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 June 30, 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 August 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.
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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........................................................................25
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
In Thousands
-------------------------------------
June 30, December 31,
1997 1996
---------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,499 3,639
Accounts receivable, net of allowance for doubtful accounts
of $205 and $322 5,164 4,544
Other receivables 686 846
Prepaid expenses and other 2,604 2,231
Investment in cable television systems, net:
Property and equipment 212,875 199,461
Franchise cost and other intangible assets 349,659 324,905
------------ -----------
Total investment in cable television systems, net 562,534 524,366
------------ -----------
Deferred financing costs, net 12,165 13,042
Earnest money deposits 8,259 500
------------ -----------
Total assets $ 597,911 549,168
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,558 1,994
Accrued liabilities 12,372 10,825
Subscriber prepayments and deposits 1,929 1,862
Accrued interest payable 5,692 6,290
Debt 429,096 398,194
------------ -----------
Total liabilities 451,647 419,165
------------ -----------
Partners' capital:
FrontierVision Partners, L.P. 146,118 129,874
FrontierVision Operating Partners, Inc. 146 129
------------ -----------
Total partners' capital 146,264 130,003
Commitments
------------ -----------
Total liabilities and partners' capital $ 597,911 549,168
============ ===========
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 For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Revenue $ 34,081 17,759 65,636 27,539
Expenses:
Operating expenses 17,679 8,980 34,462 13,668
Corporate administrative expenses 1,048 695 2,049 1,265
Depreciation and amortization 15,132 10,119 29,191 13,595
-------- -------- -------- --------
Total expenses 33,859 19,794 65,702 28,528
-------- -------- -------- --------
Operating income/(loss) 222 (2,035) (66) (989)
Interest expense, net (10,824) (4,831) (21,302) (7,304)
Other income/(expense) 5 -- (47) --
-------- -------- -------- --------
Net loss $(10,597) (6,866) (21,415) (8,293)
======== ======== ======== ========
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) 37,638 38 37,676
Net loss (Unaudited) (21,394) (21) (21,415)
------------- ------------ -------------
Balance, June 30, 1997 (Unaudited) $ 146,118 146 146,264
============= ============ =============
See accompanying notes to consolidated financial statements.
5
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
---------------------------
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996
-------- --------
Cash Flows From Operating Activities:
Net loss $(21,415) (8,293)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 29,191 13,595
Amortization of deferred debt issuance costs 1,020 --
Interest expense deferred and included in
long-term debt 472 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (462) (988)
Prepaid expenses and other (352) (536)
Accounts payable and accrued liabilities 1,310 1,322
Subscriber prepayments and deposits (66) (129)
Accrued interest payable (598) 2,195
-------- --------
Total adjustments 30,515 15,459
-------- --------
Net cash flows from operating activities 9,100 7,166
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (9,881) (3,369)
Pending acquisition costs (132) (89)
Cash paid for franchise costs (437) --
Earnest money deposits (8,259) (3,000)
Cash paid in acquisitions of cable television systems (55,494) (178,791)
-------- --------
Net cash flows from investing activities (74,203) (185,249)
-------- --------
Cash Flows From Financing Activities:
Debt borrowings 41,500 124,100
Debt payments (11,000) --
Principal payments on capital lease obligations (70) (13)
Increase in deferred financing fees (143) (3,112)
Partner capital contributions 37,676 55,867
-------- --------
Net cash flows from financing activities 67,963 176,842
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 2,860 (1,241)
Cash and Cash Equivalents, beginning of period 3,639 2,650
-------- --------
Cash and Cash Equivalents, end of period $ 6,499 1,409
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 20,448 4,902
======== ========
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 June 30, 1997, the Company owned and operated
cable television systems in three primary operating clusters - New England, Ohio
and Kentucky - with a fourth, smaller group of cable television systems in the
Southeast. The Company was initially capitalized in November 1995 with
approximately $38 from its sole limited partner, 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
limited partnership. FVOP Inc. is a wholly owned subsidiary of FVP. During the
period from January 1, 1997 to June 30, 1997, the Company received additional
capital contributions of approximately $37,676 from its partners. FVP allocates
certain administrative expenses to FVOP, which are included as capital
contributions from its partners. Such expense allocations were approximately
$255 for the six months ended June 30, 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 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. The accompanying financial
statements should 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 six months ended June
30, 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
six-month period ended June 30, 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 since its inception through June
30, 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. The following table lists the acquisitions and
the purchase price allocation for each.
7
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
PRIMARY LOCATION
PREDECESSOR OWNER OF SYSTEMS DATE ACQUIRED ACQUISITION COST (A)
United Video Cablevision, Inc. ("UVC") Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. ("Longfellow") Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. ("Americable") Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC ("Grassroots") Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $86,000
American Cable Entertainment of Kentucky-Indiana, Inc. Kentucky and Indiana October 9, 1996 $147,500
("ACE")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. ( "Penn/Ohio") Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. ( "Deep Creek") Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. ("Bluegrass") Kentucky March 20, 1997 $10,300
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,900 *
("Clear/B&G")
Milestone Communications of New York, L.P. ("Milestone") Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,700 *
Phoenix Front Row Cablevision ("Front Row") Ohio May 30, 1997 $6,800 *
- -------------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
June 30, 1997.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
----------------------------------
Acquisitions Acquisitions
for the Six for the Six
Months Ended Months Ended
June 30, 1997(a) June 30, 1996(a)
----------- -----------
Property and equipment $ 17,980 68,845
Franchise cost and other intangible assets 38,928 121,242
----------- -----------
Subtotal 56,908 190,087
----------- -----------
Net working capital deficit (914) (1,794)
Less - Earnest money deposits applied (500) (9,502)
------------ -----------
Total cash paid for acquisitions $ 55,494 178,791
=========== ===========
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
8
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
The Company has reported the operating results of its acquired cable systems
from the dates of their respective acquisition. Unaudited pro forma summarized
operating results of the Company for the six months ended June 30, 1996,
assuming the C4, Cox, Triax and ACE acquisitions (the "Acquisitions") had been
consummated on January 1, 1996, are as follows:
----------------------------------------------
Six Months Ended June 30, 1996
----------------------------------------------
Historical Pro Forma
Results Acquisitions Results
----------- ------------ ------------
Revenue $ 27,539 32,484 60,023
Operating, selling, general and administrative expenses (14,933) (18,236) (33,169)
Depreciation and amortization (13,595) (16,580) (30,175)
----------- ------------ ------------
Operating income (loss) (989) (2,332) (3,321)
Interest and other expenses (7,304) (14,040) (21,344)
----------- ------------ ------------
Net loss $ (8,293) (16,372) (24,665)
=========== ============ ============
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregate basis.
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 $78,160. As of June 30, 1997, the Company had advanced
$7,816 as an earnest money deposit related to this transaction.
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, in New Hampshire and Vermont, for a cash
purchase price of $34,500.
On June 9, 1997, the Company entered into an asset purchase agreement with SRW,
Inc.'s Blue Ridge Cable Systems, L.P. to acquire certain cable television
assets, in Tennessee and North Carolina, for a cash purchase price of $4,050. As
of June 30, 1997, the Company had advanced $100 as an earnest money related to
this transaction.
On June 10, 1997, the Company entered into an asset purchase agreement with PCI
Incorporated to acquire certain cable television assets, in Maine, for a cash
purchase price of $13,500. As of June 30, 1997, the Company had advanced $200 as
an earnest money related to this transaction.
As of June 30, 1997, the Company had advanced $30 and $113 to Bluegrass and
Phoenix, respectively, in the form of letters of credit in connection with the
transfer of certain franchises in favor of the Company.
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:
-----------------------------
June 30, December 31,
1997 1996
---- ----
Bank Credit Facility (a) --
Revolving credit loan, due June 30, 2004, interest based on various
floating rate options (8.19% average at June 30, 1997), payable monthly $ 30,500 --
Term loans, due June 30, 2004, interest based on various
floating rate options (8.55% and 8.60% weighted average at June
30, 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 note to UVC, due December 31,
2004, with interest as described below (c) 8,596 8,124
Capital lease obligations, monthly payments of $3, including average
interest at 9.1%, due November 1998 and May 1999 -- 70
-------- --------
Total debt $429,096 398,194
======== ========
(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 ending December 31, 1998, the Company
is required to make prepayments equal to 50% of its excess cash flow,
as defined in the Senior Credit Facility. 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 Senior 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 by the Company. As of June 30, 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 interest 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
interest rate swap agreement. For the six-month period ended June 30,
1997, the Company had recognized an increase in interest expense of
approximately $232 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 in connection
with the Offering, the Company entered into deferred interest rate
setting agreements to reduce the Company'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 Capital) that mature on October 15, 2006. Interest
accrues at 11% per annum beginning from the date of issuance, and is
payable each April 15 and October 15, commencing April 15, 1997.
The Subordinated Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers,
asset sales and changes in control of the Company.
(c) Subordinated Promissory Note to UVC
The subordinated promissory note to UVC, dated November 9, 1995 (the
"UVC Note"), bears interest at 9% for the first three years. At the end
of each subsequent year, the annual interest rate increases 2% per
year. Under the terms of the UVC Note, the Company may issue additional
subordinated promissory notes rather than making cash interest
payments. In this event, the UVC 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 UVC
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 4,590
1999 11,790
2000 17,010
2001 22,230
Thereafter 373,476
--------
$429,096
========
(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 six month periods ended June 30, 1997 and
1996 was $1,907 and $925, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to June 30, 1997 are as follows:
Year Ended December 31 --
1997 $ 257
1998 377
1999 237
2000 150
2001 121
Thereafter 202
------
$1,344
======
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 at the FCC level in
response to complaints on rates for cable programming services. The FCC also
adopted comprehensive and restrictive regulations allowing operators to modify
their regulated rates on a quarterly or annual basis using various methodologies
that account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula. For a more detailed
discussion of these matters, see "Legislation and Regulation" and Note 7 to the
Company's consolidated financial statements in its 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 periods of up to fifteen
years.
(5) SUBSEQUENT EVENTS
As of August 14, 1997, the Company had entered into additional letters of intent
to acquire certain cable television systems, primarily located in Ohio and
Kentucky, in four separate transactions, for aggregate consideration of
approximately $244,700.
13
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEET
------------------------------------
June 30, December 31,
1997 1996
---------------- -----------------
(Unaudited)
ASSETS
Cash $ 166 188
---------- -----------
Total assets $ 166 188
========== ===========
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 (34) (12)
--------- --------
Total owner's equity 66 88
--------- --------
Total liabilities and owner's equity $ 166 188
========= ========
See accompanying note to the financial statements.
14
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OPERATIONS
------------------------------------------------------------------
For the Period
For the Three For the Six from July 26, 1996
Months Ended Months Ended (Inception) through
June 30, June 30, December 31,
1997 1997 1996
------------------- -------------------- ---------------------
(Unaudited) (Unaudited)
Revenue $ - - -
General and administrative expenses 11 22 12
---------- ----------- -----------
Net loss $ (11) (22) (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) -- -- (22) (22)
---- ---- ---- ----
Balance, June 30, 1997 (Unaudited) $ 1 99 (34) 66
==== ==== ==== ====
See accompanying note to financial statements.
16
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
-----------------------
For the Period
For the Six from July 26,
Months Ended 1996 through
June 30, December 31,
1997 1996
----- -----
(Unaudited)
Cash flows from operating activities:
Net loss $ (22) (12)
Decrease in receivable from affiliate -- 100
----- -----
Net cash flows used in operating activities (22) 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 (22) 188
Cash and cash equivalents, beginning of period 188 --
----- -----
Cash and cash equivalents, end of period $ 166 188
===== =====
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:
PRIMARY LOCATION
PREDECESSOR OWNER OF SYSTEMS DATE ACQUIRED ACQUISITION COST (A)
United Video Cablevision, Inc. ("UVC") Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. ("Longfellow") Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. ("Americable") Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC ("Grassroots") Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $86,000
American Cable Entertainment of Kentucky-Indiana, Inc. Kentucky and Indiana October 9, 1996 $147,500
("ACE")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. ( "Penn/Ohio") Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. ( "Deep Creek") Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. ("Bluegrass") Kentucky March 20, 1997 $10,300
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,900 *
("Clear/B&G")
Milestone Communications of New York, L.P. ("Milestone") Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,700 *
Phoenix Front Row Cablevision ("Front Row") Ohio May 30, 1997 $6,800 *
- -------------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
June 30, 1997.
* 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 June 30, 1997, the Company's currently owned cable television systems (the
"Existing Systems") passed approximately 559,300 homes and served approximately
390,350 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.
19
As of August 14, 1997, the Company had entered into additional letters of intent
or asset purchase agreements to acquire certain cable television systems,
primarily located in Maine, Vermont, New Hampshire, Michigan, Ohio, Kentucky and
Tennessee, in eight separate transactions, for aggregate consideration of
approximately $374.9 million. The transactions are expected to close during the
fourth quarter of 1997. These transactions are subject to customary closing
conditions and certain regulatory approvals that are not completely within the
Company's control. The Company is currently in the process of securing the
incremental financing needed to consummate these acquisitions. See Note 2 for
more detailed descriptions of the transactions under asset purchase agreement
and Note 5 for more detailed descriptions of the transactions under letter of
intent. The Company intends to raise additional equity capital as well as secure
additional debt, substantially maintaining its current relative debt to EBITDA
and interest expense ratios.
RESULTS OF OPERATIONS
The three month period ended June 30, 1997 is the only period in which the
Company operated all of the Existing Systems, although certain systems (the
Triax I Systems and the Front Row 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, 1997 represents the
integration of all of the Existing Systems (except for the Triax I and Front Row
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.
As a result of the Company's limited operating history, the Company believes
that its results of operations for the three-month periods ended June 30, 1997
and March 31, 1997, and the six-month periods ended June 30, 1997 and June 30,
1996 are not indicative of the Company's results of operations in the future.
------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1997 March 31, 1997 June 30, 1997 June 30, 1996
--------------- ----------------- ----------------- ----------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
------ ---- -------- ---- -------- ---- -------- ----
Amounts in thousands
(Unaudited)
Revenue $ 34,081 100.0% $ 31,555 100.0% $ 65,636 100.0% $ 27,539 100.0%
Expenses
Operating expenses 17,679 51.8 16,783 53.2 34,462 52.5 13,668 49.6
Corporate expenses 1,048 3.1 1,001 3.2 2,049 3.1 1,265 4.6
------ ---- -------- ---- -------- ---- -------- ----
EBITDA (a) 15,354 45.1% $ 13,771 43.6% $ 29,125 44.4% $ 12,606 45.8%
====== ==== ======== ==== ======== ==== ======== ====
Basic Subscribers 390,350 362,350 390,350 217,900
Pay Units 164,500 149,500 164,500 91,300
- -------------
(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
with which is measured by computations substantially similar to those used
in determining EBITDA. However, EBITDA is not intended to be a performance
measure that should be regarded as an alternative 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.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenue increased 8.0%, or approximately $2.5 million, to approximately $34.1
million for the three months ended June 30, 1997 from approximately $31.6
million for the three months ended March 31, 1997. Operating and
20
corporate expenses increased approximately 5.3% and 4.7%, respectively, for the
three months ended June 30, 1997 from the three months ended March 31, 1997. The
number of basic subscribers increased approximately 7.7% from 362,350 at March
31, 1997 to 390,350 as of June 30, 1997, while the number of pay units increased
approximately 10.0% from 149,500 to 164,500 over the three-month period.
Significant growth over the first quarter of 1997 in revenue, operating and
corporate expenses, basic subscribers and pay units is primarily attributable to
the Company's acquisition of cable systems during March and May of 1997. The
Company's primary focus over the twelve-month period ended June 30, 1997 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
enhance revenues. In the second quarter of 1997, the Company has continued to
progress in certain phases of these objectives, and the impact of certain of
these efforts has resulted in the increase in EBITDA margin during the second
quarter of 1997. The Company's EBITDA margin increased to 45.1% for the three
months ended June 30, 1997 from 43.6% for the three months ended March 31, 1997.
On a pro forma basis, adjusted to include the results of operations of the
systems acquired during the quarter, the Company's revenue increased
approximately 2.4% and EBITDA increased approximately 4.4% from the quarter
ended March 31, 1997.
The Company consummated two acquisitions during the second quarter of 1997,
acquiring cable systems serving, in the aggregate, approximately 25,900 basic
subscribers in Ohio and Michigan. The Company is integrating employees from the
predecessor owners and is in the process of reducing employee staffing from
pre-acquisition levels. The Company has completed the conversion of two separate
billing systems for these two acquisitions into its automated billing system and
centralized database and will serve the customers associated with these systems
from its regional customer service center in Chillicothe, Ohio.
The Company continues the process of rebuilding and upgrading certain systems,
completing line extensions and consolidating headends. The Company had capital
expenditures of approximately $4.9 million during the second quarter of 1997
related to its technical enhancement activities. The Company completed its
rebuild of the Winchester, Kentucky system to a 750 MHz design in the first
quarter of 1997 and received approximately 11,000 addressable converters during
the second quarter which are being distributed throughout the system. The
Company also expended significant capital for the headend equipment needed to
launch additional channels contemporaneously with the service rate increases
anticipated over the course of 1997 and initiated the process of significant
rebuild/upgrade activity primarily in its New England and Ohio operating
clusters. The Company is at varying stages of completion on eight separate
upgrade/rebuild projects in systems serving, in the aggregate, approximately
37,500 basic subscribers. During the second quarter of 1997, the Company
completed the consolidation of one headend facility and initiated the process of
eliminating additional headend facilities.
In June, the Company installed HITS (Headend-in-the-Sky) headend equipment in a
system in its New England cluster. The Company has installed digital terminal
equipment in the homes of certain customers and commenced testing the HITS
digital television system. The Company anticipates a two-month testing period,
at the completion of which the Company will hold a focus group of the test users
and make final determinations as to the pricing and packaging of the digital
television service to be offered to all of the system's subscribers. The Company
plans to launch the service commercially in early fall of 1997. Two additional
HITS installations are planned for the third quarter of 1997 with testing and
commercial launches for those systems scheduled for the subsequent quarter.
In an effort to maximize revenue from existing subscribers, the Company has
established a centralized, in-house telemarketing 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
21
on telemarketing premium services to its customers in the Company's Ohio and New
England operating clusters. From opening, to June 30, 1997, telemarketers
working primarily out of the new telemarketing center contacted approximately
41,000 of the Company's subscribers located primarily in Ohio and the New
England clusters, marketing the Company's "Ultimate TV" package: a premium
service package consisting of at least three premium channels. Such marketing
efforts increased the number of pay units purchased by those subscribers by
approximately 17.4%. The Company intends to continue to aggressively market
selected premium service packages through its internal telemarketing resources.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue increased 138.3%, or approximately $38.1 million, to approximately $65.6
million for the six months ended June 30, 1997 from approximately $27.5 million
for the six months ended June 30, 1996. Operating and corporate expenses
increased approximately 152.1% and 62.0%, respectively, for the six months ended
June 30, 1997 from the six months ended June 30, 1996. The number of basic
subscribers increased approximately 79.1% from 217,900 at June 30, 1996 to
390,350 as of June 30, 1997, while the number of pay units increased
approximately 80.2% from 91,300 to 164,500 over the twelve-month period.
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 ten separate transactions. The Company's primary focus over
the twelve-month period ended June 30, 1997, has been to achieve critical mass
through acquisitions, to establish its core geography and to begin the
consolidation of operations.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenue increased 91.9%, or approximately $16.3 million, to approximately $34.1
million for the three months ended June 30, 1997 from approximately $17.8
million for the three months ended June 30, 1996. Operating and corporate
expenses increased approximately 96.9% and 50.8%, respectively, for the three
months ended June 30, 1997 from the three months ended June 30, 1996.
Significant growth in revenue, operating and corporate expenses is primarily
attributable to the Company's acquisition of cable systems in ten separate
acquisitions.
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
and equity capital. The Company intends to continue to finance such expenditures
in the future through 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 (the "Revolving Credit Facility"), a $100.0 million, 8.25-year term
loan (the "Facility A Term Loan") and a $90.0 million, 9.25-year term loan (the
"Facility B Term Loan"). At June 30, 1997, the Company had $30.5 million
outstanding 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 June 30, 1997 on the
outstanding borrowings under the Revolving Credit Facility were approximately
8.19%, and under the Facility A Term Loan and the Facility B Term Loan were
approximately 8.19% and 8.94%, 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. For
22
the three-month period ended June 30, 1997, the Company had recognized an
increase to interest expense of approximately $72,000 as a result of these
interest rate swap agreements.
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 Company 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.
As of June 30, 1997, all of such equity commitments had been invested in FVP and
FVP had contributed substantially all of such equity investments to the Company.
During the six-month period ended June 30, 1997, the Company received
approximately $37.7 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 in accordance with
the provisions of the Senior Credit Facility from EBITDA of approximately $29.1
million generated by the Company for the six-month period ended June 30, 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"). The Company may repay the UVC Note at any time.
However, as of August 14, 1997, the UVC Note had not yet been repaid.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities for the six months ended June 30, 1997 were
$9.1 million compared to $7.2 million for the six months ended June 30, 1996.
The increase was primarily a result of cable television system operations
acquired during 1996 and 1997.
23
CASH FLOWS FROM INVESTING ACTIVITIES
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the six-month period
ended June 30, 1997 were approximately $9.9 million compared to approximately
$3.4 million for the six-month period ended June 30, 1996. Capital expenditures
primarily consisted of expenditures for the construction and expansion of the
delivery system, and additional costs were incurred related to the expansion of
customer service facilities. In addition, the Company capitalized approximately
$0.4 million attributable to the cost of obtaining certain franchise, leasehold
and other long-term agreements. The Company expects to spend in excess of $49
million over the next two years for capital improvement related projects
consisting primarily of installation of (i) fiber optic cable and microwave
links which will allow for the anticipated reduction in the number of headends,
(ii) analog and digital converter boxes which will allow the Company to more
effectively market premium and pay-per-view services and (iii) the continued
deployment of coaxial cable to build-out the Existing Systems. The Company
invested approximately $55.5 million in acquisitions during the six months ended
June 30, 1997 compared with approximately $178.8 million for the same period in
1996.
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisitions during the first half of 1997 were financed primarily with equity
contributions from the Company's partners; acquisitions during the first half 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.
24
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)
10.16 Asset Purchase Agreement dated May 8, 1997 between A-R Cable Services - ME, Inc. and
FrontierVision Operating Partners, L.P.
10.17 Asset Purchase Agreement dated as of May 12, 1997 between TCI
Cablevision of Vermont, Inc., Westmarc Development Joint Venture
and FrontierVision Operating Partners, L.P.
27.4 Financial Data Schedule as of and for the six-month period ended June 30, 1997 and Financial Data
Schedule as of and for the three-month period ended June 30, 1997.
---------------
Footnote References
(1) Incorporated by reference to the exhibits to the Registrants' Registration Statement on Form S-1,
File No. 333-9535.
(2) Incorporated by reference to the exhibits of the Registrants' Quarterly Report on Form 10-Q, for
the quarter ended September 30, 1996, File No. 333-9535.
(b) Reports on Form 8-K
A Form 8-K was filed on July 11, 1997 relating to the release of
preliminary earnings for the quarterly period ended June 30, 1997.
25
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: August 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 CORPORATION
Date: August 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)