UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of May 7, 1999: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore
filing with the reduced disclosure format.
Documents Incorporated by Reference: None.
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
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.......................16
Note to Financial Statements.....................................................20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................................21
PART II. Other Information................................................................30
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
---------------------------------------
March 31, December 31,
1999 1998
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 11,224 $ 4,890
Accounts receivable, net of allowance for doubtful accounts
of $216 and $666 11,875 12,678
Other receivables 374 174
Prepaid expenses and other 4,122 4,046
Investment in cable television systems, net:
Property and equipment 344,548 342,754
Franchise costs and other intangible assets 802,581 820,524
------------ -------------
Total investment in cable television systems, net 1,147,129 1,163,278
------------ -------------
Deferred financing costs, net 15,505 16,006
Earnest money deposits 100 150
------------ -------------
Total assets $ 1,190,329 $ 1,201,222
============ =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 11,413 $ 18,233
Accrued liabilities 21,048 17,169
Subscriber prepayments and deposits 3,480 3,312
Accrued interest payable 14,940 9,547
Deferred income taxes 11,161 11,856
Debt 872,812 871,610
------------ -------------
Total liabilities 934,854 931,727
------------ -------------
Partners' capital:
FrontierVision Holdings, L.P. 255,220 269,226
FrontierVision Operating Partners, Inc. 255 269
------------ -------------
Total partners' capital 255,475 269,495
Commitments
------------ -------------
Total liabilities and partners' capital $ 1,190,329 $ 1,201,222
============ =============
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
Months Ended Months Ended
March 31, March 31,
1999 1998
----------------------- --------------------
Revenue $ 72,417 $ 53,819
Expenses:
Operating expenses 37,893 27,693
Corporate administrative expenses 1,740 1,566
Depreciation and amortization 30,319 23,769
Storm related costs - 705
------------- ------------
Total expenses 69,952 53,733
------------- ------------
Operating income 2,465 86
Interest expense, net (18,818) (15,164)
Other income (expense) 1,638 -
------------- ------------
Loss before income tax benefit (14,715) (15,078)
Income tax benefit 695 -
------------- ------------
Net loss $ (14,020) $ (15,078)
============= ============
Net loss allocated to:
FrontierVision Holdings, L.P.
(General Partner) $ (14,006) $ (15,063)
FrontierVision Operating Partners, Inc.
(Limited Partner) (14) (15)
------------- ------------
$ (14,020) $ (15,078)
============= ============
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, 1998 $ 269,226 $ 269 $ 269,495
Net loss (Unaudited) (14,006) (14) (14,020)
------------ --------- ----------
Balance, March 31, 1999 (Unaudited) $ 255,220 $ 255 $ 255,475
============ =========== ==========
See accompanying notes to consolidated financial statements.
5
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
---------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
----------------- ------------------
Cash Flows From Operating Activities:
Net loss $ (14,020) $ (15,078)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 30,319 23,769
Income tax benefit (695) -
Gain on disposal of assets (1,869) -
Amortization of deferred debt issuance costs 567 535
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 577 641
Prepaid expenses and other (80) (452)
Accounts payable and accrued liabilities (2,919) 1,058
Subscriber prepayments and deposits 168 424
Accrued interest payable 5,393 5,900
------------ ------------
Total adjustments 31,461 31,875
------------ ------------
Net cash flows from operating activities 17,441 16,797
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (18,407) (9,475)
Pending transaction costs (275) 42
Cash paid for franchise costs (115) (2)
Proceeds from disposition of cable television systems 5,228 -
Proceeds from disposition of real estate 1,470 -
Cash paid in acquisitions of cable television systems (144) (14,940)
------------ ------------
Net cash flows from investing activities (12,243) (24,375)
------------ ------------
Cash Flows From Financing Activities:
Debt borrowings 3,138 15,000
Repayment of indebtedness (1,875) -
Principal payments on capital lease obligations (61) -
Increase in deferred financing fees (59) -
Offering costs related to Senior Subordinated Notes (7) (23)
------------ ------------
Net cash flows from financing activities 1,136 14,977
------------ ------------
Net Increase in Cash and Cash Equivalents 6,334 7,399
Cash and Cash Equivalents, beginning of period 4,890 3,413
------------ ------------
Cash and Cash Equivalents, end of period $ 11,224 $ 10,812
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 12,894 $ 8,824
============ ============
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 (the "Formation
Transaction"), and therefore, FVOP and FrontierVision Capital Corporation
("Capital") became 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.
On December 2, 1998, Holdings and FrontierVision Holdings Capital II Corporation
co-issued $91,298 aggregate principal amount at maturity of Discount Notes,
Series B. During the year ended December 31, 1998, the Company received
additional capital contributions of approximately $72,648 from its partners.
This represents net proceeds received from the issuance of the Discount Notes,
Series B, which were contributed by Holdings to FVOP as a capital contribution.
The capital contribution from Holdings was used by FVOP to repay certain bank
indebtedness. Prior to the Formation Transaction, FVP allocated certain
administrative expenses to FVOP, which are included as capital contributions
from its partners. Such expense allocations were approximately $231 and $735 for
the years ended December 31, 1997 and 1996, respectively.
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.
Allocation of Profits, Losses and Distributions
Generally, the Company's partnership agreement provides that profits, losses and
distributions will be allocated to the general partner and the limited partner
pro rata based on capital contributions.
Income Taxes
The Company and its direct and indirect subsidiaries, except for FrontierVision
New England Cable, Inc. ("New England"), New England Cable Television of
Massachusetts, Inc. ("NECMA"), Main Security Surveillance, Inc. and Capital, are
limited partnerships or limited liability companies and pay no income taxes as
entities. All of the income, gains, losses, deductions and credits of the
Company are passed through to its partners. Nominal taxes are assessed by
certain state and local jurisdictions. The basis in the Company's assets and
liabilities differs for financial and tax reporting purposes.
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)
New England, NECMA, Main Security Surveillance, and Capital are corporations and
are subject to federal and state income taxes which have not been significant.
Deferred taxes relate principally to the difference between book and tax basis
of the cable television assets owned by NECMA, partially offset by the tax
effect of related net operating loss carryforwards.
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, 1998 (the "1998
10-K"), for additional disclosures, including a summary of the Company's
accounting policies.
The following notes, insofar as they are applicable to the three months ended
March 31, 1999, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the three-month period ended March 31, 1999 are not necessarily
indicative of the results for the entire 1999 fiscal year.
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 is not expected to be material.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
(2) STORM RELATED COSTS
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the three months ended March 31,
1998, the Company has recognized a loss due to service outages and increased
labor costs of approximately $740 due to the ice storms. Additionally, the
Company has incurred approximately $540 of capital expenditures to replace
damaged subscriber drops. The Company received $183 subsequent to December 31,
1998 related to a claim on its business interruption insurance for the storm
damage. Such claim was recognized as a reduction of storm cost expense in the
fourth quarter of 1998.
8
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since its inception through
December 31, 1998. 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 and equipment and to intangible assets
will be respectively depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
following table lists the acquisitions and the purchase price for transactions
occurring in the most recent two years.
- -------------------------------------------------------------------------------------------------------------------------------
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, Inc. Kentucky March 31, 1997 $1,800
Milestone Communications of New York, L.P. Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,800
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 $78,600
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 $204,100
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 $10,000
New England Cablevision of Massachusetts, Inc. ("NECMA") Massachusetts April 3, 1998 $44,900
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $37,400
Unity Cable Television, Inc. Maine September 30, 1998 $800
Appalachian Cablevision of Ohio Ohio September 1, 1998 $300
State Cable TV Corporation ("State") Maine, New Hampshire October 23, 1998 $190,200*
Paint Valley Cable Ohio October 30, 1998 $1,900
CASCO Maine November 30, 1998 $3,400
- ---------------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
March 31, 1999.
* Subject to adjustment.
9
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) ACQUISITIONS AND DISPOSITIONS (continued)
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
------------------
Acquisitions
for the three
months ended
March 31, 1998 (a)
------------------
Property and equipment $ 3,550
Franchise costs and other intangible assets 11,440
------------
Subtotal 14,990
Net working capital (deficit) (50)
------------
Total cash paid for acquisitions $ 14,940
============
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
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, assuming the NECMA, TCI-Bryan and State Cable
acquisitions (the "Acquisitions") had been consummated on January 1, 1998, are
as follows:
--------------------------------------------
Three Months Ended March 31, 1998
--------------------------------------------
Historical Pro Forma
Results Acquisitions Results
------- ------------ -------
Revenue $ 53,819 $ 11,596 $ 65,415
Operating, selling, general and administrative expenses (29,964) (8,359) (38,323)
Depreciation and amortization (23,769) (5,880) (29,649)
----------- ------------ ------------
Operating income (loss) 86 (2,643) (2,557)
Interest and other expenses (15,164) (3,814) (18,978)
----------- ------------ ------------
Net loss $ (15,078) $ (6,457) $ (21,535)
=========== ============ ============
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.
Dispositions
On January 7, 1999, the Company sold certain cable television system assets
located in the Southeast region to Helicon Partners I, LP, for an aggregate
sales price of approximately $5,200.
10
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT
The Company's debt was comprised of the following:
-------------------------------
March 31, December 31,
1999 1998
---- ----
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate options
(7.01% average at March 31, 1999), payable monthly $ 172,000 $ 172,000
Term loans, interest based on various floating libor rate options
(7.20% and 7.46% weighted average at March 31, 1999 and December 31, 1998,
respectively), payable monthly 496,250 498,125
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
Capital leases 4,562 1,485
------------ ------------
Total debt $ 872,812 $ 871,610
============ ============
(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 ("Facility A
Term Loan" and "Facility B Term Loan") and a $300.0 million revolving
credit facility ("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. This obligation may be waived with the consent of the majority
of the lenders. 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.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
11
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering,
$200,000 aggregate principal amount of the Notes. Net proceeds from
this 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, are recognized as a
component of interest expense over the term of the Notes.
The Notes are unsecured subordinated obligations of FVOP (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.
The fair market value of the Notes is estimated based on Portal Market
quotations of the issue. At March 31, 1999, the fair value of the Notes
was $224,500.
J.P. Morgan Investment Corporation and First Union Capital Partners,
Inc. are affiliates of the Company, owning in the aggregate, a 37.6%
limited partnership interest in FVP. Affiliates of such 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 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 April 7, 1999 and
November 15, 1999. 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, 1999, the Company terminated
one of its interest rate swap agreements for a notional amount of
$100,000 and entered into a new interest rate collar agreement for
$100,000 maturing on April 8, 2002. There was no termination fee
associated with this transaction.
On January 8, 1999, the Company amended its collar interest rate swap
agreement that it had entered into on April 8, 1998 for a notional
amount of $100,000. The amended collar agreement matures on April 8,
2001. The collar agreement provides for different exchanges between the
Company and the counterparty depending on the level of the floating one
month LIBOR rate (4.94% at March 31, 1999). Such exchanges occur every
month during the term of the collar agreement. The different exchanges
are as follows:
(1) When LIBOR is below 4.65%, the Company pays to the counterparty
the difference between the fixed rate of 5.95% and the LIBOR rate,
applied to the $100,000 notional amount;
12
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
(2) When LIBOR is between 5.95% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.95%
and LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.95% and 4.65%, the
Collar Agreement has no financial effect.
On October 3, 1997, in order to convert certain of the interest payable
at variable rates under indebtedness, the Company entered into a
forward interest rate swap agreement. This commenced on October 15,
1998, for a notional amount totaling $150,000, maturing on October 15,
2001. According to this agreement, the Company pays or receives 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.
This agreement was terminated on January 15, 1999, at which time the
company entered into a new collar interest rate swap agreement for a
notional amount of $150,000 ("$150,000 Collar Agreement") maturing on
April 15, 2002. There was no termination fee associated with this
transaction. The $150,000 Collar Agreement provides for different
exchanges between the Company and the counterparty depending on the
level of the floating three month LIBOR rate (5.00% at March 31, 1999).
Such exchanges occur every three months during the term of the $150,000
Collar Agreement. The different exchanges are as follows:
(1) When LIBOR is below 4.95%, the Company pays to the counterparty
the difference between the fixed rate of 6.15% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 6.15% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 6.15%
and LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 6.15% and 4.95%, the
Collar Agreement has no financial effect.
For the three months ended March 31, 1999 and 1998, the Company
recognized an increase in interest expense of approximately $365 and
$56, respectively, as a result of the interest rate swap agreements.
Information concerning the Company's interest rate agreements at March
31, 1999 is as follows:
Amount to be
Notional paid upon
Expiration date amount termination (a)
--------------- ------ ---------------
April 7, 1999 $ 100,000 $ 219.8
November 15, 1999 65,000 380.4
November 15, 1999 22,500 5.1
April 8, 2001 100,000 610.1
April 8, 2002 100,000 1,699.5
April 15, 2002 150,000 2,422.0
------------ -------------
$ 537,500 $ 5,336.9
============ =============
(a) The estimated amount that the Company would pay to terminate
the agreements on March 31, 1999. This amount takes into
consideration current interest rates, the current
creditworthiness of the counterparties and represents the fair
value of the interest rate agreements.
13
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
The debt of the Company matures as follows:
Year Ended December 31 --
-------------------------
1999 $ 9,269
2000 24,575
2001 34,575
2002 44,575
2003 55,825
Thereafter 703,993
------------
$ 872,812
============
(5) COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the three months ended March 31, 1999, and
1998 was $1,643, and $1,320, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to March 31, 1999 are as follows:
Year Ended December 31 --
-------------------------
1999 $ 1,175
2000 1,256
2001 934
2002 788
2003 537
Thereafter 777
------------
$ 5,467
============
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. 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.
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
14
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(5) COMMITMENTS AND CONTINGENCIES (continued)
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. 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.
(6) YEAR 2000 COMPLIANCE
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with third
parties having a substantial relationship to its business, including significant
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
Failure to achieve Year 2000 compliance by the Company, its principal suppliers
and certain financial institutions with which it has relationship could
negatively affect the Company's ability to conduct business for an extended
period. There can be no assurances that all Company information technology
systems and components will be fully Year 2000 compliant; in addition, other
companies on which the Company's systems and operations rely may not be fully
compliant on a timely basis, and any such failure could have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(7) SALE OF COMPANY
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
Communications Corporation to sell all outstanding partnership interests of FVP
in exchange for cash, the assumption of certain liabilities and 7 million shares
of Adelphia Class A common stock.
15
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
-----------------------------------
March 31, December 31,
1999 1998
---------------- ----------------
(Unaudited)
ASSETS
Cash $ - $ -
------------ ----------
Total assets $ - $ -
============ ==========
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) (200)
------------ ----------
Total owner's equity (100) (100)
------------ ----------
Total liabilities and owner's equity $ - $ -
============ ==========
See accompanying note to the financial statements.
16
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
---------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
------------------- ------------------
(Unaudited) (Unaudited)
Revenue $ - $ -
General and administrative expenses - 42
---------- ----------
Net loss $ - $ (42)
========== ==========
See accompanying note to financial statements.
17
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OWNER'S EQUITY
-----------------------------------------------------------
Common Additional Retained Total owner's
stock paid-in capital deficit equity
----- --------------- ------- ------
Balance, December 31, 1998 $ 1 $ 99 $ (200) $ (100)
Net loss (Unaudited) - - - -
---------- --------- ------- ----------
Balance, March 31, 1999 (Unaudited) $ 1 $ 99 $ (200) $ (100)
========== ========= ======= ==========
See accompanying note to financial statements.
18
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
--------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
---------------- ---------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ - $ (42)
Decrease in receivable from affiliate - -
--------- ---------
Net cash flows used in operating activities - (42)
--------- ---------
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 - (42)
Cash and cash equivalents, beginning of period - 143
--------- ---------
Cash and cash equivalents, end of period $ - $ 101
========= =========
See accompanying note to financial statements.
19
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.
20
PART I. FINANCIAL INFORMATION
Item 2.- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations as
well as other sections of this Form 10-Q contain certain forward-looking
statements. Our actual results could differ materially from those discussed
herein and our current business plans may be altered in response to market
conditions and other factors beyond our control. Important factors that could
cause or contribute to such differences or changes include those discussed under
"Risk Factors" in our Post-Effective Amendment No. 3 to Form S-1 filed April 2,
1999 (File no. 333-9535). Additionally, our investors' decision to sell their
ownership interest in our company to Adelphia Communications Corporation may
ultimately cause our business plan and results of operations to differ
materially from our current business plan and expected future operating results.
Introduction
In this section, we explain the general financial condition and the results of
operations for FrontierVision and its subsidiaries including what factors affect
our business, what our revenues and expenses were for the three months ended
March 31, 1999 and 1998, why those revenues and expenses were different from the
year before and how all of this effects our overall financial position.
We commenced operations in November, 1995 with the acquisition of certain cable
television systems. Since that first acquisition, we have completed over 30
separate acquisitions and have grown to become one of the twenty largest
multiple system operators in the United States, serving over 696,000 subscribers
as of March 31, 1999. Our systems are located in three primary operating
clusters New England, Ohio and Kentucky - with a fourth, smaller group of
systems in the Southeast.
21
The following table summarizes our acquisitions through March 31, 1999:
--------------------------------------------------
Purchase Basic
Price(1) Subscribers
Predecessor Owner Date Acquired (in millions) Acquired(2)
- ----------------- -------------------- ------------- -----------
United Video Cablevision, Inc. ............................ November 9, 1995 $ 120.8 87,400
Longfellow Cable Company, Inc. ............................ November 21, 1995 6.1 5,100
C4 Media Cable Southeast, Limited Partnership.............. February 1, 1996 47.6 40,400
Americable International Maine, Inc........................ March 29, 1996 4.8 3,350
Cox Communications......................................... April 9, 1996 136.0 77,200
Phoenix Grassroots Cable Systems, LLC...................... August 29, 1996 9.3 7,400
Triax Southeast Associates, L.P............................ October 7, 1996 84.7 53,200
American Cable Entertainment of Kentucky-Indiana, Inc...... October 9, 1996 146.0 83,250
SRW, Inc.'s Penn/Ohio Cablevision, L.P..................... October 31, 1996 3.8 3,225
SRW, Inc.'s Deep Creek Cable TV, L.P. ..................... December 23, 1996 3.0 2,175
Bluegrass Cable Partners, L.P.............................. March 20, 1997 9.9 7,225
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc..................................................... March 31, 1997 1.7 1,450
Milestone Communications of New York, L.P. ................ March 31, 1997 2.8 2,125
Triax Associates I, L.P.................................... May 30, 1997 34.5 20,700
Phoenix Front Row Cablevision ............................. May 30, 1997 6.8 5,250
PCI Incorporated........................................... August 29, 1997 13.5 7,750
SRW, Inc.'s Blue Ridge Cable Systems, L.P.(3).............. September 3, 1997 4.1 4,550
Harold's Home Furnishings, Inc............................. October 31, 1997 1.5 1,480
A-R Cable Services - ME, Inc............................... October 31, 1997 78.2 54,300
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture.......................................... December 2, 1997 34.5 22,100
Cox Communications, Inc.................................... December 19, 1997 203.0 85,400
TVC-Sumpter Linked Partnership and North Oakland Cablevision
Partners Limited Partnership ......................... March 6, 1998 14.2 8,100
TCI Cablevision of Ohio, Inc............................... April 1, 1998 10.0 6,000
New England Cablevision of Massachusetts, Inc. ............ April 3, 1998 44.7 26,500
Ohio Cablevision Network, Inc.............................. July 31, 1998 38.0 19,700
Appalachian Cablevision of Ohio............................ September 1, 1998 0.3 280
Unity Cable Television, Inc................................ September 30, 1998 0.8 590
State Cable TV Corporation ................................ October 23, 1998 188.2 75,000
Paint Valley Cable Company, Inc............................ October 30, 1998 1.7 1,300
Casco Cable Television, Inc................................ November 30, 1998 3.2 2,185
____________
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that we sold in 1996.
(3) All systems were sold on January 7, 1999.
During the twelve months ended March 31, 1999, we completed eight acquisition
transactions, acquiring a total of approximately 132,000 basic subscribers.
These acquisitions significantly increased the size and scale of each of our
three primary operating clusters. Our October 1998 acquisition of eight cable
systems from State Cable TV Corporation added approximately 75,000 basic
subscribers to our New England cluster in attractive communities directly
contiguous to systems which we already owned in southern Maine and central New
Hampshire. With the State Cable systems, we have grown to serve over 248,000
subscribers in our New England cluster and over 168,000 subscribers in four of
the five largest cities in the state of Maine.
On January 7, 1999, we sold nine small cable television systems located in
eastern Tennessee and western North Carolina, which in the aggregate, served
approximately 4,400 basic subscribers.
22
Results of Operations
In this section, we discuss our earnings for the three months ended March 31,
1999 and 1998 and the factors affecting them. The three month period ended March
31, 1999, is the only period in which we operated all of our cable television
systems, although certain systems were disposed of during the period and are
reflected only for that portion of the period that we owned such systems.
The following table illustrates our operating activities on a comparative basis:
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998 (Unaudited)
---------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1999 (a) March 31, 1998 (a)
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
------ ------- ------ -------
In thousands
Revenue................................... $ 72,417 100.0% $ 53,819 100.0%
Expenses
Operating expenses.................... 37,893 52.3 28,398 52.8
Corporate expenses.................... 1,740 2.4 1,566 2.9
Depreciation and amortization......... 30,319 41.9 23,769 44.2
----------- ------- ---------- -------
Total expenses................. 69,952 96.6 53,733 99.9
----------- ------- ---------- -------
Operating income.......................... 2,465 3.4 86 0.1
Interest expense, net..................... (18,818) (26.0) (15,164) (28.2)
Other income (expense).................... 1,638 2.2 - -
Income tax benefit....................... 695 1.0 - -
----------- ------- ---------- -------
Net loss.................................. $ (14,020) (19.4)% $ (15,078) (28.1)%
=========== ======= ========== =======
EBITDA ................................... $ 32,784 45.3% $ 23,855 44.3%
=========== ======= ========== =======
Basic subscribers......................... 696,000 570,500
Premium units............................. 291,500 269,200
Three Months Ended March 31, 1999 Compared to the Three Months Ended March
31,1998
Significant increases in the amounts of revenue, operating expense and EBITDA
are primarily attributable to acquisition activity during 1998, which increased
our size from 570,500 basic subscribers at March 31, 1998 to over 696,000 at
March 31, 1999. Revenue increased 34.6%, or approximately $18.6 million, to
approximately $72.4 million for the three months ended March 31, 1999 from
approximately $53.8 million for the three months ended March 31, 1998. Revenue
per subscriber, per month, increased to $34.50 in the three months ended March
31, 1999 from $31.85 in the same period a year earlier, reflecting acquisition
activity, increased service rates and new service offerings. Operating expenses
and corporate expenses increased approximately 33.4% and 11.1%, respectively,
for the three months ended March 31, 1999 from the three months ended March 31,
1998. The decrease in the percentage of operating expenses to revenue was
primarily attributable to the absense of one-time storm related costs as were
incurred during the three months ended March 31, 1998 and to cost efficiencies
achieved through the integration of acquired cable systems. Increases in
programming expenses and non-recurring expenses related to Year 2000 issues
offset these expense reductions. The EBITDA margin improved from 44.3% of
revenue for the three months ended March 31, 1998 to 45.3% in 1999.
23
Depreciation and amortization expense increased 27.6% as a result of acquisition
activity in 1998 and asset retirements in the three months ended March 31, 1999.
Net interest expense increased to $18.8 million from $15.2 million primarily as
a result of the higher weighted average drawings on our senior bank
indebtedness.
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, we have pursued selective acquisitions. Since its
founding in 1995, our cash received from equity investments, bank borrowings and
other debt issued by FrontierVision Operating Partners, L.P. (which we refer to
as "FVOP") has been sufficient to finance our acquisitions and, together with
cash generated from operating activities, also has been sufficient to service
our debt, provide sufficient working capital and fund required capital
expenditures. We intend to continue to finance such debt service, working
capital and capital expenditure requirements through a combination of cash from
operations, indebtedness and equity capital sources. We believe that we will
continue to generate cash and be able to obtain financing sufficient to meet
such requirements. Our ability to meet our debt service and other obligations
will depend upon our future performance which, in turn, is subject to general
economic conditions and to financial, political, competitive, regulatory and
other factors, many of which are beyond our control.
Amended Bank Credit Facility
Drawings on our amended bank credit facility, along with cash flow generated
from operations and high yield debt financing, have been sufficient to finance
capital improvement projects as well as acquisitions. We have adequately
serviced our debt in accordance with the provisions of the amended bank credit
facility from EBITDA of approximately $32.8 million generated by FrontierVision
Operating Partners, L.P. for the three months ended March 31, 1999.
On December 19, 1997, we amended our existing senior bank indebtedness and
entered into an $800.0 million amended bank 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 bank credit facility includes a $300.0 million,
7.75-year reducing revolving credit facility, a $250.0 million, 7.75-year term
loan and a $250.0 million, 8.25-year term loan.
At March 31, 1999, we had $172.0 million outstanding under the revolving credit
facility, $246.3 million outstanding under the 7.75 year term loan and $250.0
million outstanding under the 8.25 year term loan. The weighted average interest
rates at March 31, 1999 on the outstanding borrowings under the revolving credit
facility were approximately 7.01%, and under the 7.75 year term loan and the
8.25 year term loan were approximately 7.01% and 7.39%, respectively. We have
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 three months ended March 31, 1999, we recognized an increase to
interest expense of approximately $0.4 million as a result of these interest
rate swap agreements.
In general, the amended bank credit facility requires us to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the amended bank credit facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting us to use such proceeds to fund certain permitted acquisitions,
provided that we are otherwise in compliance with the terms of the amended bank
credit facility.
The amended bank credit facility is secured by a pledge of all limited and
general partnership interests in FVOP and in any of our restricted subsidiaries
and a first priority lien on all the tangible and intangible assets of FVOP and
each of its restricted subsidiaries. In addition, in the event of the occurrence
and continuance of an event of default
24
under the amended bank credit facility, the Administrative Agent is entitled to
replace our general partner with its designee.
FrontierVision Holdings, L.P. (which we refer to as "Holdings"), as the general
partner of FVOP, guarantees the indebtedness under the amended bank credit
facility on a limited recourse basis. The amended bank 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 notes mature on October 15, 2006 and
bear interest at 11%, with interest payments due semiannually commencing on
April 15, 1997. The notes are general unsecured obligations of FrontierVision
and rank subordinate in right of payment to all existing and any future senior
indebtedness. In anticipation of the issuance of the notes, FrontierVision
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 FrontierVision
incurs over the life of the notes.
Senior Discount Notes, Series A
Holdings and FrontierVision Holdings Capital Corporation 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. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests of
FrontierVision Operating Partners, L.P. prior to the issuance of the discount
notes on September 19, 1997 and as a result, FrontierVision Operating Partners,
L.P. and FrontierVision Capital Corporation are wholly-owned consolidated
subsidiaries of Holdings. Holdings contributed the majority of the net proceeds
of the discount notes totaling approximately $142.3 million to FVOP as a capital
contribution.
Senior Discount Notes, Series B
Holdings and FrontierVision Holdings Capital II Corporation acted as co-issuers
of $91.3 million aggregate principal amount at maturity of 11 7/8% senior
discount notes due 2007, series B. Holdings II Capital was formed for the
purpose of acting as co-issuer on these discount notes. The discount notes were
issued on December 2, 1998. Holdings contributed the majority of the net
proceeds of approximately $72.8 million from the issuance of the discount notes
to FVOP as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the three months ended March 31, 1999
were $17.4 million compared to $16.8 million for the three months ended March
31, 1998. The increase was primarily a result of cable television system
operations acquired during 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 three months
ended March 31, 1999 were approximately $18.4 million compared to approximately
$9.5 million for the three months ended March 31, 1998. 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. We invested approximately $14.9
million in acquisitions during the three months ended March 31, 1998 compared
with net proceeds from the disposition of assets of approximately $6.5 million
for the three months ended March 31, 1999.
25
Cash Flows From Financing Activities
We financed acquisitions during the three months ended March 31, 1998 with
borrowings under our senior bank indebtedness.
From inception through December 31, 1998, FVP received a total of $199.4 million
of debt and equity contributions from its partners, all of which has been
invested in Holdings and then contributed to FVOP. Such amount represents the
contractual maximum amount committed by FVP's partners.
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 and into 1999, we 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 FrontierVision employees, was established in the fourth quarter of
1997 to determine which of our 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 from Headend equipment
satellite or broadcast sources and Plant infrastructure
transmitting that signal via fiber-optic and Programming suppliers
co-axial cable to a customer's residence
or place of business.
Franchise Services The performance of tasks specifically Local origination
required by local or national regulatory Emergency broadcast
agencies.
Service Delivery The ongoing process of responding timely Customer call center infrastructure
to customer service requests. Dispatch equipment
Revenue Collection The process of collecting customer billings Subscriber management systems
and utilizing those cash receipts for Cash management
necessary corporate purposes.
Since the task force was established, FrontierVision management has committed
additional internal and external resources to address Year 2000 Issues. During
the third quarter of 1998, we engaged an external third-party Year 2000
consultant to review our 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 us to address our Year 2000 Issues by December 31, 1999. Since that
date, we have formally adopted a Year 2000 Compliance Plan, discussed in more
detail below. Additionally, we have joined an industry initiative whereby along
with other similar companies, we will achieve efficiencies in their individual
Year 2000 plans through the sharing of information and joint testing. We have
also entered into cooperative agreements with other multiple system operators to
share pertinent assessment information.
We have established a Year 2000 team which currently consists of a part-time
Project Manager, one full-time Project Administrator and one part-time
equivalent consultant.
26
The Year 2000 team also involves certain individuals in FrontierVision who are
subject matter experts, for example, engineering and information technology. The
Project Manager is accountable directly to our senior management team, who in
turn is accountable to FrontierVision's general partner.
The Year 2000 Compliance Plan, 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 have
been trained on our Year 2000 Compliance Plan and their role in the success of
the Plan has been communicated. The prevention program is designed to prevent
new problems from arising while we resolve existing problems. For example, since
October 30, 1998, we have required a Year 2000 compliance warranty on all
purchase orders to ensure that vendors ship to FrontierVision only equipment
that they have warranted is Year 2000 compliant. The find and fix program
includes three phases: inventory, assessment and remediation, and is initially
focused on mission critical business processes.
The inventory phase consists of a physical inventory of all susceptible business
components within each mission critical business process. A physical inventory
of the components used in certain of our mission critical business processes was
initiated during 1998. We substantially completed the inventory phase of the
mission critical items on January 31, 1999. We plan to initiate random inventory
verification audits during the last part of the second quarter of 1999. The
inventory consisted 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 our 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 is a comprehensive database which allows
us to review any of our business components by, among other attributes,
manufacturer/supplier, geographic location, compliance status or asset class.
This database allows us to electronically track the assessments for each item.
Once an assessment is made on a given item, the assessment is automatically
linked to the individual inventory piece. Furthermore, the database allows for
the tracking of remediation efforts at the inventory level, including the date
the item was ordered, the expected and actual cost, who the repair is made by,
when it is made and who tests the repair. This method of item management ensures
normalization of the descriptions of like items, enhancing the overall
efficiency of the project.
We are also in the process of communicating with our significant suppliers and
service providers of mission critical business processes to determine their
position with regard to Year 2000 Issues and evaluating the potential impact on
FrontierVision if those third parties fail to remediate their own Year 2000
Issues. We have received responses from or we have checked internet sites for
approximately 50% of such significant suppliers and service providers; the
majority of which are currently in their own assessment and remediation phases.
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
FrontierVision as well as maintenance and construction materials).
Since the inventory phase was completed, the Year 2000 team has focused on
assessing each business component's vulnerability to Year 2000 Issues. The
assessment phase requires management to attain a high degree of confidence that
FrontierVision 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
was the prioritization of each equipment/system in the project database. Items
of inventory have been reviewed for Year 2000 compatibility first by
cross-referencing the project database to materials received from vendors,
industry groups and other multiple systems operations, 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
27
for each item is the determination of whether a given component/system is to be
replaced or upgraded or whether specific contingency plans are needed.
Approximately 95% of the total inventory components in our headends, plant
infrastructure and customer service infrastructure have proven to have no date
sensitive components. Of the remaining 5% subject to future investigation, we
have completed assessments on approximately 83% of the components and have
determined that less than 5% of these to be non-compliant with respect to Year
2000 issues. The majority of these non-compliant items relate to information
technology equipment. Upgrades are available to bring a majority of these
information technology items into Year 2000 compliance.
After the assessment phase is completed for a given component and the component
is found to have a Year 2000 issue, the remediation phase begins. The
remediation phase includes the following activities:
o A decision is made as to the optimal remedy of the Year 2000
issue.
o A purchase order is placed for the new component or upgrade.
o Based upon the expected delivery date, the appropriate resources
are scheduled to complete the implementation.
o After the new component is implemented, dependent testing occurs
to verify that remediations do not introduce new Year 2000
problems.
If remediation is determined to be impossible with respect to a business
component, the Year 2000 team will create an appropriate contingency plan.
As of April 30, 1999, our overall progress in the find and fix program for our
mission critical systems as follows:
- --------------------------------------------------------------------------------
Percentage Complete Completion Date or
Phase of Phase Expected Completion Date
- --------------------------------------------------------------------------------
Inventory 99% January 31, 1999
Assessment 83% June 15, 1999
Remediation 30% November 30, 1999
The expected completion dates set forth above are based on our current
expectations. The assessment phase is expected to be completed by June 15, 1999
which is three and a half months behind our original estimate for completion. We
are also dependent on our suppliers for timely fulfillment of purchase orders
that will be made to replace non-compliant equipment and assistance in
installations. In addition, the current remediation timetable does not allow for
a significant amount of time for testing. Further delays in the assessment phase
and/or delays in the purchasing and receipt of replacement equipment further
reduces the time available for testing and places additional risk on the
successful completion of the remediation phase. As a result, 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 we have not yet completed the assessment of each of our mission critical
systems (either internal or external), the total costs to address the Year 2000
issue are uncertain. To date, we have expended approximately $3,800,000 to
replace components with Year 2000 issues. The majority of this amount relates to
replacing certain advertising sales equipment. Based on the assessment results
to date, we plan to spend an additional $600,000 in replacing equipment with
known Year 2000 Issues. Furthermore, as of April 30, 1999, we have expended
approximately $320,000 in third-party consulting fees and expect to spend an
additional $150,000 in external fees in conjunction with the Year 2000 project
team through December 31, 1999.
We have budgeted 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 our Year 2000 issues.
28
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, we have yet to develop or
implement any significant contingency plans. There can be no assurance that we
will identify all Year 2000 Issues or that we will be able to remedy each Year
2000 issue. A failure to sufficiently correct a material Year 2000 problem could
cause us to suffer an interruption or a failure of certain important business
operations. Additionally, the failure of a material external (third-party)
system may cause us to experience an interruption or a failure of certain
important business operations. The interruption or failure by FrontierVision in
an important business operation may cause a material, adverse impact on our
financial position. It is not management's intention that certain information
technology and technical enhancement projects planned 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 our Year
2000 readiness will not have an adverse effect on our financial position and
results of operations.
29
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)
27.1 Financial Data Schedule as of and for the three month period
ended March 31, 1999.
---------------
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
A Form 8-K was filed on April 30, 1999 relating to Holding's commencement
of an exchange offer.
30
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 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
Senior Vice President and Treasurer
Date: May 7, 1999 By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION CAPITAL CORP.
Date: May 7, 1999 By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
31