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 September 30, 1998
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 November 12, 1998: 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 SEPTEMBER 30, 1998
INDEX
PART I. Financial Information PAGE
Item 1. Consolidated Financial Statements of FrontierVision Operating
Partners, L.P. and Subsidiaries.........................3
Notes to Consolidated Financial Statements..............7
Financial Statements of FrontierVision Capital
Corporation.............................................15
Note to Financial Statements............................19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........20
PART II. Other Information.......................................29
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
---------------------------------------
September 30, December 31,
1998 1997
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 9,647 $ 3,413
Accounts receivable, net of allowance for doubtful accounts
of $436 and $640 9,923 8,071
Prepaid expenses and other 4,176 2,785
Investment in cable television systems, net:
Property and equipment 292,984 247,724
Franchise costs and other intangible assets 680,356 637,725
------------ -----------
Total investment in cable television systems, net 973,340 885,449
------------ -----------
Deferred financing costs, net 16,606 17,990
Earnest money deposits 9,500 2,000
------------ -----------
Total assets $ 1,023,192 $ 919,708
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 8,708 $ 2,647
Accrued liabilities 16,361 15,126
Subscriber prepayments and deposits 3,058 1,828
Accrued interest payable 11,338 5,064
Deferred income taxes 14,109 -
Debt 750,000 632,000
------------ -----------
Total liabilities 803,574 656,665
------------ -----------
Partners' capital:
FrontierVision Holdings, L.P. 219,398 262,780
FrontierVision Operating Partners, Inc. 220 263
------------ -----------
Total partners' capital 219,618 263,043
Commitments
------------ -----------
Total liabilities and partners' capital $ 1,023,192 $ 919,708
============ ===========
See accompanying notes to consolidated financial statements.
3
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
---------------------------------------------------------------------
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------ --------------- ---------------- -----------------
Revenue $ 61,964 $ 36,750 $ 175,559 $ 102,386
Expenses:
Operating expenses 30,380 18,332 88,469 52,794
Corporate administrative expenses 1,561 1,071 5,072 3,120
Depreciation and amortization 25,429 15,899 74,300 45,090
Storm related costs - - 705 -
------------- --------- ---------- ------------
Total expenses 57,370 35,302 168,546 101,004
------------- --------- ---------- ------------
Operating income/(loss) 4,594 1,448 7,013 1,382
Interest expense, net (17,257) (10,988) (49,041) (32,290)
Other expense (31) (7) (2,071) (54)
------------- --------- ---------- ------------
Net loss before income tax benefit (12,694) (9,547) (44,099) (30,962)
Income tax benefit 674 - 674 -
------------- --------- ---------- ------------
Net loss $ (12,020) $ (9,547) $ (43,425) $ (30,962)
============= ========= ========== ============
Net loss allocated to:
FrontierVision Holdings, L.P.
(General Partner) $ (12,008) $ (9,537) $ (43,382) $ (30,931)
FrontierVision Operating Partners, Inc.
(Limited Partner) (12) (10) (43) (31)
------------- ---------- ---------- ------------
$ (12,020) $ (9,547) $ (43,425) $ (30,962)
============= ========== ========== ============
See accompanying notes to consolidated financial statements.
4
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
----------------------------------------------------------
FrontierVision
FrontierVision Operating
Holdings, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
------------------- -------------------- ----------------
Balance, December 31, 1997 $ 262,780 $ 263 $ 263,043
Net loss (Unaudited) (43,382) (43) (43,425)
------------ ------------ ----------
Balance, September 30, 1998 (Unaudited) $ 219,398 $ 220 $ 219,618
============ ============ ==========
See accompanying notes to consolidated financial statements.
5
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
---------------------------------------
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
----------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (43,425) $ (30,962)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 74,300 45,090
Deferred tax benefit (674) -
Net loss on disposal of assets 2,038 -
Amortization of deferred debt issuance costs 1,555 1,530
Accretion of indebtedness - 721
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (1,506) 1,209
Prepaid expenses and other (1,103) (480)
Accounts payable and accrued liabilities 6,883 (2,713)
Subscriber prepayments and deposits 1,190 (548)
Accrued interest payable 6,274 4,714
------------ -------------
Total adjustments 88,957 49,523
------------ -------------
Net cash flows from operating activities 45,532 18,561
------------ -------------
Cash Flows From Investing Activities:
Capital expenditures (39,396) (18,547)
Pending acquisition costs (344) (289)
Cash paid for franchise costs (12) (482)
Earnest money deposits (9,550) (8,259)
Cash paid in acquisitions of cable television systems (107,825) (72,402)
------------ -------------
Net cash flows from investing activities (157,127) (99,979)
------------ -------------
Cash Flows From Financing Activities:
Debt borrowings 118,000 56,500
Debt payments - (76,500)
Principal payments on capital lease obligations - (70)
Increase in deferred financing fees (144) (154)
Offering costs related to Senior Subordinated Notes (27) (102)
Partner capital contributions - 179,903
------------ -------------
Net cash flows from financing activities 117,829 159,577
------------ -------------
Net Increase in Cash and Cash Equivalents 6,234 78,159
Cash and Cash Equivalents, beginning of period 3,413 3,639
------------ -------------
Cash and Cash Equivalents, end of period $ 9,647 $ 81,798
============ =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 42,076 $ 25,564
============ =============
See accompanying notes to consolidated financial statements.
6
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
Organization and Capitalization
FrontierVision Operating Partners, L.P. (the "Company" or "FVOP") is a Delaware
limited partnership formed on July 14, 1995 for the purpose of acquiring and
operating cable television systems. The Company owns and operates 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, at the time, sole general partner, FrontierVision Partners, L.P.
("FVP"), a Delaware limited partnership.
On September 19, 1997, FrontierVision Holdings, L.P. ("Holdings"), a Delaware
limited partnership, and FrontierVision Holdings Capital Corporation ("Holdings
Capital") co-issued $237,650 aggregate principal amount at maturity of 11 7/8%
Senior Discount Notes due 2007 (the "Discount Notes"). Holdings, a
newly-organized holding company, was formed to be the co-issuer of the Discount
Notes and to be the new general partner of FVOP. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests in
FVOP immediately prior to the issuance of the Discount Notes, and as a result,
FVOP and FrontierVision Capital Corporation ("Capital") are wholly-owned
consolidated subsidiaries of Holdings. In addition, FVOP Inc., previously a
wholly-owned subsidiary of FVP, is now a wholly-owned subsidiary of Holdings.
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. 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, 1997 (the "1997
10-K"), for additional disclosures, including a summary of the Company's
accounting policies.
The following notes, insofar as they are applicable to the nine months ended
September 30, 1998, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results for the entire 1998 fiscal year.
Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("Statement 109"), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
7
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION (continued)
period that includes the enactment date. The Company's deferred tax liability at
September 30, 1998 is primarily the result of temporary differences on property
and equipment and intangible assets arising from the acquisition of the stock of
New England Cablevision of Massachusetts, Inc.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
Storm Related Costs
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the nine months ended September
30, 1998, the Company has recognized a loss due to service outages and increased
labor costs of approximately $705 due to the ice storms. Additionally, the
Company has incurred approximately $540 of capital expenditures to replace
damaged subscriber drops. The Company expects the loss to be isolated to the
first quarter of 1998, although the long-term financial effect of the ice storms
cannot be determined.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 will not be material.
(2) ACQUISITIONS
Acquisitions
The Company has completed several acquisitions during the periods presented. All
of the acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based upon the estimated fair values at
the respective dates of acquisition. Such allocations are subject to adjustments
as final appraisal information is received by the Company. Amounts allocated to
property, plant and equipment and to intangible assets will be depreciated and
amortized, respectively, prospectively from the date of acquisition based upon
the Company's useful lives and amortization periods. The following table lists
the acquisitions and the purchase price, including working capital adjustments
and transaction costs, for each.
8
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) ACQUISITIONS (continued)
- ----------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition
Cost(a)
- ----------------------------------------------------------------------------------------------------------------------
Bluegrass Cable Partners, L.P. Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Kentucky March 31, 1997 $1,800
Inc.
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,900
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $79,100
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc
Development Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,800
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $204,200
TVC-Sumpter Limited Partnership and North Oakland
Cablevision Partners Limited Partnership Michigan March 6, 1998 $14,400
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $9,900
New England Cablevision of Massachusetts, Inc. Massachusetts April 3, 1998 $45,000
("NECMA")
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $38,000*
Unity Cable Television, Inc. Maine September 30, 1998 $800*
- ---------------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
September 30, 1998.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions have been allocated
to the acquired assets and liabilities as follows:
-----------------------------------------------
Acquisitions Acquisitions
for the Nine for the Nine
Months Ended Months Ended
September 30, 1998 (a) September 30, 1997 (a)
-----------------------------------------------
Property, plant and equipment $ 40,679 $ 25,000
Franchise costs and other intangible assets 83,798 49,184
-------------- -------------
Subtotal 124,477 74,184
-------------- -------------
Net working capital (deficit) 181 (982)
Deferred income taxes (14,783) -
Less - Earnest money deposits applied (2,050) (800)
-------------- -------------
Total cash paid for acquisitions $ 107,825 $ 72,402
============== =============
- ------------
(a) The combined purchase price includes purchase price adjustments for certain
acquisitions consumed prior to the respective periods.
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, assuming the Triax I, Cablevision, TCI-VT/NH,
Cox-Central Ohio, NECMA and TCI-Bryan acquisitions (the "Acquisitions") had been
consummated on January 1, 1997, are as follows:
9
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) ACQUISITIONS (continued)
-----------------------------------------------------
Nine Months Ended September 30, 1998
-----------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ----------- -----------
Revenue $ 175,559 $ 6,746 $ 182,305
Operating, selling, general and administrative expenses (94,246) (3,934) (98,180)
Depreciation and amortization (74,300) (2,991) (77,291)
---------- ----------- -----------
Operating income (loss) 7,013 (179) 6,834
Interest and other expenses (50,438) (2,022) (52,460)
---------- ------------ -----------
Net loss $ (43,425) $ (2,201) $ (45,626)
========== ============ ===========
-----------------------------------------------------
Nine Months Ended September 30, 1997
-----------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ----------- -----------
Revenue $ 102,386 $ 63,860 $ 166,246
Operating, selling, general and administrative expenses (55,914) (33,938) (89,852)
Depreciation and amortization (45,090) (25,236) (70,326)
---------- ----------- -----------
Operating income 1,382 4,686 6,068
Interest and other expenses (32,344) (24,689) (57,033)
---------- ---------- -----------
Net loss $ (30,962) $ (20,003) $ (50,965)
========== =========== ===========
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 date 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 basis.
On June 24, 1998, the Company entered into an agreement with State Cable TV
Corporation and Better Cable TV Company (collectively, "State") to acquire all
of State's cable television system assets in Maine and New Hampshire, for a base
purchase price of $188,800. As of September 30, 1998, the Company had advanced
$9,500 as an earnest money deposit related to this transaction. This transaction
was consummated on October 23, 1998.
(3) DEBT
The Company's debt was comprised of the following:
----------------------------------
September 30, December 31,
1998 1997
---------------- ----------------
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate
options (7.66% average at September 30, 1998), payable monthly $ 50,000 $ -
Term loans, interest based on various floating rate options (7.85%
and 8.33% weighted average at September 30, 1998 and December 31,
1997, respectively), payable monthly 500,000 432,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
------------ -----------
Total debt $ 750,000 $ 632,000
============ ===========
10
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) DEBT (continued)
(a) Bank Credit Facility.
On December 19, 1997, the Company entered into a Second Amended and
Restated Credit Agreement (the "Amended Credit Facility") increasing
the available senior debt by $535.0 million, for a total availability
of $800.0 million. The amount available under the Amended Credit
Facility includes two term loans of $250.0 million each (the "Facility
A Term Loan" and the "Facility B Term Loan") and a $300.0 million
revolving credit facility (the "Revolving Credit Facility"). The
Facility A Term Loan and the Revolving Credit Facility both mature on
September 30, 2005. The entire outstanding principal amount of the
Revolving Credit Facility is due on September 30, 2005, with escalating
principal payments due quarterly beginning December 31, 1998 under the
Facility A Term Loan. The Facility B Term Loan matures March 31, 2006
with 95% of the principal being repaid in the last two quarters of the
term of the facility.
Under the terms of the Amended Credit Facility, with certain
exceptions, the Company has a mandatory prepayment obligation upon a
change of control of the Company and the sale of any of its operating
systems. Further, beginning with the year ending December 31, 2001, the
Company is required to make prepayments equal to 50% of its excess cash
flow, as defined in the Amended Credit Facility. The Company also pays
commitment fees ranging from 1/2% - 3/8% per annum on the average
unborrowed portion of the total amount available under the Amended
Credit Facility.
The Amended Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company. As of September 30, 1998, the Company was in compliance with
the financial covenants of the Amended Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
(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 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.
FrontierVision Cable New England, Inc. is a subsidiary guarantor of the
Notes.
The Subordinated Notes Indenture has certain restrictions on incurrence
of indebtedness, distributions, mergers, asset sales and changes in
control of the Company.
11
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) DEBT (continued)
The fair value of the Notes is estimated based on Portal Market
quotations of the issue. At September 30, 1998, the fair value of the
Company's Notes was $220,000.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes.
(c) Interest Rate Protection Agreements
In order to convert effectively certain of the interest payable at
variable rates under the Amended Credit Facility to interest at fixed
rates, the Company has entered into interest rate swap agreements for
notional amounts totaling $187,500, and maturing between November 15,
1999 and October 7, 2001. According to these agreements, the Company
pays or receives the difference between (1) an average fixed rate of
5.84% and (2) a floating rate of the three month libor applied to the
same $187,500 notional amount every three months during the term of the
interest rate swap agreement. On April 7, 1998, the Company terminated
one of its interest rate swap agreements for a notional amount of
$82,500 and entered into a new interest rate swap agreement for
$100,000. There was no termination fee associated with this
transaction.
On April 8, 1998, the Company entered into a collar interest rate swap
agreement ("Collar Agreement") for a notional amount of $100,000,
maturing on January 8, 2001. The Collar Agreement provides for
different exchanges between the Company and the counterparty depending
on the level of the floating three month LIBOR rate (5.69% at September
30, 1998). Such exchanges occur every three months during the term of
the Collar Agreement. The different exchanges are as follows:
(1) When LIBOR is below 5.05%, the Company pays to the counterparty
the difference between the fixed rate of 5.65% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 5.65% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.65%
and LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.65% and 5.05%, the
Collar Agreement has no financial effect.
For the nine months ended September 30, 1998 and 1997, the Company had
recognized an increase in interest expense of approximately $156 and
$267, respectively, as a result of the interest rate swap agreements.
On October 3, 1997, in order to convert certain of the future interest
payable at various rates under future indebtedness, the Company entered
into a forward interest rate swap agreement, commencing October 15,
1998, for a notional amount totaling $150,000, maturing on October 15,
2001. According to this agreement, the Company will pay or receive the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every three months during the term of the interest rate swap agreement.
12
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) DEBT (continued)
Information concerning the Company's interest rate agreements at
September 30, 1998 is as follows:
Amount to be
Interest rate Notional paid upon
Expiration date to be received amount termination (i)
--------------- -------------- ------ ---------------
November 15, 1999 5.912% $ 65,000 $ 681.0
November 15, 1999 5.188% 22,500 65.8
January 8, 2001 5.650% 100,000 1,872.2
October 7, 2001 5.940% 100,000 3,541.0
October 15, 2001 6.115% 150,000 5,708.0
------------ -------------
$ 437,500 $ 11,868.0
============ =============
(i) The estimated amount that the Company would pay to terminate
the agreements on September 30, 1998. This amount takes into
consideration current interest rates, the current
creditworthiness of the counterparties and represents the fair
value of the interest rate agreements.
The debt of the Company matures as follows:
Year ended December 31 --
1998 $ 1,875
1999 11,144
2000 24,575
2001 34,575
2002 44,575
Thereafter 633,256
------------
$ 750,000
============
(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 nine month periods ended September 30,
1998 and 1997 was $4,172 and $2,897, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to September 30, 1998 are as follows:
Year ended December 31 --
1998 $ 402
1999 1,164
2000 881
2001 631
2002 491
Thereafter 465
----------
$ 4,034
==========
13
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(4) COMMITMENTS AND CONTINGENCIES (continued)
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. Cable operators may 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.
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 3% of system franchise revenue, as defined in the
franchise. 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.
For a more detailed discussion of the federal, state and local regulations
affecting the Company, see "Legislation and Regulation" in the 1997 10-K.
The Company and its affiliates have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is reasonably possible the Company may incur losses upon conclusion
of such matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
------------------------------------
September 30, December 31,
1998 1997
---------------- ----------------
(Unaudited)
ASSETS
Cash $ - $ 143
---------- --------
Total assets $ - $ 143
========== ========
LIABILITIES AND OWNER'S EQUITY
Payable to FrontierVision Operating Partners, L.P. $ 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 (200) (57)
---------- --------
Total owner's equity (100) 43
---------- --------
Total liabilities and owner's equity $ - $ 143
========== ========
See accompanying note to the financial statements.
15
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ------------------ ------------------- --------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ - $ - $ - $ -
General and administrative expenses - 11 143 33
---------- ---------- ---------- ----------
Net loss $ - $ (11) $ (143) $ (33)
========== ========== ========== ==========
See accompanying note to financial statements.
16
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OWNER'S EQUITY
-----------------------------------------------------------
Common Additional Retained Total owner's
stock paid-in capital deficit equity
---------- --------- ------- ----------
Balance, December 31, 1997 $ 1 $ 99 $ (57) $ 43
Net loss (Unaudited) - - (143) (143)
---------- --------- ------- ----------
Balance, September 30, 1998 (Unaudited) $ 1 $ 99 $ (200) $ (100)
========== ========= ======= ==========
See accompanying note to financial statements.
17
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
--------------------------------
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
--------------- ----------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (143) $ (33)
Decrease in receivable from affiliate - -
--------- ---------
Net cash flows used in operating activities (143) (33)
--------- ---------
Cash flows from investing activities - -
--------- ---------
Cash flows from financing activities:
Advance from FVOP - -
--------- ---------
Net cash flows from financing activities - -
--------- ---------
Net increase in cash and cash equivalents (143) (33)
Cash and cash equivalents, beginning of period 143 188
--------- ---------
Cash and cash equivalents, end of period $ - $ 155
========= =========
See accompanying note to financial statements.
18
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
due 2006.
19
PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 within the meaning
of Section 21E of the Securities Exchange Act of 1934. 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. 2 to Form S-1 filed April
6, 1998 (File no. 333-9535).
Introduction and Recent Developments
The Company's objective is to increase its subscriber base and operating cash
flow through: (i) selective acquisitions of cable television systems that can be
integrated with existing operations and (ii) more efficient operations and
internal revenue growth. The Company continues the process of acquiring and
integrating cable systems with its current systems and continues to invest
significant capital for their technical enhancement.
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:
--------------------------------------------------------------
Purchase Basic Purchase
Price(1) Subscribers Price Per
Predecessor Owner Date Acquired (in millions) Acquired(2) Subscriber
-------------------- --------------- ----------- ----------
United Video Cablevision, Inc. (the "UVC Systems ")................ November 9, 1995 $ 120.8 87,400 $1,382
Longfellow Cable Company, Inc. (the "Longfellow Systems ")......... November 21, 1995 6.1 5,100 1,196
C4 Media Cable Southeast, Limited Partnership (the "C4
Systems")........................................................ February 1, 1996 47.6 40,400 1,178
Americable International Maine, Inc. (the "Americable
Systems ")....................................................... March 29, 1996 4.8 3,350 1,433
Cox Communications (the "Cox Systems ")............................ April 9, 1996 136.0 77,200 1,762
Phoenix Grassroots Cable Systems, LLC (the "Grassroots
Systems")........................................................ August 29, 1996 9.3 7,400 1,257
Triax Southeast Associates, L.P. (the "Triax Systems ")............ October 7, 1996 84.7 53,200 1,592
American Cable Entertainment of Kentucky-Indiana, Inc. (the
"ACE Systems").................................................... October 9, 1996 146.0 83,250 1,754
SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio
Systems ")....................................................... October 31, 1996 3.8 3,225 1,178
SRW, Inc.'s Deep Creek Cable TV, L.P. (the "Deep Creek
System")......................................................... December 23, 1996 3.0 2,175 1,379
Bluegrass Cable Partners, L.P. (the "Bluegrass Systems ").......... March 20, 1997 9.9 7,225 1,370
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc. (the "Clear/B&G Systems ")................................. March 31, 1997 1.7 1,450 1,172
Milestone Communications of New York, L.P. (the "Milestone
Systems")........................................................ March 31, 1997 2.8 2,125 1,318
Triax Associates I, L.P. (the "Triax I Systems ").................. May 30, 1997 34.5 20,700 1,667
Phoenix Front Row Cablevision (the "Front Row Systems ")........... May 30, 1997 6.8 5,250 1,295
PCI Incorporated (the "Bedford System")............................. August 29, 1997 13.5 7,750 1,742
SRW, Inc.'s Blue Ridge Cable Systems, L.P. (the "Blue Ridge
Systems")........................................................ September 3, 1997 4.1 4,550 901
Harold's Home Furnishings, Inc. (the "Harold's System")............. October 31, 1997 1.5 1,480 1,014
A-R Cable Services - ME, Inc. (the "Cablevision Systems")........... October 31, 1997 78.2 54,300 1,440
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture (the "TCI-VT/NH Systems")......................... December 2, 1997 34.5 22,100 1,561
Cox Communications, Inc. (the "Cox-Central Ohio Systems")........... December 19, 1997 203.0 84,400 2,405
TVC-Sumpter Linked Partnership and North Oakland Cablevision
Partners Limited Partnership (the "Televista Systems")........... March 6, 1998 14.2 8,100 1,753
TCI Cablevision of Ohio, Inc. (the "TCI - Pt. Clinton
Systems")........................................................ April 1, 1998 10.0 6,000 1,667
New England Cablevision of Massachusetts, Inc. (the "NECMA
Systems")........................................................ April 3, 1998 44.7 26,500 1,687
Ohio Cablevision Network, Inc. (the "TCI - Bryan Systems)........... July 31, 1998 38.0 19,700 1,929
Unity Cable Television, Inc. (the "Unity System")................... September 30, 1998 0.8 590 1,356
-------- ------- ------
Total...................................................... $1,060.3 634,920 $1,670
======== ======= ======
- --------------------
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that were sold by the Company in
1996.
20
On July 31, 1998, the Company completed the acquisition of certain cable
television system assets in Ohio from Ohio Cablevision Network, Inc. for the
cash purchase price of $38.0 million. On September 30, 1998, the Company
consummated the acquisition of certain cable television system assets in Maine
from Unity Cable Television, Inc. for the cash purchase price of approximately
$0.8 million.
As of September 30, 1998, the Company's currently owned cable television systems
(the "Existing Systems") passed approximately 902,900 homes and served
approximately 630,200 basic subscribers. As of November 12, 1998 the Company has
consummated acquisitions of additional cable television systems to serve over
700,000 basic subscribers within its current operating clusters.
On October 23, 1998, the Company consummated the acquisition of cable television
system assets in Maine and New Hampshire from State Cable TV Corporation and
Better Cable TV Company (collectively, "State") for an aggregate purchase price
of $188.2 million. The eight State systems served approximately 75,000 basic
subscribers as of September 30, 1998, in communities directly contiguous to
certain of the Existing Systems in southern Maine and central New Hampshire.
With the acquisition of the State systems, the Company has increased the size of
its New England cluster to over 250,000 basic subscribers, serving over 150,000
basic customers and four of the five largest cities in the state of Maine. Over
70% of State's customers are served from two headend facilities, with its
largest system, Augusta, Maine, currently serving over 40,000 customers.
Additionally, up to ten headend facilities serving the Existing Systems are
expected to be combined with existing State systems; consequently, the Company
expects to significantly increase the size of its New England cluster while
reducing the number of headend facilities. The Company will operate the State
systems as part of its New England cluster.
As of November 12, 1998, the Company had entered into two additional asset
purchase or exchange agreements to acquire cable television systems located in
Ohio, Maine and New Hampshire for aggregate consideration of approximately $4.9
million. In addition, the Company had entered into an additional asset purchase
agreement to sell cable television systems located in Virginia and Tennessee for
aggregate consideration of approximately $5.2 million. All of these pending
transactions are expected to close by year-end 1998 and are subject to customary
closing conditions, and certain regulatory approvals that are not completely
within the Company's control.
See Note 2 to the financial statements for a more detailed description of the
Company's acquisitions.
Results Of Operations
Following is a discussion of the Company's results of operations for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997. The Company has operated the Existing Systems for a limited period of time
and had no operations prior to November 9, 1995. The three month period ended
September 30, 1998, is the only period in which the Company operated all of the
Existing Systems, although the TCI-Bryan Systems were purchased during the
period and are reflected only for that portion of the period that such systems
were owned by the Company.
21
The following table illustrates the Company's operating activities on a
comparative basis:
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997 (Unaudited)
---------------------------------------------------
Three Months Ended Three Months Ended
September 30, 1998 (a) September 30, 1997 (a)
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
----------- ------- --------- --------
In thousands
Revenue................................... $ 61,964 100.0% $ 36,750 100.0%
Expenses
Operating expenses.................... 30,380 49.0 18,332 49.9
Corporate expenses.................... 1,561 2.5 1,071 2.9
Depreciation and amortization......... 25,429 41.1 15,899 43.3
----------- ------- --------- --------
Total expenses................. 57,370 92.6 35,302 96.1
----------- ------- --------- --------
Operating income/(loss)................... 4,594 7.4 1,448 3.9
Interest expense, net..................... (17,257) (27.8) (10,988) (29.9)
Other expense............................. (31) (0.1) (7) -
Income tax benefit........................ 674 1.1 - -
----------- ------- --------- --------
Net loss.................................. $ (12,020) (19.4)% $ (9,547) (26.0)%
=========== ======= ========= ========
EBITDA (b)................................ $ 30,023 48.5% $ 17,347 47.2%
=========== ======== ========= ========
Basic subscribers......................... 630,200 401,300
Premium units............................. 261,000 172,850
- ------------
(a) 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.
(b) 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 bank indebtedness (the "Amended 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.
The Company's revenues increased significantly in the three months ended
September 30, 1998, to $62.0 million versus $36.8 million for the same period in
1997, an increase of $25.2 million, or 68.6%. Revenue growth was driven
primarily by an increase in cable subscribers to 630,200 basic subscribers at
September 30, 1998 from 401,300 at September 30, 1997, an increase of 57.0%.
Premium units grew from 172,850 to 261,000, or 51.0%, in the same period.
Subscriber growth was largely the result of acquisitions made in nine separate
transactions during the twelve months ended September 30, 1998.
Although operating expenses and corporate expenses increased in the three months
ended September 30, 1998 versus the same period a year earlier (by 65.7% and
45.8%, respectively), those expenses fell as a percentage of revenue. As a
percentage of revenue, operating and corporate expenses fell to 51.5% of
revenues in the three months ended September 30, 1998 from 52.8% in the
year-earlier period. The Company continues to focus on integration of business
operations to achieve efficiencies and lower operating costs.
The combination of subscriber and revenue growth with operating efficiencies led
to an increase in EBITDA in the third quarter of 1998, to $30.0 million from
$17.3 million in the same period a year earlier, a 73.1% increase. The EBITDA
margin also increased, to 48.5% in the period ended September 30, 1998 from
47.2% for the same period in 1997.
Depreciation and amortization expense increased 59.9% as a result of acquisition
activity that occurred in 1997 and 1998. Net interest expense increased to $17.3
million from $11.0 million primarily as a result of the higher weighted average
drawings on the Company's senior bank indebtedness.
22
Nine Months Ended September 30, 1998 Compared to
Nine Months Ended September 30, 1997 (Unaudited)
---------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 1998 (a) September 30, 1997 (a)
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
In thousands
Revenue................................... $ 175,559 100.0% $ 102,386 100.0%
Expenses
Operating expenses.................... 88,469 50.4 52,794 51.6
Corporate expenses.................... 5,072 2.9 3,120 3.0
Depreciation and amortization......... 74,300 42.3 45,090 44.0
Storm related costs (b) .............. 705 0.4 - -
----------- ------- --------- --------
Total expenses................. 168,546 96.0 101,004 98.6
----------- ------- --------- --------
Operating income/(loss)................... 7,013 4.0 1,382 1.4
Interest expense, net..................... (49,041) (27.9) (32,290) (31.5)
Other expense............................. (2,071) (1.2) (54) (0.1)
Deferred tax benefit...................... 674 0.3 - -
----------- ------- --------- --------
Net loss.................................. $ (43,425) (24.8)% $ (30,962) (30.2)%
=========== ======= ========= ========
EBITDA (c)................................ $ 81,313 46.3% $ 46,472 45.4%
=========== ======= ========= ========
Basic subscribers......................... 630,200 401,300
Premium units............................. 261,000 172,850
- ------------
(a) 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.
(b) For the nine months ended September 30, 1998 the Company has recognized a
loss due to service outages and increased labor costs of approximately
$705,000 due to mid January ice storms experienced by certain of the
communities served by the Company in Maine. Additionally, the Company has
incurred approximately $540,000 of capital expenditures to repair
subscriber drops damaged in the storms. The Company expects the loss to be
isolated to the first quarter of 1998, although the long-term financial
effect of the ice storms cannot be determined.
(c) 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 bank indebtedness (the "Amended 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 71.5%, or approximately $73.2 million, to approximately $175.6
million for the nine months ended September 30, 1998 from approximately $102.4
million for the nine months ended September 30, 1997. Operating expenses
(including storm related costs) and corporate expenses increased approximately
67.6% and 62.6%, respectively, for the nine months ended September 30, 1998 from
the nine months ended September 30, 1997. Decreases in the relative percentage
of operating expenses to revenue was primarily attributable to cost efficiencies
achieved through the integration of cable systems and increased revenue per
subscriber per month. The EBITDA margin, which when adjusted to exclude the
storm related costs, improved from 45.4% for the nine months ended September 30,
1997 to 46.7% for the nine months ended September 30, 1998.
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the nine months ended September
30, 1998 the Company has recognized a loss due to service outages and increased
labor costs of approximately $705,000 due these storms. Additionally, the
Company has incurred approximately $540,000 of capital expenditures to repair
subscriber drops damaged in the storms. The Company expects the loss to be
isolated to the first quarter of 1998, although the long-term financial effect
of the ice storms cannot be determined.
Depreciation and amortization expense increased 64.8% as a result of acquisition
activity that occurred in 1997 and 1998. Net interest expense increased to $49.0
million from $32.3 million primarily as a result of the higher weighted average
drawings on the Company's senior bank indebtedness. Other expenses for the nine
months ended
23
September 30, 1998 include the retirement of $2.0 million of plant assets in
connection with completed upgrade and rebuild projects.
Liquidity And Capital Resources
The cable television business generally requires substantial capital for the
construction, maintenance and expansion of cable plant and distribution
equipment. In addition, the Company has pursued, and intends to pursue in the
future, selective acquisitions. Since its founding in 1995, the Company's cash
from equity investments, bank borrowings and other debt issued by FVOP has been
sufficient to finance the Company's acquisitions and, together with cash
generated from operating activities, also has been sufficient to meet the
Company's debt service, working capital and capital expenditure requirements.
The Company intends to continue to finance such debt service, working capital
and capital expenditure requirements in the future through a combination of cash
from operations, indebtedness and equity capital sources. The Company believes
that it will continue to generate cash and be able to obtain financing
sufficient to meet such requirements. The ability of the Company to meet its
debt service and other obligations will depend upon the future performance of
the Company which, in turn, is subject to general economic conditions and to
financial, political, competitive, regulatory and other factors, many of which
are beyond the Company's control.
Amended Credit Facility
Drawings on the Amended Credit Facility, along with cash flow generated from
operations, have 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 Amended Credit Facility from EBITDA of approximately $81.3
million generated by the Company for the nine months ended September 30, 1998.
On December 19, 1997, the Company amended its existing senior bank indebtedness
and entered into an $800.0 million Amended Credit Facility with The Chase
Manhattan Bank, as Administrative Agent, J.P. Morgan Securities Inc., as
Syndication Agent, CIBC Inc., as Documentation Agent, and the other lenders
signatory thereto. The Amended Credit Facility includes a $300.0 million,
7.75-year reducing revolving credit facility (the "Revolving Credit Facility"),
a $250.0 million, 7.75-year term loan (the "Facility A Term Loan") and a $250.0
million, 8.25-year term loan (the "Facility B Term Loan").
At September 30, 1998, the Company had $50.0 million outstanding under the
Revolving Credit Facility, $250.0 million outstanding under the Facility A Term
Loan and $250.0 million outstanding under the Facility B Term Loan. The weighted
average interest rates at September 30, 1998 on the outstanding borrowings under
the Revolving Credit Facility were approximately 7.7%, and under the Facility A
Term Loan and the Facility B Term Loan were approximately 7.8% and 7.9%,
respectively. The Company has entered into interest rate protection agreements
to hedge the underlying LIBOR rate exposure for $437.5 million of borrowings
through November 1999 and October 2001. For the nine months ended September 30,
1998, the Company had recognized an increase to interest expense of
approximately $156 as a result of these interest rate swap agreements.
In general, the Amended 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 Amended 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 in compliance with the
terms of the Amended Credit Facility.
The Amended 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 Amended Credit Facility, the
Administrative Agent is entitled to replace the general partner of the Company
with its designee.
24
FrontierVision Holdings, L.P. ("Holdings"), as the general partner of FVOP,
guarantees the indebtedness under the Amended Credit Facility on a limited
recourse basis. The Amended Credit Facility is also secured by a pledge of all
limited and general partnership interests in FVOP and a first priority lien on
all the assets of FVOP and its subsidiaries.
Senior Subordinated Notes
On October 7, 1996, FVOP issued $200.0 million aggregate principal amount of 11%
Senior Subordinated Notes due 2006 (the "FVOP Notes"). The FVOP Notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The FVOP 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 FVOP Notes, the Company entered into deferred interest rate setting
agreements to reduce the interest rate exposure related to the FVOP 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 FVOP Notes.
Senior Discount Notes
Holdings and FrontierVision Holdings Capital Corporation ("Holdings Capital")
were formed for the purpose of acting as co-issuers of $237.7 million aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes due 2007 (the
"Discount Notes"). FrontierVision Partners, L.P. ("FVP"), FVOP's sole general
partner, contributed to Holdings, both directly and indirectly, all of the
outstanding partnership interests of FVOP prior to the issuance of the Discount
Notes on September 19, 1997 and as a result, FVOP and Capital are wholly-owned
consolidated subsidiaries of Holdings. Holdings contributed the proceeds of the
Discount Notes to FVOP as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the nine months ended September 30,
1998 were $45.5 million compared to $18.6 million for the nine months ended
September 30, 1997. The increase was primarily a result of cable television
system operations acquired during the twelve months ended September 30, 1998.
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the nine months ended
September 30, 1998 were approximately $39.4 million compared to approximately
$18.5 million for the nine months ended September 30, 1997. Capital expenditures
primarily consisted of expenditures for the construction and expansion of cable
plant and distribution equipment, and additional costs were incurred related to
the expansion of customer service facilities. The Company invested approximately
$107.8 million in acquisitions during the nine months ended September 30, 1998
compared with approximately $72.4 million for the same period in 1997.
The Company expects to spend a total of approximately $155 million over the next
two years for capital expenditures with respect to the Existing Systems. These
expenditures will primarily be used for (i) installation of fiber optic cable
and microwave links which will allow for the consolidation of headends, (ii)
analog and digital converter boxes which will allow the Company to more
effectively market premium and pay-per-view services, (iii) the continued
deployment of coaxial cable to build-out the Existing Systems, (iv) headend
equipment for the digital television system and (v) the upgrade of a portion of
the Company's cable television distribution systems to, among other things,
increase bandwidth and channel capacity.
Cash Flows From Financing Activities
Acquisitions during the nine months ended September 30, 1998 were financed with
borrowings under the Company's senior bank indebtedness. Acquisitions during the
nine months ended September 30, 1997 were
25
financed with equity contributions from the Company's partners and borrowings
under the company's senior bank indebtedness.
During the nine months ended September 30, 1997, the Company received
approximately $179.9 million of equity contributions from its partners.
From inception through September 30, 1998, FVP received a total of $199.4
million of equity contributions from its partners, all of which has been
invested in Holdings and down streamed to the Company.
Year 2000
Many existing hardware and software elements of computer systems and other
technologies represent the year as a two-digit number. Such representation may
cause software and hardware malfunctions to occur as a system date or
application date crosses the Year 2000 boundary. This might happen when the
actual century turns, the date of some input data exceeds January 1, 2000 and/or
the system or application must internally refer to a date that occurs on,
before, or after January 1, 2000.
During 1998, the Company continued a review of the Year 2000 Issue with the
objective of formulating a plan to identify and correct any system malfunctions
which might occur due to Year 2000 Issues. An informal task force, comprised
solely of Company employees, was established to determine which of the Company's
mission critical business processes could be impacted by Year 2000 issues. Those
mission critical business processes that were identified as subject to Year 2000
Issues are as follows: Signal Delivery, Franchise Services, Service Delivery and
Revenue Collection
The following table illustrates the primary components of each of the Year 2000
effected mission critical business processes:
---------------------- ---------------------------------------- ----------------------------------
Mission Critical
Business Process Description Significant Components
---------------------- ---------------------------------------- ----------------------------------
Signal Delivery Process of receiving a video signal Headend equipment
from satellite or broadcast sources and Plant infrastructure
transmitting that signal via Programming suppliers
fiber-optic and co-axial cable to a
customers residence or place of business.
Franchise Services The performance of tasks specifically Local origination
required by local or national Emergency broadcast
regulatory agencies.
Service Delivery The ongoing process of responding Customer call center infrastructure
timely to customer service requests. Dispatch equipment
Revenue Collection The process of collecting customer Subscriber management systems
billings and utilizing those cash Cash management
receipts for necessary corporate
purposes.
Since the task force was established, the Company's management has committed
additional internal and external resources necessary to address Year 2000
Issues. During the three months ended September 30, 1998, the Company engaged an
external third-party Year 2000 consultant to review its informal task force's
Year 2000 efforts to date and to produce a formal, written Year 2000 project
plan. This plan provides a work schedule for the Company to address its Year
2000 Issues by December 31, 1999. As part of this work schedule, the Company
expects to formally adopt a Year 2000 Compliance Plan, discussed in more detail
below, by December 31, 1998. Additionally, the Company has joined an industry
initiative whereby the Company and other similar companies will achieve
efficiencies in their individual Year 2000 plans through the sharing of
information and joint testing.
The Company has established a Year 2000 team which will consist of a part-time
Program Manager, one full-time Project Administrator and one full-time
consultant as the day-to-day Project Manager when fully staffed. The
26
Program Manager will be accountable directly to the Company's senior management
team, who in turn is accountable to the Company's general partner. The Year 2000
team will also involve certain individuals in the Company who are subject matter
experts, for example, engineering and information technology.
The Year 2000 Compliance Plan, which the Company expects to be rolled-out during
the fourth-quarter of 1998, consists of an Awareness Program, a Prevention
Program and a "Find And Fix" Program. The Awareness Program is designed to
educate employees and customers on the implications of Year 2000 Issues.
Employees will be trained on the Company's Year 2000 Compliance Plan and their
role in the success of the Plan will be communicated. The Prevention Program is
expected to prevent new problems from arising while the Company resolves
existing problems. For example, since October 30, 1998, the Company has required
a Year 2000 compliance warranty on all purchase orders to ensure that vendors
ship to the Company only equipment that they have warranted is Year 2000
compliant. The "Find And Fix" Program includes three phases: Inventory,
Assessment and Remediation, and will initially focus on mission critical
business processes.
The Inventory phase consists of taking a physical inventory of all susceptible
business components within each mission critical business process. A physical
inventory of the components used in certain of the Company's mission critical
business processes was initiated in the current year. This inventory consists of
specifically identifying each component/system (both internal and external
systems) of a mission critical business process. Internal systems include
computer systems and related software (information technology systems) as well
as systems and devices that manage the distribution of cable television service
to customers (non information technology systems). External systems include the
Company's third party billing service provider and subscriber management system,
banking partners (including cash management, lockbox providers and lenders) and
programming providers. An end product of the Inventory phase will be a
comprehensive data base (the "Project Database") which will allow the Company to
review any Company business component by, among other attributes,
manufacturer/supplier, geographic location, compliance status or asset class.
The Company has also initiated the process of communicating with its significant
suppliers and service providers to determine their position with regard to Year
2000 Issues and evaluating the potential impact on the Company if those third
parties fail to remediate their own Year 2000 Issues. Material relationships
with third parties include utility companies (providing power to the cable
plant), telephone companies (providing communication lines for use in customer
contact, employee communications and in data transfer related to subscriber and
billing management information systems) and programming and equipment vendors
(providing the product distributed by the Company as well as maintenance and
construction materials).
As specific inventories are being completed, the Year 2000 team will focus on
Assessing each business component's vulnerability to Year 2000 Issues. The
Assessment phase requires management attain a high degree of confidence that the
Company prevents Year 2000 problems with respect to components of mission
critical business processes and minimize such problems in other non-critical
areas, while controlling replacement costs. To ensure that the most at-risk
components/systems are assessed first, the initial task in the Assessment stage
is the prioritization of each equipment/system in the Project Database. Each
item of inventory will be reviewed for Year 2000 compatibility first by
cross-referencing the Project Database to materials received from vendors,
industry groups and other MSO's, second by contacting vendors as necessary and
finally, by making an "in-house" determination of compatibility where no other
information is available. The end product of the Assessment phase is the
determination of whether a given component/system is to be replaced or upgraded
or whether specific contingency plans are needed.
Remediation (i.e., actually fixing) will then be performed and a non-compliant
component with either be repaired, replaced or upgraded to a compliant system or
component. The Remediation phase, includes processes designed to ensure that
each remediating action will 1) definitely solve the Year 2000 Issue in
question, 2) be performed at the most reasonable overall cost to the Company and
3) take place in accordance with the overall strategic technical direction of
the Company. Remediation phase processes will also include Dependent Testing, to
verify that remediations do not introduce new Year 2000 problems and
Implementation Planning, to schedule wide-spread implementation of remediations.
If Remediation is determined to be impossible with respect to a business
component, the Year 2000 team will create an appropriate contingency plan.
27
As of September 30, 1998, the Company's overall progress in the "Find and Fix"
Program is as follows:
--------------- ------------------------------ ----------------------------- ---------------------
Percentage of all components Percentage Complete Expected
Phase currently in phase (i) of Phase (ii) Completion Date
--------------- ------------------------------ ----------------------------- ---------------------
Inventory 75% < 15% January 31, 1999
Assessment < 15% < 5% February 28, 1999
Remediation < 5% < 1% November 30, 1999
(i) Represent the number of components in each phase as compared to the total
number of components to be addressed.
(ii) Represents the percentage complete of the phase itself.
The completion dates set forth above are based on the Company's current
expectations. No assurances can be given as to whether each of the phases will
be completed on schedule due to uncertainties which are inherent in the
remediation of Year 2000 Issues.
As the Company has not yet identified each of its non-compliant systems (either
internal or external), the costs to address the Year 2000 Issue are uncertain.
However, to date the Company has expended approximately $30,000 in third-party
consulting fees and expects to spend approximately $625,000 in replacing certain
electronic headend equipment by December 31, 1998. The Company also expects to
expend an additional $300,000 for both external and internal resources in
conjunction with the Year 2000 project team through December 31, 1999.
Additionally, the Company expects to budget approximately $25,000 in incremental
operating expenses and in excess of $1,000,000 in incremental capital
expenditures for fiscal year 1999 to complete the Year 2000 Compliance Plan. It
is not known, at this point in time, if these budgeted amounts will be
sufficient to identify and correct the Company's Year 200 Issues.
While management believes that the Year 2000 Compliance Plan will significantly
reduce the risks associated with the transition to the year 2000 through a
process of Inventory, Assessment and Remediation, the Company has yet to develop
or implement any significant contingency plans. There can be no assurance that
the Company will identify all Year 2000 Issues or that the Company will be able
to remedy each Year 2000 Issue. A failure to sufficiently correct a material
Year 2000 problem could cause the Company to suffer an interruption or a failure
of certain important business operations. Additionally, the failure of a
material external (third-party) system may cause the Company to experience an
interruption or a failure of certain important business operations. The
interruption or failure by the Company in an important business operation may
cause a material, adverse impact on the Company's financial position. It is not
management's intention that certain information technology and technical
enhancement projects planned by the Company will be deferred as a result of the
cost to address Year 2000 Issues. Additionally, although management believes
that a combination of cash from operations and indebtedness will fund the costs
associated with correcting Year 2000 Issues, no assurances can be given that
costs ultimately required to be paid to ensure the Company's Year 2000 readiness
will not have an adverse effect on the Company's financial position.
28
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6
(a) Exhibits
3.1 Amended and Restated Agreement of Limited Partnership of FVOP.
(3)
3.2 Certificate of Limited Partnership of FVOP. (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)
27.4 Financial Data Schedule as of and for the three months and nine
month periods ended September 30, 1998.
---------------
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.
(3) Incorporated by reference to the exhibits to Holdings and Holdings
Capital's Registration Statement on Form S-4, Registration No.
333-36519.
(b) Reports on Form 8-K
None
29
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.
Date: November 12, 1998 By: FrontierVision Holdings, L.P., its
general partner,
By: FrontierVision Partners, L.P., its
general partner
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general
partner
By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
(Principal Accounting and Duly
Authorized Officer)
FRONTIERVISION CAPITAL CORP.
Date: November 12, 1998 By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
(Principal Accounting and Duly
Authorized Officer)
30