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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1996
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition 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 (I.R.S. Employer
incorporation or organization) Identification No.)
5 West Third Street
P.O. Box 472
Coudersport, PA 16915
(Address of principal executive offices) (Zip code)
814-274-9830
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
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 SK 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 the form 10-K or any amendment to the
form 10-K. X
Aggregate market value of outstanding Class A Common stock $.01 par value, held
by non-affiliates of the Registrant at June 25, 1996 was $63.9 million 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.
At June 25, 1996, 15,364,009 shares of Class A Common Stock, par value $0.01,
and 10,944,476 shares of Class B Common Stock, par value $0.01 per share, of the
registrant were outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III
hereof.
ADELPHIA COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 30
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 95
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 95
ITEM 11. EXECUTIVE COMPENSATION 95
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 95
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 96
PART I
ITEM 1. BUSINESS
(Dollars in thousands, except per share amounts)
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, 1996, cable systems owned or
managed by the Company (the "Systems") in the aggregate passed 2,479,420 homes
and served 1,752,636 basic subscribers who subscribed for 882,808 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, 1996, the Company Systems passed 1,422,077 homes and served
1,039,704 basic subscribers and 549,084 premium service units.
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") 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, 1996, the Olympus Systems passed
631,602 homes and served 403,901 basic subscribers and 200,319 premium service
units. 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 and corporations (the "Managed Partnerships").
John J. Rigas and certain members of his immediate family, including entities
they own or control (collectively, the "Rigas Family") have substantial
ownership interests in the Managed Partnerships. As of March 31, 1996, cable
systems (the "Managed Systems") owned by the Managed Partnerships passed 425,741
homes and served 309,031 basic subscribers and 133,405 premium service units.
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. 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 operations
consist of providing telecommunications services primarily over its broadband
networks. The Company did not have any material foreign operations or foreign
sales in the year ended March 31, 1996.
Unless otherwise stated, the information contained in this Annual
Report on Form 10-K is as of March 31, 1996. This Form 10-K, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements of a forward looking nature relating to
future events or the future financial performance of the Company which are
forward looking statements under Section 21E of the Securities Exchange Act of
1934. Persons reading this Form 10-K are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors identified in this Form 10-K, which could cause actual events or results
to differ materially from those indicated by such forward looking statements.
Video Services
Cable television systems receive a variety of television, radio and
data signals transmitted to receiving sites ("headends") by way of off-air
antennas, microwave relay systems and satellite earth stations. Signals are then
modulated, amplified and distributed primarily through 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.
In addition, digital radio and 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, 1996, over 94% of
subscribers of the 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.
Competitive Local Exchange Services
The Company is currently offering competitive local exchange
telecommunications ("CLEC") services through an unrestricted subsidiary,
Hyperion Telecommunications, Inc. ("Hyperion"). CLEC 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. These competitive
access networks also can complement existing networks by providing redundant
telecommunications service backup and route diversity for their customers.
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.
The Company expects passage of the Telecommunications Act of 1996
(the "1996 Act") on February 8, 1996 to substantially expand the market
opportunities for Hyperion and its networks by removing legal barriers to enter
the local exchange telecommunications markets and by requiring the existing
local exchange carrier to negotiate with CLECs on many competitive issues.
(Based on data compiled by the Federal Communications Commission ("FCC"), the
Company believes that passage of the 1996 Act increases the potential market for
CLECs from approximately $26.3 billion to approximately $97.1 billion annually
due to the opening of the market for switched services which will permit CLECs
to offer a full range of local telecommunications services). In the markets
where Hyperion's networks are currently operating or are under construction, the
addressable market opportunity is estimated to be approximately $4.8 billion,
substantially all of which is currently provided by the incumbent local exchange
carrier. As of February 28, 1996, Hyperion's 13 operating networks served 19
cities and, along with four networks under construction, included approximately
2,180 route miles of fiber optic cable and were connected to approximately 808
buildings.
On April 15, 1996, Hyperion completed a private placement
to institutional investors and realized gross proceeds of
$175,265 upon issuance of $329,000 aggregate principal amount at maturity of 13%
Senior Discount Notes and warrants to purchase an aggregate of 613,427 common
shares of Hyperion. If all warrants were exercised, the warrants would represent
approximately 5.78% of the common stock of Hyperion on a fully diluted basis.
The notes will not require payment of interest until October 15, 2001, and may
not be redeemed prior to April 15, 2001. Hyperion is using the net proceeds from
the offering to expand its existing markets, to complete construction of new
networks, to enter additional markets, to repay certain indebtedness owed to
Adelphia, and for working capital purposes.
Residential Telephone Service
With the Company's aggressive deployment of fiber optic
cable plant and through cooperation with its CLEC subsidiary,
Hyperion, the Company is currently positioned to begin offering residential
telephone service in select markets prior to December 1996. The Company
anticipates selling its own brand of local telephone services, as well as
providing third-party telephone service as a reseller of such service. The
Company is currently negotiating with a third-party to provide such service in
several of its markets.
In May 1996, the Company completed successful technical
trials of telephone service in its Toms River system located
in Dover Township, New Jersey. The Company expects to offer residential
telephone service in its Toms River system as soon as New Jersey regulators make
it possible for cable companies to compete in the local telephone market. By
March 31, 1997, the Company expects its residential telephone service to pass
approximately 150,000 homes served by its cable systems, subject to regulatory
approvals and equipment delivery.
Cable Data Services
...........Cable data services, which consist of residential, institutional and
business applications, represent a high speed alternative access to the Internet
and other on-line services as compared to traditional telephone based services.
Cable data services, which will be available at speeds up to 300 times faster
than that available from 28.8 kilobit per second telephone modems, require the
computer used to be equipped with an ethernet card and an adjunct cable modem.
Other benefits of cable data services include not using the phone line, no
log-on required and use of multiple sessions or connections to multiple services
simultaneously.
...........One-way data service product offerings include data transmitted to
either a home computer or the television set. Currently, all of the Company's
cable plant is capable of providing one-way data transmission to customers.
Because residential data services are highly asymmetrical (some estimates assert
that 95% of the data transmission is "downstream" and 5% of the data
transmission is "upstream"), cable modems are being produced that utilize the
cable plant downstream (with speeds as high as the two way service) and a
telephone circuit is used for the upstream data traffic.
Television data services are implemented through advanced analog set-top boxes
currently available. Data can be transmitted to these set-tops and displayed on
thetelevision. These one-way data services are currently being evaluated by the
Company for possible additional product offerings.
Two-way data service requires certain electronics capable of
delivering a signal from the customer back to the Company's headend.
Approximately 29% of the Company Systems have cable plant capable of delivering
two-way data transmission service to its customers. The Company is currently
evaluating which additional product offerings it may introduce, and the timing
of such introduction, to maximize the two-way data service capability of its
cable plant.
In May 1996, the Company completed a successful technical trial of
its two-way data services in its Toms River system located in Dover Township,
New Jersey. Services launched included high speed access to the Internet,
digital audio and interactive games and will be offered to homes, schools,
government offices and businesses. While the Toms River launch was successful,
such services are not expected to be provided to customers until later in 1996
upon delivery of cable modems and other services.
Other Services
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. is currently in discussions to use
its narrowband PCS licenses with a third-party as the basis for a planned
nationwide paging service.
Adelphia began providing wireless messaging services with the
formation of Page Time, Inc. in November 1994. Page Time, Inc. offers one-way
messaging services for resale to the Company's systems and other multiple system
cable operators, by establishing its own reselling arrangements with existing
paging network operators. The Company, Olympus and Managed Systems currently
provide paging services through Page Time to approximately 12,000 customers.
In April 1994, Adelphia made a $4,200 investment in Lancaster Alarm
Company (d/b/a Commonwealth Security Systems), the largest independent security
company in Pennsylvania. Commonwealth Security Systems provides electronic
security monitoring services to over 25,000 accounts in the Mid-Atlantic region
of the United States. Its five largest markets include Lancaster, Harrisburg,
Philadelphia and York, Pennsylvania and Richmond, Virginia. In September 1995,
Olympus contributed its security business customers in exchange for a 50.36%
general and limited partnership interest in Starpoint, L.P. (d/b/a Checkpoint
Ltd.), a security services company providing residential security services to
approximately 23,000 accounts in the state of Florida as of March 31, 1996.
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.
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, data transmission and
telephony 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.
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 which served approximately 43,000 subscribers at the
acquisition date 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 which served approximately 36,500 subscribers, at the acquisition date,
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 served approximately 4,200
subscribers, at the acquisition date, 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 which served, at the date of
acquisition, approximately 7,000 subscribers in Martha's Vineyard,
Massachusetts. On April 12, 1995, Adelphia acquired cable systems from Clear
Channels Cable TV Company located in Kittanning, New Bethlehem and Freeport,
Pennsylvania, for $17,456. These systems served approximately 10,700 subscribers
at the acquisition date. On January 9, 1996, Adelphia completed the acquisition
of the cable systems of Eastern Telecom Corporation and Robinson Cable TV, Inc.
for $43,000. These systems served approximately 24,000 subscribers at the
acquisition date located in western Pennsylvania. On April 1, 1996, Adelphia
purchased the cable property of Cable TV Fund 11-B, Ltd. from Jones Intercable.
This system was acquired for $84,000 and served approximately 39,700 subscribers
at the acquisition date in the New York counties of Erie and Niagara.
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
FPL 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, which served approximately 50,000 subscribers at
February 28, 1995 in southern Florida, in exchange for general and limited
partner interests and newly issued preferred limited partner interests in
Olympus. On April 3, 1995, Olympus purchased all of the cable and security
systems of WB Cable Associates, Ltd. ("WB Cable") which served approximately
44,000 cable and security monitoring subscribers at the date of acquisition, 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.
On January 5, 1996, Olympus acquired all of the southeast Florida cable systems
of the Leadership Cable of Fairbanks Communications, Inc., which served
approximately 50,000 cable and security monitoring subscribers at the
acquisition date for a purchase price of $95,800.
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, 1996. 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, 1991 through March 31,
1996, 68% 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 32% of such aggregate growth was derived from
penetration increases.
- -----------------------------------------------------------------------------------------------------
Year Ended March 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
COMPANY SYSTEMS:
Homes passed (b)
Beginning of Period .................... 1,117,401 1,145,308 1,172,755 1,207,425 1,340,808
Internal Growth (c) .................... 27,907 20,507 10,623 39,012 30,665
% Internal Growth ...................... 2.5% 1.8% 0.9% 3.2% 2.3%
Acquired Homes Passed .................. 6,940 24,047 94,371 50,604
End of Period .......................... 1,145,308 1,172,755 1,207,425 1,340,808 1,422,077
Basic subscribers (d)
Beginning of Period .................... 800,551 825,553 852,335 888,167 975,066
Internal Growth (c) .................... 25,002 21,216 17,355 31,651 29,215
% Internal Growth ...................... 3.1% 2.6% 2.0% 3.6% 3.0%
Acquired Subscribers ................... 5,566 18,477 55,248 35,423
End of Period .......................... 825,553 852,335 888,167 975,066 1,039,704
Basic Penetration (e) .................. 72.1% 72.7% 73.6% 72.7% 73.1%
OLYMPUS SYSTEMS (a):
Homes passed (b)
Beginning of Period .................... 391,342 408,616 386,971 406,753 512,052
Internal Growth (c) .................... 17,274 (21,645) 19,782 11,911 12,050
% Internal Growth ...................... 4.4% (5.3%) 5.1% 2.9% 2.4%
Acquired Homes Passed .................. 93,388 107,500
End of Period .......................... 408,616 386,971 406,753 512,052 631,602
Basic subscribers (d)
Beginning of Period .................... 224,488 237,766 211,025 239,357 306,317
Internal Growth (c) .................... 13,278 (26,741) 28,332 19,198 9,329
% Internal Growth ...................... 5.9% (11.2%) 13.4% 8.0% 3.0%
Acquired Subscribers ................... 47,762 88,255
End of Period .......................... 237,766 211,025 239,357 306,317 403,901
Basic Penetration (e) .................. 58.2% 54.5% 58.8% 59.8% 63.9%
- -------------------------------------------------------------------------------
(a) Data included for the South Dade System at March 31, 1993, 1994
,1995 and 1996 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, 1995 and 1996, the South Dade
system served 40,999, 65,398, 74,601 and 80,725 basic subscribers,
respectively.
Data for the Northeast Cable 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
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, 1996.
Homes Basic Basic Premium Premium
Passed Subscribers Penetration Units Penetration
----------- ----------- ------------- --------- ----------
COMPANY SYSTEMS:
Western New York ................................. 297,893 213,068 71.53% 119,381 56.03%
New England ...................................... 260,542 183,819 70.55% 108,517 59.03%
Virginia ......................................... 228,588 174,019 76.13% 77,354 44.45%
Western Pennsylvania ............................. 216,052 159,272 73.72% 63,726 40.01%
Ohio ............................................. 168,332 121,960 72.45% 66,131 54.22%
Coastal New Jersey ............................... 125,646 98,304 78.24% 53,917 54.85%
Eastern Pennsylvania ............................. 125,024 89,262 71.40% 60,058 67.28%
TOTAL ............................................ 1,422,077 1,039,704 73.11% 549,084 52.81%
=========== =========== ============= ========= =========
OLYMPUS SYSTEMS:
Southeastern Florida ............................. 631,602 403,901 63.95% 200,319 49.60%
=========== =========== ============= ========= =========
MANAGED SYSTEMS:
Southeastern Florida ............................. 177,081 147,476 83.28% 37,523 25.44%
Virginia ......................................... 107,673 71,729 66.62% 33,891 47.25%
Western New York ................................. 70,178 41,053 58.50% 29,433 71.70%
Western Pennsylvania ............................. 35,961 25,019 69.57% 8,762 35.02%
Eastern Pennsylvania ............................. 34,848 23,754 68.16% 23,796 100.18%
TOTAL ............................................ 425,741 309,031 72.59% 133,405 43.17%
=========== =========== ============= ========= =========
TOTAL SYSTEMS:
Southeastern Florida ............................. 808,683 551,377 68.18% 237,842 43.14%
Western New York ................................. 368,071 254,121 69.04% 148,814 58.56%
Virginia ......................................... 336,261 245,748 73.08% 111,245 45.27%
New England ...................................... 260,542 183,819 70.55% 108,517 59.03%
Western Pennsylvania ............................. 252,013 184,291 73.13% 72,488 39.33%
Ohio ............................................. 168,332 121,960 72.45% 66,131 54.22%
Eastern Pennsylvania ............................. 159,872 113,016 70.69% 83,854 74.20%
Coastal New Jersey ............................... 125,646 98,304 78.24% 53,917 54.85%
TOTAL ............................................ 2,479,420 1,752,636 70.69% 882,808 50.37%
=========== =========== ============= ========= =========
Financial Information
The financial data regarding the Company's revenues, results of
operations and identifiable assets for each of the Company's last three fiscal
years is set forth in, and incorporated herein by reference to, Item 8,
Financial Statements and Supplementary Data of this Form 10-K.
Technological Developments
The Company has made a substantial commitment to the technological
development of the Systems and has actively sought to upgrade the technical
capabilities of its cable plant in a cost efficient manner. This development
will allow the Company to further increase the reliability of its services, to
increase channel capacity for the delivery of additional programming and to
provide new telecommunications services. Currently, all of the Systems have a
minimum of 35-channel capacity and are capable of delivering one-way data
transmission and digital video services. Further, over 94% of the subscribers to
the Systems are served 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.
In most of its recent upgrades, the Company has utilized a Modified
Passive Network Architecture ("MPNA") which utilizes fiber optic cable as an
alternative to the coaxial cable that historically has been used to distribute
cable signals to the subscriber's home. The MPNA design deploys on average one
fiber node for every two miles of fiber optic cable, or approximately one fiber
node for every 180 homes passed. The Company believes this compares favorably
with current industry averages. This deep penetration of fiber optic cable into
the Systems' networks has the advantages of providing increased reliability to
customers, improved bandwidth and easier implementation of the return path plant
capabilities. This will position the Company to offer additional video
programming services, to utilize the expanded bandwidth potential of digital
compression technology and to meet the anticipated transmission requirements for
high-definition television, digital television, high-speed data and telephone
services.
The following table summarizes the status of the cable plant and
service capabilities of the Systems as of March 31, 1996:
STATUS OF CABLE PLANT AT MARCH 31, 1996
Company Olympus Managed Total
Systems Systems Systems Systems
---------------- ---------------- --------------- -------------
Cable Plant Characteristics:
Plant miles 20,996 7,267 6,166 34,429
Fiber route miles 2,394 290 331 3,015
Fiber Strand miles 50,617 7,526 6,877 65,020
Fiber nodes 1,601 110 237 1,948
Homes passed per fiber node 888 5,742 1,796 1,273
Channel Capacity (Plant Miles):
Less than 400 Mhz 5,626 39 2,927 8,592
400 Mhz up to 550 Mhz 7,934 6,051 1,739 15,724
550 Mhz or more 7,436 1,177 1,500 10,113
Total plant miles 20,996 7,267 6,166 34,429
Channel Capacity (Percent of Plant Miles):
Less than 400 Mhz 26.8% 0.5% 47.5% 25.0%
400 Mhz up to 550 Mhz 37.8% 83.3% 28.2% 45.6%
550 Mhz or more 35.4% 16.2% 24.3% 29.4%
Total plant miles 100.0% 100.0% 100.0% 100.0%
Services Capability (as a percent of total plant miles):
Digital video 100.0% 100.0% 100.0% 100.0%
Interactive video (a) 29.0% 9.3% 21.1% 23.4%
One-way data transmission 100.0% 100.0% 100.0% 100.0%
Two-way data transmission (a) 29.0% 9.3% 21.1% 23.4%
Residential telephone (a) 11.9% 0.0% 9.6% 9.0%
(a) Service capability denotes cable plant with sufficient bandwidth
and fiber penetration to provide such services. In some systems,
certain electronics to deliver the return signal would be necessary
to provide these services. The Company estimates that additional
capital to install these electronics would, on average, cost an
additional $15 per home passed.
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 $15.00 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. The 1996 Act ends FCC regulation on nonbasic tier rates
on March 31, 1999. 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 Systems operate pursuant to
franchises or other authorizations issued by governmental authorities,
substantially all of which are nonexclusive. Such franchises or authorizations
awarded by a governmental authority generally are not transferable without the
consent of the authority. As of March 31, 1996, the Company held 460 franchises,
Olympus held 118 franchises and the Managed Systems held 125 franchises. Most of
these franchises can be terminated prior to their stated expiration by the
relevant governmental authority, after due process, for breach of material
provisions of the franchise.
Under the terms of most of the Company's franchises, a franchise fee
(generally ranging up to 5% of the gross revenues of the cable system) is
payable to the governmental authority. For the past three years, franchise fee
payments made by the Company have averaged approximately 2.5% 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
television system's ability to provide an even greater variety of programming
than that available off-air or through competitive alternative delivery sources.
In addition, certain provisions of the 1992 Cable Act and the 1996 Act are
expected to increase competition significantly in the cable industry. See
"Legislation and Regulation."
The 1992 Cable Act prohibits the award of exclusive franchises,
prohibits franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises.
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment, generally at a cost to
the viewer. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home View Copyright Act of 1988, which became
effective January 1, 1989 for a six-year period. This Act establishes a
statutory compulsory license for certain transmissions made by satellite owners
to home satellite dishes for which carriers are required to pay a royalty fee to
the Copyright Office. This Act 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 recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. These technologies include, among others, the
direct broadcast satellite ("DBS") service whereby signals are transmitted by
satellite to receiving facilities located on the premises of subscribers.
Programming is currently available to the owners of home satellite dish earth
stations through conventional, medium and high-powered satellites. Primestar
Partners L.P. ("Primestar"), a consortium comprised of cable operators and a
satellite company, commenced operation in 1990 of a medium-power DBS satellite
system using the Ku portion of the frequency spectrum and currently provides
service consisting of approximately 95 channels of programming, including
broadcast signals and pay-per-view services. DirecTV, which recently added AT&T
Corp. as an investor, began offering nationwide high-power DBS service in 1994
accompanied by extensive marketing efforts. Several other major companies are
preparing to develop and operate high-power DBS systems, including MCI
Communications Corp. and News Corp. DBS systems are expected to use video
compression technology to increase the channel capacity of their systems to
provide movies, broadcast stations and other program services competitive with
those of cable systems. The extent to which DBS systems are competitive with the
service provided by cable systems depends, among other things, on the
availability of reception equipment at reasonable prices and on the ability of
DBS operators to provide competitive programming.
Cable communications systems also compete with wireless program
distribution services such as multichannel, multipoint distribution service
("MMDS"), commonly called wireless cable systems, which use low-power microwave
frequencies to transmit video programming over-the-air to subscribers. There are
MMDS operators who are authorized to provide or are providing broadcast and
satellite programming to subscribers in areas served by the Company's Systems.
MMDS systems are less capital intensive, are not required to obtain local
franchises or to pay franchise fees and are subject to fewer regulatory
requirements than cable television systems. MMDS systems' ability to compete
with cable television systems has previously been limited by channel capacity,
the inability to obtain programming and regulatory delays. Recently, however,
MMDS systems have developed digital compression technology which provides for
more channel capacity and better signal delivery. Although relatively few MMDS
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. A series of
actions taken by the FCC, including reallocating certain frequencies to wireless
services, are intended to facilitate the development of wireless cable
television spectrum that will be used by wireless operators to provide
additional channels of programming over longer distances. The FCC also initiated
a new rulemaking proceeding to allocate frequencies in the 28 Ghz band for a new
multichannel wireless video service. Recently, several Regional Bell Operating
Companies ("BOCs") acquired interests in major MMDS companies. The Company is
unable to predict whether wireless video services will have a material impact on
its operations.
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. Under the 1996 Act, SMATV systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights-of-way. 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 some cases, SMATV operators may be able to charge a lower price
than could a cable system providing comparable services and the FCC's
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 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.
The 1996 Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Act
authorizes local telephone companies to operate "open video systems" without
obtaining a local cable franchise, although telephone companies operating such
systems can be required to make payments to local governmental bodies in lieu of
cable franchise fees. Up to two-thirds of the channel capacity of an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC's video dialtone rules.
The 1996 Act also includes numerous provisions designed to make it easier for
cable operators and others to compete directly with local exchange telephone
carriers. With certain limited exceptions, neither a local exchange carrier nor
a cable operator can acquire more than 10% of the other entity operating within
its own service area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry. The ability of cable systems to
compete with present, 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 22, 1996, there were 2,877 full-time employees of the
Company, of which 106 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")
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. On
December 12, 1995, the District Court again upheld the must-carry provisions.
The Supreme Court has again agreed to review the District Court's decision.
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.
Telecommunications Acts of 1996 (the "1996 Act")
The 1996 Act significantly revised the federal regulatory structure.
As it pertains to cable television, the 1996 Act, among other things, (i)
eliminates the regulation of certain nonbasic programming services in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC will have to conduct a number of
rulemaking proceedings in order to implement many of the provisions of the 1996
Act.
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.
The 1996 Act requires certain changes to various provisions of these
regulations. A brief summary of the most material federal regulations as adopted
to date follows.
Rate Regulation. The 1984 Cable Act codified existing FCC preemption
of rate regulation for premium channels and optional nonbasic program tiers. The
1984 Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the statutory and FCC rate regulation standards. The 1992
Cable Act replaced the FCC's old standard for determining effective competition,
under which most cable systems were not subject to local rate regulation, with a
statutory provision that has resulted in nearly all cable television systems
becoming subject to local rate regulation of basic service. The 1996 Act expands
the definition of effective competition to cover situations where a local
telephone company or its affiliate, or any multichannel video provider using
telephone company facilities, offers comparable video service by any means
except DBS. Satisfaction of this test deregulates both basic and nonbasic tiers.
Additionally, the 1992 Cable Act 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; 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 1996 Act ends FCC regulation of nonbasic tier rates
on March 31, 1999.
The FCC's regulations set standards for the regulation of basic and
nonbasic cable service rates (other than per-channel or per-program services).
The FCC's original rules became effective on September 1, 1993. The rules have
been amended several times. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic service
rates, and a formula for evaluating future rate increases. Alternatively, cable
operators have the opportunity to make cost-of-service showings which, in some
cases, may justify rates above the applicable benchmarks. The rules also require
that charges for cable-related equipment (e.g., converter boxes and remote
control devices) and installation services be unbundled from the provision of
cable service and based upon actual costs plus a reasonable profit. Local
franchising authorities and/or the FCC are empowered to order a reduction of
existing rates which exceed the benchmark level for either basic and/or nonbasic
cable services and associated equipment, and refunds could be required. The
retroactive refund period for basic cable service rates is limited to one year.
In general, the reductions for basic and nonbasic cable service rates require an
aggregate reduction of up to 17 percent, adjusted forward for inflation and
certain other factors, from the rates in force as of September 30, 1992. The
regulations also provide that future rate increases may not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable operator adds or deletes programming channels or completes a
significant system rebuild or upgrade. 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 allows
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
nonbasic 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. Complaints have also been filed with the FCC
seeking review of the rates charged for nonbasic cable service. The Company's
ability to implement rate increases consistent with its past practices will
likely be limited by the regulations that the FCC has adopted.
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 appealed this decision to the full FCC which
affirmed the Bureau's decision. The Company has sought reconsideration. 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). Certain other cable
television companies that utilized a la carte packages have recently reached
settlement/resolution with the FCC on this issue. Adelphia believes that in view
of this experience with other operators, resolution of these differences is
possible, consistent with the terms and conditions of those earlier resolutions.
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, noncommercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of
(i) a 50 mile radius from the station's city of license or (ii) the station's
Grade B contour (a measure of signal strength). Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable systems will have
to obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WTBS. The 1992 Cable Act also
eliminated, effective December 4, 1992, the FCC's regulations requiring the
provision of input selector switches. The statutory must-carry provisions for
noncommercial stations became effective on December 4, 1992. Must-carry rules
for both commercial and noncommercial stations and retransmission consent rules
for commercial stations were adopted by the FCC on March 11, 1993. The
must-carry requirement for commercial stations went into effect on June 2, 1993,
and any stations for which retransmission consent had not been obtained (other
than must-carry stations, non-commercial stations and superstations) had to be
dropped as of October 6, 1993. A number of stations previously carried by the
Company's cable television systems elected retransmission consent. The Company
was able to reach agreements with broadcasters who elected retransmission
consent 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. The next election between must-carry and retransmission consent for
local commercial television broadcast stations will be October 1, 1996.
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 stopped 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. The FCC has proposed to revise the existing rate formula
in a way which would significantly lower the rates cable operators could charge.
It is possible that such leased access will result in competition to services
offered by the Company on the other channels of its cable systems.
Competing Franchises. Questions concerning the ability of
municipalities to award a single cable television franchise and to impose
certain franchise restrictions upon cable television companies have been
considered in several recent federal appellate and district court decisions.
These decisions have been somewhat inconsistent and, until the U.S. Supreme
Court rules definitively on the scope of cable television's First Amendment
protections, the legality of the franchising process and of various specific
franchise requirements is likely to be in a state of flux. It is not possible at
the present time to predict the constitutionally permissible bounds of cable
franchising and particular franchise requirements. However, the 1992 Cable Act,
among other things, prohibits franchising authorities from unreasonably refusing
to grant franchises to competing cable systems and permits franchising
authorities to operate their own cable systems without franchises.
The 1996 Act repealed the restrictions on local exchange telephone
companies ("LECs") from providing video programming directly to customers within
their local exchange telephone service areas, except in rural areas or by
specific waiver of FCC rules. The Supreme Court recently vacated a Fourth
Judicial Circuit decision which had held the 1984 Cable Act's cable telephone
cross-ownership prohibition unconstitutional. The Supreme Court remanded for the
Court of Appeals to consider whether the case is moot in light of the repeal of
the statutory cross-ownership ban. The 1996 Act also authorized LECs to operate
"open video systems" without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Where demand exceeds channel capacity,
up to two-thirds of the channels on an "open video system" must be available to
programmers unaffiliated with the LEC.
The 1996 Act eliminated the FCC rule prohibiting common ownership
between a cable system and a national broadcast television network. The 1996 Act
also eliminated the statutory ban covering certain common ownership interests,
operation or control between a television station and cable system within the
station's Grade B signal coverage area. However, the parallel FCC rules against
cable/television station cross-ownership remains in place, subject to review by
the FCC within two years. Finally, the 1992 Cable Act prohibits common
ownership, control or interest in cable television systems and MMDS facilities
or SMATV systems having overlapping service areas, except in limited
circumstances. The 1996 Act exempts cable systems facing "effective competition"
from the MMDS and SMATV cross-ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30 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.
Franchise Transfers. The 1992 Cable Act requires franchising
authorities to act on any franchise transfer request submitted after December 4,
1992 within 120 days after receipt of all information required by FCC
regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
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. 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. The 1996 Act
directs the FCC to set only minimal standards to assure compatibility between
television sets, VCRs and cable systems, and to rely on the marketplace. The FCC
must adopt rules to assure the competitive availability to consumers of customer
premises equipment, such as converters, used to access the services offered by
cable systems and other multichannel video programming distributors. Finally,
the 1996 Act prohibits local franchising authorities from prohibiting,
conditioning or restricting a cable system's use of any type of subscriber
equipment or transmission technology.
Pole Attachments. The FCC currently regulates the rates and
conditions imposed by certain public utilities for use of their poles, unless
under the Federal Pole Attachments Act state public service commissions are able
to demonstrate that they regulate rates, terms and conditions of the cable
television pole attachments. A number of states (including Massachusetts,
Michigan, New Jersey, New York, Ohio and Vermont) and the District of Columbia
have certified to the FCC that they regulate the rates, terms and conditions for
pole attachments. In the absence of state regulation, the FCC administers such
pole attachment rates through use of a formula which it has devised and from
time to time revises. The 1996 Act directs the FCC to adopt a new rate formula
for any attaching party, including cable systems, which offers
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems which choose to offer such services.
Other Matters. FCC regulation also includes matters regarding a cable
system's carriage of local sports programming; restrictions on origination and
cablecasting by cable system operators; application of the fairness doctrine and
rules governing political broadcasts; customer service; home wiring; and
limitations on advertising contained in nonbroadcast children's programming.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations. 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. Requests to adjust the
rates were made in January 1996, and are pending before the Copyright Office.
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.
Copyrighted music performed by cable systems themselves on local
origination channels, PEG channels, and in locally inserted advertising and
cross promotional announcements must also be licensed. A blanket license is
available from BMI. Cable industry negotiations with ASCAP are still in
progress.
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. The 1996 Act prohibits a franchising authority from either
requiring or limiting a cable operator's provision of telecommunications
services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Attempts in other
states to regulate cable television systems are continuing and can be expected
to increase. Such proposals and legislation may be preempted by federal statute
and/or FCC regulation. To date, the states in which the Company operates that
have enacted such state level 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 1996.
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 71 Chairman, Chief Executive Officer, President and Director
Michael J. Rigas 42 Executive Vice President, Operations and Director
Timothy J. Rigas 39 Executive Vice President, Chief Financial Officer,
Treasurer and Director
James P. Rigas 38 Executive Vice President, Strategic Planning and Director
Daniel R. Milliard 48 Senior 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. Riga
and James P. Rigas, each of whom currently serves as a director and
executive officer of the Company.
Michael J. Rigas is Executive Vice President, Operations of Adelphia
and is a Vice President of its subsidiaries. Since 1981, Mr. Rigas has served as
a Senior Vice President, 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 Executive Vice President, Chief Financial
Officer, Chief Accounting Officer and Treasurer of Adelphia and its
subsidiaries. Since 1979, Mr. Rigas has served as Senior Vice President, 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 Executive Vice President, Strategic Planning of
Adelphia and is a Vice President of its subsidiaries. Since February 1986, Mr.
Rigas has served as a Senior Vice President, 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. Among his business activities, Mr. Rigas is a member of the Board
of Directors of Cable Labs. 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 Senior Vice President and Secretary of Adelphia
and its subsidiaries, and also serves as President of a subsidiary, Hyperion
Telecommunications, Inc. Since 1982, 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, 64, joined the Company in 1986 and currently
holds the position of Vice President of Administration/Labor Relations. From
1981 until joining the Company, 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, 45, 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 a Masters Degree in Engineering Management from the University of
Massachusetts. He previously 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, 33, 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, 44, 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.
Jack A. Olson, 41, joined the Company in 1982 and currently holds the
position of Vice President of Media Development. Mr. Olson has held various
sales and marketing positions with the Company and is currently responsible for
the sale of television advertising and the development and sales of other media
related services. Prior to joining the Company, Mr. Olson was a partner in a
family owned contract sales and marketing firm consulting to the cable industry.
Edward E. Babcock, Jr., CPA, 33, joined the Company in May 1995
and currently holds the position of Director of Financial Administration and
Chief Accounting Officer. Prior to joining Adelphia, Mr. Babcock was the Vice
President of Finance and Administration of Pure Industries. Before joining Pure
Industries, Mr. Babcock spent eight years with the Pittsburgh office of Deloitte
& Touche LLP. Mr. Babcock received his B.S. degree in Accounting from The
Pennsylvania State University in 1984.
John B. Glicksman, 36, joined the Company in February 1992 and
currently holds the position of Deputy General Counsel for Operations.
Previously Mr. Glicksman was in private practice with the Washington, D.C. law
firms of Leventhal, Senter & Lerman; Fleischman and Walsh; and Howrey & Simon.
Mr. Glicksman received his J.D. degree, with honors, from The National Law
Center, George Washington University, Washington, D.C. and his B.A. degree, with
high honors, from Trinity College, Hartford, Connecticut.
Larry Brett, 43, 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, 35, 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, 45, 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.
Michael C. Mulcahey, CPA, 38, joined the Company in 1991 and
currently holds the position of Director of Accounting and Assistant Treasurer.
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, 33, 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, 54, 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.
Charles R. Drenning, 50, is Vice President, Engineering Operations
of Hyperion. Prior to joining Hyperion, Mr. Drenning was a District Sales
manager for Penn Access Corporation. In addition, he has over 22 years
experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, accounting, data processing,
research and development, and strategic planning. Mr. Drenning began his career
with AT&T as a member of the technical staff of Bell Laboratories in Columbus,
Ohio. His seven years of research work at the laboratories included both
hardware and software development for central office switching equipment. Mr.
Drenning holds a B.S. in Electrical Engineering and an M.S. in Computer
Information Science from Ohio State University. He is a member of the
Pennsylvania Technical Institute and IEEE.
Paul D. Fajerski, 47, is Vice President, Marketing and Sales of
Hyperion. Prior to joining Hyperion, Mr. Fajerski was a District Sales Manager
for Penn Access Corporation, a competitive access provider in Pittsburgh,
Pennsylvania. In addition, he has over 13 years experience with AT&T and the
Bell System where he served in a number of executive level positions in sales
and marketing. Mr Fajerski holds a B.S. in Business Administration from the
College of Steubenville.
Randolph S. Fowler, 44, is Vice President, Business Development and
Regulatory Affairs of Hyperion. Prior to joining Hyperion, Mr. Fowler was Vice
President of Marketing for Penn Access Corporation, a competitive access
provider in Pittsburgh, Pennsylvania. He previously served for four years as
Director of Technology Transfer and Commercial Use of Space in two
NASA-sponsored technology transfer programs. In addition, he has over 17 years
experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, operations, human resources,
business controls, and strategy development. Mr. Fowler holds a B.S. in Business
Administration from the University of Pittsburgh. He has developed and taught
courses in Marketing, Network Management, and Regulation for the University of
Pittsburgh's Graduate Program in Telecommunications. Mr. Fowler is a
contributing author for the Encyclopedia of Telecommunications.
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
QUARTER ENDED: HIGH LOW
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
June 30, 1995 $10 3/4 $ 7 1/2
September 30, 1995 $11 1/4 $ 8 1/4
December 31, 1995 $ 9 3/4 $ 6 1/4
March 31, 1996 $ 8 7/8 $ 6 1/4
As of June 25, 1996, there were approximately 168 holders of record
of Adelphia's Class A Common Stock. As of June 25, 1996, two 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 25, 1996 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, 1996 have been derived from the
audited consolidated financial statements of the Company.
Year Ended March 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ----------- ---------- ---------- ----------
Statement of Operations Data:
Revenues .......................... $ 273,630 $ 305,222 $ 319,045 $ 361,505 $ 403,597
Direct operating and programming
expenses ........................ 74,787 82,377 90,547 106,993 124,116
Selling, general and administrative
expenses ........................ 44,427 49,468 52,801 63,487 68,357
--------- --------- --------- --------- ---------
Operating income before
depreciation, amortization and
rate regulation expenses ........ 154,416 173,377 175,697 191,025 211,124
Depreciation and amortization ..... 84,817 90,406 89,402 97,602 111,031
Rate regulation charge ............ -- -- -- -- 5,300
--------- --------- --------- --------- ---------
Operating income .................. 69,599 82,971 86,295 93,423 94,793
Interest income from affiliates ... 3,085 5,216 9,188 11,112 10,623
Other income (expense) ............ 968 1,447 (299) 1,453 --
Priority investment income (a) .... 22,300 22,300 22,300 22,300 28,852
Cash interest expense ............. (129,237) (164,695) (180,456) (180,942) (194,403)
Noncash interest expense .......... (35,602) (164) (1,680) (14,756) (16,288)
Equity in loss of joint ventures .. (52,718) (46,841) (30,054) (44,349) (46,257)
--------- --------- --------- --------- ---------
Loss before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle (b) .................... (121,605) (99,766) (94,706) (111,759) (122,680)
Income tax (expense) benefit ...... -- (3,143) (2,742) 5,475 2,786
--------- --------- --------- --------- ---------
Loss before extraordinary loss
and cumulative effect of change
in accounting principle ......... (121,605) (102,909) (97,448) (106,284) (119,894)
Extraordinary loss on early
retirement of debt (b) .......... -- (14,386) (752) -- --
Cumulative effect of
change in accounting for
income taxes (b) ................. -- (59,500) (89,660) -- --
--------- --------- --------- --------- ---------
Net loss .......................... $(121,605) $(176,795) $(187,860) $(106,284) $(119,894)
========= ========= ========= ========= =========
Year Ended March 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
Loss per weighted average share
of common stock before extra-
ordinary loss and cumulative
effect of change in accounting
principle ....................... $ (8.80) $ (6.80) $ (5.66) $ (4.32) $ (4.56)
Net loss per weighed average
share of common stock ........... (8.80) (11.68) (10.91) (4.32) (4.56)
Cash dividends declared per
common share
--------- --------- --------- --------- ---------
Other Data:
EBITDA (d) ........................ $ 180,769 $ 202,340 $ 207,936 $ 225,890 $ 247,999
March 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
Balance Sheet Data:
Cash and cash equivalents ......... $ 11,173 $ 38,671 $ 74,075 $ 5,045 $ 10,809
Investment in and amounts
due from (to) Olympus (a) ....... 64,972 7,692 9,977 11,943 (33,656)
Total assets ...................... 925,791 949,593 1,073,846 1,267,291 1,333,923
Total debt ........................ 1,554,270 1,731,099 1,793,711 2,021,610 2,175,473
Debt net of cash (c) .............. 1,543,097 1,692,428 1,719,636 2,016,565 2,164,664
Stockholders' equity (deficiency) . (713,544) (868,614) (918,064 (1,011,575) (1,128,239)
(a) On March 28, 1996, ACP, Telesat, Olympus, Adelphia and certain
shareholders of Adelphia entered into an agreement which provided for a
distribution to Adelphia of $40,000 and the repayment of certain
amounts owed Telesat totaling $20,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
details.
Investment in and amounts due from Olympus at March 31, 1996 are
comprised of the following:
Gross investment in PLP Interests and general partners'
equity $ 298,402
Excess of ascribed value of contributed property over
historical cost (98,303)
Cumulative equity in net loss of Olympus (359,584)
Additional investment in Olympus -
net of distributions 65,922
---------------
Investment in Olympus (93,563)
Amounts due from Olympus 59,907
---------------
$ (33,656)
===============
(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 joint ventures, 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 and its subsidiaries ("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 local exchange telecommunications ("CLEC") 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."
The changes in Adelphia's results of operations for the years ended
March 31, 1995 and 1996, compared to the same period of the prior year, were
primarily the result of acquisitions, expanding existing cable television
operations and, for the year ended March 31, 1996, the impact of increased
advertising sales and other service offerings as well as an increase in cable
rates which became effective October 1, 1995.
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.
An 89% owned unrestricted subsidiary of the Company, Hyperion
Telecommunications, Inc. ("Hyperion"), together with its subsidiaries owns
certain investments in CLEC joint ventures and manages those ventures. Hyperion
is an unrestricted subsidiary for purposes of the Company's indentures.
Excluding the impact of Hyperion's operating results, the Company's EBITDA (see
definition below) would increase by $1,941, $2,138 and $2,254 for the years
ended March 31, 1994, 1995 and 1996, respectively. On April 15, 1996, Hyperion
realized gross proceeds of $175,265 upon issuance of notes and warrants (see
Liquidity and Capital Resources).
The following table is derived from Adelphia's Consolidated Financial
Statements that are included in this Annual Report on Form 10-K and sets forth
the historical percentage relationship to revenues of the components of
operating income contained in such financial statements for the years indicated.
Percentage of Revenues
Year Ended March 31,
------------------------
1994 1995 1996
------ ------ ------
Revenues ................................ 100.0% 100.0% 100.0%
Operating expenses:
Direct operating and programming ........ 28.4% 29.6% 30.8%
Selling, general and administrative ..... 16.5% 17.6% 16.9%
------ ------ ------
Operating income before depreciation,
amortization and rate regulation expenses 55.1% 52.8% 52.3%
Depreciation and amortization ........... 28.0% 27.0% 27.5%
Rate regulation ......................... 0.0% 0.0% 1.3%
------ ------ ------
Operating income ........................ 27.1% 25.8% 23.5%
====== ====== ======
Comparison of the Years Ended March 31, 1994, 1995 and 1996
Revenues. Revenues increased approximately 13.3% for the year ended
March 31, 1995 and 11.6% for the year ended March 31, 1996 compared with the
prior fiscal year. The increases were attributable to the following:
Year Ended March 31,
---------------------
1995 1996
----- -----
Acquisitions ......................... 87% 36%
Basic subscriber growth .............. 10% 20%
Rate increases ....................... 0% 20%
Advertising sales and other services . 3% 24%
Effective October 1, 1995, certain rate increases related to
regulated cable services were implemented in substantially all of the Company's
Systems. No rate increases were implemented during the 1995 fiscal year.
Advertising revenues and revenues derived from other strategic service offerings
such as paging and CLEC services also had a positive impact on revenues for the
year ended March 31, 1996.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs and
technical expenses, increased 18.2% and 16.0% for the years ended March 31, 1995
and 1996, respectively, compared with the respective prior years. Such increases
were primarily due to increased operating expenses from acquired systems,
increased programming costs and incremental costs associated with increased
subscribers. Because of regulatory limitations on the timing and extent to which
cost increases may be passed on to customers, operating and programming expenses
during the fiscal years ended 1995 and 1996 have increased at a greater
magnitude than corresponding revenue increases. As a result of recent FCC
regulatory rulemaking decisions, the Company intends to implement a systematic
program of rate increases to reverse this trend. Consistent with such program,
the Company intends to increase rates in most markets, in accordance with FCC
guidelines, during the second quarter of fiscal 1997.
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 20.2% and
7.7% the years ended March 31, 1995 and 1996, 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. Selling, general and administrative
expenses increased as a percentage of revenues for the year ended March 31,
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. For the year ended March 31, 1996, selling,
general and administrative expenses decreased as a percentage of revenues
compared to the prior year, primarily due to the favorable impact on revenues of
the above mentioned October 1, 1995 rate increases.
Operating Income Before Depreciation, Amortization and Rate
Regulation Expenses. Operating income before depreciation, amortization and rate
regulation settlement was $175,697, $191,025 and $211,124 for the years ended
March 31, 1994, 1995 and 1996, respectively. The increase for the year ended
March 31, 1995 was due primarily to the impact of acquisitions, offset by cost
increases at a rate greater than increases in revenues due largely to the above
noted rate freeze. For the year ended March 31, 1996, the increase is
attributable to a combination of acquisitions, an increase in subscriber rates,
internal subscriber growth and the expansion of advertising and other non-cable
services, partially offset by increased programming, general and administrative
costs.
Rate Regulation Expenses. The fiscal year ended March 31, 1996
includes a $5,300 charge representing management's estimate of the total costs
associated with the resolution of subscriber rate disputes. Such costs include,
(i) an estimate of credits to be extended to customers in future periods of up
to $2,700, (ii) legal and other costs incurred during the fiscal year ended
March 31, 1996, and (iii) an estimate of legal and other costs to be incurred
associated with the ultimate resolution of this matter.
Depreciation and Amortization. Depreciation and amortization was
higher for the years ended March 31, 1995 and 1996, compared with the respective
prior year, primarily due to increased depreciation and amortization related to
acquisitions consummated during the years ended March 31, 1994, 1995 and 1996 as
well as increased capital expenditures made during the past several years.
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. Priority investment income increased
during the year ended March 31, 1996 as compared with the prior two fiscal years
due to increased payments by Olympus.
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 $207,936, $225,890 and $247,999 for the years ended March 31, 1994,
1995 and 1996, respectively. The increase of 8.6% and 9.8% for the years ended
March 31, 1995 and 1996, compared with the respective prior fiscal years is
primarily due to the acquisition of cable systems during the years ended March
31, 1995 and 1996 and increased priority investment income from Olympus during
the year ended March 31, 1996. Increased revenues and operating expenses for the
years ended March 31, 1995 and 1996, compared with the respective prior years,
primarily reflect the impact of acquisitions consummated during fiscal 1995 and
1996. 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 7.4% and
7.7% for the years ended March 31, 1995 and 1996, 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. For the year ended March 31, 1996, interest expense increased due
to incremental debt outstanding during the period, partially offset by a
decrease in the average interest rate on outstanding debt during fiscal 1996
compared with the prior fiscal year. Approximately 27% of the increase in
interest expense in fiscal 1996 as compared with the prior year was attributable
to incremental debt related to acquisitions. Interest expense includes non-cash
accretion of original issue discount and non-cash interest expense totaling
$1,680, $14,756 and $16,288 for the years ended March 31, 1994, 1995 and 1996,
respectively.
Equity in Loss of Joint Ventures. The equity in loss of joint
ventures represents primarily (i) the Company's pro rata share of Olympus'
losses and the accretion requirements of Olympus' preferred limited partner
interests, and (ii) Hyperion's pro-rata share of its less than majority owned
partnerships' operating losses. The increase in the year ended March 31, 1995,
compared with the prior year, is primarily attributable to the impact of the
sale by Olympus of Northeast Cable and lower operating margins at Olympus. The
increase in the loss during the year ended March 31, 1996, compared with the
prior year, is due to an increase in the losses of certain investments in the
CLEC business in which the Company is a less than majority partner partially
offset by improved operating performance in the Olympus partnership.
Net Loss. The Company reported net losses of $187,860, $106,284 and
$119,894 for the years ended March 31, 1994, 1995 and 1996, respectively. Net
loss for fiscal 1994 included the cumulative effect of the change in accounting
of income taxes by the Company of $89,660. Excluding the effect of this item,
net loss increased by $8,084 for fiscal 1995 compared with the prior fiscal
year. 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 ventures
(primarily Olympus) and higher non-cash interest expense, partially offset by
higher operating income. The increase in net loss of $13,610 in fiscal 1996 when
compared with the prior year was due primarily to an increase in interest
expense and the impact of rate regulation expenses, partially offset by
increased operating income and priority investment income from Olympus.
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, 1996, 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, 1994, 1995 and
1996, were $75,894, $92,082 and $100,089, respectively. The increase in capital
expenditures for fiscal 1994, 1995 and 1996, compared to each respective 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 Hyperion. Management expects capital expenditures for fiscal 1997 to
be somewhat higher than fiscal 1996 due to the further expansion of cable plant
rebuilds and due to further expansion by Hyperion. See "Business - Competitive
Local Exchange Services."
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, 1996, the Company funded its
working capital requirements, capital expenditures, and investments in Olympus
and other affiliates and entities 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, 1996, an
aggregate of $1,096,675 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, 1996, an aggregate of $128,000
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, 1996.
At March 31, 1996, Adelphia's subsidiaries had an aggregate of
$301,000 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 $10,809 in cash and cash equivalents at March 31, 1996 which
combined with the Company's unused credit lines with banks aggregated to
$311,809. The Company has the ability to pay interest on its 9 1/2% Pay-In-Kind
Notes by issuing additional notes totaling approximately $57,906 in lieu of cash
interest payments through February 15, 1999. Based upon the results of
operations of subsidiaries for the quarter ended March 31, 1996, approximately
$219,000 of available assets could have been transferred to Adelphia at March
31, 1996, 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, 1996, the Company's
unused credit lines were provided by reducing revolving credit facilities whose
revolver periods expire through December 31, 2004. The Company's scheduled
maturities of debt are currently expected to total $127,906 for fiscal 1997.
At March 31, 1996, the Company's total outstanding debt aggregated
$2,175,473 which included $950,798 of parent company debt and $1,224,675 of
subsidiary debt. Bank debt interest rates are based upon one or more of the
following rates at the option of Adelphia: 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 8.36% at March
31, 1996, compared to 9.33% at March 31, 1995. At March 31, 1996, approximately
36% 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 64% of the Company's total indebtedness is at fixed interest rates
as of March 31, 1996.
Adelphia has entered into interest rate swap agreements and interest
rate cap agreements with banks to reduce the impact of changes in interest rates
on its bank debt. During fiscal 1996, the Company received $11,526 upon
termination of several interest rate swap agreements having a stated notional
principal amount of $270,000. The amount received will be amortized as a
reduction of interest expense through November 1998. Also during fiscal 1996,
the Company received $4,900 and assumed the obligations as a counterparty under
certain interest rate swap agreements with Olympus. These interest rate swap
agreements have a notional principal amount of $140,000 and expire through
November 1998.
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., ("SHHH") which hold and
control the Managed Systems, purchased 4,374,453 and 1,458,151 of such 5,832,604
shares, respectively.
On February 15, 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
totaling approximately $57,906 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,
FPL Group Inc. ("FPL") purchased 1,000,000 shares of newly issued Class A Common
Stock for $15,000.
As of March 31, 1996, certain subsidiaries of the Company had
commitments for a $690,000 financing arrangement consisting of a $540,000
revolving credit facility maturing December 31, 2003 and a $150,000 term loan
facility maturing December 31, 2004. Initial borrowings during April 1996 of
$483,000 were used primarily to repay existing indebtedness and for working
capital purposes. The maximum available under the revolving credit facility is
reduced, in increasing quarterly amounts, beginning June 30, 1998 through
December 31, 2003. Borrowings under the term loan facility are payable in
installments, in increasing quarterly amounts, commencing June 30, 1998 and
ending on December 31, 2004.
On April 15, 1996, Hyperion completed a private placement to
institutional investors and realized gross proceeds of $175,265 upon issuance of
$329,000 aggregate principal amount at maturity of 13% Senior Discount Notes and
warrants to purchase an aggregate of 613,427 common shares of Hyperion. If all
warrants were exercised, the warrants would represent approximately 5.78% of the
common stock of Hyperion on a fully diluted basis. The notes will not require
payment of interest until October 15, 2001, and may not be redeemed prior to
April 15, 2001. Hyperion is using the net proceeds from the offering to expand
its existing markets, to complete construction of new networks, to enter
additional markets, to repay certain indebtedness owed to Adelphia, and for
working capital purposes.
Acquisitions. On March 10, 1994, the Company purchased a 75% equity
interest in Three Rivers Cable Associates, L.P. ("TR") for $6,000. At the
acquisition date, TR served 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, 1996,
there were outstanding borrowings of $13,164 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 ("NHL") Franchise,
convertible to a 34% equity interest and (ii) warrants allowing Adelphia to
increase its interest to 40%. Adelphia has also committed to advance $12,500 to
the Sabres Partnership in the form of 14% convertible capital funding notes. In
connection with the $12,500 commitment, Adelphia's convertible preferred units'
return has been increased to 14%. During the year ended March 31, 1996, the
Company funded $7,681 of the $12,500 and by April 24, 1996, the entire $12,500
had been funded. The Sabres Partnership manages and will receive allocations of
profits, losses and distributions from the Marine Midland Arena, a new sports
and entertainment facility expected to be completed by the opening of the
1996-1997 NHL season. Adelphia believes this investment will be a competitive
advantage in the Buffalo cable television market.
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 which, at the acquisition date, served
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 which, at the acquisition date, served
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. No gain or loss
was recognized as a result of this exchange.
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 served approximately 4,200 subscribers at the acquisition date, 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 which, at the
acquisition date, served approximately 7,000 subscribers located in Martha's
Vineyard, Massachusetts. 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 April 12, 1995, Adelphia acquired cable systems from Clear
Channels Cable TV Company located in Kittanning, New Bethlehem and Freeport,
Pennsylvania, for $17,456. These systems served approximately 10,700 subscribers
at the acquisition date. The acquisition of these systems has been accounted for
using the purchase method of accounting. The consolidated statements of
operations and cash flows include the operations of the acquired systems since
April 12, 1995.
On June 12, 1995, Adelphia announced the signing of a definitive
agreement for the purchase of all of the cable systems of First Carolina Cable
TV, L.P. These systems together serve approximately 34,000 subscribers located
in Vermont and are being purchased for an aggregate price of $48,500, which is
expected to be consummated in the second quarter of fiscal 1997.
On January 9, 1996, Adelphia completed the acquisition of the cable
systems of Eastern Telecom Corporation and Robinson Cable TV, Inc. These systems
served approximately 24,000 subscribers at the acquisition date located in
western Pennsylvania and were purchased for an aggregate price of $43,000. The
acquisition of these systems has been 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 9, 1996.
On April 1, 1996, Adelphia purchased the cable television operations
of Cable TV Fund 11-B, Ltd. from Jones Intercable. This CATV system was acquired
for $84,000 and served approximately 39,700 subscribers at the acquisition date
in the New York counties of Erie and Niagara.
Olympus. During the years ended March 31, 1994 and 1995, the Company
made net investments in and advances to Olympus totaling $2,285 and $1,966,
respectively. Such investments and advances provided funds to Olympus for
capital expenditures, for the repayment of debt and for working capital. During
the year ended March 31, 1996, the Company received net distributions and
advances from Olympus totaling $45,599. During the years ended March 31, 1994,
1995 and 1996, the Company received priority investment income from Olympus of
$22,300, $22,300 and $28,852, respectively.
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. ("ACP", a wholly owned subsidiary of Adelphia and managing
general partner of Olympus), Olympus, Telesat and certain shareholders of
Adelphia entered into an investment agreement (the "Telesat 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 of $5, Senior Limited Partner ("SLP") interests of $20,000 and
$112,500 of newly issued 16.5% preferred limited partner ("PLP") interests.
Prior to the Telesat Investment Agreement, Olympus had obligations to
Adelphia for intercompany advances, redeemable PLP interests and accrued
priority return on redeemable PLP interests. In conjunction with the Telesat
Investment Agreement, Adelphia contributed $49,974 of the intercompany advances,
$51,101 of the existing redeemable PLP interests and all of the then existing
accrued priority return on the redeemable PLP interests to general partners'
equity (deficiency). Adelphia then exchanged its remaining redeemable PLP
interests for $225,000 of new PLP interests. Also, Senior Debt (as defined in
the Telesat Investment Agreement) owed by Olympus to Adelphia of $40,000
remained outstanding after consummation of the Telesat Investment Agreement.
After this transaction Adelphia holds a 50% voting interest in Olympus with a
Telesat subsidiary as its only other voting 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 the Managed
Partnerships up to an amount of $50,000. During the years ended March 31, 1994,
1995 and 1996, the Company made advances in the net amount of $7,828, $10,028
and $14,859, 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 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.
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, or its subsidiaries, 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 each of the years ended March 31, 1995 and 1996, 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 deferral of the gain from the termination of
certain interest rate swaps.
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, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable companies or their assets, and other partnering and
investment transactions of various structures and sizes involving cable or other
telecommunications companies. The Company continues to evaluate new
opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore potential
transactions of various types with other cable and telecommunications companies.
However, no assurances can be given as to whether any such transaction may be
consummated or, if so, when.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires an asset and
liability approach for financial accounting and reporting for income taxes.
Effective April 1, 1993, 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 the Company of $89,660.
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. Effective January
1, 1994 and April 1, 1994, respectively, both Olympus and the Company 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 in the period ended March 31, 1996,
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, 1996, after giving effect to interest rate hedging agreements,
approximately $778,375 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, 1995, held $5 of voting general partnership interests
representing, in the aggregate, 50% of the voting interests of Olympus. The
Company also held, as of December 31, 1995, $251,083 aggregate principal amount
of nonvoting PLP interests in Olympus, which entitle the Company to a 16.5% per
annum priority return. The remaining equity in Olympus consists of voting and
non-voting partnership interests held by subsidiaries of FPL.
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,
Olympus, Telesat and certain shareholders of Adelphia entered into the Telesat
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 of $5, Special Limited Partner ("SLP") interests
of $20,000 and $112,500 of newly issued 16.5% PLP interests.
On March 28, 1996, ACP, Telesat, Olympus, Adelphia and certain
shareholders of Adelphia entered into an agreement which amended certain aspects
of the Olympus Partnership Agreement. The amendment provides for the repayment
of certain amounts owed to Telesat totaling $20,000, the release of certain
obligations of Telesat to Olympus and the reduction of Telesat's PLP and accrued
priority return balances by $20,000. The amendment further provides for a
$40,000 distribution to Adelphia as a reduction of its PLP interests and accrued
priority return. These repayments and distributions were made on March 29, 1996
and were funded through internally generated funds and advances from an
affiliate.
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 April 3, 1995, Olympus acquired all of the cable and security
systems of WB Cable Associates, Ltd. ("WB Cable") which, at the acquisition
date, served 44,000 cable and security monitoring 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, and was financed principally through borrowings under an Olympus
subsidiary's credit agreement.
On May 12, 1995, certain Olympus subsidiaries entered into a $475,000
revolving credit facility with several banks, maturing December 31, 2003. The
proceeds at closing were used to repay existing bank debt. At December 31, 1995,
$56,000 of unused commitments was available.
On January 5, 1996, Olympus acquired all of the southeast Florida
cable systems of the Leadership Cable division of Fairbanks Communications,
Inc., which, at the acquisition date, served approximately 50,000 cable and
security monitoring subscribers for a purchase price of $95,800. The purchase
price consists of $40,000 in cash and a seller note due December 30, 1997
totaling $55,800 plus accrued interest. The cash portion of the acquisition
price was financed through borrowings under an Olympus credit agreement.
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,
----------------------------------------------------------------
1993 1994 1995
-------------------- -------------------- -------------------
Statement of Operations Data:
Revenues $ 89,099 $ 93,421 $ 120,968
Business interruption revenue 9,547 1,037 -
-------------------- -------------------- -------------------
Total 98,646 94,458 120,968
Operating income before depreciation and
amortization 55,195 47,079 53,228
Depreciation and amortization 37,240 36,703 31,953
Operating income 17,955 10,376 21,275
Interest expense (29,470) (32,262) (36,718)
Net loss (70,744) (21,025) (19,391)
Balance Sheet Data:
Total assets $ 458,663 $ 375,985 $ 533,909
Total long-term debt 368,263 314,069 419,809
Limited partners' interests 281,101 281,986 396,630
Other Financial Data:
Capital expenditures $ 23,164 $ 23,916 $ 21,498
Operating margin (a) 56.0% 49.8% 44.0%
(a) Percentage representing operating income before depreciation and
amortization divided by total revenues.
Comparison of Years Ended December 31, 1993, 1994 and 1995 - Olympus
Revenues. Total revenues for the year ended December 31, 1994
declined 4.2% from the prior year. The decrease in revenues in 1994 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. For the year ended December 31, 1995, revenues increased
28.1% from the prior year which primarily reflects the impact of the
acquisitions of Telesat and WB Cable during 1995 coupled with the positive
impact of rate increases implemented effective October 1, 1995 and the internal
growth of subscribers.
Operating Income Before Depreciation and Amortization. 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. For the year ended December 31, 1995, operating
income before depreciation and amortization increased 13.1% as compared with the
prior year. The increase was primarily due to the increased operating income
provided by the Telesat and WB Cable acquisitions, partially offset by increased
programming costs and incremental costs associated with increased subscribers.
Operating Income. 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, the above noted FCC rate freeze impact and the
effect of the Northeast sale. For the year ended December 31, 1995, operating
income increased by $10,899 to $21,275. The increase was primarily due to the
incremental operating income of acquired systems, the Telesat and WB Cable
acquisitions, the positive impact of the rate increase discussed above and lower
depreciation and amortization.
Interest Expense. For the year ended December 31, 1994, interest
expense increased 9.5% primarily due to higher average rates outstanding on debt
partially offset by the reduction of debt from the sale of Northeast. For the
year ended December 31, 1995, interest expense increased 13.8% primarily due to
the higher level of debt outstanding.
Net Loss. Olympus reported net losses of $70,744, $21,025 and $19,391
for the years ended December 31, 1993, 1994 and 1995, respectively. The decrease
in net loss in 1994 compared to the prior year was attributable to the absence
in 1994 of the impact of the change in accounting for income taxes of $59,500
which was recorded in 1993, offset by lower operating income for the period. The
decline in net loss in 1995 compared to 1994 is primarily due to the increased
operating income of acquired systems, partially offset by increased programming
costs and incremental costs associated with increased subscribers
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 1996 Act ends FCC regulation of cable
programming service tier rates on March 31, 1999. 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 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. Refunds with interest will be required to be paid by
cable operators who are required to reduce regulated rates. The FCC has reserved
the right to reduce or increase the benchmarks it has established. The rate
regulations 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 or completes a significant
system rebuild or upgrade. 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 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. The 1996 Act deregulates the rates
for cable programming services on March 31, 1999. Adelphia cannot predict the
effect if the 1996 Act on future rulemaking proceedings or changes to the rate
regulations.
Effective September 1, 1993, as a result of the 1992 Cable Act,
Adelphia repackaged certain existing cable services by adjusting rates for basic
service and introducing a new method of offering certain cable services.
Adelphia 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. Adelphia also
implemented a program in all of its systems called "CableSelect" under which
most of Adelphia'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, Adelphia 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
Adelphia. Adelphia believes CableSelect provides increased programming choices
to its subscribers while providing flexibility to Adelphia 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 FCC released amended rules under which,
on a prospective basis, any a la carte package will be treated as a regulated
tier, except for packages involving premium services. Also, 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. Adelphia has
appealed this decision to the full Commission which affirmed the Cable Service
Bureau's decision. Adelphia has sought reconsideration of the decision.
Certain other cable television companies that utilized a la carte
packages have recently reached settlement/resolution with the FCC on this issue.
Adelphia believes that in view of this experience with other operators,
resolution of these differences is possible, consistent with the terms and
conditions of those earlier resolutions. Accordingly, results of operations for
the fiscal year ended March 31, 1996 include a $5,300 charge representing
management's estimate of the total costs associated with the resolution of this
matter. Such costs include, (i) an estimate of credits to be extended to
customers in future periods of up to $2,700, (ii) legal and other costs incurred
during the fiscal year ended March 31, 1996, and (iii) an estimate of legal and
other costs to be incurred associated with the ultimate resolution of this
matter. At March 31, 1996, $3,800 of the charge to earnings remained as an
estimate of future costs to be incurred to resolve this matter. While Adelphia
cannot predict the ultimate outcome or effect of this matter, management of
Adelphia does not expect the ultimate outcome of this matter to have a material
adverse effect on Adelphia's financial position and results of operations. 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. 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.
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 and the 1996 Act contain provisions
which encourage competition from such other sources. The Company cannot predict
the extent to which competition will materialize from other cable television
operators, local telephone companies, other distribution systems for delivering
television programming to the home, or other potential competitors, or, if such
competition materializes, the extent of its effect on the Company.
FCC rules heretofore permitted 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.
The 1996 Act repealed the prohibition on local exchange telephone
exchange companies ("LECs") from providing video programming directly to
customers within their local exchange areas other than in rural areas or by
specific waiver of FCC rules. The 1996 Act also authorized LECs to operate "open
video systems" ("OVS") without obtaining a local cable franchise, although LECs
operating such a system can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Where demand exceeds capacity, up to
two-thirds of the channels on an OVS must be available to programmers
unaffiliated with the LEC. The statute states that the OVS scheme supplants the
FCC's "video dialtone" rules, but existing authorizations are grandfathered.
Once the FCC has promulgated rules to implement the OVS concept, however, New
Jersey Bell will presumably have the option of converting its video dialtone
authorization to an OVS authorization.
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. 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 50
Consolidated Balance Sheets, March 31, 1995 and 1996 51
Consolidated Statements of Operations,
Years Ended March 31, 1994, 1995 and 1996 52
Consolidated Statements of Stockholders' Equity (Deficiency),
Years Ended March 31, 1994, 1995 and 1996 53
Consolidated Statements of Cash Flows,
Years Ended March 31, 1994, 1995 and 1996 54
Notes to Consolidated Financial Statements 55
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
Independent Auditors' Report 74
Consolidated Balance Sheets, December 31, 1994 and 1995 75
Consolidated Statements of Operations,
Years Ended December 31, 1993, 1994, and 1995 76
Consolidated Statements of Partners' Equity (Deficiency),
Years Ended December 31, 1993, 1994 and 1995 77
Consolidated Statements of Cash Flows,
Years Ended December 31, 1993, 1994 and 1995 78
Notes to Consolidated Financial Statements 79
INDEPENDENT AUDITORS' REPORT
Adelphia Communications Corporation:
We have audited the accompanying consolidated balance sheets of Adelphia
Communications Corporation and subsidiaries as of March 31, 1995 and 1996, 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, 1996. 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, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996 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.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 28, 1996
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
March 31,
-------------------------
ASSETS: 1995 1996
----------- -----------
Cable television systems, at cost, net of depreciation and amortization:
Property, plant and equipment .................................................. $ 518,405 $ 560,376
Intangible assets .............................................................. 546,116 568,898
----------- -----------
Total .......................................................................... 1,064,521 1,129,274
Cash and cash equivalents ...................................................... 5,045 10,809
Investments .................................................................... 48,968 68,147
Preferred equity investment in Managed Partnership ............................. 18,338 18,338
Subscriber receivables - net ................................................... 20,433 23,803
Prepaid expenses and other assets - net ........................................ 48,352 52,658
Related party investments and receivables - net ................................ 61,634 30,894
----------- -----------
Total .......................................................................... $ 1,267,291 $ 1,333,923
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Notes payable of subsidiaries to banks and institutions ........................ $ 1,086,350 $ 1,224,675
12 1/2% Senior Notes due 2002 .................................................. 400,000 400,000
10 1/4% Senior Notes due 2000 .................................................. 99,011 99,158
11 7/8% Senior Debentures due 2004 ............................................. 124,470 124,502
9 7/8% Senior Debentures due 2005 .............................................. 127,994 128,118
9 1/2% Senior Pay-In-Kind Notes due 2004 ....................................... 164,370 180,357
Other debt ..................................................................... 19,415 18,663
Accounts payable ............................................................... 42,872 66,668
Subscriber advance payments and deposits ....................................... 16,494 14,706
Accrued interest and other liabilities ......................................... 87,751 99,106
Deferred income taxes .......................................................... 110,139 106,209
----------- -----------
Total liabilities .............................................................. 2,278,866 2,462,162
----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 50,000,000 and 200,000,000 shares
authorized, respectively; 14,906,691 and 15,364,009 shares
outstanding, respectively ...................................................... 149 154
Class B Common Stock, $.01 par value, 25,000,000 shares
authorized and 10,944,476 shares outstanding ................................... 109 109
Additional paid-in capital ..................................................... 211,190 214,415
Accumulated deficit ............................................................ (1,223,023) (1,342,917)
----------- -----------
Total stockholders' equity (deficiency) ........................................ (1,011,575) (1,128,239)
----------- -----------
Total .......................................................................... $ 1,267,291 $ 1,333,923
=========== ===========
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,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
Revenues ............................................ $ 319,045 $ 361,505 $ 403,597
----------- ----------- -----------
Operating expenses:
Direct operating and programming .................... 90,547 106,993 124,116
Selling, general and administrative ................. 52,801 63,487 68,357
Depreciation and amortization ....................... 89,402 97,602 111,031
Rate regulation ..................................... -- -- 5,300
----------- ----------- -----------
Total ............................................... 232,750 268,082 308,804
----------- ----------- -----------
Operating income .................................... 86,295 93,423 94,793
----------- ----------- -----------
Other income (expense):
Interest income from affiliates ..................... 9,188 11,112 10,623
Other income ........................................ (299) 1,453 --
Priority investment income from Olympus ............. 22,300 22,300 28,852
Interest expense .................................... (182,136) (195,698) (210,691)
Equity in loss of joint ventures .................... (30,054) (44,349) (46,257)
----------- ----------- -----------
Total ............................................... (181,001) (205,182) (217,473)
----------- ----------- -----------
Loss before income taxes, extraordinary loss and
cumulative effect of change in accounting principle . (94,706) (111,759) (122,680)
Income tax (expense) benefit ........................ (2,742) 5,475 2,786
----------- ----------- -----------
Loss before extraordinary loss and cumulative
effect of change in accounting principle ............ (97,448) (106,284) (119,894)
Extraordinary loss on early retirement of debt ...... (752) -- --
Cumulative effect of change in accounting for
income taxes ........................................ (89,660) -- --
----------- ----------- -----------
Net loss ............................................ $ (187,860) $ (106,284) $ (119,894)
=========== =========== ===========
Loss per weighted average share of common stock
before extraordinary loss and cumulative effect of
change in accounting principle ...................... (5.66) (4.32) (4.56)
Extraordinary loss per weighted average share on
early retirement of debt ............................ (0.04) -- --
Cumulative effect per weighted average share of
change in accounting for income taxes ............... (5.21) -- --
----------- ----------- -----------
Net loss per weighed average share of common stock .. $ (10.91) $ (4.32) $ (4.56)
=========== =========== ===========
Weighted average shares of common stock outstanding . 17,221 24,628 26,305
=========== =========== ===========
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, 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 owners' 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 owners' 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)
Issuance of Class A Common
Stock on April 3, 1995 ............................. 5 -- 4,995 -- 5,000
Excess of purchase price of
acquired assets over
predecessor owners' book
value .............................................. -- -- (1,770) -- (1,770)
Net loss ........................................... -- -- -- (119,894) (119,894)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1996 ............................ $ 154 $ 109 $ 214,415 $ (1,342,917) $ (1,128,239)
============ ============ ============ ============ ============
See notes to consolidated
financial statements.
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended March 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
Cash flows from operating activities:
Net loss .................................................. $ (187,860) $ (106,284) $ (119,894)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation .............................................. 56,370 66,064 70,890
Amortization .............................................. 33,032 31,538 40,141
Noncash interest expense .................................. 1,680 14,756 16,288
Equity in loss of joint ventures .......................... 30,054 44,349 46,257
Rate regulation ........................................... -- -- 2,700
Extraordinary loss on debt retirement ..................... 752 -- --
Loss on disposal of property .............................. 1,051 -- --
Cumulative effect of change in accounting for
income taxes .............................................. 89,660 -- --
Increase (decrease) in deferred income taxes,
net of effects of acquisitions ............................ 2,061 (5,975) (3,930)
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Subscriber receivables .................................... (155) (478) (3,370)
Prepaid expenses and other assets ......................... (16,288) (21,152) (14,465)
Accounts payable .......................................... 5,871 14,789 23,796
Subscriber advance payments and deposits .................. (1,134) 699 (1,788)
Accrued interest and other liabilities .................... 11,858 10,630 7,662
------------ ------------ ------------
Net cash provided by operating activities ................. 26,952 48,936 64,287
------------ ------------ ------------
Cash flows from investing activities:
Cable television systems acquired ......................... (21,681) (70,256) (60,804)
Expenditures for property, plant and equipment ............ (75,894) (92,082) (100,089)
Investments in other joint ventures ....................... (8,890) (38,891) (24,333)
Preferred equity investment in Managed Partnership ........ (18,338) -- --
Amounts invested in and advanced to Olympus
and related parties ....................................... (45,285) (46,046) (4,236)
Alternate access rights acquired .......................... (27,000) -- --
------------ ------------ ------------
Net cash used for investing activities .................... (197,088) (247,275) (189,462)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from debt ........................................ 744,770 155,314 273,508
Repayments of debt ........................................ (690,232) (38,107) (138,694)
Costs associated with debt financing ...................... (4,961) (2,759) (3,875)
Issuance of Class A Common Stock .......................... 155,963 14,861 --
------------ ------------ ------------
Net cash provided by financing activities ................. 205,540 129,309 130,939
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents .......... 35,404 (69,030) 5,764
Cash and cash equivalents, beginning of year .............. 38,671 74,075 5,045
------------ ------------ ------------
Cash and cash equivalents, end of year .................... $ 74,075 $ 5,045 $ 10,809
============ ============ ============
Supplemental disclosure of cash flow activity -
Cash payments for interest ................................ $ 178,840 $ 193,206 $ 198,369
============ ============ ============
See notes to consolidated
financial statements.
===============================================================================
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. The Company and Summary of Significant Accounting Policies:
The Company and Basis for Consolidation
Adelphia Communications Corporation and subsidiaries ("Adelphia")
owns, operates and manages cable television systems and other related
telecommunications businesses. Adelphia'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
Adelphia and its more than 50% owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
During the years ended March 31, 1995 and 1996, Adelphia 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 Adelphia effective with the date acquired. A description
of the acquisitions is provided below.
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 which, at the acquisition date, served
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. 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 which, at the acquisition date, served
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. Debt assumed, included in notes payable of subsidiaries
to banks and institutions, was $42,300 at closing.
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.
At the acquisition date, Oxford served approximately 4,200 subscribers located
in the North Carolina counties of Granville and Warren.
On January 31, 1995, Adelphia acquired a majority equity position in
Tele-Media Company of Martha's Vineyard, L.P. for $11,775, a cable system which,
at the acquisition date, served approximately 7,000 subscribers located in
Martha's Vineyard, Massachusetts.
On April 12, 1995, Adelphia acquired cable systems from Clear
Channels Cable TV Company located in Kittanning, New Bethlehem and Freeport,
Pennsylvania, for $17,456. These systems served approximately 10,700 subscribers
at the date of acquisition.
On January 9, 1996, Adelphia completed the acquisition of the cable
systems of Eastern Telecom Corporation and Robinson Cable TV, Inc. These systems
served approximately 24,000 subscribers at the acquisition date located in
western Pennsylvania and were purchased for an aggregate price of $43,000.
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, Adelphia'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 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 Adelphia 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,
--------------------------------
1995 1996
-------------- --------------
Operating plant and equipment .......... $ 786,917 $ 863,957
Real estate and improvements ........... 46,453 51,147
Support equipment ...................... 28,242 30,076
Construction in progress ............... 77,026 105,158
-------------- --------------
938,638 1,050,338
Accumulated depreciation ............... (420,233) (489,962)
-------------- --------------
$ 518,405 $ 560,376
============== ==============
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 $1,345,
$1,736 and $1,766 for the years ended March 31, 1994, 1995 and 1996,
respectively.
Intangible Assets
Intangible assets, net of accumulated amortization, are comprised of
the following:
March 31,
-------------------
1995 1996
-------- --------
Purchased franchises ..... $493,249 $465,983
Goodwill ................. 38,805 58,377
Non-compete agreements ... 13,495 11,240
Purchased subscriber lists 567 33,298
-------- --------
$546,116 $568,898
======== ========
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 $107,914 and $137,012 at March 31, 1995 and
1996, respectively.
Cash and Cash Equivalents
Adelphia considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Interest on liquid
investments was $2,020, $1,230 and $1,859 for the years ended March 31, 1994,
1995, and 1996, 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, Adelphia'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 Adelphia's investment. Investments in affiliates accounted for using the
equity method generally reflect Adelphia's equity in their underlying assets.
Investments in entities in which Adelphia's ownership is less than
20% and investments greater than 20% in which Adelphia does not influence the
operating or financial decisions of the entity are generally accounted for using
the cost method. Under the cost method, Adelphia'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 Adelphia's investments is as follows:
March 31,
-------------------------
1995 1996
----------- -----------
Investments accounted for using the equity method:
Gross investment:
Alternate access ventures ........................ $ 15,764 $ 28,754
Page Call, Inc. .................................. 6,915 11,187
Other ............................................ 2,847 800
Cumulative equity in net losses .................. (1,458) (6,814)
----------- -----------
Total ............................................ 24,068 33,927
----------- -----------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. .................... 15,000 22,681
Commonwealth Security, Inc. ...................... 4,200 4,200
SuperCable ....................................... 3,000 3,171
Other ............................................ 2,700 4,168
----------- -----------
Total ............................................ 24,900 34,220
----------- -----------
Total investments ................................ $ 48,968 $ 68,147
=========== ===========
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 ("NHL") Franchise,
convertible to a 34% equity interest and (ii) warrants allowing Adelphia to
increase its interest to 40%. Adelphia has also committed to advance $12,500 to
the Sabres Partnership in the form of 14% convertible capital funding notes. In
connection with the $12,500 commitment, Adelphia's convertible preferred units'
return has been increased to 14%. During the year ended March 31, 1996, the
Company funded $7,681 of the $12,500 and by April 24, 1996, the entire $12,500
had been funded. The Sabres Partnership manages and will receive allocations of
profits, losses and distributions from the Marine Midland Arena, a new sports
and entertainment facility expected to be completed by the opening of the
1996-1997 NHL season. Adelphia believes this investment will be a competitive
advantage in the Buffalo cable television market.
Subscriber Receivables
An allowance for doubtful accounts of $3,503 and $1,216 has been
deducted from subscriber receivables at March 31, 1995 and 1996, respectively.
The decrease in the allowance for doubtful accounts as of March 31, 1996
resulted from a change in procedure for writing off doubtful accounts. This
change had no effect on bad debt expense.
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 $23,355 and $25,274 at March 31, 1995 and
1996, respectively.
Asset Impairments
Adelphia periodically reviews the carrying value of its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying value of assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
carrying value. An impairment loss would be recognized as the amount by which
the carrying value of the assets exceeds their fair value.
Noncash Financing and Investing Activities
Capital leases entered into during the year ended March 31, 1994
totaled $7,186. There were no material capital leases entered into the years
ended March 31, 1995 and 1996. Reference is made to Notes 1, 2, 5 and 9 for
descriptions of additional non-cash financing and investing activities.
Derivative Financial Instruments
Net settlement amounts under interest rate swap agreements are
recorded as adjustments to interest expense during the period incurred.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain 1994 and 1995 amounts have been reclassified for
comparability with the 1996 presentation.
2. Related Party Investments and Receivables:
The following table summarizes the investments in and receivables
from Olympus and related parties:
March 31,
-------------------------
1995 1996
----------- -----------
Investment in Olympus ............................ $ (48,688) $ (93,563)
Amounts due from Olympus ......................... 60,631 59,907
Amounts due from other related parties - net ..... 49,691 64,550
----------- -----------
$ 61,634 $ 30,894
=========== ===========
Amounts due from other related parties - net represent advances to
(from) Managed Partnerships (see Note 9), the Rigas family (principal
shareholders and officers of Adelphia) and Rigas family controlled entities. No
related party advances are collateralized.
On February 28, 1995, ACP Holdings, Inc., a wholly-owned subsidiary
of Adelphia, and the managing general partner of Olympus, certain shareholders
of Adelphia, Olympus and various Telesat Entities ("Telesat"), wholly-owned
subsidiaries of FPL 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 Adelphia for
intercompany advances, preferred limited partner ("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. At March 31, 1994, 1995 and 1996,
Adelphia owned $276,101, $225,000 and $222,860 in Olympus PLP Interests,
respectively.
On March 28, 1996, ACP, Telesat, Olympus, Adelphia and certain
shareholders of Adelphia entered into an agreement which amended certain aspects
of the Olympus Partnership Agreement. The amendment provides for the repayment
of certain amounts owed to Telesat totaling $20,000, the release of certain
obligations of Telesat to Olympus and the reduction of Telesat's PLP and accrued
priority return balances by $20,000. The amendment further provides for a
$40,000 distribution to Adelphia as a reduction of its PLP interests and accrued
priority return. These repayments and distributions were made on March 29, 1996
and were funded through internally generated funds and advances from an
affiliate.
On March 31, 1994, Adelphia 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 Adelphia. The
$15,400 excess of the purchase price over Olympus' book value has been recorded
by Adelphia as an additional investment in Olympus.
The major components of the financial position of Olympus as of March
31, 1995 and 1996, and December 31, 1994 and 1995, and the results of operations
for the three months ended March 31, 1995 and 1996, and the years ended December
31, 1994 and 1995 were as follows:
March 31, December 31,
------------------------------ ------------------------------
1995 1996 1994 1995
----------- ----------- ---------- ------------
(Unaudited)
Balance Sheet Data
Property, plant and equipment - net $ 181,705 $ 221,381 $ 154,298 $ 203,129
Total assets 425,813 625,243 375,985 533,909
Notes payable to banks 298,309 514,500 314,010 419,000
Total liabilities 411,299 706,239 588,104 552,453
Redeemable limited and PLP Interests -- -- 281,986 --
Limited partners' interests 337,500 334,290 -- 396,630
General partners' equity
(deficiency) (342,991) (435,291) (494,105) (415,174)
Income Statement Data
Revenues $ 23,920 $ 39,088 $ 94,458 $ 120,968
Operating income 3,449 8,265 10,376 21,275
Net loss (5,497) (2,845) (21,025) (19,391)
Net loss of general partners after
priority return and accretion requirements (22,224) (20,067) (83,833) (82,749)
On October 6, 1993, Adelphia purchased the preferred Class B Limited
Partnership Interest in Syracuse Hilton Head Holdings, L.P. ("SHHH"), a Managed
Partnership, 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 Adelphia. 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 $2,654 and $2,645 and is included in
revenues for the years ended March 31, 1995 and 1996, 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 Adelphia authorized
Adelphia to make loans in the future to the Managed Partnerships up to an amount
of $50,000. During the year ended March 31, 1994, Adelphia 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, Adelphia 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 Company of Delaware.
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,
------------------------
1995 1996
----------- -----------
Credit agreements with banks payable through 2003
(weighted average interestrate 8.16% and 7.51%
at March 31, 1995 and 1996, respectively) ............ $ 584,250 $ 758,975
10.66% Senior Secured Notes due 1996 through 1999 .... 250,000 245,000
9.95% Senior Secured Notes due through 1997 .......... 9,600 3,200
10.80% Senior Secured Notes due 1996 through 2000 .... 45,000 36,000
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 72,000 56,000
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
---------- ----------
$1,086,350 $1,224,675
========== ==========
The amount of borrowings available to Adelphia under its revolving
credit agreements is generally based upon the subsidiaries achieving certain
levels of operating performance. Adelphia had commitments from banks for
additional borrowings of up to $301,000 at March 31, 1996 (including the effects
of the refinancing and the acquisition of cable operations discussed in Note 11)
which expire through 2003. Adelphia 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, 1996
approximately $219,000 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, 1996. 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 Adelphia: 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,
1995 and 1996, the weighted average interest rate on notes payable to banks and
institutions was 9.33% and 8.36%, respectively. The rates on 36% of Adelphia'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.
12 1/2% Senior Notes due 2002
On May 14, 1992, Adelphia 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 Adelphia, investments in affiliates and certain
other affiliate transactions. The notes further require that Adelphia 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. Adelphia 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, Adelphia 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.
11 7/8% Senior Debentures due 2004
On September 10, 1992, Adelphia 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. Adelphia 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, Adelphia 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, Adelphia 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 Adelphia 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. Adelphia 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, Adelphia 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, 1996 are as follows:
1997 $ 127,906
1998 177,475
1999 162,791
2000 82,483
2001 157,381
The maturities of debt listed above have been adjusted to reflect
changed maturity dates resulting from repayment of certain debt during April
1996 from borrowings under a new credit facility (see Note 11). 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 Adelphia will
refinance its debt in the future.
Interest Rate Swaps and Caps
Adelphia has entered into interest rate swap agreements and interest
rate cap agreements with banks, Olympus and Managed Entities to reduce the
impact of changes in interest rates on its debt. Several of Adelphia's credit
arrangements include provisions which require interest rate protection for a
portion of its debt. Adelphia enters into pay-fixed agreements to effectively
convert a portion of its variable-rate debt to fixed-rate debt to reduce the
risk of incurring higher interest costs due to rising interest rates. Adelphia
enters into receive-fixed agreements to effectively convert a portion of its
fixed-rate debt to a variable-rate debt which is indexed to LIBOR rates to
reduce the risk of incurring higher interest costs in periods of falling
interest rates. Interest rate cap agreements are used to reduce the impact of
increases in interest rates on variable rate debt. Adelphia is exposed to credit
loss in the event of nonperformance by the banks, by Olympus or by the Managed
Entities. Adelphia does not expect any such nonperformance. The following table
summarizes the notional amounts outstanding and weighted average interest rate
data, based on variable rates in effect at March 31, 1995 and 1996, for all
swaps and caps which expire 1996 through 1998.
March 31,
------------------------
1995 1996
--------- ---------
Pay Fixed Swaps
Notional amount $396,000 $416,000
Average receive rate 6.19% 5.68%
Average pay rate 7.50% 7.94%
Receive Fixed Swaps
Notional amount $406,000 $108,500
Average receive rate 6.77% 6.66%
Average pay rate 6.30% 5.74%
Interest Rate Caps
Notional amount - $ 50,000
Average cap rate - 9.00%
During fiscal 1996, Adelphia received $11,526 upon termination of
several interest rate swap agreements having a stated notional principal amount
of $270,000. The amount received will be amortized as a reduction of interest
expense through November 1998. At March 31, 1996, the unamortized balance is
$10,027. Also during fiscal 1996, the Company received $4,900 and assumed the
obligations as a counterparty under certain interest rate swap agreements with
Olympus. These interest rate swap agreements have a notional principal amount of
$140,000 and expire through November 1998.
4. Commitments and Contingencies:
Adelphia 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 $3,988, $4,356 and $4,687 for the
years ended March 31, 1994, 1995 and 1996, respectively.
In connection with certain obligations under franchise agreements,
Adelphia obtains surety bonds guaranteeing performance to municipalities and
public utilities. Payment is required only in the event of nonperformance.
Adelphia has fulfilled all of its obligations such that no payments under surety
bonds have been required.
As of July 1, 1993, Adelphia adopted a program to self insure for
casualty and business interruption insurance. This program is part of an
agreement between Adelphia and each of its subsidiaries in which Adelphia will
provide insurance for casualty and business interruption claims of up to $10,000
and $20,000 per claim, respectively, for each subsidiary of Adelphia. These
risks were previously insured by outside parties.
On June 12, 1995, Adelphia announced the signing of a definitive
agreement for the purchase of all of the cable systems of First Carolina Cable
TV, L.P. These systems together serve approximately 34,000 subscribers located
in Vermont and are being purchased for an aggregate price of $48,500. The
acquisition, which will be accounted for under the purchase method of
accounting, is expected to close in the second quarter of fiscal 1997.
The cable television industry and Adelphia are subject to extensive
regulation at the federal, state and local levels. Pursuant to the 1992 Cable
Act, which significantly expanded the scope of regulation of certain subscriber
rates and a number of other matters in the cable industry the FCC has adopted
rate regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology, and (ii) associated equipment and installation services based upon
cost plus a reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The
original rate regulations became effective on September 1, 1993. Several
amendments to the rate regulations have subsequently been added.
The FCC has adopted regulations implementing 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. The Telecommunications Act of 1996
(the "1996 Act") deregulates the rates for cable programming services on March
31, 1999. Adelphia cannot predict the effect of the 1996 Act on future
rulemaking proceedings or changes to the rate regulations.
Effective September 1, 1993, as a result of the 1992 Cable Act,
Adelphia repackaged certain existing cable services by adjusting rates for basic
service and introducing a new method of offering certain cable services.
Adelphia 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. Adelphia also
implemented a program in all of its systems called "CableSelect" under which
most of Adelphia'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, Adelphia 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
Adelphia. Adelphia believes CableSelect provides increased programming choices
to its subscribers while providing flexibility to Adelphia 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 FCC released amended rules under which,
on a prospective basis, any a la carte package will be treated as a regulated
tier, except for packages involving premium services. Also, 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. Adelphia has
appealed this decision to the full Commission which affirmed the Cable Service
Bureau's decision. Adelphia has sought reconsideration of the decision.
Certain other cable television companies that utilized a la carte
packages have recently reached settlement/resolution with the FCC on this issue.
Adelphia believes that in view of this experience with other operators,
resolution of these differences is possible, consistent with the terms and
conditions of those earlier resolutions. Accordingly, results of operations for
the fiscal year ended March 31, 1996 include a $5,300 charge representing
management's estimate of the total costs associated with the resolution of this
matter. Such costs include, (i) an estimate of credits to be extended to
customers in future periods of up to $2,700, (ii) legal and other costs incurred
during the fiscal year ended March 31, 1996, and (iii) an estimate of legal and
other costs to be incurred associated with the ultimate resolution of this
matter. At March 31, 1996, $3,800 of the charge to earnings remained as an
estimate of future costs to be incurred to resolve this matter. While Adelphia
cannot predict the ultimate outcome or effect of this matter, management of
Adelphia does not expect the ultimate outcome of this matter to have a material
adverse effect on Adelphia's financial position and results of operations. 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. 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.
5. Stockholders' Equity (Deficiency):
Adelphia has no convertible securities or other common stock
equivalent securities outstanding.
Public Offering of Class A Common Stock on January 14, 1994
On January 14, 1994, Adelphia 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 Adelphia, purchased the other 5,832,604 shares at the public offering price
less the underwriting discount. Net proceeds to Adelphia after offering expenses
aggregated $155,963.
Stock Issued During Fiscal 1995
On January 10, 1995, Adelphia 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 FPL Group, Inc. for
$15.00 per share.
Stock Issued During Fiscal 1996
On April 3, 1995, Olympus purchased from Adelphia, through a charge
to its receivable balance with Adelphia, 457,300 shares of Adelphia Class A
Common Stock for $5,000. Olympus used the stock in the acquisition of the cable
and security systems of WB Cable Associates, Ltd.
Preferred Stock
The Certificate of Incorporation of Adelphia authorizes 5,000,000
shares of Preferred Stock, $.01 par value. None have been issued.
Common Stock
The Certificate of Incorporation of Adelphia 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 Adelphia'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 Adelphia, 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
Adelphia 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
Adelphia has a stock option plan, which provides for the granting of
options to purchase up to 200,000 shares of Adelphia'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:
Adelphia has a savings plan (401(k)) which provides that eligible
full-time employees may contribute from 2% to 20% of their pre-tax compensation
subject to certain limitations. Adelphia makes matching contributions not
exceeding 1.5% of each participant's pre-tax compensation. Adelphia's matching
contributions amounted to $305, $343 and $350 for the years ended March 31,
1994, 1995 and 1996, respectively.
7. Taxes on Income:
Adelphia 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, 1996, Adelphia had net operating
loss carryforwards for federal income tax purposes of approximately $1.1 billion
expiring through 2011. 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.
Adelphia adopted Statement of Financial Accounting Standards ("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
Adelphia 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 Adelphia's net
deferred tax liability are as follows:
April 1, March 31,
--------- -----------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
Deferred tax liabilities:
Differences between book and
tax basis of property, plant
and equipment and intangible
assets ..................... $ 192,444 $ 210,816 $ 232,639 $ 234,312
Other ...................... 8,401 9,703 11,783 --
--------- --------- --------- ---------
Subtotal ................... 200,845 220,519 244,422 234,312
--------- --------- --------- ---------
Deferred tax assets:
Reserves not currently
deductible ................. 687 15,576 12,326 14,467
Operating loss carryforwards 307,001 337,924 381,377 415,121
--------- --------- --------- ---------
307,688 353,500 393,703 429,588
Valuation allowance ........ (196,503) (224,702) (259,420) (301,485)
--------- --------- --------- ---------
Subtotal ................... 111,185 128,798 134,283 128,103
--------- --------- --------- ---------
Net deferred tax liability . $ 89,660 $ 91,721 $ 110,139 $ 106,209
========= ========= ========= =========
The net change in the valuation allowance for the years ended
March 31, 1995 and 1996 was an increase of $34,718 and $42,065, respectively.
Income tax (expense) benefit for the years ended March 31, 1994, 1995
and 1996 is as follows:
Year Ended March 31,
-------------------------------
1994 1995 1996
-------- -------- --------
Current ...................................... $ (681) $ (500) $ (1,144)
Deferred ..................................... (2,061) 5,975 3,930
-------- -------- --------
Total ........................................ $ (2,742) $ 5,475 $ 2,786
======== ======== ========
A reconciliation of the statutory federal income tax rate and
Adelphia's effective income tax rate is as follows:
Year Ended March 31,
-------------------------------
1994 1995 1996
-------- -------- --------
Statutory federal income tax rate ............ 35% 35% 35%
Change in valuation allowance ................ (30%) (31%) (37%)
State taxes, net of federal benefit .......... (2%) 4% (1%)
Other ........................................ (6%) (3%) 5%
-------- -------- --------
Effective income tax (expense) benefit rate .. (3%) 5% 2%
======== ======== ========
8. Disclosures about Fair Value of Financial Instruments:
Included in Adelphia's financial instrument portfolio are cash, notes
payable, debentures and interest rate swaps and caps. The carrying values of
notes payable approximate their fair values at March 31, 1995 and 1996. The
carrying cost of the public notes and debentures at March 31, 1995 and 1996 of
$915,845 and $932,135, respectively, exceeded their fair value by $95,628 and
$1,420, respectively. At March 31, 1995 and 1996, Adelphia would have been
required to pay approximately $6,929 and $14,225, respectively, to settle its
interest rate swap and cap agreements, representing the excess of carrying cost
over fair value of these agreements. The fair values of the debt and interest
rate swaps and caps were based upon quoted market prices of similar instruments
or on rates available to Adelphia for instruments of the same remaining
maturities.
9. Related Party Transactions:
Adelphia currently manages cable television systems which are
principally owned by Olympus and limited partnerships in which certain of
Adelphia's principal shareholders who are executive officers have equity
interests (the "Managed Partnerships").
Adelphia has agreements with Olympus and the Managed Partnerships
which provide for the payment of fees to Adelphia. The aggregate fee revenues
from Olympus and the Managed Partnerships amounted to $2,946, $7,293 and $2,700
for the years ended March 31, 1994, 1995 and 1996, respectively. In addition,
Adelphia was reimbursed by Olympus and Managed Partnerships for allocated
corporate costs of $4,021, $4,521 and $7,517 for the years ended March 31, 1994,
1995 and 1996, respectively, which have been recorded as a reduction of selling,
general and administrative expense.
Adelphia 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 $933 and $451 at March 31, 1995
and 1996, respectively. Adelphia also leases from this partnership certain
buildings under operating leases. Rent expense under these operating leases
aggregated $391, $97 and $127 for the years ended March 31, 1994, 1995 and 1996,
respectively.
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 Adelphia's interest expense by $1,920 and
$173 for the years ended March 31, 1994 and 1995, respectively, and increased
interest expense by $826 for the year ended March 31, 1996.
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 certain partnerships owned by
principal shareholders who are executive officers for a total of $14,312. The
purchase of the assets resulted in a reduction of amounts due Adelphia of
$28,312. Since these asset purchases are transactions among entities under
common control, they have been recorded by Adelphia 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
Adelphia's additional paid-in capital.
10. Quarterly Financial Data (Unaudited):
The following tables summarize the financial results of Adelphia for each of
the quarters in the years ended March 31, 1995 and 1996:
Three Months Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
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
------------ ------------ ------------ ------------
Other income (expense):
Interest income from affiliates ............................ 2,369 2,386 2,912 3,445
Other income ............................................... 593 270 76 514
Priority investment income from Olympus..................... 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 (expense) benefit ............................... (1,223) 1,119 (1,214) 6,793
------------ ------------ ------------ ------------
Net loss ................................................... $ (29,291) $ (24,267) $ (28,422) $ (24,304)
============ ============ ============ ============
Net loss per weighed average share
of common stock ............................................ $ (1.20) $ (0.99) $ (1.16) $ (0.97)
============ ============ ============ ============
Weighted average shares of common
outstanding (in thousands) ................................. 24,452 24,452 24,452 25,175
============ ============ ============ ============
Three Months Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
Year ended March 31, 1996:
Revenues ................................................... $ 96,921 $ 97,082 $ 102,457 $ 107,137
------------ ------------ ------------ ------------
Operating expenses:
Direct operating and programming ........................... 28,522 29,630 32,066 33,898
Selling, general and administrative ........................ 16,870 17,110 16,981 17,396
Depreciation and amortization .............................. 27,624 26,165 25,679 31,563
Rate regulation ............................................ -- -- -- 5,300
------------ ------------ ------------ ------------
Total ...................................................... 73,016 72,905 74,726 88,157
------------ ------------ ------------ ------------
Operating income ........................................... 23,905 24,177 27,731 18,980
------------ ------------ ------------ ------------
Other income (expense):
Interest income from affiliates ............................ 3,410 3,378 2,087 1,748
Other income ............................................... -- -- -- --
Priority investment income from
Olympus .................................................... 5,575 6,575 6,575 10,127
Interest expense ........................................... (53,124) (52,754) (53,281) (51,532)
Equity in loss of joint ventures ........................... (11,054) (9,629) (10,636) (14,938)
------------ ------------ ------------ ------------
Total ...................................................... (55,193) (52,430) (55,255) (54,595)
------------ ------------ ------------ ------------
Loss before income taxes ................................... (31,288) (28,253) (27,524) (35,615)
Income tax benefit ......................................... 1,044 195 1,127 420
------------ ------------ ------------ ------------
Net loss ................................................... $ (30,244) $ (28,058) $ (26,397) $ (35,195)
============ ============ ============ ============
Net loss per weighed average share
of common stock ............................................ $ (1.15) $ (1.07) $ (1.00) $ (1.34)
============ ============ ============ ============
Weighted average shares of common
outstanding (in thousands) ................................. 26,294 26,308 26,308 26,308
============ ============ ============ ============
11. Subsequent Events:
As of March 31, 1996, certain subsidiaries of the Company
(collectively, the "Borrowers") had commitments for a $690,000 financing
arrangement consisting of a $540,000 revolving credit facility maturing December
31, 2003 and a $150,000 term loan facility maturing December 31, 2004. Initial
borrowings during April 1996 of $483,000 were used primarily to repay existing
indebtedness. Interest rates charged are based upon one or more of the following
rates at the option of the Borrowers: Eurodollar rate or the greater of the
prime rate and the Federal funds rate plus 1/2 of 1% plus a margin of from 0% to
2% depending upon the Company's senior funded debt ratio. Interest on
outstanding borrowings is generally payable on a quarterly basis. The maximum
available under the revolving credit facility is reduced, in increasing
quarterly amounts, beginning June 30, 1998 through December 31, 2003. The
Borrowers pay a commitment fee of either .375% or .250% per annum (depending
upon the Company's senior funded debt ratio) of the unused revolving credit
facility commitments during the term of the agreement. Borrowings under the term
loan facility are payable in installments, in increasing quarterly amounts,
commencing June 30, 1998 and ending on December 31, 2004 .
On April 1, 1996, Adelphia purchased the cable television
operations of Cable TV Fund 11-B, Ltd. from Jones Intercable. This CATV system
was acquired for $84,000 and serves approximately 39,700 subscribers in the New
York counties of Erie and Niagara. The acquisition will be accounted for under
the purchase method of accounting.
On April 15, 1996, Hyperion, the Company's 89% owned competitive
local exchange telecommunication services subsidiary, completed a private
placement to institutional investors and realized gross proceeds of $175,265
upon issuance of $329,000 aggregate principal amount at maturity of 13% Senior
Discount Notes and warrants to purchase an aggregate of 613,427 common shares of
Hyperion. The notes will not require payment of interest until October 15, 2001,
and may not be redeemed prior to April 15, 2001. Hyperion is using the net
proceeds from the offering to expand its existing markets, to complete
construction of new networks, to enter additional markets, to repay certain
indebtedness owed to Adelphia, and for working capital purposes.
-----------------------------------------------------
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, 1994 and 1995, and the
related consolidated statements of operations, partners' equity (deficiency),
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the 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, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, effective
January 1, 1993, the Partnership changed its method of accounting for income
taxes.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 29, 1996
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-----------------------
ASSETS: 1994 1995
---------- ----------
Cable systems, at cost, net of accumulated
depreciation and amortization:
Property, plant and equipment ........................ $ 154,298 $ 203,129
Intangible assets .................................... 210,928 280,873
---------- ----------
Total ................................................ 365,226 484,002
Cash and cash equivalents ............................ 425 32,677
Subscriber receivables - net ......................... 5,419 7,838
Prepaid expenses and other assets - net .............. 3,784 9,392
Investment in Northeast Cable, Inc. .................. 1,131 --
---------- ----------
Total ................................................ $ 375,985 $ 533,909
========== ==========
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY):
Notes payable to banks ............................... $ 314,010 $ 419,000
Other debt ........................................... 59 809
Accounts payable ..................................... 9,984 14,261
Subscriber advance payments and deposits ............. 2,717 3,957
Accrued interest and other liabilities ............... 10,219 12,992
Accrued priority return on preferred limited
partner interests .................................... 135,553 19,269
Due to affiliates - net .............................. 75,861 38,613
Deferred income taxes ................................ 39,701 43,552
---------- ----------
Total liabilities .................................... 588,104 552,453
Commitments and contingencies (Note 6)
16.5% redeemable preferred limited partner interests . 276,101 --
Redeemable limited partner interests ................. 5,885 --
Partners' equity (deficiency):
Limited partners' interests .......................... -- 396,630
General partners' equity (deficiency) ................ (494,105) (415,174)
---------- ----------
Total partners' equity (deficiency) .................. (494,105) (18,544)
---------- ----------
Total ................................................ $ 375,985 $ 533,909
========== ==========
See notes to consolidated finacial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------
1993 1994 1995
------------ ------------ ------------
Revenues ........................................................ $ 89,099 $ 93,421 $ 120,968
Business interruption revenue ................................... 9,547 1,037 --
------------ ------------ ------------
Total ........................................................... 98,646 94,458 120,968
------------ ------------ ------------
Operating expenses:
Direct operating and programming ................................ 22,078 22,369 37,494
Selling, general and administrative ............................. 16,692 18,708 23,912
Depreciation and amortization ................................... 37,240 36,703 31,953
Management fees to Managing Affiliate ........................... 4,681 6,302 6,334
------------ ------------ ------------
Total ........................................................... 80,691 84,082 99,693
------------ ------------ ------------
Operating income ................................................ 17,955 10,376 21,275
------------ ------------ ------------
Other income (expense):
Interest expense ................................................ (24,515) (22,889) (29,217)
Interest expense - affiliates ................................... (4,955) (9,373) (7,501)
Other income (expense) .......................................... 271 585 (15)
------------ ------------ ------------
(29,199) (31,677) (36,733)
------------ ------------ ------------
Loss before income taxes, extraordinary loss and
cumulative effect of change in accounting principle ............. (11,244) (21,301) (15,458)
Income tax benefit (expense) .................................... -- 276 (2,824)
------------ ------------ ------------
Loss before extraordinary loss and cumulative effect
of change in accounting principle ............................... (11,244) (21,025) (18,282)
Extraordinary loss on early retirement of debt (net
of income tax benefit of $486) .................................. -- -- (1,109)
Cumulative effect of change in accounting
for income taxes ................................................ (59,500) -- --
------------ ------------ ------------
Net loss ........................................................ (70,744) (21,025) (19,391)
Priority return on preferred and senior limited
partner interests ............................................... (57,436) (61,923) (63,358)
Net loss allocated to redeemable limited partners ............... 9,720 5,000 --
Accretion requirement of redeemable limited partners ............ (5,000) (5,885) --
------------ ------------ ------------
Net loss of general and limited partners after
priority return and accretion requirements ...................... $ (123,460) $ (83,833) $ (82,749)
============ ============ ============
Loss per general and limited partners' unit before extraordinary
loss and cumulative effect of change in accounting principle and
after priority return and accretion requirements ................ (6,396) (8,383) (8,164)
Extraordinary loss per general and limited partners'
unit on early retirement of debt ................................ -- -- (111)
Cumulative effect per general and limited partners'
unit of change in accounting for income taxes ................... (5,950) -- --
------------ ------------ ------------
Net loss per general and limited partners' unit after
priority return and accretion requirements ...................... $ (12,346) $ (8,383) $ (8,275)
============ ============ ============
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
(Dollars in thousands)
Total
Limited General Partners' Equity
Partners Partners (Deficiency)
-------- --------- ---------
Balance, December 31, 1992 ............................. $ -- $(322,055) $(322,055)
Conversion of general partnership interests to preferred
limited partnership interests .......................... -- (6,500) (6,500)
Net loss of general partner after priority return and
accretion requirements ................................. -- (123,460) (123,460)
Capital distribution ................................... -- (100) (100)
-------- --------- ---------
Balance, December 31, 1993 ............................. -- (452,115) (452,115)
Excess of sale price over carrying value of assets sold
to affiliates .......................................... -- 41,943 41,943
Net loss of general partner after priority return and
accretion requirements ................................. -- (83,833) (83,833)
Capital distribution ................................... -- (100) (100)
-------- --------- ---------
Balance, December 31, 1994 ............................. -- (494,105) (494,105)
Intercompany advances converted to general partners'
equity (deficiency) .................................... -- 49,974 49,974
Redeemable preferred limited partner interests converted
to general partners' equity (deficiency) ............... -- 51,101 51,101
Accrued priority return converted to general partners'
equity (deficiency) .................................... -- 142,300 142,300
Excess of obligation for redeemable limited partner
interest over carrying value of investment exchanged
to satisfy such obligation ............................. -- 4,754 4,754
Excess of ascribed value over historical cost of assets
contributed by Telesat ................................. -- (86,349) (86,349)
Issuance of preferred limited partner interests ........ 376,625 -- 376,625
Issuance of limited and senior limited partner interests 20,005 -- 20,005
Net loss of general and limited partners after priority
return ................................................. -- (82,749) (82,749)
Capital distribution ................................... -- (100) (100)
-------- --------- ---------
Balance, December 31, 1995 ............................. $396,630 $(415,174) $ (18,544)
======== ========= =========
See notes to consolidated financial statements.
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
------------------------------------------
1993 1994 1995
------------ ------------ ------------
Cash flows from operating activities:
Net loss ............................................................. $ (70,744) $ (21,025) $ (19,391)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation ......................................................... 17,229 19,132 22,593
Amortization ......................................................... 20,011 17,571 9,360
Cumulative effect of change in accounting for
income taxes ......................................................... 59,500 -- --
Extraordinary loss on debt retirement (net of
income tax benefit) .................................................. -- -- 1,109
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Subscriber receivables ............................................... (890) 398 (1,026)
Prepaid expenses and other assets .................................... (251) (2,722) (2,505)
Accounts payable ..................................................... (1,585) 4,590 2,729
Subscriber advance payments and deposits ............................. (884) 368 581
Accrued interest and other liabilities ............................... (494) 3,333 (8,113)
Deferred business interruption proceeds .............................. (5,240) (1,037) --
Deferred taxes ....................................................... -- (323) 2,824
------------ ------------ ------------
Net cash provided by operating activities ............................ 16,652 20,285 8,161
------------ ------------ ------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired .......................... -- -- (85,853)
Expenditures for property, plant and equipment ....................... (23,164) (23,916) (21,498)
Proceeds from sale of assets to affiliates ........................... -- 43,318 --
Purchase of limited partner equity interests ......................... (9,795) -- --
------------ ------------ ------------
Net cash (used for) provided by investing activities ................. (32,959) 19,402 (107,351)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from debt ................................................... 13,000 -- 438,000
Repayments of debt ................................................... (7,165) (11,871) (336,094)
Costs associated with debt financing ................................. -- -- (4,872)
Payments of priority return .......................................... (22,300) (22,300) (37,341)
Amounts advanced from (to) affiliates ................................ 37,193 (16,362) 32,724
Issuance of preferred limited partner interests ...................... -- -- 39,125
Capital distributions ................................................ (100) (100) (100)
------------ ------------ ------------
Net cash provided by (used for) financing activities ................. 20,628 (50,633) 131,442
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ..................... 4,321 (10,946) 32,252
Cash and cash equivalents, beginning of year ......................... 7,050 11,371 425
------------ ------------ ------------
Cash and cash equivalents, end of year ............................... $ 11,371 $ 425 $ 32,677
============ ============ ============
Supplemental disclosure of cash flow activity -
Cash payments for interest ........................................... $ 30,117 $ 31,377 $ 38,057
============ ============ ============
See notes to consolidated financial statements.
===============================================================================
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
-94-
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 held by Adelphia Communications Corporation
("Adelphia"). As described below, effective February 28,1995 the remaining 50%
of the voting interest is held by various Telesat entities ("Telesat") which are
wholly-owned subsidiaries of FPL Group, Inc. ("FPL"). Olympus' operations
consist primarily of selling video programming which is distributed to
subscribers in Florida for a monthly fee through a network of fiber optic and
coaxial cables.
The consolidated financial statements include the accounts of Olympus and its
substantially wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
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 Olympus' existing amount payable to
Adelphia. No gain or loss was recognized on this transaction. The consolidated
statements of operations and cash flows for Olympus include the operations of
Northeast for the year ended December 31, 1993 and 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.
("ACP", a wholly owned subsidiary of Adelphia and managing general partner of
Olympus) Olympus, Telesat and certain shareholders of Adelphia entered into an
investment agreement (the "Telesat 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 of $5, Senior
Limited Partner ("SLP") interests of $20,000 and $112,500 of newly issued 16.5%
preferred limited partner ("PLP") interests. On March 28, 1996, ACP, Telesat,
Olympus, Adelphia and certain shareholders of Adelphia entered into an agreement
which amended certain aspects of the Telesat Investment Agreement (see Note 11).
Prior to the Telesat Investment Agreement, Olympus had obligations to Adelphia
for intercompany advances, redeemable PLP interests, and accrued priority return
on redeemable PLP interests. In conjunction with the Telesat Investment
Agreement, Adelphia contributed $49,974 of the intercompany advances, $51,101 of
the existing redeemable PLP interests and all of the then existing accrued
priority return on the redeemable PLP interests to general partners' equity
(deficiency). Adelphia then exchanged its remaining redeemable PLP interests for
$225,000 of new PLP interests. Also, Senior Debt (as defined in the Telesat
Investment Agreement) owed by Olympus to Adelphia of $40,000 remained
outstanding after consummation of the Telesat Investment Agreement.
On April 3, 1995, Olympus purchased all of the cable and security systems of WB
Cable Associates, Ltd., ("WB Cable") serving approximately 44,000 cable and
security monitoring 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. The acquisition, which was accounted
for under the purchase method of accounting, was financed principally through
additional borrowings under an Olympus subsidiaries' credit agreement (see Note
4).
The following unaudited financial information assumes that all of the above
described transactions had occurred at the beginning of each of the years ended
December 31, 1994 and 1995.
Year Ended December 31,
1994 1995
Revenues $117,401 $131,500
Loss before extraordinary loss and priority return
on preferred and senior limited partner interests (26,757) (17,272)
Net loss of general and limited partners after
priority return (82,445) (82,620)
Net loss per general and limited partners' unit
after priority return (8,245) (8,262)
2. Summary of Significant Accounting Policies:
Subscriber Revenues
Subscriber revenues are recorded in the month the service is provided.
Subscriber Receivables
An allowance for doubtful accounts of $1,660 and $411 is recorded as a reduction
of subscriber receivables at December 31, 1994 and 1995, respectively. The
decrease in the allowance for doubtful accounts as of December 31, 1995 resulted
from a change in procedure for writing off doubtful accounts. This change had no
effect on bad debt expense.
Programming Expense
Adelphia allocates charges from programmers to affiliates based on the number of
subscribers to each programming service. Adelphia charges programming expense to
affiliates (including Olympus) based on the number of subscribers to each
programming service. In 1993 and 1994, Adelphia charged programming expense to
affiliates (including Olympus) based on cost reductions under programming
contracts from incremental subscribers, as well as the number of subscribers to
each programming service, the effect of which was to reduce programming expense
by $2,888 and $3,250, respectively.
Property, Plant and Equipment
Property, plant and equipment are comprised of the following:
December 31,
---------------------------
1994 1995
------------ ------------
Operating plant and equipment .....$ 201,921 $ 272,968
Real estate and improvements ...... 3,690 4,564
Support equipment ................. 3,513 5,102
Construction in progress .......... 14,302 12,026
------------ ------------
223,426 294,660
Accumulated depreciation .......... (69,128) (91,531)
------------ ------------
$ 154,298 $ 203,129
============ ============
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 $391 and $346 for 1994 and
1995, respectively.
Intangible Assets
Intangible assets, net of accumulated amortization, are comprised of the
following:
December 31,
---------------------------
1994 1995
------------ ------------
Purchased franchises ..............$ 206,441 $ 254,186
Goodwill .......................... 4,429 13,661
Non-compete agreements ............ 33 75
Purchased subscriber lists ........ 25 12,951
------------ ------------
$ 210,928 $ 280,873
============ ============
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 that the listed subscribers are expected to receive service
from the date of acquisition, which range from 7 to 10 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 $76,642 and
$78,940 at December 31, 1994 and 1995, 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 $1,457
and $4,964 at December 31, 1994 and 1995, respectively.
Asset Impairments
Olympus periodically reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of assets may not be recoverable. Measurement of any impairment
would include a comparison of estimated future operating cash flows anticipated
to be generated during the remaining life of the assets with their net carrying
value. An impairment loss would be recognized as the amount by which the
carrying value of the assets exceeds their fair value.
Noncash Financing and Investing Activities
Capital leases entered into during 1995 totaled $341. There were no material
capital leases entered into during 1993 or 1994. Reference is made to Notes 1
and 5 for descriptions of additional noncash financing and investing activities.
Net Loss Per General and Limited Partner Unit After Priority Return
Net loss per general and limited partner unit after priority return and
accretion requirements is based upon the weighted average number of general and
limited partner units outstanding of 10.0 for 1993, 1994 and 1995.
Cash and Cash Equivalents
Olympus considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Derivative Financial Instruments
Net settlement amounts under interest rate swap agreements are recorded as
adjustments to interest expense during the period incurred (see Note 4).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 $20,225 and $4,305 in the years ended
December 31, 1992 and 1993, respectively. There were no net proceeds received in
1994 or 1995. Allocation of the business interruption proceeds between years was
based upon estimated revenues lost as a result of the hurricane.
4. Debt:
Notes Payable to Banks
Notes payable to banks of Olympus' subsidiaries is comprised of amounts drawn
under credit agreements with banks, which totaled $314,010 and $419,000 at
December 31, 1994 and 1995, respectively.
At December 31, 1994, notes payable to banks were comprised of borrowings under
a $350,000 credit agreement between an Olympus subsidiary and several banks,
which was refinanced on May 12, 1995. Interest rates charged for the bank debt
were 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 to the banks,
including the effect of interest rate hedging arrangements, was 8.90% at
December 31, 1994. Interest on outstanding borrowings was generally payable on a
quarterly basis.
On May 12, 1995, certain Olympus subsidiaries (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% or Eurodollar rate plus .625% to 1.75%. The
weighted average interest rate on notes payable to the banks, including the
effect of interest rate hedging arrangements, was 7.11% at December 31, 1995.
Interest on outstanding borrowings is generally payable on a quarterly basis.
Initial borrowings under the revolving credit facility were used to repay the
Borrowers' existing notes payable to banks and accrued interest. An
extraordinary loss on early retirement of debt of $1,109, net of income tax
benefit of $486, was recognized for the year ended December 31, 1995 which
represents the unamortized deferred financing costs related to such notes at the
date of refinancing.
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 permitted to be outstanding
under this revolving credit agreement at December 31 of each of the next five
years:
December 31, 1996 $ 475,000
December 31, 1997 446,500
December 31, 1998 394,250
December 31, 1999 337,250
December 31, 2000 270,750
Management intends to fund Olympus' debt maturities through borrowings under new
credit agreements and internally generated funds. Changing conditions in the
financial markets may have an impact on how Olympus will refinance its debt in
the future.
Olympus has entered into interest rate swap agreements and interest rate cap
agreements with banks and an affiliate (see Note 10) to reduce the impact of
changes in interest rates on its bank debt and its PLP interests. Olympus enters
into pay-fixed agreements to effectively convert a portion of its variable-rate
debt to fixed-rate debt. Olympus enters into receive-fixed agreements to
effectively convert a portion of its fixed-rate PLP interests to a variable-rate
which is indexed to LIBOR rates. Interest rate cap agreements are used to reduce
the impact of increases in interest rates on variable rate debt. Olympus is
exposed to credit loss in the event of nonperformance by the banks and the
affiliate. Olympus does not expect any such nonperformance. The following table
summarizes the notional amounts outstanding and weighted average interest rate
data for all swaps and caps which expire 1996 through 2000.
December 31,
1994 1995
Pay Fixed Swaps
Notional amount $115,000 $155,000
Average receive rate 6.07% 5.88%
Average pay rate 8.43% 6.76%
Receive Fixed Swaps
Notional amount $140,000 $140,000
Average receive ra 7.58% 7.58%
Average pay rate 6.06% 5.77%
Interest Rate Caps
Notional amount -- $75,000
Average cap rate -- 7.50%
Other Debt
Other debt consists of purchase money indebtedness and capital leases incurred
in connection with the acquisition of, and are collateralized by, certain
equipment. The interest rate on such debt is based on the Federal Funds rate
plus 1.4% and is adjusted monthly based on changes in the Federal Funds rate.
5. Limited Partners' Interests and General Partners' Equity (Deficiency):
16.5% Redeemable PLP Interests
The redeemable PLP Interests issued to Adelphia, totaling $276,101 at December
31, 1994, were nonvoting, senior to claims represented by other partner
interests and provided for a priority return of 16.5% per annum (payable
quarterly). In the event that any priority return was not paid when due, such
unpaid amounts accrued additional return at a rate of 18.5% per annum. As a
result of the February 28, 1995 Telesat Investment Agreement (see Note 1),
$225,000 of the redeemable PLP interests were converted to new PLP interests as
described below, and $51,101 of the redeemable PLP interests and $142,300 of the
unpaid priority return was converted to general partners' equity (deficiency).
Redeemable Limited Partner Interests
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 Note 1).
The following summarizes activity related to the redeemable limited partners for
the three years ended December 31, 1995:
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
Exchange of redeemable limited partner interests (5,885)
--------------
Balance, December 31, 1995 $ --
==============
Preferred, Senior, Limited and General Partnership Interests
On February 28, 1995, as a result of the Telesat Investment Agreement (as
described in Note 1), $337,500 of new Preferred Limited Partner interests,
$20,000 of Senior Limited Partner interests and $5 of Limited Partner interests
were issued to Adelphia and Telesat as summarized in the table below:
Adelphia Telesat Total
---------- ---------- ----------
16.5% Preferred Limited Partner Interests . $ 225,000 $ 112,500 $ 337,500
16.5% Senior Limited Partner Interests .... -- 20,000 20,000
General and Limited Partner Interests ..... -- 5 5
---------- ---------- ----------
Total ..................................... $ 225,000 $ 132,505 $ 357,505
========== ========== ==========
In addition, on various dates during the year ended December 31, 1995, a total
of $39,125 additional Preferred Limited Partner interests were issued for cash.
The Preferred Limited Partner interests are nonvoting, do not participate in the
profits and losses of the partnership and provide for a priority return of 16.5%
per annum (payable quarterly). In the event that any priority return is not paid
when due, such unpaid amounts accrue additional return at a rate of 16.5% per
annum.
The Senior Limited Partner interests held by Telesat are nonvoting, senior to
claims represented by all other partner interests and provide for a priority
return of 16.5% per annum (payable quarterly). In the event that any priority
return is not paid when due, such unpaid amounts accrue additional return at a
rate of 16.5% per annum.
Allocation of Profits, Losses and Distributions
Prior to February 28, 1995, the general partner and limited partners of Olympus
generally shared in 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 in effect
at the time. As specified in the partnership agreement, after the holders of the
PLP Interests received a return of their capital plus 16.5% per annum priority
return, distributions by Olympus were made in the following order: (i) to
partners holding voting units (other than Adelphia) until each partner received
an 18% compounded return on its investment; (ii) to Adelphia until it received
an 18% compounded return on its investment in the voting units; (iii) to
Adelphia as managing general partner, to the special limited partners and to the
partners holding voting units until each partner holding voting units received a
24% compounded return on its investment; and (iv) to Adelphia as managing
general partner, to the special limited partners and to the partners holding
voting units.
On and after February 28, 1995, profits and losses of Olympus for income tax
purposes will be allocated 99% to the limited partner of Olympus and 1% to the
managing general partner of Olympus until the aggregate profits allocated to the
limited partner equals the aggregate losses allocated to the limited partner, at
which time the managing general partner receives two-thirds, and the limited
partner of Olympus receives one-third of the net income and losses of Olympus.
As specified in the partnership agreement, allocations will be made in the
following order to the holders of the: (i) Senior Limited Partner Interests;
(ii) Special Limited Partner Interests, if any, and (iii) Preferred Limited
Partner Interests. Such allocations will equal a return of their capital plus
16.5% per annum priority return less any priority return previously paid. After
such allocations, distributions by Olympus will be made in the following order:
(i) 99% of any remaining amount will be distributed two-thirds to the managing
general partner and any partner holding voting units acquired directly or
indirectly from the managing partner, pro rata, and one-third to partners
holding the remaining voting units and; (2) thereafter pro rata to all partners
holding voting units. At December 31, 1995, 10 voting units were outstanding of
which five were held by ACP, the managing general partner; and five were held by
Telesat, the general and limited partners.
6. 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 $1,148, $1,036 and $1,379 for 1993, 1994 and 1995,
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
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.
The cable television industry and Olympus are subject to extensive regulation at
the federal, state and local levels. Pursuant to the 1992 Cable Act, which
significantly expanded the scope of regulation of certain subscriber rates and a
number of other matters in the cable industry, the FCC has adopted rate
regulations that establish, on a system-by-system basis, maximum allowable rates
for (i) basic and cable programming services (other than programming offered on
a per-channel or per-program basis), based upon a benchmark methodology, and
(ii) associated equipment and installation services based upon cost plus a
reasonable profit. Under the FCC rules, franchising authorities are authorized
to regulate rates for basic services and associated equipment and installation
services, and the FCC will regulate rates for regulated cable programming
services in response to complaints filed with the agency. The original rate
regulations became effective on September 1, 1993. Several amendments to the
rate regulations have subsequently been added.
The FCC 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. The Telecommunications Act of 1996
(the "1996 Act") deregulates the rates for cable programming services on March
31, 1999. Olympus cannot predict the effect of the 1996 Act on future rulemaking
proceedings or changes to the rate regulations.
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.
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 appealed this decision to the full Commission which affirmed the Cable
Services Bureau's decision. Olympus has sought reconsideration of this decision.
Olympus cannot predict the outcome or effect of this proceeding; however,
management of Olympus does not expect the ultimate outcome of this matter to
have a material adverse effect on Olympus' financial position and results of
operations.
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 has appealed this ruling to the U.S. Court of Appeals for the
District of Columbia Circuit. 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.
7. Employee Benefit Plans:
Olympus participates in an Adelphia savings plan (401(k)) which provides that
eligible full-time employees may contribute from 2% to 20% of their pre-tax
compensation subject to certain limitations. Olympus matches contributions not
exceeding 1.5% of each participant's pre-tax compensation. During 1993, 1994 and
1995, no significant matching contributions were made by Olympus.
8. Taxes on Income:
Wholly-owned subsidiaries of Olympus are corporations that file separate federal
and state income tax returns. At December 31, 1995, these subsidiaries had net
operating loss carryforwards for federal income tax purposes of approximately
$172,120 expiring through 2010.
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, 1994 and 1995 are as follows:
December 31,
-----------------------------
1994 1995
------------ ------------
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment and intangible assets .... $ 89,738 $ 93,740
------------ ------------
Deferred tax assets:
Operating loss carryforwards ................. 66,598 66,395
Other ........................................ 358 (51)
Valuation allowance .......................... (16,919) (16,156)
------------ ------------
Subtotal ..................................... 50,037 50,188
------------ ------------
Net deferred tax liability ................... $ 39,701 $ 43,552
============ ============
The net change in the valuation allowance in 1995 was a decrease of $763.
The provision for income taxes for years ended December 31, 1993, 1994 and 1995
is as follows:
Year Ended December 31,
------------------------------------
1993 1994 1995
--------- ----------- -----------
Federal:
Current .................................. $ -- $ -- $ --
Deferred ................................. -- 234 (2,184)
State:
Current .................................. -- -- --
Deferred ................................. -- 42 (640)
--------- ----------- -----------
$ -- $ 276 $ (2,824)
========= =========== ===========
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 1995
--------- ----------- -----------
Statutory federal income tax rate ........ (35 %) (35 %) (35 %)
Change in valuation allowance ............ 16 % 25 % (5 %)
Operating losses passed through to partners 19 % 9 % 54 %
State taxes, net of federal benefit ...... 0 % 0 % 4 %
--------- ----------- -----------
Effective income tax rate ................ 0 % (1 %) 18 %
========= =========== ===========
9. Disclosures about Fair Value of Financial Instruments:
Included in Olympus' financial instrument portfolio are cash, notes payable and
interest rate swaps and caps. The carrying values of the notes payable
approximate their fair values at December 31, 1995. 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. At December 31, 1995, Olympus would have received
approximately $3,034 to settle its interest rate swap and cap agreements,
representing the excess of fair value over carrying cost 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.
10. Transactions with Related Parties:
Olympus has an agreement with a subsidiary of Adelphia which provided for
payment of management fees by Olympus. The amount and payment of these fees is
subject to restrictions contained in the bank credit and partnership agreements.
Prior to January 1, 1995, Olympus also reimbursed Adelphia for direct operating
costs, which amounted to $600 and $1,477 for 1993 and 1994, respectively. During
the year ended December 31, 1995, Olympus paid Adelphia a fee totaling $646 in
connection with the acquisition of Leadership Cable. Olympus has an agreement to
lease certain fiber optic cable to an affiliate. Revenue generated from this
agreement amounted to $162 and $120 for 1994 and 1995, respectively.
Olympus has periodically received funds from and advanced funds to Adelphia and
other affiliates. Olympus was charged $4,955, $9,373 and $7,501 of interest on
such net payables for 1993, 1994 and 1995, respectively.
At December 31, 1995, Olympus has interest rate swaps with an affiliate for
notional amounts of $40,000 and $140,000 for Pay Fixed Swaps and Receive Fixed
Swaps, respectively. These swaps expire at various dates through 1998. The net
effect of these interest rate swaps was to increase interest expense by $651 in
1993 and $0 in 1994, and to decrease interest expense by $244 in 1995.
Olympus has agreements with affiliates to provide for the payment of management
fees to Olympus equal to a percentage of the affiliates' revenues. Such fees
amounted to $397, $1,356 and $29 for 1993, 1994 and 1995, respectively, which
are included in revenues.
On March 31, 1994, Olympus sold to Adelphia, 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
Adelphia 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 partners' equity (deficiency).
On June 30, 1994, Olympus sold to Adelphia 85% of the common stock of Northeast
Cable, Inc., a wholly-owned subsidiary, for a selling price of $31,875. Adelphia
paid $16,000 in cash and the remainder resulted in a decrease of Adelphia's
existing receivable from Olympus.
11. Subsequent Events:
Leadership Cable Acquisition
On January 5, 1996, Olympus acquired all of the southeast Florida cable systems
of the Leadership Cable division of Fairbanks Communications, Inc., ("Leadership
Cable") which serve approximately 50,000 cable and security monitoring
subscribers for a purchase price of $95,800. Leadership Cable provides cable
service and security monitoring services in and around West Palm Beach, Florida.
The purchase price consists of $40,000 in cash and a seller note due December
30, 1997 totaling $55,800 plus accrued interest. The acquisition will be
accounted for under the purchase method of accounting.
The accompanying unaudited pro forma balance sheet assumes that the acquisition
of Leadership Cable had occurred on December 31, 1995. The unaudited pro forma
statement of operations has been prepared assuming that the purchase of Telesat,
West Boca, and Leadership Cable had occurred on January 1, 1995. The pro forma
data are not necessarily indicative of the results that actually would have
occurred if the purchases of Telesat, West Boca, and Leadership Cable had
occurred on January 1, 1995 or what may be achieved in the future.
Telesat Investment Agreement Amendment
On March 28, 1996, ACP, Telesat, Olympus, Adelphia and certain shareholders of
Adelphia entered into an agreement which amended certain aspects of the Telesat
Investment Agreement and the Olympus Partnership Agreement. The amendment
provides for the repayment of certain amounts owed to Telesat totaling $20,000,
the release of certain obligations of Telesat to Olympus and the reduction of
Telesat's PLP and accrued priority return balances by $20,000. The amendment
further provides for a $40,000 distribution to Adelphia as a reduction of its
PLP interest and accrued priority return. These repayments and distributions
were made on March 29, 1996 and were funded through internally generated funds
and advances from an affiliate.
================================================================================
OLYMPUS COMMUNICATIONS, L.P. AND SUBSIDIARIES
================================================================+===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
PRO FORMA BALANCE SHEET
DECEMBER 31, 1995
(Dollars in thousands)
(UNAUDITED)
Leadership
Pro Forma
ASSETS: As Reported Adjustments Pro Forma
--------------------- --------------------- ---------------------
Cable television systems, at cost, net of depreciation and amortization:
Property, plant and equipment $ 203,129 $ 18,598 (a) $ 221,727
Intangible assets 280,873 77,202 (a) 358,075
--------------------- --------------------- ---------------------
Total 484,002 95,800 579,802
Cash and cash equivalents 32,677 - 32,677
Subscriber receivables - net 7,838 852 (a) 8,690
Prepaid expenses and other assets - net 9,392 1,372 (a) 10,764
--------------------- --------------------- ---------------------
Total $ 533,909 $ 98,024 $ 631,933
===================== ===================== =====================
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY):
Notes payable to banks $ 419,000 $ 40,000 (a) $ 459,000
Other debt 809 55,800 (a) 56,609
Accounts payable 14,261 - 14,261
Subscriber advance payments and deposits 3,957 588 (a) 4,545
Accrued interest and other liabilities 12,992 1,636 (a) 14,628
Accrued priority return on redeemable preferred
limited partner interests 19,269 - 19,269
Due to affiliates - net 38,613 - 38,613
Deferred income taxes 43,552 - 43,552
--------------------- --------------------- ---------------------
Total liabilities 552,453 98,024 650,477
--------------------- --------------------- ---------------------
Partners' equity (deficiency):
Limited partner interests 396,630 - 396,630
General partners' equity (deficiency) (415,174) - (415,174)
--------------------- --------------------- ---------------------
Total partners' equity (deficiency) (18,544) - (18,544)
--------------------- --------------------- ---------------------
Total $ 533,909 $ 98,024 $ 631,933
===================== ===================== =====================
(a) Reflects the acquisition of the net assets of Leadership Cable and the debt
incurred to finance the Leadership Cable acquisition which includes
incremental bank debt and the issuance of a seller note.
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands)
(UNAUDITED)
Telesat/
West Boca Leadership
Pro Forma Pro Forma
As Reported Adjustments Adjustments Pro Forma
--------------------------------------- ------------------ -----------------
Revenues $ 120,968 $ 10,532 (b) $ 14,764 (a) $ 146,264
----------------- ------------------- ------------------ -----------------
Operating expenses:
Direct operating and programming 37,494 4,071 (b) 6,639 (a) 48,204
Selling, general and administrative 23,912 2,488 (b) 1,768 (a) 28,168
Depreciation and amortization 31,953 2,158 (b) 5,690 (a) 39,801
Management fees to Managing Affiliate 6,334 551 (b) 1,878 (a) 8,763
----------------- ------------------ ----------------- ---------------------
Total 99,693 9,268 15,975 124,936
----------------- ---------------- ------------------ -----------------
Operating income 21,275 1,264 (1,211) 21,328
----------------- ---------------- ------------------ -----------------
Other income (expense):
Interest expense (29,217) (1,155) (b) (9,051) (a) (39,423)
Interest expense - affiliate (7,501) 901 (b) - (6,600)
Other expense (15) - - (15)
----------------- ---------------- ------------------ -----------------
(36,733) (254) (9,051) (46,038)
Loss before income taxes and
extraordinary loss (15,458) 1,010 (10,262) (24,710)
Income tax expense (2,824) - - (2,824)
----------------- ---------------- ------------------ -----------------
Loss before extraordinary loss (18,282) 1,010 (10,262) (27,534)
Extraordinary loss on early retirement of debt (1,109) - - (1,109)
----------------- ---------------- ------------------ -----------------
Net loss (19,391) 1,010 (10,262) (28,643)
Priority return on preferred and senior limited
partner interests (63,358) (881) (c) - (64,239)
----------------- ---------------- ---------------- --------------
Net loss of general and limited partners after
priority return $ (82,749) $ 129 $ (10,262) $ (92,882)
================= =================== ================== =================
Net loss per general and limited partners' unit
after priority return $ (8,275) $ 13 $ (1,026) $ (9,288)
================= =================== ================== =================
(a) Reflects the operations for Leadership Cable for the year ended December 31, 1995.
(b) Reflects the operations for Telesat and West Boca for January 1, 1995 to the date of acquisition.
(c) Reflects the accrued priority return on the PLP interests from January 1, 1995 through February 28, 1995.
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 1996 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 1996 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 1996 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 1996 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.
===============================================================================
Exhibit No. Description
===============================================================================
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 49
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. Description
3.01 Certificate of Incorporation of Adelphia Communications
Corporation (Incorporated herein by reference is
Exhibit 3.01 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.)
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 9 1/2% Senior Pay-In-Kind Notes
Due 2004 (Incorporated herein by reference is Exhibit
4.01 to Registrant's Current Report on Form 8-K dated
May 5, 1994.)
4.02 Indenture, dated as of February 22, 1994, with respect to
Registrant's 9 1/2% Senior Pay-In-Kind Notes Due 2004
(Incorporated herein by reference is Exhibit 4.05 to
Registration Statement No. 33-52513 on Form S-4.)
4.03 Indenture, dated as of July 28, 1993, with respect to
Registrant's 10 1/4% Senior Notes Due 2000
(Incorporated herein by reference is Exhibit 4.01 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993.)
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 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
(Incorporated herein by reference is Exhibit 4.03 to
Registration
Statement No. 33-52630 on Form S-1.)
===============================================================================
Exhibit Description
===============================================================================
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
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1992.)
10.01 Class B Common Stockholders Agreement (Incorporated herein
by reference is Exhibit 10.01 to Registration Statement
No. 33-6974 on Form S-1.)
10.02 Joinder to Class B Common Stockholders Agreement
(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 Form of Management Agreement for Managed Companies
(Filed herewith).
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 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.)
10.18 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.)
10.19 $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.)
10.20 $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.)
10.21 Agreement for the Purchase of Class A Common Stock by the
Rigas family, dated January 7, 1994 (Incorporated herein
by reference is Exhibit 10.01 to Registrant's Quarterly
Report on Form 10-Q dated December 31, 1993.)
10.22 Olympus Communications, L.P. Second Amended and Restated
Limited Partnership Agreement, dated as of
February 28, 1995. (Incorporated herein by reference is
Exhibit 10.32 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.23 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. (Incorporated herein by
reference is Exhibit 10.32 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 31, 1995.)
10.24 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, dated May 12,
1995. (Incorporated herein by reference is Exhibit 10.03
to Registrant's Current Report on Form 8-K dated
June 30, 1995.)
10.25 Credit Agreement, dated as of October 27, 1995, among Plato
Communications, Inc. Northeast Cable, Inc.,
Robinson/Plum Cablevision L.P., the several other banks
and other financial institutions from time to time
parties to this agreement and Chemical Bank, as
Administrative Agent. (Incorporated herein by reference
is Exhibit 10.35 to Registrant's Current Report on Form
8-K dated December 7, 1995.)
10.26 Credit Agreement, dated as of April 12, 1996, among
Chelsea Communications, Inc., Kittanning Cablevision
Inc., Robinson/Plum Cablevision L.P., the several banks
and financial institutions parties thereto, and
Toronto Dominion (Texas), Inc. as Administrative Agent.
(Incorporated herein by reference is Exhibit 10.36 to
Registrant's Current Report on Form 8-K dated
June 3, 1996.)
10.27 Amended Credit Agreement, dated as of March 29, 1996,
among Highland Video Associates L.P., Telesat Acquisition
Limited Partnership, Global Acquisition Partners, L.P.,
the various financial institutions as parties thereto,
Bank of Montreal as syndication agent, Chemical Bank as
documentation agent, and the Bank of Nova Scotia as
administrative agent. (Incorporated herein by reference
is Exhibit 10.37 to Registrant's Current Report on Form
8-K dated June 19, 1996.)
10.28 Purchase Agreement dated as of April 10, 1996 between
Hyperion Telecommunications, Inc. and Bear Stearns &
Co. Inc., Chase Securities Inc. and NationsBanc Capital
Markets, Inc.(Incorporated by reference is Exhibit 1.1
to Registration Statement No. 333-06957 on Form S-4
filed for Hyperion Telecommunications, Inc.)
10.29 Indenture, dated as of April 15, 1996, between Hyperion
Telecommunications, Inc. and Bank of Montreal
Trust Company. (Incorporated by reference is Exhibit 4.1
to Registration Statement No. 333-06957 on Form S-4
filed for Hyperion Telecommunications, Inc.)
10.30 Registration Rights Agreement dated as of April 15, 1996,
between Hyperion Telecommunications, Inc. and the Initial
Purchasers. (Incorporated by reference is Exhibit 4.3
to Registration Statement No. 333-06957 on Form S-4 filed
for Hyperion Telecommunications, Inc.)
10.31 Warrant Agreement dated as of April 15, 1996, by and among
Hyperion Telecommunications, Inc. and Bank of Montreal
Trust Company. (Incorporated by reference is
Exhibit 10.13 to Registration Statement No. 333-06957
on Form S-4 filed for Hyperion Telecommunications, Inc.)
10.32 Warrant Registration Rights Agreement dated as of
April 15, 1996, by and among Hyperion Telecommunications,
Inc. and the Initial Purchasers. (Incorporated by
reference is Exhibit 10.14 to Registration Statement
No. 333-06957 on Form S-4 filed for Hyperion
Telecommunications, Inc.)
21.01 List of Subsidiaries of Adelphia Communications Corporation
(Filed herewith)
23.01 Independent Auditors' Consent (Filed herewith)
27.01 Financial Data Schedule (Filed herewith)
- -------------------------
* Denotes management contracts and compensatory plans and arrangements
required to be identified by Item 14(a)(3).
- -------------------------
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 did not file any Form 8-K reports during the three
months ended March 31, 1996. A Form 8-K dated April 17, 1996 was filed
subsequent to March 31, 1996 which reported information under items 5 and 7
thereof. No financial statements were filed. Forms 8-K dated June 3, 1996 and
June 19, 1996 were filed subsequent to March 31, 1996 which reported information
under items 5 and 7 thereof. No financial statements were filed.
(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.
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,
---------------------------------------
1995 1996
------------------ -------------------
ASSETS:
Investment in cable television subsidiaries $ 218,708 $ 380,016
Property and equipment - net 27,540 27,808
Cash and cash equivalents 80 3,097
Other assets - net 68,692 57,901
Notes and receivables from cable television subsidiaries and
related parties - net 43,033 --
------------------ -----------------
Total $ 358,053 $ 468,822
================== ===================
LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY):
Losses and distributions in excess of investments in and net advances
to cable television subsidiaries $ 275,044 $ 377,454
Unsecured notes and payables to cable television subsidiaries and
related parties 128,382 215,366
Other debt 9,476 8,485
12 1/2% Senior Notes due 2002 400,000 400,000
10 1/4% Senior Notes due 2000 99,011 99,158
11 7/8% Senior Debentures due 2004 124,470 124,502
9 7/8% Senior Debentures due 2005 127,994 128,118
9 1/2% Senior Pay-In-Kind Notes due 2004 164,370 180,357
Accrued interest and other liabilities 40,881 63,621
------------------ -------------------
Total liabilities 1,369,628 1,597,061
Stockholders' equity (deficiency) - [see consolidated financial
statements included herein for details] (1,011,575) (1,128,239)
------------------ -------------------
Total $ 358,053 $ 468,822
================== ===================
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,
-----------------------------------
1994 1995 1996
--------- --------- ---------
INCOME:
Income from subsidiaries and affiliates ............ $ 53,004 $ 72,413 $ 55,277
--------- --------- ---------
EXPENSES:
Operating expenses and fees to subsidiaries ........ 2,710 1,044 2,156
Depreciation and amortization ...................... 3,610 5,179 5,942
Interest expense to subsidiaries and affiliates .... 5,893 4,371 14,645
Interest expense to others ......................... 88,724 103,367 107,829
--------- --------- ---------
Total .............................................. 100,937 113,961 130,572
--------- --------- ---------
Loss before equity in loss of subsidiaries ......... (47,933) (41,548) (75,295)
Equity in net loss of subsidiaries before cumulative
effect of change in accounting principle ........... (49,515) (64,736) (44,599)
--------- --------- ---------
Loss before extraordinary loss and cumulative
effect of change in accounting principle ........... (97,448) (106,284) (119,894)
Extraordinary loss on early retirement of debt
cumulative effect of change in accounting principle (752) -- --
Cumulative effect of change in accounting
principle .......................................... (89,660) -- --
--------- --------- ---------
Net loss ........................................... $(187,860) $(106,284) $(119,894)
========= ========= =========
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,
------------------------------------
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss ........................................... $(187,860) $(106,284) $(119,894)
Adjustments to reconcile net loss to net cash used
for operating activities:
Equity in loss of subsidiaries ..................... 49,515 64,736 44,599
Cumulative effect of change in accounting for
income taxes ....................................... 89,660 -- --
Extraordinary loss on debt retirement .............. 752 -- --
Depreciation and amortization ...................... 3,396 5,179 5,942
Noncash interest expense ........................... 363 14,756 16,288
Loss on disposal of property ....................... 214 -- --
Change in operating assets and liabilities, net of
effects of acquisitions:
Other assets ....................................... (6,877) (52,096) (6,832)
Accrued interest and other liabilities ............. 4,956 12,523 22,107
--------- --------- ---------
Net cash used for operating activities ............. (45,881) (61,186) (37,790)
--------- --------- ---------
Cash flows from investing activities:
Investments in and advances to subsidiaries ........ (72,642) (53,087) (103,497)
Amounts (advanced to) repayments from subsidiaries
and related parties ................................ (182,900) 108,772 146,617
Expenditures for property, plant and equipment ..... (11,772) (447) (161)
--------- --------- ---------
Net cash (used for) provided by investing activities (267,314) 55,238 42,959
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt ................................. 258,674 3,300 1,100
Repayments of debt ................................. (101,450) (12,213) (3,252)
Issuance of Class A Common Stock ................... 155,963 14,861 --
--------- --------- ---------
Net cash provided by (used for) financing activities 313,187 5,948 (2,152)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents ... (8) -- 3,017
Cash and cash equivalents, beginning of year ....... 88 80 80
--------- --------- ---------
Cash and cash equivalents, end of year ............. $ 80 $ 80 $ 3,097
========= ========= =========
Supplemental disclosure of cash flow activity -
Cash payments for interest ......................... $ 84,904 $ 103,454 $ 103,965
========= ========= =========
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 ("Adelphia") has partially funded its
acquisitions and capital needs through borrowings and advances from
subsidiaries. Adelphia had issued to certain of its cable television
subsidiaries and related parties unsecured demand notes payable in the principal
amount of $215,366 at March 31, 1996. The notes, which eliminate upon
preparation of consolidated financial statements, provide for interest at rates
ranging from 3% to 16% , are due upon demand five years after March 31, 1996,
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
(In thousands)
Balance Charged
at to Costs Balance
Beginning and Deductions- at End
of Period Expenses Write-Offs of Period
------------------ ------------------ ------------------- -----------
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
================== ================== =================== ============
Year Ended March 31, 1996
Allowance for Doubtful Accounts $ 3,503 $ 5,827 $ 8,114 $ $1,216
================== ================== =================== ============
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 28, 1996 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 28, 1996 /s/ John J. Rigas
John J. Rigas,
Director
June 28, 1996 /s/ Timothy J. Rigas
Timothy J. Rigas,
Executive Vice President, Chief Financial
Officer, Treasurer and Director
June 28, 1996 /s/ Michael J. Rigas
Michael J. Rigas,
Executive Vice President and Director
June 28, 1996 /s/ James P. Rigas
James P. Rigas,
Executive Vice President and Director
June 28, 1996 /s/ Daniel R. Milliard
Daniel R. Milliard,
Senior Vice President, Secretary and Director
June 28, 1996 /s/ Dennis P. Coyle
Dennis P. Coyle,
Director
June 28, 1996 /s/ Pete J. Metros
Pete J. Metros,
Director
June 28, 1996 /s/ Perry S. Patterson
Perry S. Patterson,
Director
June 28, 1996 /s/ Edward E. Babcock Jr.
Edward E. Babcock, Jr.
Chief Accounting Officer