SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
COMMISSION FILE NUMBERS: 333-9535 AND 333-9535-01
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of May 14, 1997: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore
filing with the reduced disclosure format.
Documents Incorporated by Reference: None.
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
PART I. Financial Information PAGE
Item 1. Consolidated Financial Statements of FrontierVision Operating Partners,
L.P. and Subsidiary...................................................................... 3
Notes to Consolidated Financial Statements............................................... 7
Financial Statements of FrontierVision Capital Corporation............................... 14
Note to Financial Statements............................................................. 18
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................... 19
PART II. Other Information........................................................................ 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
In Thousands
------------------------------
March 31, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,004 3,639
Accounts receivable, net of allowance for doubtful accounts
of $212 and $322 4,230 4,544
Other receivables 818 846
Prepaid expenses and other 2,625 2,231
Investment in cable television systems, net:
Property and equipment 203,271 199,461
Franchise costs 251,593 248,055
Covenants not to compete 11,903 12,650
Subscriber lists 35,473 36,321
Goodwill 28,767 27,879
-------- --------
Total investment in cable television systems, net 531,007 524,366
-------- --------
Deferred financing costs, net 12,628 13,042
Earnest money deposits 1,030 500
-------- --------
Total assets $558,342 549,168
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 1,792 1,994
Accrued liabilities 10,471 10,825
Subscriber prepayments and deposits 1,878 1,862
Accrued interest payable 11,721 6,290
Debt 398,349 398,194
-------- --------
Total liabilities 424,211 419,165
-------- --------
Partners' capital:
FrontierVision Partners, L.P. 133,998 129,874
FrontierVision Operating Partners, Inc. 133 129
-------- --------
Total partners' capital 134,131 130,003
Commitments
-------- --------
Total liabilities and partners' capital $558,342 549,168
======== ========
See accompanying notes to consolidated financial statements.
3
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1997 1996
-------- --------
Revenue $ 31,555 9,780
Expenses:
Operating expenses 16,783
4,688
Corporate administrative expenses 1,001 570
Depreciation and amortization 14,059 3,476
-------- --------
Total expenses 31,843 8,734
-------- --------
Operating loss (288) 1,046
Interest expense, net (10,478) (2,473)
Other expense (52) --
-------- --------
Net loss $(10,818) (1,427)
======== ========
See accompanying notes to consolidated financial statements.
4
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
------------------------------------------------
FrontierVision
FrontierVision Operating
Partners, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
--------- --------- ---------
Balance, December 31, 1995 $ 46,361 46 46,407
Capital contributions 107,289 108 107,397
Net loss (23,776) (25) (23,801)
--------- --------- ---------
Balance, December 31, 1996 129,874 129 130,003
Capital contributions (Unaudited) 14,931 15 14,946
Net loss (Unaudited) (10,807) (11) (10,818)
--------- --------- ---------
Balance, March 31, 1997 (Unaudited) $ 133,998 133 134,131
========= ========= =========
See accompanying notes to consolidated financial statements.
5
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
---------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1997 1996
-------- --------
Cash Flows From Operating Activities:
Net loss $(10,818) (1,427)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 14,059 3,476
Amortization of deferred debt issuance costs 510 --
Interest expense deferred and included in
long-term debt 225 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 431 1,603
Prepaid expenses and other (375) (271)
Accounts payable and accrued liabilities (996) (372)
Subscriber prepayments and deposits (63) 7
Accrued interest payable 5,431 421
-------- --------
Total adjustments 19,222 4,864
-------- --------
Net cash flows from operating activities 8,404 3,437
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (4,982) (1,141)
Cash paid for franchise costs (826) --
Earnest money deposits (1,030) --
Cash paid in acquisitions of cable television systems (13,981) (50,466)
-------- --------
Net cash flows from investing activities (20,819) (51,607)
-------- --------
Cash Flows From Financing Activities:
Debt borrowings -- 30,912
Principal payments on capital lease obligations (70) --
Increase in deferred financing fees (96) (14)
Partner capital contributions 14,946 15,029
-------- --------
Net cash flows from financing activities 14,780 45,927
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 2,365 (2,243)
Cash and Cash Equivalents, beginning of period 3,639 2,650
-------- --------
Cash and Cash Equivalents, end of period $ 6,004 407
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 4,339 1,807
======== ========
See accompanying notes to consolidated financial statements.
6
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
FrontierVision Operating Partners, L.P. (the "Company") is a Delaware limited
partnership formed on July 14, 1995 for the purpose of acquiring and operating
cable television systems. As of March 31, 1997, the Company owned and operated
cable television systems in three primary operating regions - Ohio, Kentucky and
New England - with a fourth, smaller group of cable television systems in the
Southeast. The Company was initially capitalized in November 1995 with
approximately $38 from its sole limited partner, FrontierVision Operating
Partners, Inc. ("FVOP Inc."), a Delaware corporation, and approximately $38,300
from its sole general partner, FrontierVision Partners, L.P. ("FVP"), a Delaware
partnership. FVOP Inc. is a wholly owned subsidiary of FVP. During the period
from January 1, 1997 to March 31, 1997 the Company received additional capital
contributions of approximately $14,900 from its partners. FVP allocates certain
administrative expenses to FVOP which are included as capital contributions from
its partners. Such expense allocations were approximately $54 for the period
ended March 31, 1997.
FrontierVision Capital Corporation (Capital), a Delaware corporation, is a
wholly owned subsidiary of the Company, and was organized on July 26, 1996 for
the sole purpose of acting as co-issuer with the Company of $200 million
aggregate principal amount of the 11% Senior Subordinated Notes due 2006 (the
"Notes"). Capital has nominal assets and does not have any material operations.
REFERENCE TO ANNUAL REPORT
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, for additional
disclosures, including a summary of the Company's accounting policies.
The following notes, insofar as they are applicable to the three months ended
March 31, 1997, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the three-month period ended March 31, 1997 are not necessarily
indicative of the results for the entire 1997 fiscal year.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified for comparative purposes.
(2) ACQUISITIONS AND DISPOSITIONS
The Company has completed several acquisitions from January 1, 1996 through
March 31, 1997. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition.
7
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
On February 1, 1996, the Company acquired certain cable television assets,
primarily in Virginia and Tennessee, from C4 Media Cable Southeast L.P. ("C4"),
for a purchase price of approximately $48,300 (subject to adjustment), excluding
working capital. Through March 31, 1997, there has been approximately $700
received in purchase price adjustments.
On March 29, 1996, the Company acquired certain cable television assets located
in Maine from Americable International Maine, Inc. for a purchase price of
approximately $4,800, excluding working capital.
On April 9, 1996, the Company acquired certain cable television system assets,
primarily in Ohio, from affiliates of Cox Communications, Inc. ("Cox") for a
purchase price of approximately $135,900, excluding working capital.
On October 7, 1996, the Company acquired certain cable television assets,
primarily in Kentucky and Ohio, from Triax Southeast Associates, L.P. ("Triax"),
for a purchase price of approximately $85,900 (subject to adjustment), excluding
working capital. The Company has filed a claim with Triax seeking a purchase
price adjustment due to what the Company believes to be a shortfall in the
revenue warranted by Triax with respect to the two-month period immediately
preceding the acquisition date. As the outcome of this claim is currently
unknown, no benefit has been recognized in the Company's financial statements.
On October 9, 1996, the Company acquired certain cable television assets,
primarily in Kentucky and Indiana, from American Cable Entertainment of
Kentucky-Indiana, Inc. ("ACE") for a purchase price of approximately $147,400,
excluding working capital.
During 1996, the Company also acquired certain cable television assets, located
in Maine, New Hampshire, Ohio, Pennsylvania, and Maryland for a purchase price
of approximately $16,500, excluding working capital, in a series of three
transactions.
During the third quarter of 1996, the Company sold certain cable television
system assets located in Chatsworth, Georgia and Woodstock and New Market,
Virginia for aggregate disposition proceeds of approximately $15,000.
On March 20, 1997, the Company acquired certain cable television assets located
in Kentucky, from Bluegrass Cable Partners, L.P. for a purchase price of
approximately $10,300 (subject to adjustment), excluding working capital. As of
March 31, 1997, the Company had advanced $30 in the form of a letter of credit
in connection with the transfer of a certain franchise in favor of the Company.
On March 28, 1997, the Company acquired certain cable television assets located
in Kentucky, from Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. for a
purchase price of approximately $1,700 (subject to adjustment), excluding
working capital.
On March 31, 1997, the Company acquired certain cable television assets located
in Ohio, from Milestone Communications of New York, L.P. for a purchase price of
approximately $2,900 (subject to adjustment), excluding working capital.
8
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
The combined purchase price of selected of these acquisitions have been
allocated to the acquired assets and liabilities as follows:
---------------------------
Acquisitions Acquisitions
for the Three for the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
-------- --------
Property, plant and equipment $ 5,760 32,657
Franchise Costs 7,166 14,621
Subscriber Lists 644 260
Covenant not to compete -- 3,355
Goodwill 1,322 2,175
-------- --------
Subtotal 14,892 53,068
-------- --------
Net working capital deficit (411) (100)
Less - Earnest money deposits applied (500) (2,502)
-------- --------
Total cash paid for acquisitions $ 13,981 50,466
======== ========
The Company has reported the operating results of its acquired cable systems
from the date of their respective acquisition. Unaudited pro forma summarized
operating results of the Company for the three months ended March 31, 1996,
assuming the C4, Cox, Triax and ACE acquisitions (the "Acquisitions") had been
consummated on January 1, 1996, are as follows:
Three Months Ended March 31, 1996
-------------------------------------------
Historical Pro Forma
Results Acquisitions Results
------- ------- -------
Revenue $ 9,780 19,428 29,208
Operating, selling, general and administrative expenses (5,258) (10,753) (16,011)
Depreciation and amortization (3,476) (10,190) (13,666)
------- ------- -------
Operating income (loss) 1,046 (1,515) (469)
Interest and other expenses (2,473) (8,298) (10,771)
------- ------- -------
Net loss $(1,427) (9,813) (11,240)
======= ======= =======
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregated basis.
9
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT
The Company's debt was comprised of the following:
--------------------------
March 31, December 31,
1997 1996
-------- --------
Bank Credit Facility (a) --
Term loans, due June 30, 2004, interest based on various floating
rate options (8.44% and 8.6% weighted average at March
31, 1997 and December 31, 1996, respectively), payable monthly $190,000 190,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
Subordinated promissory notes to UVC, due December 31,
2004, with interest as described below (c) 8,349 8,124
Capital lease obligations, monthly payments of $3, including average
interest at 9.1%, due November 1998 and May 1999 -- 70
-------- --------
Total debt $398,349 398,194
======== ========
(a) Bank Credit Facility.
The Company has an Amended and Restated Credit Facility (the "Senior
Credit Facility") which includes a $75.0 million revolving credit
facility ("Revolving Credit Facility"), a $100.0 million term loan
("Facility A Term Loan") and a $90.0 million term loan ("Facility B
Term Loan"). The Facility A Term Loan and the Revolving Credit Facility
both mature on June 30, 2004. Escalating principal payments are due
quarterly beginning September 30, 1998 under the Facility A Term Loan
with quarterly principal reductions of the Revolving Credit Facility
also beginning September 30, 1998. The Facility B Term Loan matures
June 30, 2005 with 91% of the principal being repaid in the last four
quarters of the term of the facility.
Under the terms of the Senior Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon any sale of new
partnership interests and the sale of any of its operating systems.
Further, beginning with the year ended December 31, 1998, the Company
is required to make prepayments equal to 50% of its excess cash flow,
as defined in the credit agreement. The Company also pays commitment
fees of 1/2% per annum, on the average unborrowed portion of the total
amount available for borrowings under the bank credit facility.
The Senior Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio, fixed charges ratio, and capital expenditures. In
addition, the Senior Credit Facility has restrictions on certain
Partnership distributions. As of March 31, 1997, the Company was in
compliance with the financial covenants of the Senior Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiary are pledged as collateral for the Senior Credit
Facility.
10
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) DEBT (continued)
In order to convert certain of the interests payable at variable rates
under the Senior Credit Facility to interest at fixed rates, the
Company has entered into interest rate swap agreements for notional
amounts totaling $170,000, and maturing between November 15, 1999 and
October 7, 2000. According to these agreements, the Company pays or
receives the difference between (1) an average fixed rate of 5.932% and
(2) various available floating rate options applied to the same
$170,000 notional amount every three months during the term of the
agreement. For the three month period ended March 31, 1997, the Company
had recognized an increase in interest expense of approximately $169 as
a result of these interest rate swap agreements.
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering
(the "Offering"), $200,000 aggregate principal amount of the Notes. Net
proceeds from the Offering of $192,500, after costs of approximately
$7,500, were available to the Company on October 7, 1996.
In connection with the anticipated issuance of the Notes, the
Partnership entered into deferred interest rate setting agreements to
reduce the Partnership's interest rate exposure in anticipation of
issuing the Notes. The cost of such agreements amounting to $1,390 will
be recognized as a component of interest expense over the term of the
Notes.
The Notes are unsecured subordinated obligations of the Company
(co-issued by FrontierVision Capital Corporation) that mature on
October 15, 2006. Interest accrues at 11% per annum beginning from the
date of issuance, and is payable each April 15 and October 15,
commencing April 15, 1997.
The Subordinated Note Indenture (the "Indenture") also requires the
Company to maintain compliance with covenants relating to total
indebtedness. In addition, the Indenture has certain restrictions on
distributions, mergers, asset sales and changes in control of the
Company. As of March 31, 1997, the Company was in compliance with the
financial covenants of the Indenture.
(c) Subordinated Promissory Note to UVC
The subordinated promissory note to UVC, dated November 9, 1995, bears
interest at 9% for the first three years. At the end of each subsequent
year, the annual interest rate increases 2% per year. Under the terms
of the subordinated promissory note, the Company may issue additional
subordinated promissory notes rather than making cash interest
payments. In this event, the subordinated promissory note bears
interest equal to the annual interest of the original promissory note
plus 2.5% for the first three years and 3% for each of the subsequent
years. Further, in the event the Company's leverage ratio exceeds
certain specified amounts, the interest rate also increases by 2%.
Under the terms of the subordinated promissory note, the Company can
prepay the balance at any time.
11
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT (continued)
The debt of the Company matures as follows:
Year ended December 31 --
1997 $ --
1998 3,675
1999 9,350
2000 13,350
2001 17,350
Thereafter 354,624
--------
$398,349
========
(4) COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the three month periods ended March 31, 1997
and 1996 was $926 and $382, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to March 31, 1997 are as follows:
Year ended December 31 --
1997 $ 399
1998 400
1999 310
2000 172
2001 133
Thereafter 301
------
$1,715
======
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services which allowed cable operators to justify regulated
rates in excess of the FCC benchmarks through cost of service showings at both
the franchising authority level for basic service and to the FCC in response to
complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula. For a more detailed
discussion of these matters, see "Legislation and Regulation" and Note 7 to the
Company's consolidated financial statements in Form 10-K for the fiscal year
ended December 31, 1996.
12
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(4) COMMITMENTS AND CONTINGENCIES (continued)
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 5% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended period of up to fifteen years.
(5) SUBSEQUENT EVENTS
On January 8, 1997, the Company entered into an asset purchase agreement with
Triax Associates I, L.P., to acquire certain cable television assets, located in
Ohio and Michigan, for a cash purchase price of $34,500. As of March 31, 1997,
the Company had advanced $1,000 as an earnest money deposit related to this
transaction.
On May 8, 1997, the Company entered into an asset purchase agreement with A-R
Cable Services-ME, Inc., a wholly-owned subsidiary of Cablevision Systems, Inc.,
to acquire certain cable television assets in Maine, for a cash purchase price
of approximately $78,300.
On May 12, 1997, the Company entered into an asset purchase agreement with TCI
Cablevision of Vermont, Inc., and Westmarc Development Joint Venture to acquire
certain cable television assets, primarily in New Hampshire and Vermont, for a
cash purchase price of $34,500.
As of May 13, 1997, the Company had entered into additional letters of intent or
asset purchase agreements to acquire certain cable television systems, primarily
located in Ohio, Kentucky, and Michigan, in four separate transactions, for
aggregate consideration of approximately $25,900.
13
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEET
---------------------
March 31, December 31,
1997 1996
----- -----
(Unaudited)
ASSETS
Cash $ 177 188
----- -----
Total assets $ 177 188
===== =====
LIABILITIES AND OWNER'S EQUITY
Payable to FVOP $ 100 100
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding 1 1
Additional paid-in capital 99 99
Retained deficit (23) (12)
----- -----
Total owner's equity 77 88
----- -----
Total liabilities and owner's equity $ 177 188
===== =====
See accompanying note to the financial statements.
14
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OPERATIONS
------------------------
For the Three from July 26, 1996
Months Ended (inception) through
March 31, December 31,
1997 1996
---- ----
(Unaudited)
Revenue $-- --
General and administrative expenses 11 12
---- ----
Net loss $(11) (12)
==== ====
See accompanying note to financial statements.
15
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OWNER'S EQUITY
------------------------------------------------------
Common Additional Retained Total owner's
stock paid-in capital deficit equity
---- ---- ---- ----
Balance, at July 26, 1996 (inception) $-- -- -- --
Issuance of Common Stock 1 99 -- 100
Net loss -- -- (12) (12)
---- ---- ---- ----
Balance, December 31, 1996 1 99 (12) 88
Net loss (Unaudited) -- -- (11) (11)
---- ---- ---- ----
Balance, March 31, 1997 (Unaudited) $ 1 99 (23) 77
==== ==== ==== ====
See accompanying note to financial statements.
16
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
-----------------------
For the period
For the Three from July 26,
Months Ended 1996 through
March 31, December 31,
1997 1996
----- -----
(Unaudited)
Cash flows from operating activities:
Net loss $ (11) (12)
Decrease in receivable from affiliate -- 100
----- -----
Net cash flows used in operating activities (11) 88
----- -----
Cash flows from investing activities -- --
----- -----
Cash flows from financing activities:
Advance from FVOP -- 100
----- -----
Net cash flows from financing activities -- 100
----- -----
Net increase in cash and cash equivalents (11) 188
Cash and cash equivalents, beginning of period 188 --
----- -----
Cash and cash equivalents, end of period $ 177 188
===== =====
See accompanying note to financial statements.
17
FRONTIERVISION CAPITAL CORPORATION
NOTE TO THE FINANCIAL STATEMENTS (Unaudited)
FrontierVision Capital Corporation, a Delaware corporation, is a wholly owned
subsidiary of FrontierVision Operating Partners, L.P. (FVOP), and was organized
on July 26, 1996 for the sole purpose of acting as co-issuer with FVOP of $200
million aggregate principal amount of the 11% Senior Subordinated Notes.
FrontierVision Capital Corporation has nominal assets and does not have any
material operations.
18
PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the financial condition and results of operations of
the Company, the description of the Company's business as well as other sections
of this Form 10-Q contain certain forward-looking statements. The Company's
actual results could differ materially from those discussed herein and its
current business plans could be altered in response to market conditions and
other factors beyond the Company's control. Important factors that could cause
or contribute to such differences or changes include those discussed under "Risk
Factors" in the Company's Post-Effective Amendment No. 1 to Form S-1 filed March
28, 1997 (File no. 333-9535).
The Company commenced operations in November 1995 with the acquisition of
certain cable television systems. The following table summarizes the Company's
acquisitions since inception:
Predecessor Owner Date Acquired Acquisition Cost (a)
----------------- ------------- -------------------
United Video Cablevision, Inc. (the "UVC Systems") November 9, 1995 $121.8 million
Longfellow Cable Company, Inc. (the "Longfellow Systems") November 21, 1995 $6.1 million
C4 Media Cable Southeast, Limited Partnership (the "C4 Systems") February 1, 1996 $47.6 million *
Americable International Maine, Inc. (the "Americable Systems") March 29, 1996 $4.8 million
Cox Communications (the "Cox Systems") April 9, 1996 $135.9 million
Phoenix Grassroots Cable Systems, LLC (the "Grassroots Systems") August 29, 1996 $9.7 million
Triax Southeast Associates, L.P. (the "Triax Systems") October 7, 1996 $85.9 million *
American Cable Entertainment of Kentucky-Indiana,Inc. (the "ACE October 9, 1996 $147.4 million
Systems")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio Systems") October 31, 1996 $3.8 million
SRW, Inc.'s Deep Creek Cable TV, L.P. (the "Deep Creek System") December 23, 1996 $3.0 million *
Bluegrass Cable Partners, L.P. (the "Bluegrass Systems"), March 20, 1997 $10.3 million *
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. (the "Clear/B&G March 28, 1997 $1.7 million *
Systems")
Milestone Communications of New York, L.P. (the "Milestone Systems") March 31, 1997 $2.9 million *
- -----------
(a) Acquisition cost represents purchase price including certain purchase
accounting adjustments.
* Subject to adjustment.
During the third quarter of 1996, the Company sold systems serving, in the
aggregate, approximately 10,400 basic subscribers located in Chatsworth, Georgia
and Woodstock and New Market, Virginia for aggregate disposition proceeds of
approximately $15.0 million.
As of March 31, 1997, the Company's currently owned cable television systems
(the "Existing Systems") passed approximately 519,200 homes and served
approximately 362,350 basic subscribers. The Company has operated the Existing
Systems for a limited period of time and had no operations prior to November 9,
1995. All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's historical results of operations
include the results of operations for each acquired system subsequent to its
respective acquisition date.
As of May 13, 1997, the Company had entered into additional letters of intent or
asset purchase agreements to acquire certain cable television systems, primarily
located in Maine, Ohio and Kentucky, in seven separate transactions, for
aggregate consideration of approximately $173.2 million. The transactions are
expected to close by the fourth quarter of 1997. These transactions are subject
to customary closing conditions, and, certain
19
regulatory approvals that are not completely within the Company's control. See
Note 5 to the financial statements for a more detailed description.
RESULTS OF OPERATIONS
The three month period ended March 31, 1997, is the only period in which the
Company operated all of the Existing Systems, although certain systems (the
Bluegrass Systems, the Milestone Systems, and the Clear/B&G Systems) were
purchased during the period and are reflected only for that portion of the
period that such systems were owned by the Company. The three month period ended
March 31, 1996, represents the integration of the UVC Systems, the Longfellow
Systems, and the C4 Systems, into the operations of the Company, although the C4
Systems and the Americable Systems were purchased during the period and are only
reflected for that portion of the period that such systems were owned by the
Company.
As a result of the Company's limited operating history, the Company believes
that its results of operations for the three month periods ended March 31, 1997
and 1996 are not indicative of the Company's results of operations in the
future.
Three Months Ended March 31, 1997 Compared to
Three Months Ended March 31, 1996
(Unaudited)
----------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
-------------------------- --------------------------
Amount % of Revenue Amount % of Revenue
-------- ---- -------- ----
Amounts in thousands
Revenue $ 31,555 100.0% $ 9,780 100.0%
Expenses
Operating expenses 16,783 53.2 4,688 47.9
Corporate expenses 1,001 3.2 570 5.8
-------- ---- -------- ----
EBITDA (a) $ 13,771 43.6% $ 4,522 46.2%
======== ==== ======== ====
Basic Subscribers 362,350 126,250
Pay Units 149,500 49,750
- ---------
(a)EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's Senior
Credit Facility and Note Indenture contain certain covenants, compliance of
which is measured by computations substantially similar to those used in
determining EBITDA. However, EBITDA is not intended to be a performance
measure that should be regarded as an alternative to either operating income
or net income as an indicator of operating performance or to cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles.
Revenue increased 222.6%, or approximately $21.8 million, to approximately $31.6
million for the three months ended March 31, 1997 from approximately $9.8
million for the three months ended March 31, 1996. Operating and corporate
expenses increased approximately 258.0% and 75.6%, respectively, for the three
months ended March 31, 1997 from the three months ended March 31, 1996. Basic
subscribers increased approximately 187.0% from 126,250 at March 31, 1996 to
362,350 as of March 31, 1997, while pay units increased approximately 200.5%
from 49,750 to 149,500 over the twelve month period. Increases in the relative
percentage of operating expenses to revenue was primarily attributable to the
Company's acquisition of cable systems which operated at lower margins.
20
The decrease in the relative percentage of Corporate expenses to revenue is
attributable to the Company having been staffed at March 31, 1996 in
anticipation of the acquisition of additional subscribers.
Significant growth in revenue, operating and corporate expenses, basic
subscribers and pay units is primarily attributable to the Company's acquisition
of cable systems in a series of nine separate transactions. The Company's
primary focus over the twelve month period has been to achieve critical mass
through acquisitions, to establish its core geography and to begin the
consolidation of operations. By early 1998, the Company expects to reach its
growth objective of acquiring geographically concentrated cable systems serving
at least 500,000 basic subscribers in operating clusters of 100,000 or more
subscribers each.
As its operations base has developed, the Company has increased its focus on the
integration of business operations to achieve efficiencies, the significant
investment in technical plant and the promotion of new and existing services to
drive revenues. In the first quarter of 1997, the Company has made progress in
certain phases of these objectives.
The Company has consummated three acquisitions during the first quarter of 1997,
acquiring cable systems serving, in the aggregate, approximately 10,800 basic
subscribers in Ohio and Kentucky. The Company is integrating employees from
these predecessor owners, in the process reducing employee staffing by
approximately 35% from pre-acquisition levels. The Company is completing the
conversion of three separate billing systems into its automated billing system
and centralized database and will serve these customers from its regional
customer service centers in Chillicothe, Ohio, and Richmond, Kentucky.
The Company has initiated the process of rebuilding and upgrading certain
systems, completing line extensions and consolidating headends. The Company had
capital expenditures of approximately $5.0 million during the first quarter of
1997 related to its technical enhancement activities. The Company completed its
rebuild of the Winchester, Kentucky system to a 750 MHz design and expended
significant capital for the headend equipment needed to launch additional
channels contemporaneously with the service rate increases anticipated over the
course of the year. During the first three months of 1997, the Company completed
the consolidation of one headend facility and initiated the process of
eliminating four additional headend facilities. Approximately nineteen new miles
of plant was activated, passing 485 additional homes.
In an effort to maximize revenue from existing subscribers, the Company has
established a centralized, in-house tele-marketing center equipped with
state-of-the art predictive dialing and communications equipment. The Company
commenced operations of its centralized telemarketing center on April 7, 1997,
and is initially focusing on telemarketing premium services to its customers in
the Company's Ohio operating region. While the ultimate financial statement
impact cannot be determined, initial results from the tele-marketing efforts
have exceeded the Company's expectations. Initially staffed by only eight
tele-marketing representatives, the Company has seen an average sales to contact
ratio in excess of that generally realized by third-party tele-marketing service
providers previously used by the Company.
In March 1997, the Company increased basic and tiered basic rates to, in the
aggregate, approximately 84,500 subscribers, or approximately 67.2% of its
subscribers in its Kentucky region. The service rate increases were generally
accompanied by the addition of between 1 and 8 new basic and tiered basic
channels and, on average, basic service rates were increased 3.9% and tiered
basic 10.6%. Although there can be no assurance as to the long-term effect of
the rate adjustments, the Company believes that its strategy of increasing
service rates while simultaneously offering more services and greater customer
choice will have a positive impact on its financial results.
During late February and early March of 1997, certain of the communities served
by the Company in Ohio, Kentucky and Indiana along the Ohio River experienced
devastating floods. The Company expects that a portion of the damage to the
Company's cable television infrastructure will be covered by insurance. As of
May 1, 1997, the Company has disconnected service to approximately 400
subscribers for flood related reasons, including the fact
21
that many of the subscriber's homes were completely destroyed. The Company is
continuing to evaluate the immediate as well as long-term financial effect of
the flooding and its rights under various insurance arrangements. The results of
operations at March 31, 1997 do not include any material financial impact of the
flood.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for the
construction, expansion and maintenance of the delivery system. In addition, the
Company has pursued, and intends to pursue in the future, a business strategy
which includes selective acquisitions. The Company has financed these
expenditures to date through a combination of cash from operations, indebtedness
from outside sources and equity capital from its partners. The Company intends
to continue to finance such expenditures in the future though these same
sources.
The Company has entered into a $265.0 million Amended and Restated Credit
Agreement (the "Senior Credit Facility") with The Chase Manhattan Bank, as
Administrative Agent, J.P. Morgan Securities Inc., as Syndication Agent, CIBC
Inc., as Managing Agent, and the other lenders signatory thereto. The Senior
Credit Facility includes a $75.0 million, 8.25-year reducing revolving credit
facility ("Revolving Credit Facility"), a $100.0 million, 8.25-year term loan
("Facility A Term Loan") and a $90.0 million, 9.25-year term loan ("Facility B
Term Loan"). At March 31, 1997, the Company had no outstanding borrowings under
the Revolving Credit Facility, $100.0 million outstanding under the Facility A
Term Loan and $90.0 million outstanding under the Facility B Term Loan. The
weighted average interest rates at March 31, 1997 on the outstanding borrowings
under the Facility A Term Loan and the Facility B Term Loan were approximately
8.69% and 8.22%, respectively. The Company has entered into interest rate
protection agreements to hedge the underlying LIBOR rate exposure for $170.0
million of borrowings through November 1999 and October 2000.
In general, the Senior Credit Facility requires the Company to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the Senior Credit Facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting the Company to use such proceeds to fund certain permitted
acquisitions, provided that the Company is otherwise is compliance with the
terms of the Senior Credit Facility.
The Senior Credit Facility is secured by a pledge of all limited and general
partnership interests in the Company and in any subsidiaries of the Company and
a first priority lien on all the tangible and intangible assets of the Company
and each of its subsidiaries. In addition, in the event of the occurrence and
continuance of an event of default under the Senior Credit Facility, the
Administrative Agent is entitled to replace the general partner of the Company
with its designee.
On October 7, 1996, the Company issued $200.0 million aggregate principal amount
of 11% Senior Subordinated Notes due 2006 (the "Notes"). The Notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The Company paid its first interest
payment of $11.5 million on April 15, 1997. The Notes are general unsecured
obligations of the Company and rank subordinate in right of payment to all
existing and any future senior indebtedness. In anticipation of the issuance of
the Notes, the Partnership entered into deferred interest rate setting
agreements to reduce the interest rate exposure related to the Notes. The
financial statement effect of these agreements will be to increase the effective
interest rate which the Company incurs over the life of the Notes.
In addition, in connection with the acquisition of the ACE Systems and the Triax
Systems, FrontierVision Partners, L.P. ("FVP"), the Company's sole general
partner, received additional equity commitments of approximately $76.0 million.
FVP currently has available for use an additional $21.0 million in commitments,
the net proceeds of which will be contributed to the Company over time to fund
future acquisitions. Such remaining commitments will expire
22
on June 30, 1997, subject to election by FVP, and approval by the Advisory
Committee to extend the commitment period to June 30, 1998.
During the three month period ended March 31, 1997, the Company received
approximately $14.9 million of equity contributions from its partners. Such
equity contributions and senior debt, along with cash flow generated from
operations, has been sufficient to finance capital improvement projects as well
as acquisitions. The Company has adequately serviced its debt load in accordance
with the provisions of the Senior Credit Facility from EBITDA of approximately
$13.8 million generated by the Company for the three month period ended March
31, 1997.
In connection with the acquisition of the UVC Systems, the Company issued a
subordinated note to UVC in the aggregate principal amount of $7.2 million (the
"UVC Note"). It is possible that the Company will cause the conversion of $5.0
million aggregate principal amount of the UVC Note into limited partnership
interests of the Company and repay the balance of the UVC Note. In addition, the
Company may pay off the UVC Note at any time. However, as of May 14, 1997, the
UVC Note had not yet been converted or repaid, and the Company is currently
considering all options related thereto.
The Company had capital expenditures of approximately $5.0 million during the
three month period ended March 31, 1997, primarily consisting of expenditures
for the construction and expansion of the delivery system; additional costs were
incurred related to the expansion of customer service facilities. In addition,
the Company capitalized approximately $0.8 million attributable to the cost of
obtaining certain franchise, leasehold and other long-term agreements. The
Company expects to spend in excess of $52 million over the next two years for
capital improvement related projects consisting primarily of installation of
fiber optic cable and microwave links which will allow for the anticipated
reduction in the number of headends, analog and digital converter boxes which
will allow the Company to more effectively market premium and pay-per-view
services and the continued deployment of coaxial cable to build-out existing
systems.
Cash flows from operating activities for the three months ended March 31, 1997
were $8.4 million compared to $3.4 million for the three months ended March 31,
1996. The increase was primarily a result of cable television system operations
acquired during 1996. Investing cash flows were primarily used to fund capital
expenditures and acquire cable television systems. Capital expenditures for the
three month period ended March 31, 1997 were approximately $5.0 million compared
to approximately $1.1 million for the three month period ended March 31, 1996.
Capital expenditures are discussed in greater detail above. The Company invested
approximately $14.0 million in acquisitions during the three months ended March
31, 1997 compared with approximately $50.5 million for the same period in 1996.
Acquisitions during the first quarter of 1997 were financed primarily with
equity contributions from the Company's partners; acquisitions during the first
quarter of 1996 were financed primarily with borrowings under the Senior Credit
Facility and, to a lesser extent, with equity contributions from the Company's
partners.
23
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6
(a) Exhibits
3.1 Agreement of Limited Partnership for FrontierVision Operating Partners, L.P. (1)
3.2 Certificate of Limited Partnership for FrontierVision Operating Partners, L.P. (1)
3.9 Certificate of Incorporation for FrontierVision Capital Corporation. (1)
3.10 Bylaws for FrontierVision Capital Corporation. (1)
4.1 Indenture dated as of October 7, 1996, among FrontierVision Operating Partners, L.P.,
FrontierVision Capital Corporation and Colorado National Bank, as Trustee. (2)
27.3 Financial Data Schedule as of and for the three month period ended March 31, 1997, and Amended
Financial Data Schedule as of and for the three month period ended March 31, 1996.
---------------
Footnote References
(1) Incorporated by reference to the exhibits to the Registrant's Registration Statement on Form S-1,
File No. 333-9535.
(2) Incorporated by reference to the exhibits of the Registrant's Quarterly Report on Form 10-Q, for
the quarter ended September 30, 1996, File No. 333-9535.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FRONTIERVISION OPERATING PARTNERS, L.P.
By: FrontierVision Partners, L.P., its general partner,
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general partner
By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
Date: May 14, 1997 By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION CAPITAL CORP.
Date: May 14, 1997 By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
(Principal Accounting Officer)
25