner
Interest in SHHH totaled $1,213 and $2,654 and is included in revenue for
the years ended March 31, 1994 and 1995, respectively. SHHH is obligated to
redeem the Class B Limited Partnership Interest between June 11, 1996 and
December 31, 1996.
In September 1993, the Board of Directors of ACC authorized ACC to make
loans in the future to two Managed Partnerships up to an amount of $25,000
for each. During the year ended March 31, 1994, ACC made loans in the net
amount of $15,000 to SHHH, to facilitate the acquisition of cable television
systems serving Palm Beach County, Florida from unrelated parties. During
fiscal year 1995, ACC sold its investment in TMIP to SHHH for $13,000. On
January 31, 1995, a wholly owned subsidiary of ACC received a $20,000
preferred investment from SHHH to facilitate the acquisition of cable
properties from Tele-Media Company of Delaware.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
3. Debt:
Notes Payable of Subsidiaries to Banks and Institutions
Notes payable of subsidiaries to banks and institutions are comprised of the
following:
March 31,
1994 1995
Credit agreements with banks payable through 2003
(weighted average interest rate 6.35% and 8.16% at
March 31, 1994 and 1995, respectively)...............$ 354,375 $ 584,250
10.66% Senior Secured Notes due 1996 through 1999...... 250,000 250,000
9.95% Senior Secured Notes due through 1997............ 16,000 9,600
10.80% Senior Secured Notes due 1996 through 2000. ..... 45,000 45,000
10.50% Senior Secured Notes due 1997 through 2001. ..... 16,000 16,000
9.73% Senior Secured Notes due 1998 through 2001.. ..... 37,500 37,500
10.25% Senior Subordinated Notes due 1996 through 1998. 80,000 72,000
11.85% Senior Subordinated Notes due 1998 through 2000. 60,000 60,000
11.13% Senior Subordinated Notes due 1999 through 2002. 12,000 12,000
$ 870,875 $1,086,350
The amount of borrowings available to ACC under its revolving credit
agreements is generally based upon the subsidiaries achieving certain levels
of operating performance. ACC had commitments from banks for additional
borrowings of up to $117,000 at March 31, 1995, which expire through 2003.
At the expiration of the commitments, all outstanding borrowings are
convertible into term loans. ACC pays commitment fees of up to .5% of
unused principal.
Borrowings under most of these credit arrangements of subsidiaries are
collateralized by a pledge of the stock in their respective subsidiaries,
and, in some cases, by assets. These agreements stipulate, among other
things, limitations on additional borrowings, investments, transactions with
affiliates and other subsidiaries, and the payment of dividends and fees by
the subsidiaries. They also require maintenance of certain financial ratios
by the subsidiaries. Several of the subsidiaries' agreements, along with
the notes of the parent company, contain cross default provisions. At March
31, 1995, approximately $141,000 of the net assets of subsidiaries would be
permitted to be transferred to the parent company in the form of dividends,
priority return and loans without the prior approval of the lenders based
upon the results of operations of such subsidiaries for the quarter ended
March 31, 1995. The subsidiaries are permitted to pay fees to the parent
company or other subsidiaries. Such fees are limited to a percentage of the
subsidiaries' revenues.
Bank debt interest rates are based upon one or more of the following rates
at the option of ACC: prime rate plus 0% to 1.5%; certificate of deposit
rate plus 1.25% to 2.75%; or LIBOR rate plus 1% to 2.5%. At March 31, 1994
and 1995, the weighted average interest rate on notes payable to banks and
institutions was 8.91% and 9.33%, respectively. The rates on 55% of ACC's
notes payable to banks and institutions were fixed for at least one year
through the terms of the notes or interest rate swap agreements.
On March 15, 1995, certain subsidiaries of the Company (collectively, the
"Borrowers") entered into a $200,000 revolving credit facility, maturing
September 30, 2003. Interest rates charged are based upon one or more of
the following rates
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
3. Debt, continued:
at the option of the Borrowers: the greater of the prime rate or the Federal
funds rate plus 0% to .875%, certificate of deposit rate plus 1.125% to
2.125%, or LIBOR plus .875% to 1.875%. Interest on outstanding borrowings
is generally payable on
a quarterly basis. Initial borrowings under the revolving credit facility
were used to repay existing indebtedness of the Borrowers. The Borrowers
pay a commitment fee of .375% of unused commitments during the term of the
agreement. The maximum available under this credit facility is reduced on
June 30, 1997 by the lesser of $25,000 or 50% of the unused and available
commitment. Thereafter, the credit facility provides for mandatory
reductions in the revolving loan commitment, in increasing quarterly
amounts, commencing June 30, 1997 through September 30, 1997.
ACC has entered into fixed and floating interest rate swap agreements with
banks, Olympus and the Managed Partnerships (see Note 9) to mitigate its
exposure to interest rate fluctuations by attempting to achieve an
appropriate balance between its fixed and variable rate debt. At March 31,
1995, ACC had an aggregate notional principal amount of $802,000 outstanding
under such agreements, which expire from 1996 through 2000. These
agreements provide for a weighted average interest rate of 7.88% at March
31, 1995. ACC is exposed to credit loss in the event of nonperformance by
the counterparties, although it does not expect any such nonperformance.
Net settlement amounts under these swap agreements are recorded as
adjustments to interest expense during the period incurred.
12 1/2% Senior Notes due 2002
On May 14, 1992, ACC issued at face value to the public $400,000 aggregate
principal amount of unsecured 12 1/2% Senior Notes due May 15, 2002.
Interest is due on the notes semi-annually. The notes, which are
effectively subordinated to all liabilities of the subsidiaries, contain
restrictions on, among other things, the incurrence of indebtedness, mergers
and sale of assets, certain restricted payments by ACC, investments in
affiliates and certain other affiliate transactions. The notes further
require that ACC maintain a debt to annualized operating cash flow ratio of
not greater than 8.75 to 1.00, based on the latest fiscal quarter, exclusive
of the incurrence of $50,000 in additional indebtedness which is not subject
to the required ratio. ACC may redeem the notes in whole or in part on or
after May 15, 1997, at 106% of principal, declining to 100% of principal on
or after May 15, 1999.
10 1/4% Senior Notes due 2000
On July 28, 1993, ACC issued $110,000 aggregate principal amount of
unsecured 10 1/4% Senior Notes due July 2000. Interest is due on the notes
semi-annually. The notes which are effectively subordinated to all
liabilities of the subsidiaries, contain restrictions and covenants similar
to the restrictions on the 12 1/2% Senior Notes. The notes are not callable
prior to the maturity date of July 15, 2000. During fiscal 1995 $10,000 of
notes were retired through open market purchases.
16 1/2% Senior Discount Notes due 1999
On July 1, 1992, ACC redeemed all of the 16 1/2% Senior Discount Notes, at
104% of principal. The $10,000 redemption premium together with $4,386 in
unamortized deferred financing costs comprise the extraordinary loss on
early retirement of debt recognized on ACC's consolidated financial
statements for the year ended March 31, 1993.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
3. Debt, continued:
11 7/8% Senior Debentures due 2004
On September 10, 1992, ACC issued to the public $125,000 aggregate principal
amount of unsecured 11 7/8% Senior Debentures due September 2004. Interest
is due on the
debentures semi-annually. The debentures, which are effectively
subordinated to all liabilities of the subsidiaries, contain restrictions
and covenants similar to the restrictions on the 12 1/2% Senior Notes. ACC
may redeem the debentures in whole
or in part on or after September 15, 1999, at 104.5% of principal, declining
to 100% of principal on or after September 15, 2002.
9 7/8% Senior Debentures due 2005
On March 11, 1993, ACC issued 9 7/8% Senior Debentures due March 2005 in the
aggregate principal amount of $130,000. Interest on the debentures is
payable semi-annually. The debentures, which are effectively subordinated
to all liabilities of the subsidiaries, contain restrictions and covenants
similar to the restrictions on
the 12 1/2% Senior Notes. The debentures are not redeemable prior to the
maturity date of March 1, 2005.
9 1/2% Senior Pay-In-Kind Notes due 2004
On February 15, 1994, ACC issued $150,000 aggregate principal amount of
unsecured 9 1/2% Senior Pay-In-Kind Notes due February 2004. On or prior to
February 1999, all interest on the notes, which is due semi-annually, may at
the option of ACC be paid in cash or through the issuance of additional
notes valued at 100% of their principal amount. The notes will bear cash
interest from February 1999 through maturity. The notes which are
effectively subordinate to all liabilities of the subsidiaries contain
restrictions and covenants similar to the 12 1/2% Senior Notes. ACC may
redeem the notes in whole or in part on or after February 15, 1999, at
103.56% of principal, declining to 100% of principal on or after February
15, 2002.
13% Senior Subordinated Notes due 1996
On February 14, 1994, ACC redeemed all of the 13% Senior Subordinated Notes
for 100% of the $100,000 aggregate principal amount.
Maturities of Debt
Maturities of debt for the five years after March 31, 1995 are as follows:
1996...................................................... $ 114,921
1997...................................................... 216,099
1998...................................................... 274,701
1999...................................................... 264,427
2000...................................................... 113,014
Management intends to fund its requirements for maturities of debt through
borrowings under new and existing credit arrangements and internally
generated funds. Changing conditions in the financial markets may have an
impact on how ACC will refinance its debt in the future.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
4. Commitments and Contingencies:
ACC rents office and studio space, tower sites, and space on utility poles
under
leases with terms which are generally less than one year or under agreements
that are generally cancelable on short notice. Total rental expense under
all operating
leases aggregated $4,090, $3,988 and $4,356 for the years ended March 31,
1993, 1994 and 1995, respectively.
In connection with certain obligations under franchise agreements, ACC
obtains surety bonds guaranteeing performance to municipalities and public
utilities. Payment is required only in the event of nonperformance. ACC
has fulfilled all of its obligations such that no payments under surety
bonds have been required.
As of July 1, 1993, ACC adopted a program to self insure for casualty and
business interruption insurance. This program is part of an agreement
between ACC and each of its subsidiaries in which ACC will provide insurance
for casualty and business
interruption claims of up to $10,000 and $20,000 per claim, respectively,
for each subsidiary of ACC. These risks were previously insured by outside
parties with nominal deductible amounts.
ACC's cable television operations may be adversely affected by changes and
developments in governmental regulation, competitive forces and technology.
The cable television industry and ACC are subject to extensive regulation at
the federal, state and local levels. Many aspects of such regulation are
currently the subject of judicial proceedings and administrative or
legislative proceedings or proposals. On October 5, 1992, Congress passed
the 1992 Cable Act, which significantly expands the scope of regulation of
certain subscriber rates and a number of other matters in the cable
industry, such as mandatory carriage of local broadcast stations and
retransmission consent, and which will increase the administrative costs of
complying with such regulations. The FCC has adopted rate regulations that
establish, on a system-by-system basis, maximum allowable rates for (i)
basic and cable programming services (other than programming offered on a
per-channel or per-program basis), based upon a benchmark methodology, and
(ii) associated equipment and installation services based upon cost plus a
reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The
original rate regulations became effective on September 1, 1993. Amendments
to the rate regulations became effective May 15, 1994. Further amendments
were adopted on November 10, 1994. The FCC ordered an interim rate freeze
effective April 5, 1993 which was extended through May 15, 1994.
The FCC had adopted regulations implementing virtually all of the
requirements of the 1992 Cable Act. The FCC is also likely to continue to
modify, clarify or refine the rate regulations. In addition, litigation has
been instituted challenging various portions of the 1992 Cable Act and the
rulemaking proceedings including the
rate regulations. ACC cannot predict the effect or outcome of the future
rulemaking proceedings, changes to the rate regulations, or litigation.
Further, because the FCC has only issued its interim rules and has not
adopted final cost-of-service rules, ACC has not determined to what extent
it will be able to utilize cost-of-service showings to justify rates.
Effective September 1, 1993, as a result of the 1992 Cable Act, ACC
repackaged certain existing cable services by adjusting rates for basic
service and introducing a new method of offering certain cable services.
ACC adjusted the basic service rates and related equipment and installation
rates in all of its systems in order for such rates to be in compliance with
the applicable benchmark or equipment and installation cost levels. The
amended rules may require further adjustments to ACC's rates. ACC also
implemented a program in all of its systems called
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
4. Commitments and Contingencies, continued:
"CableSelect" under which most of ACC's satellite-delivered programming
services are now offered individually on a per channel basis, or as a group
at a price of approximately 15% to 20% below the sum of the per channel
prices of all such services. For subscribers who elect to customize their
channel lineup, ACC will provide, for a monthly rental fee, an electronic
device located on the cable line outside the home, enabling a subscriber's
television to receive only those channels selected by the subscriber. These
basic service rate adjustments and the CableSelect program have also been
implemented in all systems managed by ACC. ACC believes CableSelect
provides increased programming choices to its subscribers while providing
flexibility to ACC to respond to future changes in areas such as customer
demand and programming.
On November 10, 1994 the FCC ruled that, prospectively, any "a la carte"
package will be treated as a regulated tier, except for packages involving
premium services. ACC is currently unable to predict the effect that the
amended regulations, future FCC treatment of "a la carte" packages or other
future FCC rulemaking proceedings will have on its business and results of
operations in future periods. No assurance can be given at this time that
such matters will not have a material negative
financial impact on ACC's business and results of operations in the future.
Also,
no assurance can be given as to what other future actions Congress, the FCC
or other regulatory authorities may take or the effects thereof on ACC.
A letter of inquiry, one of at least 63 sent by the FCC to numerous cable
operators, was received by ACC regarding the implementation of this new
method of offering services. ACC responded in writing to the FCC's inquiry.
On November 18, 1994, the Cable Services Bureau of the FCC issued a decision
holding that the "CableSelect" program was an evasion of the rate
regulations and ordered this package to be treated as a regulated tier.
This decision, and all other letters of inquiry decisions, were principally
decided on the number of programming services moved from regulated tiers to
"a la carte" packages. ACC has appealed this decision to the full
Commission. ACC cannot predict the outcome or effect of this proceeding.
5. Stockholders' Equity (Deficiency):
ACC has no convertible securities or other common stock equivalent
securities outstanding.
Public Offering of Class A Common Stock on May 14, 1992
On May 14, 1992, ACC sold to the public 1,500,000 shares of Class A Common
Stock for $15.00 per share. The net proceeds of the sale, after offering
costs, aggregated $21,725.
Public Offering of Class A Common Stock on January 14, 1994
On January 14, 1994, ACC sold 9,132,604 shares of Class A Common Stock. Of
the 9,132,604 shares, 3,300,000 shares were sold to the public at $18.00 per
share, with an underwriting discount of $.855 per share. Partnerships
controlled by the family
of John J. Rigas, President and Chief Executive Officer of ACC, purchased
the other 5,832,604 shares at the public offering price less the
underwriting discount. Net proceeds to ACC after offering expenses
aggregated $155,963.
Stock Issued During Fiscal 1995
On January 10, 1995, ACC issued 399,087 shares of Class A Common Stock in
connection with the acquisition of Oxford (see Note 1). On February 28,
1995, 1,000,000 shares of Class A Common Stock were sold to FP & L Group,
Inc. for $15.00 per share.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
5. Stockholders' Equity (Deficiency), continued:
Preferred Stock
The Certificate of Incorporation of ACC authorizes 5,000,000 shares of
Preferred Stock, $.01 par value. None have been issued.
Common Stock
The Certificate of Incorporation of ACC authorizes two classes of common
stock, Class A and Class B. Holders of Class A Common Stock and Class B
Common Stock vote as a single class on all matters submitted to a vote of
the stockholders, with each
share of Class A Common Stock entitled to one vote and each share of Class B
Common Stock entitled to ten votes, except (i) for the election of directors
and (ii) as otherwise provided by law. In the annual election of directors,
the holders of Class A Common Stock voting as a separate class, are entitled
to elect one of ACC's directors. In addition, each share of Class B Common
Stock is automatically convertible into a share of Class A Common Stock upon
transfer, subject to certain
limited exceptions. In the event a cash dividend is paid, the holders of
Class A Common Stock will be paid 105% of the amount payable per share for
each share of Class B Common Stock.
Upon liquidation, dissolution or winding up of ACC, the holders of Class A
Common Stock are entitled to a preference of $1.00 per share. After such
amount is paid, holders of Class B Common Stock are entitled to receive
$1.00 per share. Any remaining amount would then be shared ratably by both
classes.
Restricted Stock Bonus Plan
ACC has reserved 500,000 shares of Class A Common Stock for issuance to
officers and other key employees at the discretion of the Compensation
Committee of the Board of Directors. The bonus shares will be awarded
without any cash payment by the recipient unless otherwise determined by the
Compensation Committee. Shares awarded under the plan vest over a five year
period. No awards have been made under the plan.
Stock Option Plan
ACC has a stock option plan, which provides for the granting of options to
purchase up to 200,000 shares of ACC's Class A Common Stock to officers and
other key employees of the Company and its subsidiaries. Options may be
granted at an exercise price equal to the fair market value of the shares on
the date of grant. The plan permits the granting of tax-qualified incentive
stock options, in addition to non-qualified stock options. Options
outstanding under the plan may be exercised by paying the exercise price per
share through various alternative settlement methods. No stock options have
been granted under the plan.
6. Employee Benefit Plans:
ACC has a savings plan (401(k)) which provides that eligible full-time
employees may contribute from 2% to 20% of their pre-tax compensation. ACC
makes matching contributions not exceeding 1.5% of each participant's pre-
tax compensation. ACC's matching contributions amounted to $241, $305 and
$343 for the years ended March 31, 1993, 1994 and 1995, respectively.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
7. Taxes on Income:
ACC and its corporate subsidiaries file a consolidated federal income tax
return, which includes its share of the subsidiary partnerships and joint
venture partnership results. At March 31, 1995, ACC had net operating loss
carryforwards for federal income tax purposes of approximately $1,000,000
expiring through 2010. Depreciation and amortization expense differs for
tax and financial statement purposes due to the use of prescribed periods
rather than useful lives for tax purposes and also as a result of
differences between tax basis and book basis of certain acquisitions.
ACC adopted SFAS No. 109, "Accounting for Income Taxes," effective April 1,
1993. Under SFAS No. 109, deferred tax assets and liabilities are
recognized for differences between the financial statement amounts of assets
and liabilities and their respective tax bases. The cumulative effect of
adopting SFAS No. 109 at April 1, 1993 was to increase the net loss by
$89,660 for the year ended March 31, 1994. The effect of adopting SFAS No.
109 on loss before extraordinary loss and cumulative effect of a change in
accounting principle was not significant for the year ended March 31, 1994.
As a result of applying SFAS No. 109, $110,498 of previously unrecorded
deferred tax benefits from operating loss carryforwards incurred by ACC were
recognized at April 1, 1993 as part of the cumulative effect of adopting the
statement. Under prior accounting, a portion of these benefits would have
been recognized as a reduction of income tax expense from continuing
operations in the year ended March 31, 1994.
The tax effects of significant items comprising ACC's net deferred tax
liability are as follows:
April 1, March 31,
1993 1994 1995
Deferred tax liabilities:
Differences between book and tax basis of
property, plant and equipment and intangible
assets........................................ $ 192,444 $ 210,816 $ 232,639
Other.......................................... 8,401 9,703 11,783
Total................................ 200,845 220,519 244,422
Deferred tax assets:
Reserves not currently deductible.............. 687 15,576 12,326
Operating loss carryforwards................... 307,001 337,924 381,377
307,688 353,500 393,703
Valuation allowance............................ (196,503) (224,702) (259,420)
Total................................ 111,185 128,798 134,283
Net deferred tax liability..................... $ 89,660 $ 91,721 $ 110,139
The net change in the valuation allowance for the years ended March 31, 1994
and 1995 was an increase of $28,199 and $34,718, respectively.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
7. Taxes on Income, continued:
Income tax (expense) benefit for the years ended March 31, 1993, 1994 and
1995 is as follows:
March 31,
1993 1994 1995
Current............................. $ (3,143) $ (681) $ (500)
Deferred............................. -- (2,061) 5,975
Total................................$ (3,143) $ (2,742) $ 5,475
A reconciliation of the statutory federal income tax rate and ACC's
effective income tax rate is as follows:
March 31,
1994 1995
Statutory federal income tax rate......... 35.0% 35.0%
Change in valuation allowance............. (29.8) (31.1)
State taxes, net of federal benefit....... (2.4) 3.7
Other..................................... (5.7) (2.7)
Income tax (expense) benefit.............. (2.9%) 4.9%
8. Disclosures about Fair Value of Financial Instruments:
Included in ACC's financial instrument portfolio are cash, notes payable,
debentures and interest rate swaps. The carrying values of notes payable
approximate their fair values at March 31, 1995. The fair value of the
debentures totaled $938,589 at March 31, 1994, which exceeded the carrying
value by approximately $27,500. The fair market value of debentures at
March 31, 1995 totaled $820,378 which exceeded the carrying value by
$95,468. At March 31, 1995, ACC would have been required to pay
approximately $6,929 to settle its interest rate swap agreements,
representing the excess carrying cost over fair value of these agreements.
The fair values of the debt and interest rate swaps were based upon quoted
market prices of similar instruments or on rates available to ACC for
instruments of the same remaining maturities.
9. Related Party Transactions:
ACC currently manages cable television systems which are principally owned
by Olympus and limited partnerships of which certain of ACC's principal
shareholders who are executive officers have equity interests (the "Managed
Partnerships").
ACC has agreements with Olympus and the Managed Partnerships which provide
for the payment of fees to ACC. The aggregate fee revenues from Olympus and
the Managed Partnerships amounted to $4,659, $2,946 and $7,293 for the years
ended March 31, 1993, 1994 and 1995, respectively. In addition, ACC was
reimbursed by Olympus and Managed Partnerships for allocated corporate costs
of $4,521, $4,021 and $4,521 for the years ended March 31, 1993, 1994 and
1995, respectively, which have been recorded as a reduction of selling,
general and administrative expense.
ACC leases from a partnership and a corporation owned by principal
shareholders who are executive officers support equipment under agreements
which have been accounted for as capital leases. These obligations, which
are included in other debt, amounted to $1,415 and $933 at March 31, 1994
and 1995, respectively. ACC also leases from this partnership certain
buildings under operating leases. Rent expense under these operating leases
aggregated $715, $391 and $97 for the years ended March 31, 1993, 1994 and
1995, respectively.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
9. Related Party Transactions, continued:
Net settlement amounts under interest rate swap agreements with Olympus and
the Managed Partnerships recorded as adjustments to interest expense during
the period incurred, decreased ACC's interest expense by $1,698, $1,920 and
$173 for the years ended March 31, 1993, 1994 and 1995, respectively.
On March 31, 1994, ACC acquired from certain Managed Partnerships the rights
to provide alternate access in their respective franchise areas for a
purchase price of $14,000. Additionally, on March 31, 1994, ACC purchased
real property from certain partnerships owned by principal shareholders who
are certain executive officers for a total of $14,312. The purchase of the
assets resulted in a reduction of amounts due ACC of $28,312. Since these
asset purchases are transactions among entities under common control, they
have been recorded by ACC based upon the predecessor owners' book value.
The $17,553 excess of the purchase price of these assets over the
predecessor owners' book value has been recorded as a direct charge to ACC's
additional paid-in capital.
10. Quarterly Financial Data (Unaudited):
The following tables summarize the financial results of ACC for each of the
quarters in the years ended March 31, 1994 and 1995:
Three Months Ended,
June 30 Sept. 30 Dec. 31 March 31
Year Ended March 31, 1994:
Revenues..................... $ 79,658 $ 79,388 $ 79,945 $ 80,054
Operating expenses:
Direct operating and
programming................ 22,332 22,363 22,675 23,177
Selling, general and
administrative............. 12,817 12,577 12,758 14,649
Depreciation and
amortization............... 21,695 23,621 22,200 21,886
Total........................ 56,844 58,561 57,633 59,712
Operating income............. 22,814 20,827 22,312 20,342
Other income (expense):
Interest income from
affiliates................. 1,435 1,629 1,565 4,559
Other income (expense)...... -- 283 287 (869)
Priority investment income.. 5,575 5,575 5,575 5,575
Interest expense............ (44,035) (46,096) (46,626) (45,379)
Equity in loss of
joint ventures............. (9,947) (5,374) (8,087) (6,646)
Total........................ (46,972) (43,983) (47,286) (42,760)
Loss before income taxes,
extraordinary loss and
cumulative effect of change
in accounting principle..... (24,158) (23,156) (24,974) (22,418)
Income tax expense........... (1,130) (660) (811) (141)
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
10. Quarterly Financial Data (Unaudited), continued:
Three Months Ended,
June 30 Sept. 30 Dec. 31 March 31
Year Ended March 31, 1994:
Loss before extraordinary loss
and cumulative effect
of change in accounting
principle................... (25,288) (23,816) (25,785) (22,559)
Extraordinary loss on early
retirement of debt.......... -- -- -- (752)
Cumulative effect of change
in accounting for income
taxes....................... (89,660) -- -- --
Net loss..................... $ (114,948) $ (23,816) $ (25,785) $ (23,311)
Loss per weighted average
share of common stock before
extraordinary loss and
cumulative effect of change
in accounting principle..... $ (1.65) $ (1.55) $ (1.68) $ (.98)
Extraordinary loss per weighted
average share on early
retirement of debt.......... -- -- -- (.03)
Cumulative effect per weighted
average share of change
in accounting for income
taxes....................... (5.85) -- -- --
Net loss per weighted average
share of common stock....... $ (7.50) $ (1.55) $ (1.68) $ (1.01)
Weighted average shares of
common stock outstanding.... 15,319,476 15,319,476 15,319,476 23,031,453
Year Ended March 31, 1995:
Revenues..................... $ 84,020 $ 90,795 $ 92,737 $ 93,953
Operating expenses:
Direct operating and
programming................ 24,896 26,632 27,644 27,821
Selling, general and
administrative............. 14,693 15,117 16,409 17,268
Depreciation and
amortization............... 21,489 25,267 26,043 24,803
Total........................ 61,078 67,016 70,096 69,892
Operating income............. 22,942 23,779 22,641 24,061
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
10. Quarterly Financial Data (Unaudited), continued:
Three Months Ended,
June 30 Sept. 30 Dec. 31 March 31
Year Ended March 31, 1995:
Other income (expense):
Interest income from
affiliates................. 2,369 2,386 2,912 3,445
Other income................ 593 270 76 514
Priority investment income.. 5,575 5,575 5,575 5,575
Interest expense............ (46,913) (48,412) (49,668) (50,705)
Equity in loss of
joint ventures............. (12,634) (8,984) (8,744) (13,987)
Total........................ (51,010) (49,165) (49,849) (55,158)
Loss before income taxes..... (28,068) (25,386) (27,208) (31,097)
Income tax benefit (expense). (1,223) 1,119 (1,214) 6,793
Net loss..................... $ (29,291) $ (24,267) $ (28,422) $ (24,304)
Net loss per weighted average
share of common stock....... $ (1.20) $ (.99) $ (1.16) $ (.97)
Weighted average shares of
common stock outstanding.... 24,452,080 24,452,080 24,452,080 25,174,845
11. Subsequent Events
On June 12, 1995, ACC announced the signing of definitive agreements for the
purchase of all of the cable systems of Eastern Telecom Corporation,
Robinson Cable TV, Inc. and First Carolina Cable TV, L.P. These systems
together serve approximately 58,000 subscribers and are being purchased for
an aggregate price of $92,000. The acquisitions, which will be accounted
for under the purchase method of accounting, are expected to close in the
third quarter of fiscal 1996.
On June 28, 1995, Adelphia and other relevant parties terminated their
previously announced November 1994 letter of intent to increase by $63,000
to $75,000 the overall investment of Adelphia and the companies it manages
(the "Adelphia Group") in cable systems held by Tele-Media Investment
Partnership, L.P. and certain other Tele-Media controlled entities
(collectively, "Tele-Media"). The Adelphia Group will continue to hold its
existing investments in and recent acquisitions of Tele-Media cable systems.
INDEPENDENT AUDITORS' REPORT
Olympus Communications, L.P.:
We have audited the accompanying consolidated balance sheets of Olympus
Communications, L.P. and subsidiaries as of December 31, 1993 and 1994, and
the related consolidated statements of operations, general partner's equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Olympus Communications,
L.P. and subsidiaries at December 31, 1993 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 9 to the consolidated financial statements, effective
January 1, 1993, the Partnership changed its method of accounting for income
taxes.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
April 13, 1995 (June 8, 1995 as
to Notes 4 and 12)
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
1993 1994
ASSETS:
Cable television systems, at cost, net of accumulated
depreciation and amortization:
Property, plant and equipment - net...................... $ 163,689 $ 154,298
Intangible assets - net.................................. 273,489 210,928
Total............................................ 437,178 365,226
Cash and cash equivalents.................................. 11,371 425
Subscriber receivables - net............................... 6,294 5,419
Prepaid expenses and other assets - net.................... 3,820 3,784
Investment in Northeast Cable, Inc......................... -- 1,131
Total............................................ $ 458,663 $ 375,985
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY):
Notes payable to banks..................................... $ 368,000 $ 314,010
Other debt................................................. 263 59
Accounts payable........................................... 6,236 9,984
Subscriber advance payments and deposits................... 3,251 2,717
Accrued interest and other liabilities..................... 7,907 10,219
Accrued priority return on redeemable preferred limited
partner interests......................................... 95,930 135,553
Deferred business interruption proceeds.................... 1,037 --
Due to affiliates - net.................................... 87,553 75,861
Deferred income taxes...................................... 59,500 39,701
Total............................................ 629,677 588,104
Commitments and contingencies (Note 7)
16.5% redeemable preferred limited partner interests....... 276,101 276,101
Redeemable limited partner interests....................... 5,000 5,885
General partner's equity (deficiency)...................... (452,115) (494,105)
Total............................................ $ 458,663 $ 375,985
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended December 31,
1992 1993 1994
Revenues......................................... $ 86,255 $ 89,099 $ 93,421
Business interruption revenue.................... 7,146 9,547 1,037
Total.................................. 93,401 98,646 94,458
Operating expenses:
Direct operating and programming................ 22,473 22,078 22,369
Selling, general and administrative............. 18,817 16,692 18,708
Depreciation and amortization................... 39,407 37,240 36,703
Management fees to Managing Affiliate........... 4,831 4,681 6,302
Total.................................. 85,528 80,691 84,082
Operating income................................. 7,873 17,955 10,376
Interest expense................................. (25,775) (24,515) (22,889)
Interest expense - affiliates.................... (4,497) (4,955) (9,373)
Priority return to an affiliate.................. 5,247 -- --
Other income..................................... 535 271 585
Loss before income tax benefit and cumulative
effect of change in accounting principle........ (16,617) (11,244) (21,301)
Income tax benefit............................... -- -- 276
Loss before cumulative effect of change in
accounting principle............................ (16,617) (11,244) (21,025)
Cumulative effect of change in accounting
for income taxes................................ -- (59,500) --
Net loss............................... (16,617) (70,744) (21,025)
Priority return on redeemable preferred
limited partner interests....................... (52,135) (57,436) (61,923)
Net loss allocated to redeemable limited
partners........................................ 8,309 9,720 5,000
Accretion requirements of redeemable
limited partners................................ (12,924) (5,000) (5,885)
Net loss of general partner after
priority return and accretion
requirements.................................... $ (73,367) $(123,460) $(83,833)
Net loss per general partner unit
after priority return and
accretion requirements.......................... $ (4,446) $ (12,346) $ (8,383)
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF GENERAL PARTNER'S EQUITY (DEFICIENCY)
(Dollars in thousands)
General
Partner
Balance, December 31, 1991............................................$(248,688)
Net loss of general partner after priority return and accretion
requirements......................................................... (73,367)
Balance, December 31, 1992............................................ (322,055)
Conversion of general partnership interests to preferred limited
partnership interests................................................ (6,500)
Net loss of general partner after priority return and accretion
requirements......................................................... (123,460)
Capital distribution.................................................. (100)
Balance, December 31, 1993............................................ (452,115)
Excess of sale price over carrying value of subsidiary sold to
affiliate............................................................ 26,548
Proceeds from sale of alternate access rights to affiliate............ 13,000
Excess of sale price over carrying value of investment sold
to affiliate......................................................... 2,395
Net loss of general partner after priority return and accretion
requirements......................................................... (83,833)
Capital distribution.................................................. (100)
Balance, December 31, 1994............................................$(494,105)
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended
December 31,
1992 1993 1994
Cash flows from operating activities:
Net loss.......................................... $(16,617) $(70,744) $(21,025)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................... 16,907 17,229 19,132
Amortization.................................... 22,500 20,011 17,571
Gain on property damage related to hurricane.... (535) -- --
Cumulative effect of change in accounting
for income taxes............................... -- 59,500 --
Costs associated with debt financing............ (969) -- --
Changes in operating assets and liabilities, net
of effects of acquisitions and divestitures:
Subscriber receivables - net.................. 498 (890) 398
Prepaid expenses and other assets - net....... (58) (251) (2,722)
Accounts payable.............................. (13) (1,585) 4,590
Subscriber advance payments and deposits...... (59) (884) 368
Accrued interest and other liabilities........ (10,245) (494) 3,333
Deferred business interruption proceeds......... 6,279 (5,240) (1,037)
Deferred taxes.................................. -- -- (323)
Net cash provided by operating activities.......... 17,688 16,652 20,285
Cash flows from investment activities:
Expenditures for property, plant and equipment.... (26,827) (23,164) (23,916)
Insurance proceeds for property damage related
to hurricane..................................... 6,800 -- --
Proceeds from sale of subsidiary to affiliate..... -- -- 27,818
Proceeds from sale of investment to affiliate..... -- -- 2,500
Proceeds from sale of alternate access rights
to affiliate..................................... -- -- 13,000
Proceeds from repayment of note receivable from
affiliated partnership........................... 10,157 -- --
Purchase of limited partner equity interests...... -- (9,795) --
Net cash (used for) provided by investment
activities........................................ (9,870) (32,959) 19,402
Cash flows from financing activities:
Proceeds from debt................................ 59,956 13,000 --
Repayments of debt................................ (90,314) (7,165) (11,871)
Payments of priority return....................... (22,300) (22,300) (22,300)
Amounts advanced from (to) affiliates............. 48,119 37,193 (16,362)
Capital distribution.............................. -- (100) (100)
Net cash (used for) provided by financing
activities........................................ (4,539) 20,628 (50,633)
Increase (decrease) in cash and cash equivalents... 3,279 4,321 (10,946)
Cash and cash equivalents, beginning of year....... 3,771 7,050 11,371
Cash and cash equivalents, end of year............. $ 7,050 $ 11,371 $ 425
Supplemental disclosure of cash flow activity -
Cash payments for interest........................ $ 32,387 $ 30,117 $ 31,377
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. The Partnership and Basis of Presentation:
Olympus Communications, L.P. and Subsidiaries ("Olympus") is a joint venture
limited partnership formed under the laws of Delaware with 50% of the
outstanding voting interests controlled by Adelphia Communications
Corporation ("ACC"). Olympus' operations consist primarily of selling
video programming which is distributed to subscribers for a monthly fee
through a network of fiber optic and coaxial cables.
The consolidated financial statements include the accounts of Olympus and
its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
On June 30, 1994, ACC acquired from Olympus 85% of the common stock of
Northeast Cable, Inc. ("Northeast") for a purchase price of $31,875.
Northeast owns cable television systems serving approximately 36,500
subscribers in eastern Pennsylvania. Of the purchase price, $16,000 was
paid in cash and the remainder resulted in a decrease in Olympus' existing
amount payable to ACC. The consolidated statements of operations and cash
flows for Olympus include the operations of Northeast for the six months
ended June 30, 1994.
On February 28, 1995, Olympus entered into a Liquidation Agreement with the
Gans Family ("Gans"), an Olympus limited partner. Under this Liquidation
Agreement, Gans agreed to exchange their redeemable limited partner
interests in Olympus for the remaining 15% of the common stock of Northeast
held by Olympus. Concurrently with the closing of the Liquidation
Agreement, ACP Holdings, Inc., a wholly owned subsidiary of ACC and managing
general partner of Olympus, certain shareholders of ACC, Olympus and various
Telesat Entities ("Telesat"), wholly-owned subsidiaries of FP&L Group, Inc.,
entered into an investment agreement whereby Telesat contributed to Olympus
substantially all of the assets associated with certain cable television
systems, serving approximately 50,000 subscribers in southern Florida, in
exchange for general and limited partner interests and newly issued
preferred limited partner interests in Olympus (see Note 12).
The following unaudited pro forma consolidated statement of operations has
been prepared assuming that the sale of the Northeast cable system had
occurred on January 1, 1994. The effects of the sale of Northeast on the
consolidated balance sheet are included in the accompanying consolidated
balance sheet as of December 31, 1994. The pro forma data are not
necessarily indicative of the results that actually would have occurred if
Northeast had been sold on January 1, 1994, or what may be achieved in the
future.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. The Partnership and Basis of Presentation, continued:
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1994
(Dollars in thousands)
(UNAUDITED)
As Pro Forma Pro Forma
Reported Adjustments (Unaudited)
Revenues................................. $ 94,458 $ (5,831)(a) $ 88,627
Operating expenses:
Direct operating and programming....... 22,369 (1,729)(a) 20,640
Selling, general and administrative.... 18,708 (372)(a) 18,336
Depreciation and amortization.......... 36,703 (2,393)(a) 34,310
Management fees to Managing Affiliate.. 6,302 (284)(a) 6,018
Total.......................... 84,082 (4,778) 79,304
Operating income......................... 10,376 (1,053) 9,323
Interest expense......................... (32,262) 1,386 (a) (30,876)
Other income............................. 585 -- 585
Loss before income tax benefit........... (21,301) 333 (20,968)
Income tax benefit....................... 276 23 (a) 299
Net loss....................... (21,025) 356 (20,669)
Priority return on redeemable preferred
limited partner interests............... (61,923) -- (61,923)
Net loss allocated to redeemable limited
partners................................ 5,000 -- 5,000
Accretion requirements of redeemable
limited partners........................ (5,885) -- (5,885)
Net loss of general partner
after priority return and
accretion requirements.................. $(83,833) $ 356 $ (83,477)
Net loss per general partner
unit after priority return and
accretion requirements.................. $ (8,383) $ 36 $ (8,348)
(a) Pro forma adjustments reflect the elimination of the operations of the
Northeast cable systems for the six months ended June 30, 1994.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
2. Summary of Significant Accounting Policies:
Subscriber Receivables
Subscriber revenues are recorded in the month the service is provided.
An allowance for doubtful accounts of $2,598 and $1,660 is recorded as a
reduction of subscriber receivables at December 31, 1993 and 1994,
respectively.
Programming Expense
Prior to July 1, 1992, ACC charged programming expense to affiliates
(including Olympus) based on the number of subscribers to each programming
service in the affiliate. Effective July 1, 1992, programming expense
charged by ACC to affiliates is based on cost reductions under programming
contracts from incremental subscribers, as well as the number of
subscribers. The effect of this change was to decrease programming expense
by $814 and $2,888 and $3,250 for the years ended December 31, 1992, 1993
and 1994, respectively.
Property, Plant and Equipment
Property, plant and equipment are comprised of the following:
December 31,
1993 1994
Operating plant and equipment................... $197,604 $201,921
Real estate and improvements..................... 4,158 3,690
Support equipment................................ 3,440 3,513
Construction in progress......................... 15,258 14,302
220,460 223,426
Accumulated depreciation......................... (56,771) (69,128)
$163,689 $154,298
Depreciation is computed on the straight-line method using estimated useful
lives of 5 to 12 years for operating plant and equipment and 3 to 20 years
for support equipment and buildings. Additions to property, plant and
equipment are recorded at cost which includes amounts for material,
applicable labor, and interest. Olympus capitalized interest amounting to
$436 and $391 for 1993 and 1994, respectively.
Intangible Assets
Intangible assets, net of accumulated amortization, are comprised of the
following:
December 31,
1993 1994
Purchased franchises..............................$248,647 $206,441
Goodwill.......................................... 4,568 4,429
Non-compete agreements............................. 20,211 33
Purchased subscriber lists........................ 63 25
$273,489 $210,928
A portion of the aggregate purchase price of cable television systems
acquired has been allocated to purchased franchises, purchased subscriber
lists, non-compete agreements and goodwill. Purchased franchises and
goodwill are amortized on the straight-line method over periods, which range
from 34 to 40 years. Purchased subscriber lists are amortized on the
straight-line method over the average periods
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
2. Summary of Significant Accounting Policies, continued:
Intangible Assets, continued
that the listed subscribers are expected to receive service from the date of
acquisition, which is 7 years. The non-compete agreements are amortized
over their contractual lives, which range from 2 to 5 years. Accumulated
amortization of intangible assets amounted to $81,668 and $76,642 at
December 31, 1993 and 1994, respectively.
Amortization of Other Assets
Deferred debt financing costs are amortized over the term of the related
debt. The unamortized amount included in prepaid expenses and other assets
was $2,426 and $1,457 at December 31, 1993 and 1994, respectively.
Asset Impairments
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." In accordance with SFAS No. 121, Olympus periodically reviews the
carrying value of its long-lived assets, identifiable intangibles and
goodwill in relation to historical financial results, current business
conditions and trends (including the impact of existing legislation and
regulation) to identify potential situations in which the carrying value of
assets may not be recoverable. If a review indicates that the carrying
value of such assets may not be recoverable, the carrying value of such
assets in excess of their fair value would be recorded as a reduction of the
assets cost as if a permanent impairment has occurred. The adoption of SFAS
No. 121 did not materially affect the financial statements of Olympus.
Net Loss Per General Partner Unit After Priority Return and Accretion
Requirements
Net loss per general partner unit after priority return and accretion
requirements is based upon the weighted average number of general partner
units outstanding of 10.0 for 1993 and 1994.
Cash and Cash Equivalents
Olympus considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
3. Business Interruption and Property Damage Related to Hurricane:
On August 24, 1992, service in Olympus' South Dade system was interrupted by
Hurricane Andrew. The hurricane damaged property with a net book value of
approximately $6,265. Olympus maintained insurance for property loss and
for business interruption and transmission lines. Olympus received total
net proceeds from the insurance carriers of which $20,225 and $4,305 were
received in the years ended December 31, 1992 and 1993, respectively. There
were no net proceeds received in 1994. Of the total insurance proceeds
received, $7,146, $9,547, and $1,037 were allocated to business interruption
in 1992, 1993 and 1994, respectively. Allocation of the business
interruption proceeds between years was based upon estimated revenues lost
as a result of the hurricane.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
4. Debt:
Notes Payable to Banks
Notes payable to banks of Olympus' subsidiaries are comprised of the
following:
December 31,
1993 1994
Revolving credit agreement with banks, converted into
term notes with quarterly principal installments
increasing from 1% to 5.25% due March 31, 1993 through
1999 -- Adelphia Cable Partners, L.P. ("ACP")........... $323,900 $314,010
$45,000 revolving credit agreement with banks
convertible into term notes with the first quarterly
installment of 2% due September 30, 1993 and due through
1999 -- Northeast Cable, Inc............................ 44,100 --
$368,000 $314,010
Notes payable to banks are comprised of borrowings under a $350,000 credit
agreement between ACP and several banks, which was refinanced on May 12,
1995 as discussed below. The ACP revolving credit agreement converted to a
term note on December 30, 1992. Simultaneous with the conversion, ACP
prepaid $25,000 of principal through March 31, 1994. Additional quarterly
installments will be due through December 31, 1999. Borrowings under the
ACP credit arrangement are collateralized by a pledge of the stock or
partnership interests of the subsidiaries. The agreement stipulates, among
other things, limitations on additional borrowings, investments,
transactions with affiliates, payment of dividends, distributions and fees,
and requires the maintenance of certain financial ratios. The indebtedness
under these agreements is non-recourse to Olympus and ACC.
Interest rates charged for the ACP bank debt are based upon one or more of
the following options: prime rate plus 0% to 1.50%, certificate of deposit
rate plus
.88% to 2.63%, or Eurodollar rate plus .75% to 2.50%. The weighted average
interest rate on notes payable of ACP to the banks, including the effect of
interest rate hedging arrangements, was 8.90% at December 31, 1994.
Interest on outstanding borrowings is generally payable on a quarterly
basis.
As a result of the sale of 85% of the common stock of Northeast on June 30,
1994 (see Note 1), the $44,100 of notes payable to banks of Northeast is no
longer an obligation of Olympus.
Olympus has entered into interest rate swap agreements with banks and ACC to
reduce the impact of changes in interest rates on its floating rate bank
debt and its redeemable preferred limited partner interests. At December
31, 1994, Olympus had an aggregate notional principal amount of $255,000
outstanding under such agreements, which expire from 1995 through 2000.
These agreements provide for a weighted average rate of 8.90%, at December
31, 1994. Olympus is exposed to credit loss in the event of nonperformance
by the bank and ACC. Olympus does not expect any such nonperformance. Net
settlement amounts under these swap agreements are recorded as adjustments
to interest expense during the period incurred.
Prior to March 31, 1992, Olympus, ACC and an affiliated partnership
consummated a series of transactions which resulted in the repayment of
amounts owed to Olympus by the affiliate, the release of the affiliate from
the guarantee and the cancellation of the rights of the affiliate and ACC to
contribute assets to Olympus in return for PLP Interest and the related
return thereon, through an amendment to
the Olympus partnership agreement. As a condition of the release of the
affiliate's guarantee, ACP repaid $24,000 of its bank debt through funds
provided by Olympus.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
4. Debt, continued:
Notes Payable to Banks, continued
Olympus obtained these funds through the repayment of the term note plus
interest from the affiliate and advances from affiliates of ACC. In
connection with the amendment, as of March 31, 1992, Olympus reversed $5,674
of the net priority return amounts previously accrued under the guarantee
arrangement.
Refinancing
On May 12, 1995, ACP and an affiliate, West Boca Acquisition, L.P.
(collectively, the "Borrowers") entered into a $475,000 revolving credit
facility with several banks, maturing December 31, 2003. Interest rates
charged are based upon one or more of the following options: prime rate
plus 0% to .75%, the Federal Funds rate plus .5% to 1.25%, or Eurodollar
rate plus .625% to 1.75%.
Initial borrowings under the revolving credit facility were used to repay
the Borrowers' existing notes payable to banks and accrued interest.
Borrowings under this credit arrangement are collateralized by substantially
all of the assets of the Borrowers. The agreement limits, among other
things, additional borrowings, investments, transactions with affiliates,
payment of distributions and fees, and requires the maintenance of certain
financial ratios by the Borrowers. The agreement also provides that
advances and contributions from affiliates may be returned to the affiliate
to the extent contributed or advanced from the closing date of the loan.
The amount of actual borrowings available under the facility is based upon
achieving certain levels of operating performance. The Borrowers will pay
commitment fees at the annual rate of .375% on unused principal. The credit
facility provides for mandatory reductions in the revolving loan commitment,
in increasing quarterly amounts, commencing June 30, 1997 through December
31, 2003. On the dates of such mandatory commitment reductions, the
Borrowers are obligated to repay outstanding loans in excess of the
remaining total commitment.
The following table sets forth the maximum principal outstanding under this
revolving credit agreement at December 31 of each of the next five years:
December 31, 1995 $475,000
December 31, 1996 475,000
December 31, 1997 446,500
December 31, 1998 394,250
December 31, 1999 337,250
Other Debt
Other debt, with interest at 9.0% to 11.3%, consists of purchase money
indebtedness and capital leases incurred in connection with the acquisition
of, and are collateralized by, certain equipment.
5. 16.5% Redeemable PLP Interests and Special Limited Partner Interests:
The PLP Interests issued to ACC are nonvoting, senior to claims represented
by other partner interests, provide for a priority return of 16.5% per annum
(payable quarterly), and are to be repaid by 2004. In the event that any
priority return is not paid when due, such unpaid amounts will accrue
additional return at a rate of 18.5% per annum. The unpaid priority return
amounted to $95,930 and $135,553 at
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
5. 16.5% Redeemable PLP Interests and Special Limited Partner Interests,
continued:
December 31, 1993 and 1994, respectively. As a result of the February 28,
1995 investment agreement among ACC, Olympus and Telesat (see Notes 1 and
12), the unpaid priority return was eliminated.
The following summarizes the PLP Interests of ACC during the three years
ended December 31, 1994:
Balance, December 31, 1992........................................$269,601
Conversion of general partnership interests to preferred limited
partnership interests............................................ 6,500
Balance, December 31, 1993 and 1994...............................$276,101
Special limited partner interests were issued to ACC in connection with the
issuance of PLP Interests and general partner interests, without any
contribution of assets by ACC. These interests provide for special
allocations of Olympus' income (see Note 6).
6. Redeemable Limited Partner Interests and General Partner's Equity
(Deficiency):
The general partner and limited partners of Olympus will generally share in
future net income and losses of Olympus based upon their respective
percentage ownership of partnership voting units except for certain special
allocation provisions set forth in the Olympus partnership agreement. As
specified in the partnership agreement, after the holders of the PLP
Interests have received a return of their capital plus 16.5% per annum
priority return, distributions by Olympus will be made in the following
order: (i) to partners holding voting units (other than ACC) until each
partner receives an 18% compounded return on its investment; (ii) to ACC
until it receives an 18% compounded return on its investment in the voting
units; (iii) to ACC as managing general partner, to the special limited
partners and to the partners holding voting units until each partner holding
voting units receives a 24%
compounded return on its investment; and (iv) to ACC as managing general
partner, to the special limited partners and to the partners holding voting
units.
The $16,500 in redeemable limited partner units issued to unrelated parties
in connection with the 1990 cable television system acquisitions represent
voting
partnership interests which are subject to certain put and call rights. In
the
event that any such redemption or purchase of limited partner units results
in ACC owning more than 50% of the Partnership's voting interests, ACC will
be required under the Partnership Agreement to reduce its voting interests
so as to maintain its voting interest at or below 50%. ACC may at its
option convert voting partner units to PLP Interests or senior debt in order
to maintain its voting interest at or below 50%.
After giving notice to Olympus in July 1992, the holder of the $6,500 in
limited partner interests exercised its right to require Olympus to redeem
its units on or before January 30, 1993. On January 3, 1993, Olympus
acquired the redeemable limited partner units from the holder for $9,795.
Concurrently, ACC converted 6.5 general partner units to PLP interests,
thereby maintaining its 50% partnership voting interest.
The holders (Gans) of redeemable limited partner units can, at various dates
through January 1996, require Olympus to redeem all of its units at the fair
market value of the units on the exercise date. In the event that Olympus
does not
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
6. Redeemable Limited Partner Interests and General Partner's Equity
(Deficiency),
continued:
make the required purchase or if such purchase would cause Olympus, ACC or
any affiliate of ACC to be in default of the provisions of their respective
loan agreements, then Olympus may sell the assets and liquidate the
partnership. At various dates through January 1996, ACC may purchase the
limited partner units at their fair market value at the exercise date.
For financial reporting purposes, the $9,900 redemption price on the $6,500
in limited partner units was being accreted using the interest method. Such
accretion was charged proportionately to the remaining limited and general
partners' capital accounts. The carrying value of the limited partner units
were adjusted as the fair market value of the units changed. The difference
between the carrying value and the fair market value was accreted ratably
through January 1993 as a charge to the general partners' capital account.
As a result of the Liquidation Agreement entered into on February 28, 1995
between Gans and Olympus, Gans exchanged their redeemable limited
partnership interest in Olympus for 15% of the common stock of Northeast
(see Notes 1 and 12).
The following summarizes activity related to the redeemable limited partners
for the three years ended December 31, 1994:
Balance, December 31, 1991........................................$ 14,900
Net loss allocated to redeemable limited partners............. (8,309)
Accretion requirements to redeemable limited partners......... 12,924
Balance, December 31, 1992......................................... 19,515
Redemption of limited partnership interests on January 3, 1993. (9,795)
Net loss allocated to redeemable limited partners.............. (9,720)
Accretion requirements to redeemable limited partners......... 5,000
Balance, December 31, 1993........................................ 5,000
Net loss allocated to redeemable limited partners............ (5,000)
Accretion requirements to redeemable limited partners........ 5,885
Balance, December 31, 1994........................................$ 5,885
7. Commitments and Contingencies:
Olympus rents office space, tower sites, and space on utility poles under
leases with terms which are generally less than one year or under agreements
that are generally cancelable on short notice. Total rental expense under
all operating leases aggregated $1,008, $1,148 and $1,036 for 1992, 1993 and
1994, respectively.
In connection with certain obligations under existing franchise agreements,
Olympus obtains surety bonds guaranteeing performance to municipalities and
public utilities. Payment is required only in the event of nonperformance.
Olympus has fulfilled all of its obligations such that no payments under
surety bonds have been required.
As of July 1, 1993, Olympus adopted a program to self insure for casualty
and business interruption insurance. This program is part of an aggregate
agreement
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
7. Commitments and Contingencies, continued:
between Olympus and its subsidiaries in which Olympus will provide insurance
for casualty and business interruption claims of up to $10,000 and $20,000
per claim, respectively, for each subsidiary. These risks were previously
insured by outside parties with nominal deductible amounts.
Olympus' cable television operations may be adversely affected by changes
and developments in governmental regulation, competitive forces and
technology. The cable television industry and Olympus are subject to
extensive regulation at the federal, state and local levels. Many aspects
of such regulation are currently the subject of judicial proceedings and
administrative or legislative proceedings or proposals. On October 5, 1992,
Congress passed the 1992 Cable Act, which significantly expands the scope of
regulation of certain subscriber rates and a number of other matters in the
cable industry, such as mandatory carriage of local broadcast stations and
retransmission consent, and which will increase the administrative costs of
complying with such regulations. The FCC has adopted rate regulations that
establish, on a system-by-system basis, maximum allowable rates for (i)
basic and cable programming services (other than programming offered on a
per-channel or per-program basis), based upon a benchmark methodology, and
(ii) associated equipment and installation services based upon cost plus a
reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The
original rate regulations became effective on September 1, 1993. Amendments
to the rate regulations became effective May 15, 1994. Further amendments
were adopted on November 10, 1994. The FCC ordered an interim rate freeze
effective April 5, 1993 which was extended through May 15, 1994.
The FCC had adopted regulations implementing virtually all of the
requirements of the 1992 Cable Act. The FCC is also likely to continue to
modify, clarify or refine the rate regulations. In addition, litigation has
been instituted challenging various portions of the 1992 Cable Act and the
rulemaking proceedings including the
rate regulations. Olympus cannot predict the effect or outcome of the
future rulemaking proceedings, changes to the rate regulations, or
litigation. Further, because the FCC has only issued its interim rules and
has not adopted final cost-of-service rules, Olympus has not determined to
what extent it will be able to utilize cost-of-service showings to justify
rates.
Effective September 1, 1993, as a result of the 1992 Cable Act, Olympus
repackaged certain existing cable services by adjusting rates for basic
service and introducing a new method of offering certain cable services.
Olympus adjusted the basic service rates and related equipment and
installation rates in all of its systems in order for such rates to be in
compliance with the applicable benchmark or equipment and installation cost
levels. The amended rules may require further adjustments to Olympus'
rates. Olympus also implemented a program in all of its
systems called "CableSelect" under which most of Olympus' satellite-
delivered programming services are now offered individually on a per channel
basis, or as a group at a price of approximately 15% to 20% below the sum of
the per channel prices of all such services. For subscribers who elect to
customize their channel lineup, Olympus will provide, for a monthly rental
fee, an electronic device located on the cable line outside the home,
enabling a subscriber's television to receive only those channels selected
by the subscriber. These basic service rate adjustments and the CableSelect
program have also been implemented in all systems managed by Olympus.
Olympus believes CableSelect provides increased programming choices to its
subscribers while providing flexibility to Olympus to respond to future
changes in areas such as customer demand and programming.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
7. Commitments and Contingencies, continued:
On November 10, 1994 the FCC ruled that, prospectively, any "a la carte"
package will be treated as a regulated tier, except for packages involving
premium services. Olympus is currently unable to predict the effect that
the amended regulations, future FCC treatment of "a la carte" packages or
other future FCC rulemaking proceedings will have on its business and
results of operations in future periods. No assurance can be given at this
time that such matters will not have a material negative financial impact on
Olympus' business and results of operations in the future. Also, no
assurance can be given as to what other future actions Congress, the FCC or
other regulatory authorities may take or the effects thereof on Olympus.
A letter of inquiry, one of at least 63 sent by the FCC to numerous cable
operators, was received by Olympus regarding the implementation of this new
method of offering services. Olympus responded in writing to the FCC's
inquiry. On November 18, 1994, the Cable Services Bureau of the FCC issued
a decision holding that the "CableSelect" program was an evasion of the rate
regulations and ordered this package to be treated as a regulated tier.
This decision, and all other letters of inquiry decisions, were principally
decided on the number of programming services moved from regulated tiers to
"a la carte" packages. Olympus has appealed this decision to the full
Commission. Olympus cannot predict the outcome or effect of this
proceeding.
8. Employee Benefit Plans:
Olympus participates in an ACC savings plan (401(k)) which provides that
eligible full-time employees may contribute from 2% to 20% of their pre-tax
compensation. Olympus matches contributions not exceeding 1.5% of each
participant's pre-tax compensation. During 1992, 1993 and 1994, no
significant matching contributions were made by Olympus.
9. Taxes on Income:
Wholly-owned subsidiaries of Olympus are corporations that file separate
federal and state income tax returns. At December 31, 1994, these
subsidiaries had net operating loss carryforwards for federal income tax
purposes of approximately $172,600 expiring through 2009.
Olympus adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. This Statement supersedes Accounting Principles Board
Opinion No. 11, "Accounting for Income Taxes," which Olympus had followed
previously and under which Olympus recorded no deferred tax liability. The
cumulative effect of adopting SFAS No. 109 at January 1, 1993 was to
increase the net loss by $59,500 for the year ended December 31, 1993. As a
result of applying SFAS No. 109, $47,130 of previously unrecorded deferred
tax assets generated from previous operating loss carryforwards incurred by
Olympus and $86,000 in deferred tax liabilities from differences between the
book and tax basis of property were recognized at January 1, 1993 as part of
the cumulative effect of adopting the Statement. Under prior accounting, a
portion of these benefits would have been recognized as a reduction of
income tax expense from continuing operations in the year ended December 31,
1993.
Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising Olympus' net deferred tax liability as of
December 31, 1993 and 1994 are as follows:
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
9. Taxes on Income, continued:
December 31,
1993 1994
Deferred tax liabilities:
Differences between book and tax basis of property
plant and equipment and intangible assets............. $106,309 $ 89,738
Deferred tax assets:
Operating loss carryforwards.......................... 58,034 66,598
Other................................................. 380 358
Valuation allowance................................... (11,605) (16,919)
Subtotal........................................... 46,809 50,037
Net deferred tax liability.............................. $ 59,500 $ 39,701
The net change in the valuation allowance in 1994 was an increase of $5,314.
The provision for income taxes for years ended December 31, 1992, 1993 and
1994 is as follows:
Year Ended December 31,
1992 1993 1994
Federal:
Current......................................... $ -- $ -- $ --
Deferred........................................ -- -- 234
State:
Current......................................... -- -- --
Deferred........................................ -- -- 42
$ -- $ -- $ 276
Reconciliations between the statutory federal income tax rate and Olympus'
effective income tax rate as a percentage of loss before income tax benefit
and cumulative effect of change in accounting principle are as follows:
Year Ended
December 31,
1993 1994
Statutory federal income tax
(benefit) rate......................................... (35%) (35%)
Change in valuation allowance........................... 16% 25%
Operating losses passed through to partners............. 19% 9%
Effective income tax benefit rate....................... 0% 1%
10. Disclosures about Fair Value of Financial Instruments:
Included in Olympus' financial instrument portfolio are cash, notes payable,
interest rate swaps, and redeemable limited partner interests (including
redeemable preferred limited partner interests and the accrued priority
return thereon). The carrying values of the notes payable and redeemable
limited partnership interests approximate their fair values at December 31,
1994. At December 31, 1994, Olympus would have been required to pay
approximately $3,455 to settle its interest rate swap agreements,
representing the excess of carrying cost over fair value of these
agreements. The fair values of the debt and interest rate swaps were based
upon quoted market prices of similar instruments or on rates available to
Olympus for instruments of the same remaining maturities.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
10. Disclosures about Fair Value of Financial Instruments, continued:
The aggregate of the redeemable limited partner and the redeemable preferred
limited partner interests (collectively the "Aggregate Redeemable Partner
Interests") had carrying values totalling $417,539 at December 31, 1994.
The Aggregate Redeemable Partner Interests had an estimated fair value
ranging from $250,000 to $350,000 at December 31, 1994. The fair value of
the Aggregate Redeemable Partner Interests was based upon an investment bank
market research report, computed using multiples of estimated cash flows.
Considerable judgment is necessary to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that a holder could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
11. Transactions with Related Parties:
Olympus has an agreement with a subsidiary of ACC (Managing Affiliate) which
provides for payment of management fees by Olympus equal to 5% of Olympus'
gross revenues. The amount and payment of these fees is subject to the
restrictions contained in the credit agreements. Olympus also reimburses
ACC for direct operating costs, which amounted to $1,245, $600 and $1,477
for 1992, 1993 and 1994, respectively. In 1992 Olympus assigned to ACC $750
of insurance proceeds for assistance provided with respect to the hurricane
and the resulting insurance claims (see Note 3).
At December 31, 1991, Olympus held a 16.5% term note from an affiliated
partnership of certain executive officers of ACC in the amount of $10,157.
This note was repaid on March 27, 1992. Interest income from this
affiliated partnership on the term note and other receivables amounted to
$597 for 1992, which is included in revenues.
Olympus has periodically received funds from and advanced funds to ACC and
other affiliates. Olympus was charged $4,497, $4,955 and $9,373 of interest
on such net payables for 1992, 1993 and 1994, respectively.
Net settlement amounts under interest rate swap agreements with ACC are
recorded as adjustments to interest expense during the period incurred. The
effect of the interest rate swaps was to increase interest expense by $1,434
and $651 in 1992 and 1993, respectively.
Olympus entered into an agreement with an affiliated partnership to provide
for the payment of management fees to Olympus equal to 5% of the affiliated
partnership's revenues. Such fees amounted to $397 and $1,356 for 1993 and
1994, respectively, which are included in revenues.
On March 31, 1994, Olympus sold to ACC, rights to provide alternate access
in its franchised areas and an investment in an unaffiliated partnership for
a purchase price of $15,500. The sale resulted in the reduction of a
payable to ACC of $15,500. Due to the common control of these entities, the
excess of the sale price over Olympus' carrying value has been credited
directly in general partner's equity (deficiency).
On June 30, 1994, Olympus sold to ACC 85% of the common stock of Northeast
Cable, Inc., a wholly-owned subsidiary, for a selling price of $31,875.
Northeast owned cable television systems serving approximately 36,500
subscribers in eastern Pennsylvania. ACC paid $16,000 in cash and the
remainder resulted in a decrease of ACC's existing receivable from Olympus.
Due to the common control of these entities, the excess of the sale price
over Olympus' carrying value has been credited directly in general partner's
equity (deficiency).
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Continued)
11. Transactions with Related Parties, continued:
During 1994, Olympus entered into an agreement with an affiliate to provide
the affiliate with alternate access rights to certain cable systems.
Revenue generated from this agreement amounted to $162 for the year ended
December 31, 1994.
12. Subsequent Events:
On February 28, 1995, Olympus entered into both the Gans Liquidation
Agreement and the Telesat Investment Agreement (see Note 1). As a result of
the Gans Liquidation Agreement, Gans agreed to exchange their redeemable
limited partnership interests in Olympus for 15% of the common stock of
Northeast.
As a result of the Telesat Investment Agreement, Telesat contributed certain
Florida cable systems serving approximately 50,000 subscribers. In
exchange, Telesat received general and limited partner interests and
$112,500 of 16.5% preferred limited partner interests and
loaned Olympus $20,000.
Prior to the Telesat Investment Agreement, Olympus had obligations to ACC
for intercompany advances, preferred limited partner ("PLP") interests, and
priority return on PLP interests. In conjunction with the Telesat
Investment Agreement, ACC contributed a portion of the intercompany
advances, a portion of the existing PLP interests and all of the existing
accrued priority return on the PLP interests, to capital contributions.
On April 3, 1995, Olympus purchased all of the cable and security systems of
WB Cable Associates, Ltd., ("WB Cable") serving approximately 44,000
subscribers for a purchase price of $82,000. WB Cable provides cable
service from one headend and security monitoring services from one location
in West Boca Raton, Florida. Of the purchase price, $77,000 was paid in
cash and $5,000 was paid in ACC Class A Common Stock. The acquisition,
which will be accounted for under the purchase method of accounting, was
financed principally through additional borrowings under the ACP credit
agreement (see Note 4).
On June 8, 1995, Olympus entered into a definitive agreement for the
purchase of all the southeast Florida cable and electronic security
monitoring systems of the Leadership Cable division of Fairbanks
Communications, Inc. ("Leadership Cable") serving approximately 50,000
subscribers for a purchase price of approximately $94 million. Leadership
Cable provides cable service and security monitoring services in and around
West Palm Beach, Florida. The acquisition, which will be accounted for
under the purchase method of accounting, is expected to close in the fourth
quarter of 1995.
The following unaudited pro forma balance sheet, assumes that all
transactions except Leadership Cable, which has not closed, had occurred on
December 31, 1994. The unaudited pro forma statement of operations has been
prepared assuming that the purchase of the Telesat and WB Cable systems and
the sale of Northeast (see Note 1) had occurred on January 1, 1994. The pro
forma data are not necessarily indicative of the results that actually would
have occurred if the purchase of Telesat and WB Cable occurred on January 1,
1994 or what may be achieved in the future.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1994
(Dollars in thousands)
(UNAUDITED)
Gans Telesat ACC WB Cable
As Pro Forma Pro Forma Pro Forma Pro Forma
Reported Adjustments Adjustments Adjustments Adjustments Pro Forma
ASSETS:
Cable television systems, at cost,
net of accumulated depreciation
and amortization:
Property, plant and
equipment - net................... $ 154,298 $ -- $ 30,527 (b) $ -- $ 31,178 (j) $ 216,003
Intangible assets - net............ 210,928 -- 1,444 (b) -- 42,065 (j) 254,437
Total.................... 365,226 -- 31,971 -- 73,243 470,440
Cash and cash equivalents.......... 425 -- 20,000 (c) -- 9,944 (j) 30,369
Subscriber receivables - net....... 5,419 -- 1,482 (b) -- 431 (j) 7,332
Prepaid expenses and other
assets - net...................... 3,784 -- 761 (b) -- 687 (j) 5,232
Investment in Northeast ........... 1,131 (1,131)(a) -- -- -- --
Total.................... $ 375,985 $ (1,131) $ 54,214 $ 0 $ 84,305 $ 513,373
LIABILITIES AND PARTNERS' EQUITY:
Notes payable to banks............. $ 314,010 $ -- $ -- $ -- $ 82,000 (j) $ 396,010
Accounts payable................... 9,984 -- 307 (b) -- 355 (j) 10,646
Subscriber advance payments and
deposits.......................... 2,717 -- 1,277 (b) -- 433 (j) 4,427
Accrued interest and other
liabilities....................... 10,278 -- 477 (b) -- 1,517 (j) 12,272
Accrued priority return on
redeemable preferred limited
partner interests................ 135,553 -- -- (135,553)(f) -- --
Due to affiliates - net............ 75,861 -- 20,000 (c) (35,861)(g) -- 60,000
Deferred income taxes.............. 39,701 -- -- -- -- 39,701
Total.................... 588,104 -- 22,061 (171,414) 84,305 523,056
16.5% redeemable preferred limited
partner interests................. 276,101 -- 112,500 (d) (51,101)(h) -- 337,500
Redeemable limited partner
interests......................... 5,885 (5,885)(a) -- -- -- --
General partners' equity
(deficiency)...................... (494,105) 4,754 (a) (80,347)(e) 222,515 (i) -- (347,183)
Total.................... $ 375,985 $ (1,131) $ 54,214 $ 0 $ 84,305 $ 513,373
(a) Exchange of the Gans redeemable limited partner interests for Olympus'
investment in Northeast.
(b) Historical cost basis of the assets of the cable systems contributed by
Telesat.
(c) Loan made by Telesat to Olympus. Under certain circumstances all or a
portion of this loan will be converted to equity.
(d) Telesat's 16.5% redeemable preferred limited partner interest.
(e) Net assets of Telesat at acquisition date of $32,153 offset by the
equity allocated to the 16.5% redeemable limited partner interests.
(f) Conversion of the accrued priority return to general partner's equity.
(g) Conversion of a portion of the affiliate payables to general partner's
equity.
(h) Conversion of a portion of the preferred limited partner units to
general partner's equity.
(i) Total effect of the items described in (f), (g), and (h).
(j) Acquisition of the assets of WB Cable Associates, Ltd.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(Dollars in thousands)
(UNAUDITED)
Pro Forma Pro Forma
(See Note 1) Adjustments Proforma
Revenues................................. $ 88,627 $ 28,774 (a) $117,401
Operating expenses:
Direct operating and programming........ 20,640 13,372 (a) 34,012
Selling, general and administrative..... 18,336 5,019 (a) 23,355
Depreciation and amortization........... 34,310 8,800 (a) 43,110
Management fees to Managing
Affiliate.............................. 6,018 300 (a) 6,318
Total.......................... 79,304 27,491 106,795
Operating income......................... 9,323 1,283 10,606
Interest expense......................... (30,876) (7,298)(a) (38,174)
Other income............................. 585 30 (a) 615
Loss before income tax benefit........... (20,968) (5,985) (26,953)
Income tax benefit....................... 299 (103)(a) 196
Net loss ...................... (20,669) (6,088) (26,757)
Priority return on redeemable
preferred limited partner interests..... (61,923) 6,235 (b) (55,688)
Net loss allocated to redeemable
limited partners........................ 5,000 (5,000)(c) --
Accretion requirements of redeemable
limited partners........................ (5,885) 5,885 (d) --
Net (loss) income of general
partner after priority return
and accretion requirements.... $(83,477) $ 1,032 $(82,445)
Net (loss) income per general
partner unit after priority
return and accretion
requirements.................. $ (8,348) $ 103 $ (8,245)
(a) Reflects the operations for Telesat and WB Cable for the year ended
December 31, 1994.
(b) Represents the difference between the priority return calculated under
the previous equity structure and the 16.5% return on the pro forma $337,500
in redeemable preferred limited partner interests.
(c) Elimination of the net loss allocated to Gans.
(d) Elimination of the accretion requirements of Gans.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth above in Part I under the caption "Executive
Officers of the Registrant" is incorporated herein by reference. The other
information required by this item is incorporated herein by reference to the
information set forth under the caption "Election of Directors - Description
of Board of Directors"; the information set forth under the caption
"Election of Directors - Nominee for Election by Holders of Class A Common
Stock"; the information set forth under the caption "Election of Directors -
Nominees for Election by Holders of Class A Common Stock and Class B Common
Stock"; and the information under the caption "Certain Transactions -
Certain Reports," in the Company's definitive proxy statement for the 1995
Annual Meeting of Stockholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, or by reference to a filing
amending this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Executive
Compensation" in the Company's definitive proxy statement for the 1995
Annual Meeting of Stockholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, or by reference to a filing
amending this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Principal
Stockholders" in the Company's definitive proxy statement for the 1995
Annual Meeting of Stockholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, or by reference to a filing
amending this Annual Report of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Certain
Transactions" in the Company's definitive proxy statement for the 1995
Annual Meeting of Stockholders filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, or by reference to a filing amending this Annual Report on Form 10-
K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements, schedules and exhibits not listed have been
omitted where the required information is included in the consolidated
financial statements or notes thereto, or is not applicable or required.
(a)(1)A listing of the consolidated financial statements, notes and
independent auditors' report required by Item 8 are listed on page 46 of
this Annual Report on Form 10-K.
(2)Financial Statement Schedules:
The following are included in this Report:
Schedule I -- Condensed Financial Information of the Registrant
Schedule II -- Valuation and Qualifying Accounts
(3)Exhibits
Exhibit No.
Reference 3.01 Certificate of Incorporation
of Adelphia Communications
Corporation
Incorporated herein by reference is
Exhibit 3.01 to Registration
Statement No. 33-6974 on Form S-1.
3.02 Bylaws of Adelphia
Communications Corporation, as
amended
Incorporated herein by reference is
Exhibit 3.02 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1994.
4.01 First Supplemental Indenture,
dated as of May 4, 1994, with
respect to Registrant's 91/2%
Senior Pay-In-Kind Notes Due
2004
4.02 Indenture, dated as of
February 22, 1994, with
respect to Registrant's 91/2%
Senior Pay-In-Kind Notes Due
2004
4.03 Indenture, dated as of July
28, 1993, with respect to
Registrant's 101/4% Senior
Notes Due 2000
4.04 Amended and Restated
Indenture, dated as of May 11,
1993, with respect to
Registrant's 9-7/8% Senior
Debentures Due 2005
Incorporated herein by reference is
Exhibit 4.01 to Registrant's Current
Report on Form 8-K dated May 5,
1994.
Incorporated herein by reference is
Exhibit 4.05 to Registration
Statement No. 33-52513 on Form S-4.
Incorporated herein by reference is
Exhibit 4.01 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.
Incorporated herein by reference is
Exhibit 4.01 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1993.
4.05 Indenture, dated as of
September 2, 1992, with
respect to the Registrant's
11-7/8% Senior Debentures Due
2004
4.06 Indenture, dated as of May 7,
1992, with respect to the
Registrant's 12-1/2% Senior
Notes Due 2002
Incorporated herein by reference is
Exhibit 4.03 to Registration
Statement No. 33-52630 on Form S-1.
Incorporated herein by reference is
Exhibit 4.03 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1992.
10.01 Class B Common Stockholders
Agreement
10.02 Joinder to Class B Common
Stockholders Agreement
Incorporated herein by reference is
Exhibit 10.01 to Registration
Statement No. 33-6974 on Form S-1.
Incorporated herein by reference is
Exhibit 10.02 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1994.
10.03 Registration Rights Agreement
and Amendment to Registration
Rights Agreement
Incorporated herein by reference are
Exhibit 10.02 to Registration
Statement No. 33-6974 on Form S-1
and Exhibit 10.35 to Registration
Statement No. 33-25121 on Form S-1.
10.04 Management Agreement--Highland
Video Associates, L.P.
Incorporated herein by reference is
Exhibit 10.06 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1990.
10.05 Management Agreement--
Montgomery Cablevision
Associates, L.P.
Incorporated herein by reference is
Exhibit 10.08 to Registration
Statement No. 33-6974 on Form S-1.
10.06 Management Agreement--Adelphia
Cablevision Associates of
Radnor, L.P.
Incorporated herein by reference is
Exhibit 10.09 to Registration
Statement No. 33-6974 on Form S-1.
10.07 Form of Agreement Regarding
Management Services for
Olympus Communications, L.P.
Incorporated herein by reference is
Exhibit 10.06 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1991.
10.08* Stock Option Plan of 1986, as
amended
Incorporated herein by reference is
Exhibit 10.07 to Registration
Statement No. 33-46551 on Form S-1.
10.09* Restricted Stock Bonus Plan,
as amended
Incorporated herein by reference is
Exhibit 10.08 to Registration
Statement No. 33-46551 on Form S-1.
10.10 Business Opportunity Agreement
Incorporated herein by reference is
Exhibit 10.13 to Registration
Statement No. 33-3674 on Form S-1.
10.11* Employment Agreement between
the Company and John J. Rigas
Incorporated herein by reference is
Exhibit 10.14 to Registration
Statement No. 33-6974 on Form S-1.
10.12* Employment Agreement between
the Company and Daniel R.
Milliard
Incorporated herein by reference is
Exhibit 10.15 to Registration
Statement No. 33-6974 on Form S-1.
10.13* Employment Agreement between
the Company and Timothy J.
Rigas
Incorporated herein by reference is
Exhibit 10.16 to Registration
Statement No. 33-6974 on Form S-1.
10.14* Employment Agreement between
the Company and Michael J.
Rigas
Incorporated herein by reference is
Exhibit 10.17 to Registration
Statement No. 33-6974 on Form S-1.
10.15* Employment Agreement between
the Company and James P.
Rigas
Incorporated herein by reference is
Exhibit 10.18 to Registration
Statement No. 33-6974 on Form S-1.
10.16 Agreement Regarding Management
Fees relating to the
subsidiaries of Chauncey
Communications Corporation
Incorporated herein by reference is
Exhibit 10.16 of Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1991.
10.17 Loan Agreement among Chelsea
Communications, Inc. and The
Toronto-Dominion Bank Trust
Company and NCNB Texas
National Bank, as Agents, and
the Banks named therein, dated
as of September 25, 1989
Incorporated herein by reference is
Exhibit 10.01 of Registrant's
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1989.
10.18 Agreement Regarding Management
Fees relating to subsidiaries
of Chelsea Communications,
Inc.
Incorporated herein by reference is
Exhibit 10.31 of Registrant's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1990.
10.19 Form of Note Agreement, dated
as of August 1, 1990, relating
to the 10.66% Senior Secured
Notes due August 1, 1998 of
Chauncey Communications
Corporation
Incorporated herein by reference is
Exhibit 10.01 of Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990.
10.20 Amendatory Agreement regarding
Chauncey Communications
Corporation 10.66% Senior
Secured Note Agreement, dated
as of August 6, 1991
Incorporated herein by reference is
Exhibit 10.02 of Registrant's
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1991.
10.21 $50,000 Term Note and Pledge
Agreement between Adelphia
Communications Corporation as
lender and Daniel R. Milliard,
dated October 1, 1988
Incorporated herein by reference is
Exhibit 10.03 of Registrant's
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1991.
10.22 $205,000 Revolving Term Note
and Pledge Agreement among
Adelphia Communications
Corporation as lender,
Daniel R. Milliard and David
Acker
Incorporated herein by reference is
Exhibit 10.04 of Registrant's
Quarterly Report on Form 10-Q for
the quarter ended September 30,
1991.
10.23 First Amendment to Loan
Agreement among Chelsea
Communications, Inc. and The
Toronto-Dominion Bank Trust
Company and NCNB Texas
National Bank, as Agents, and
the Banks named therein, dated
as of August 10, 1992
Incorporated herein by reference is
Exhibit 10.39 to Registration
Statement No. 33-52630 on Form S-1.
10.24Purchase Agreement relating to
101/4% Senior Notes Due 2000, Series
A and B, by and between Adelphia
Communications Corporation and the
Purchaser, dated July 20, 1993
Incorporated herein by reference is
Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.
10.25 Registration Rights Agreement
relating to 101/4% Senior
Notes Due 2000, Series A and
B, by and between Adelphia
Communications Corporation and
the Purchaser, dated July 28,
1993
10.26 Agreement for the Purchase of
Class A Common Stock by the
Rigas family, dated January 7,
1994
10.27 Underwriting Agreement between
the Company and Salomon
Brothers, Inc., dated January
7, 1994
10.28 Registration Agreement between
the Company and Salomon
Brothers, Inc., dated January
7, 1994
10.29 Second Amendment to Loan
Agreement between Chelsea
Communications, Inc. and The
Toronto-Dominion Bank Trust
Company and NationsBank of
Texas, N.A, as Agents, dated
December 31, 1993
10.30 Purchase Agreement relating to
91/2% Senior Pay-In-Kind Notes
Due 2004, Series A, by and
between Adelphia
Communications Corporation and
the Purchaser, dated February
14, 1994
10.31 Registration Rights Agreement
relating to 91/2% Senior Pay-
In-Kind Notes Due 2004, Series
A, by and between Adelphia
Communications Corporation and
the Purchaser, dated February
22, 1994.
10.32 Olympus Communications, L.P.
Second Amended and Restated
Limited Partnership Agreement,
dated as of February 28, 1995.
10.33 Credit, Security and Guaranty
Agreement among UCA Corp. and
certain of its Affiliates and
First Union National Bank of
North Carolina as
Administrative Agent, dated as
of March 15, 1995.
10.34 Revolving Credit Facility
among Adelphia Cable partners,
L.P., Southwest Florida Cable,
Inc., West Boca Acquisition
Limited Partnership and
Toronto-Dominion (Texas),
Inc., as Administrative Agent,
date May 12, 1995.
21.01 List of Subsidiaries of
Adelphia Communications
Corporation
Incorporated herein by reference is
Exhibit 10.02 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.
Incorporated herein by reference is
Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended December 31, 1993.
Incorporated herein by reference is
Exhibit 10.01 to Registrant's
Current Report on Form 8-K dated
January 14, 1994.
Incorporated herein by reference is
Exhibit 10.02 to Registrant's
Current Report on Form 8-K dated
January 14, 1994.
Incorporated herein by reference is
Exhibit 10.03 to Registrant's
Current Report on Form 8-K dated
January 14, 1994.
Incorporated herein by reference is
Exhibit 10.01 to Registration
Statement No. 33-52513.
Incorporated herein by reference is
Exhibit 10.02 to Registration
Statement No. 33-52513.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
23.01 Independent Auditors Consent
27.01 Financial Data Schedule
Filed herewith
Filed herewith
The Registrant will furnish to the Commission upon request copies of
instruments not filed herewith which authorize the issuance of long-term
obligations of Registrant not in excess of 10% of the Registrant's total
assets on a consolidated basis.
(b)The Registrant filed the following Reports on Form 8-K during the three
(3) months ended March 31, 1995.
Date of Report Item Reported Financial Statements
Filed
February 28, 1995 Items 5, 7 None
(c)The Company hereby files as exhibits to this Form 10-K the exhibits set
forth in Item 14(a)(3) hereof which are not incorporated by reference.
(d)The Company hereby files as financial statement schedules to this Form
10-K the financial statement schedules set forth in Item 14(a)(2) hereof.
_________________________
* Denotes management contracts and compensatory plans and arrangements
required to be identified by Item 14(a)(3).
SCHEDULE
I
Page 1 of
4
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Information as to the
Financial Position of the Registrant
(Dollars in thousands)
March 31,
1994 1995
ASSETS:
Investments in cable television subsidiaries.............$ 50,126 $ 218,708
Property and equipment - net............................. 21,297 27,540
Cash and cash equivalents................................ 80 80
Other assets - net....................................... 21,582 68,692
Notes and receivables from cable television subsidiaries
and related parties - net............................... 295,862 43,033
Total..........................................$ 388,947 $ 358,053
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Losses and distributions in excess of investments in
and net advances to cable television subsidiaries....... $237,006 $ 275,044
Other debt............................................... 6,931 9,476
Unsecured notes payable to cable television
subsidiaries............................................ 128,382 128,382
12 1/2% Senior Notes due 2002............................ 400,000 400,000
10 1/4% Senior Notes due 2000 (face amount ($110,000).... 108,765 99,011
11 7/8% Senior Debentures due 2004 (face amount $125,000) 124,442 124,470
9 7/8% Senior Debentures due 2005 (face amount $130,000). 127,882 127,994
9 1/2% Pay-In-Kind Notes due 2004........................ 150,000 164,370
Accrued interest and other liabilities................... 23,603 40,881
Total liabilities.............................. 1,307,011 1,369,628
Stockholders' equity (deficiency) (see consolidated
financial statements for detail)........................ (918,064) (1,011,575)
Total..........................................$ 388,947 $ 358,053
See notes to condensed financial information of the Registrant.
SCHEDULE I
Page 2
of 4
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Information as to the
Operations of the Registrant
(Dollars in thousands)
Year Ended March 31,
1993 1994 1995
INCOME:
Income from subsidiaries and affiliates.........$ 46,666 $ 53,004 $ 72,413
EXPENSES:
Operating expenses and fees to subsidiaries..... 1,811 2,710 1,044
Depreciation and amortization................... 2,321 3,610 5,179
Interest expense to subsidiaries and
affiliates..................................... 25,813 5,893 4,371
Interest expense to others...................... 68,759 88,724 103,367
Total........................................... 98,704 100,937 113,961
Loss before equity in loss of
subsidiaries................................... (52,038) (47,933) (41,548)
Equity in net loss of subsidiaries before
cumulative effect.............................. ( 50,871) (49,515) (64,736)
Loss before extraordinary loss and cumulative
effect of change in accounting principle....... (102,909) (97,448) (106,284)
Extraordinary loss on early retirement of debt.. (14,386) (752) --
Cumulative effect of change in accounting for
income taxes................................... -- (89,660) --
Cumulative effect of Olympus change in
accounting for income taxes.................... (59,500) -- --
Net Loss........................................$(176,795) $(187,860) $(106,284)
See notes to condensed financial information of the Registrant. SCHEDULE I
Page 3 of 4
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Information as to the
Cash Flows of the Registrant
(Dollars in thousands)
Year Ended March 31,
1993 1994 1995
Cash flows from operating activities:
Net loss.................................. $(176,795) $(187,860) $(106,284)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in loss of subsidiaries............... 50,871 49,515 64,736
Cumulative effect of accounting change....... 59,500 89,660 --
Extraordinary loss on debt retirement........ 14,386 752 --
Depreciation and amortization ............... 2,321 3,396 5,179
Noncash interest expense..................... 164 363 14,756
Redemption premium on debt retirement........ (10,000) -- --
Loss on disposal of property................. -- 214 --
Changes in operating assets and liabilities
excluding the effects of business
acquisitions:
Other assets............................... (18,335) (6,877) (52,096)
Accrued interest and other liabilities..... 15,009 4,956 12,523
Net cash used for operating activities.......... (62,879) (45,881) (61,186)
Cash flows from investing activities:
Investments in and advances to subsidiaries.... (135,921) (72,642) (53,087)
Dividends received from subsidiaries........... 16,150 -- --
Amounts advanced to related parties............ (93,477) (182,900) 108,772
Expenditures for property and equipment........ (2,184) (11,772) (447)
Net cash used for investing activities.......... (215,432) (267,314) 55,238
Cash flows from financing activities:
Proceeds from debt............................. 652,181 258,674 3,300
Repayments of debt............................. (251,692) (101,450) (12,213)
(Advances to) repayments of amounts due from
consolidated subsidiaries..................... (143,823) -- --
Issuance of Class A Common Stock............... 21,725 155,963 14,861
Net cash provided by financing activities....... 278,391 313,187 5,948
Increase (decrease) in cash and cash
equivalents.................................... 80 <8> --
Cash and cash equivalents, beginning of year.... 8 88 80
Cash and cash equivalents, end of year.......... $ 88 $ 80 $ 80
Supplemental disclosure of cash flow activity-
Cash payments for interest..................... $ 53,262 $ 84,904 $ 103,454
See notes to condensed financial information of the Registrant.
SCHEDULE I
Page 4
of 4
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Information of the Registrant
(Dollars in thousands)
1. Notes Payable to Subsidiaries:
Adelphia Communications Corporation ("ACC") has partially funded its
acquisitions and capital needs through borrowings and advances from
subsidiaries. ACC had issued to certain of its subsidiaries unsecured
demand notes payable in the principal amount of $128,382 at March 31, 1994
and 1995. The notes, which have been eliminated in consolidation, provide
for interest at rates ranging from 4.83% to 16.5%, are due upon demand five
years after March 31, 1995, and provide that non-payment of principal or
interest is not an event of default.
SCHEDULE II
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance Charged
at to Costs Balance
Beginning and Deductions- at End
of Period Expenses Write-Offs of Period
Year Ended March 31, 1993
Allowance for Doubtful Accounts...... $ 1,964 $ 3,024 $ 2,972 $ 2,016
Year Ended March 31, 1994
Allowance for Doubtful Accounts...... $ 2,016 $ 3,975 $ 2,388 $ 3,603
Year Ended March 31, 1995
Allowance for Doubtful Accounts...... $ 3,603 $ 3,846 $ 3,946 $ 3,503
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ADELPHIA COMMUNICATIONS CORPORATION
June 29, 1995 By: /s/ John J. Rigas
John J. Rigas,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
June 29, 1995 /s/ John J. Rigas
John J. Rigas,
Director
June 29, 1995 /s/ Timothy J. Rigas
Timothy J. Rigas,
Senior Vice President,
Chief Financial Officer,
Treasurer, Director and
Chief Accounting Officer
June 29, 1995 /s/ Michael J. Rigas
Michael J. Rigas,
Senior Vice President
and Director
June 29, 1995 /s/ James P. Rigas
James P. Rigas,
Vice President and
Director
June 29, 1995 /s/ Daniel R. Milliard
Daniel R. Milliard,
Vice President, Secretary
and Director
June 29, 1995 /s/ Perry S. Patterson
Perry S. Patterson,
Director
June 29, 1995 /s/ Pete J. Metros
Pete J. Metros,
Director