<PAGE>
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of November 14, 1997: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore
filing with the reduced disclosure format.
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<S> <C>
PART I. Financial Information PAGE
Item 1. Consolidated Financial Statements of FrontierVision Operating Partners,
L.P. and Subsidiary...................................................................... 3
Notes to Consolidated Financial Statements............................................... 7
Financial Statements of FrontierVision Capital Corporation............................... 14
Note to Financial Statements............................................................. 18
Consolidated Financial Statements of FrontierVision Holdings, L.P........................ 19
Notes to Consolidated Financial Statements............................................... 23
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................... 31
PART II. Other Information........................................................................ 38
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
---------------------------------
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 81,798 $ 3,639
Accounts receivable, net of allowance for doubtful accounts
of $663 and $767 4,037 4,544
Other receivables 275 846
Prepaid expenses and other 2,734 2,231
Investment in cable television systems, net:
Property and equipment 220,607 199,461
Franchise cost and other intangible assets 352,171 324,905
-------- --------
Total investment in cable television systems, net 572,778 524,366
-------- --------
Deferred financing costs, net 11,768 13,042
Earnest money deposits 7,959 500
-------- --------
Total assets $681,349 $549,168
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 667 $ 1,994
Accrued liabilities 10,345 10,825
Subscriber prepayments and deposits 1,544 1,862
Accrued interest payable 11,004 6,290
Debt 378,845 398,194
-------- --------
Total liabilities 402,405 419,165
-------- --------
Partners' capital:
FrontierVision Holdings, L.P. 278,665 129,874
FrontierVision Operating Partners, Inc. 279 129
-------- --------
Total partners' capital 278,944 130,003
Commitments
-------- --------
Total liabilities and partners' capital $681,349 $549,168
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
<TABLE>
---------------------------------------------------------------------
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,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 36,750 $ 18,668 $ 102,386 $ 46,207
Expenses:
Operating expenses 18,332 9,989 52,794 23,657
Corporate administrative expenses 1,071 706 3,120 1,971
Depreciation and amortization 15,899 8,791 45,090 22,386
--------- --------- --------- ---------
Total expenses 35,302 19,486 101,004 48,014
--------- --------- --------- ---------
Operating income/(loss) 1,448 (818) 1,382 (1,807)
Interest expense, net (10,988) (4,313) (32,290) (11,617)
Other expense (7) (99) (54) (99)
--------- --------- --------- ---------
Net loss $ (9,547) $ (5,230) $ (30,962) $ (13,523)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
------------------------------------------------------
FrontierVision
FrontierVision Operating
Partners, L.P. (a) Partners, Inc.
(General Partner) (Limited Partner) Total
--------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 46,361 $ 46 $ 46,407
Capital contributions 107,289 108 107,397
Net loss (23,776) (25) (23,801)
--------- --------- ---------
Balance, December 31, 1996 129,874 129 130,003
Capital contributions (Unaudited) 179,722 181 179,903
Net loss (Unaudited) (30,931) (31) (30,962)
--------- --------- ---------
Balance, September 30, 1997 (Unaudited) $ 278,665 $ 279 $ 278,944
========= ========= =========
(a) FrontierVision Holdings, L.P. became the new general partner of FrontierVision Operating Partners, L.P. on
September 19, 1997.
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
<TABLE>
---------------------------------
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (30,962) $ (13,523)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 45,090 22,386
Net loss on disposal of assets -- 99
Amortization of deferred debt issuance costs 1,530 --
Interest expense deferred and included in
long-term debt 721 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 1,209 1,313
Prepaid expenses and other (480) (515)
Accounts payable and accrued liabilities (2,713) (814)
Subscriber prepayments and deposits (548) (3)
Accrued interest payable 4,714 1,202
--------- ---------
Total adjustments 49,523 23,668
--------- ---------
Net cash flows from operating activities 18,561 10,145
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,547) (5,791)
Pending acquisition costs (289) (8,285)
Cash paid for franchise costs and other intangible assets (482) --
Earnest money deposits (8,259) --
Proceeds from dispositions of cable television systems -- 15,993
Cash paid in acquisitions of cable television systems (72,402) (188,116)
--------- ---------
Net cash flows from investing activities (99,979) (186,199)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings 56,500 114,969
Debt payments (76,500) --
Principal payments on capital lease obligations (70) --
Increase in deferred financing fees (256) (3,738)
Partner capital contributions 179,903 67,218
--------- ---------
Net cash flows from financing activities 159,577 178,449
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 78,159 2,395
Cash and Cash Equivalents, beginning of period 3,639 2,650
--------- ---------
Cash and Cash Equivalents, end of period $ 81,798 $ 5,045
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 25,564 $ 10,442
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
FrontierVision Operating Partners, L.P. (the "Company" or "FVOP") is a Delaware
limited partnership formed on July 14, 1995 for the purpose of acquiring and
operating cable television systems. As of September 30, 1997, the Company owned
and operated cable television systems in three primary operating clusters - New
England, Ohio and Kentucky - with a fourth, smaller group of cable television
systems in the Southeast. The Company was initially capitalized in November 1995
with approximately $38 from its sole limited partner, FrontierVision Operating
Partners, Inc. ("FVOP Inc."), a Delaware corporation, and approximately $38,300
from its, 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 Captial 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") have become
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.
During the period from January 1, 1997 to September 30, 1997, the Company
received additional capital contributions of approximately $179,903 from its
partners. This amount includes net proceeds of $142,250 received from the
issuance of the Discount Notes, 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 of $65,500 with the remainder placed in escrow
to finance pending acquisitions. 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 for the nine months ended September 30, 1997.
Capital, a Delaware corporation, is a wholly owned subsidiary of the Company,
and was organized on July 26, 1996 for the sole purpose of acting as co-issuer
with the Company of $200 million aggregate principal amount of 11% Senior
Subordinated Notes due 2006 (the "Notes"). Capital has nominal assets and does
not have any material operations.
REFERENCE TO ANNUAL REPORT
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. The accompanying financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 for additional disclosures,
including a summary of the Company's accounting policies.
The following notes, insofar as they are applicable to the nine months ended
September 30, 1997, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results for the entire 1997 fiscal year.
7
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION (continued)
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified for comparative purposes.
(2) ACQUISITIONS AND DISPOSITIONS
The Company has completed several acquisitions since its inception through
September 30, 1997. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition. The following table lists the
acquisitions and the purchase price allocation for each.
<TABLE>
PRIMARY LOCATION
PREDECESSOR OWNER OF SYSTEMS DATE ACQUIRED ACQUISITION COST (A)
<S> <C> <C> <C>
United Video Cablevision, Inc. ("UVC") Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. ("Longfellow") Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. ("Americable") Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC ("Grassroots") Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $85,700
American Cable Entertainment of Kentucky-Indiana, Inc. Kentucky and Indiana October 9, 1996 $147,300
("ACE")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. ( "Penn/Ohio") Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. ( "Deep Creek") Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. ("Bluegrass") Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,900
("Clear/B&G")
Milestone Communications of New York, L.P. ("Milestone") Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,700
Phoenix Front Row Cablevision ("Front Row") Ohio May 30, 1997 $6,900
PCI Incorporated ("Bedford") Michigan August 29, 1997 $13,500 *
SRW, Inc.'s Blue Ridge Cable Systems, L.P. ("Blue Tennessee and North September 3, 1997 $4,100 *
Ridge") Carolina
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
September 30, 1997.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
8
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
<TABLE>
-----------------------------------
Acquisitions Acquisitions
for the Nine for the Nine
Months Ended Months Ended
September 30, 1997(a) September 30, 1996(a)
------------- -------------
<S> <C> <C>
Property and equipment $ 25,000 $ 89,837
Franchise cost and other intangible assets 49,184 110,412
------------- -------------
Subtotal 74,184 200,249
------------- -------------
Net working capital deficit (982) (2,631)
Less - Earnest money deposits applied (800) (9,502)
------------- -------------
Total cash paid for acquisitions $ 72,402 $ 188,116
============= =============
- ------------
</TABLE>
(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 for the nine months ended September 30, 1996,
assuming the C4, Cox, Triax and ACE acquisitions (the "Acquisitions") had been
consummated on January 1, 1996, are as follows:
<TABLE>
----------------------------------------------
Nine Months Ended September 30, 1996
----------------------------------------------
Historical Pro Forma
Results Acquisitions Results
----------- ------------ ------------
<S> <C> <C> <C>
Revenue $ 46,207 $ 45,072 $ 91,279
Operating, selling, general and administrative expenses (25,628) (23,626) (49,254)
Depreciation and amortization (22,386) (22,954) (45,340)
----------- ------------ ------------
Operating income (loss) (1,807) (1,508) (3,315)
Interest and other expenses (11,716) (23,065) (34,781)
----------- ------------ ------------
Net loss $ (13,523) $ (24,573) $ (38,096)
=========== ============ ============
</TABLE>
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregate basis.
On May 8, 1997, the Company entered into an asset purchase agreement with A-R
Cable Services - ME, Inc., a wholly-owned subsidiary of Cablevision Systems,
Corporation, to acquire certain cable television assets in Maine, for a cash
purchase price of approximately $78,260. As of September 30, 1997, the Company
had advanced $7,816 as an earnest money deposit related to this transaction.
This transaction was consummated on October 31, 1997.
On May 12, 1997, the Company entered into an asset purchase agreement with TCI
Cablevision of Vermont, Inc., and Westmarc Development Joint Venture to acquire
certain cable television assets in New Hampshire and Vermont for a cash purchase
price of $34,500.
9
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
As of September 30, 1997, the Company had advanced $30 and $113 to Bluegrass and
Front Row, respectively, in the form of letters of credit in connection with the
transfer of certain franchises in favor of the Company.
On October 15, 1997, the Company entered into an asset purchase agreement with
Harold's Home Furnishings, Inc., to acquire certain cable television assets in
Maryland, for a cash purchase price of approximately $1,500. This transaction
was consummated on October 31, 1997.
(3) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
September 30, December 31,
1997 1996
-------- --------
Bank Credit Facility (a) --
<S> <C> <C>
Term loans, due June 30, 2004, interest based on various floating rate
options (8.52% and 8.60% weighted average at September
30, 1997 and December 31, 1996, respectively), payable monthly $170,000 $190,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
Subordinated promissory note to UVC, due December 31,
2004, with interest as described below (c) 8,845 8,124
Capital lease obligations, monthly payments of $3, including average
interest at 9.1%, due November 1998 and May 1999 -- 70
-------- --------
Total debt $378,845 $398,194
======== ========
</TABLE>
(a) Bank Credit Facility.
The Company has an Amended and Restated Credit Facility (the "Senior
Credit Facility") which includes a $75.0 million revolving credit
facility ("Revolving Credit Facility"), a $100.0 million term loan
("Facility A Term Loan") and a $90.0 million term loan ("Facility B
Term Loan"). The Facility A Term Loan and the Revolving Credit Facility
both mature on June 30, 2004. Escalating principal payments are due
quarterly beginning September 30, 1998 under the Facility A Term Loan
with quarterly principal reductions of the Revolving Credit Facility
also beginning September 30, 1998. The Facility B Term Loan matures
June 30, 2005 with 91% of the principal being repaid in the last four
quarters of the term of the facility.
Under the terms of the Senior Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon any sale of new
partnership interests and the sale of any of its operating systems.
Further, beginning with the year ending December 31, 1998, the Company
is required to make prepayments equal to 50% of its excess cash flow,
as defined in the Senior Credit Facility. The Company also pays
commitment fees of 1/2% per annum on the average unborrowed portion of
the total amount available under the Senior Credit Facility.
10
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT (continued)
The Senior Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio, fixed charges ratio, and capital expenditures. In
addition, the Senior Credit Facility has restrictions on certain
partnership distributions by the Company. As of September 30, 1997, the
Company was in compliance with the financial covenants of the Senior
Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiary are pledged as collateral for the Senior Credit
Facility.
In order to convert certain of the interest payable at variable rates
under the Senior Credit Facility to interest at fixed rates, the
Company has entered into interest rate swap agreements for notional
amounts totaling $170,000, and maturing between November 15, 1999 and
October 7, 2000. According to these agreements, the Company pays or
receives the difference between (1) an average fixed rate of 5.932% and
(2) various available floating rate options applied to the same
$170,000 notional amount every three months during the term of the
interest rate swap agreement. For the nine-month period ended September
30, 1997, the Company had recognized an increase in interest expense of
approximately $267 as a result of these interest rate swap agreements.
On September 15, 1997, the Company received a commitment from its
principal lenders under the Senior Credit Facility to enter into a new
replacement senior credit facility (the "New Credit Facility"), which
will refinance and replace the Senior Credit Facility. The commitment
will provide that the lenders will extend up to $650,000 aggregate
principal amount of revolving credit and term loan financing to the
Company. The Company expects to enter into the New Credit Facility in
the fourth quarter of 1997.
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.
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering
(the "Offering"), $200,000 aggregate principal amount of the Notes. Net
proceeds from the Offering of $192,500, after costs of approximately
$7,500, were available to the Company on October 7, 1996.
In connection with the anticipated issuance of the Notes in connection
with the Offering, the Company entered into deferred interest rate
setting agreements to reduce the Company's interest rate exposure in
anticipation of issuing the Notes. The cost of such agreements,
amounting to $1,390, will be recognized as a component of interest
expense over the term of the Notes.
The Notes are unsecured subordinated obligations of the Company
(co-issued by Capital) that mature on October 15, 2006. Interest
accrues at 11% per annum beginning from the date of issuance, and is
payable each April 15 and October 15, commencing April 15, 1997.
The Subordinated Notes Indenture (the "Indenture") has certain
restrictions on incurrence of indebtedness, distributions, mergers,
asset sales and changes in control of the Company.
11
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT (continued)
(c) Subordinated Promissory Note to UVC
The subordinated promissory note to UVC, dated November 9, 1995 (the
"UVC Note"), bears interest at 9% for the first three years. At the end
of each subsequent year, the annual interest rate increases 2% per
year. Under the terms of the UVC Note, the Company may issue additional
subordinated promissory notes rather than making cash interest
payments. In this event, the UVC Note bears interest equal to the
annual interest of the original promissory note plus 2.5% for the first
three years and 3% for each of the subsequent years. Further, in the
event the Company's leverage ratio exceeds certain specified amounts,
the interest rate also increases by 2%. Under the terms of the UVC
Note, the Company can prepay the balance at any time.
The debt of the Company matures as follows:
Year Ended December 31 --
1997 $ -
1998 3,289
1999 8,368
2000 11,947
2001 15,527
Thereafter 339,714
--------
$378,845
========
(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,
1997 and 1996 was $2,897 and $1,509, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to September 30, 1997 are as follows:
Year Ended December 31 --
1997 $ 150
1998 384
1999 238
2000 144
2001 120
Thereafter 220
------
$1,256
======
12
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARY
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. The Federal Communications
Commission ("FCC") adopted comprehensive regulations, effective September 1,
1993, governing rates charged to subscribers for basic cable and cable
programming services which allowed cable operators to justify regulated rates in
excess of the FCC benchmarks through cost of service showings at both the
franchising authority level for basic service and at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula. For a more detailed
discussion of these matters, see "Legislation and Regulation" and Note 7 to the
Company's consolidated financial statements in its Form 10-K for the fiscal year
ended December 31, 1996.
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 5% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
(5) SUBSEQUENT EVENTS
As of November 14, 1997, the Company had entered into additional letters of
intent to acquire certain cable television systems, primarily located in Ohio,
Michigan, Massachusetts and Kentucky, in four separate transactions, for
aggregate consideration of approximately $104,400.
13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEET
<TABLE>
---------------------
September 30, December 31,
1997 1996
----- -----
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 155 $ 188
----- -----
Total assets $ 155 $ 188
===== =====
LIABILITIES AND OWNER'S EQUITY
Payable to FVOP $ 100 $ 100
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding 1 1
Additional paid-in capital 99 99
Retained deficit (45) (12)
----- -----
Total owner's equity 55 88
----- -----
Total liabilities and owner's equity $ 155 $ 188
===== =====
</TABLE>
See accompanying note to the financial statements.
14
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
---------------------------------------------------------------------
For the Period For the Period
For the Three For the Nine from July 26, 1996 from July 26, 1996
Months Ended Months Ended (Inception) through (Inception) through
September 30, September 30, September 30, December 31,
1997 1997 1996 1996
---- ---- ---------- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
General and administrative expenses 11 33 -- 12
---- ---- ---------- ----
Net loss $(11) $(33) $ -- $(12)
==== ==== ========== ====
</TABLE>
See accompanying note to financial statements.
15
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF OWNER'S EQUITY
<TABLE>
-------------------------------------------------------------------
Common Additional Retained Total owner's
stock paid-in capital deficit equity
----- ----- ----- -----
<S> <C> <C> <C> <C>
Balance, at July 26, 1996 (inception) $ -- $ -- $ -- $ --
Issuance of Common Stock 1 99 -- 100
Net loss -- -- (12) (12)
----- ----- ----- -----
Balance, December 31, 1996 1 99 (12) 88
Net loss (Unaudited) -- -- (33) (33)
----- ----- ----- -----
Balance, September 30, 1997 (Unaudited) $ 1 $ 99 $ (45) $ 55
===== ===== ===== =====
</TABLE>
See accompanying note to financial statements.
16
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
-------------------------------
For the Period
For the Nine from July 26,
Months Ended 1996 through
September 30, September 30,
1997 1996
------------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (33) $ --
Decrease in receivable from affiliate -- --
----- -------
Net cash flows used in operating activities (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 (33) --
Cash and cash equivalents, beginning of period 188 --
----- -------
Cash and cash equivalents, end of period $ 155 $ --
===== =======
</TABLE>
See accompanying note to financial statements.
17
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
NOTE TO THE FINANCIAL STATEMENTS (Unaudited)
FrontierVision Capital Corporation, a Delaware corporation, is a wholly owned
subsidiary of FrontierVision Operating Partners, L.P. ("FVOP"), and was
organized on July 26, 1996 for the sole purpose of acting as co-issuer with FVOP
of $200 million aggregate principal amount of the 11% Senior Subordinated Notes.
FrontierVision Capital Corporation has nominal assets and does not have any
material operations.
18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
--------------------------
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 84,001 $ 3,639
Accounts receivable, net of allowance for doubtful accounts
of $663 and $767 4,037 4,544
Other receivables 275 846
Prepaid expenses and other 2,734 2,231
Investment in cable television systems, net:
Property and equipment 220,607 199,461
Franchise cost and other intangible assets 352,171 324,905
-------- --------
Total investment in cable television systems, net 572,778 524,366
-------- --------
Deferred financing costs, net 17,308 13,042
Earnest money deposits 7,959 500
-------- --------
Total assets $689,092 $549,168
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 670 $ 1,994
Accrued liabilities 10,345 10,825
Subscriber prepayments and deposits 1,544 1,862
Accrued interest payable 11,004 6,290
Debt 529,390 398,194
-------- --------
Total liabilities 552,953 419,165
-------- --------
Partners' capital:
FrontierVision Partners, L.P. 136,003 129,874
FrontierVision Holdings, LLC 136 129
-------- --------
Total partners' capital 136,139 130,003
Commitments
-------- --------
Total liabilities and partners' capital $689,092 $549,168
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
<TABLE>
---------------------------------------------------------------------
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,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 36,750 $ 18,668 $ 102,386 $ 46,207
Expenses:
Operating expenses 18,332 9,989 52,794 23,657
Corporate administrative expenses 1,071 706 3,120 1,971
Depreciation and amortization 15,899 8,791 45,090 22,386
--------- --------- --------- ---------
Total expenses 35,302 19,486 101,004 48,014
--------- --------- --------- ---------
Operating income/(loss) 1,448 (818) 1,382 (1,807)
Interest expense, net (11,544) (4,313) (32,846) (11,617)
Other expense (7) (99) (54) (99)
--------- --------- --------- ---------
Net loss $ (10,103) $ (5,230) $ (31,518) $ (13,523)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
--------------------------------------------------------
FrontierVision FrontierVision
Partners, L.P. Holdings, LLC
(General Partner) (Limited Partner) Total
--------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 46,361 $ 46 $ 46,407
Capital contributions 107,289 108 107,397
Net loss (23,776) (25) (23,801)
--------- --------- ---------
Balance, December 31, 1996 129,874 129 130,003
Capital contributions (Unaudited) 37,616 38 37,654
Net loss (Unaudited) (31,487) (31) (31,518)
--------- --------- ---------
Balance, September 30, 1997 (Unaudited) $ 136,003 $ 136 $ 136,139
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
<TABLE>
-------------------------------
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (31,518) $ (13,523)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 45,090 22,386
Net loss on disposal of assets -- 99
Amortization of deferred debt issuance costs 1,546 --
Interest expense deferred and included in
long-term debt and non-cash interest expense 1,266 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 1,209 1,313
Prepaid expenses and other (480) (515)
Accounts payable and accrued liabilities (2,710) (814)
Subscriber prepayments and deposits (548) (3)
Accrued interest payable 4,714 1,202
--------- ---------
Total adjustments 50,087 23,668
--------- ---------
Net cash flows from operating activities 18,569 10,145
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,547) (5,791)
Pending acquisition costs (289) (8,285)
Cash paid for franchise costs (482) --
Earnest money deposits (8,259) --
Proceeds from dispositions of cable television systems -- 15,993
Cash paid in acquisitions of cable television systems (72,402) (188,116)
--------- ---------
Net cash flows from investing activities (99,979) (186,199)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings 206,500 114,969
Debt payments (76,500) --
Principal payments on capital lease obligations (70) --
Increase in deferred financing fees (5,812) (3,738)
Partner capital contributions 37,654 67,218
--------- ---------
Net cash flows from financing activities 161,772 178,449
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 80,362 2,395
Cash and Cash Equivalents, beginning of period 3,639 2,650
--------- ---------
Cash and Cash Equivalents, end of period $ 84,001 $ 5,045
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 25,564 $ 10,442
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
FrontierVision Holdings, L.P. ("Holdings"), a wholly owned subsidiary of
FrontierVision Partners ("FVP"), is a Delaware limited partnership formed on
September 3, 1997 for the purpose of acting as co-issuer with its wholly-owned
subsidiary, FrontierVision Holdings Capital Corporation ("Holdings Capital"), of
$237,650 aggregate principal amount at maturity of 11 7/8% Senior Discount Notes
(the "Discount Notes") due 2007. FVP contributed to Holdings, both directly and
indirectly, all of the outstanding partnership interests of FrontierVision
Operating Partners, L.P. ("FVOP") prior to the issuance of the Discount Notes on
September 19, 1997 ("Formation Transaction") and therefore, at that time, FVOP
and FrontierVision Capital Corporation ("Capital") became wholly-owned,
consolidated subsidiaries of Holdings. Holdings had no operations from inception
through September 18, 1997.
FVOP 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. FVOP Inc., previously a wholly owned subsidiary of FVP, is now a
wholly owned subsidiary of Holdings. As used herein, the "Company" refers
collectively to Holdings, Holdings Captial, FVOP, FVOP, Inc. and Capital.
As of September 30, 1997, the Company owned and operated cable television
systems in three primary operating clusters - New England, Ohio and Kentucky -
with a fourth, smaller group of cable television systems in the Southeast.
During the period from January 1, 1997 to September 30, 1997, the Company
received additional capital contributions of approximately $37,700 from its
partners.
PRINCIPLES OF CONSOLIDATION
The interim consolidated financial statements for Holdings are presented on an
pooling basis as if the Formation Transaction had occurred on July 14, 1995, the
date of FVOP's inception. For comparability, the consolidated financial
statements are presented for FVOP as of and for the twelve months ended December
31, 1996. The consolidated financial statements for Holdings are included in
this Form 10-Q for informational purposes only.
REFERENCE TO ANNUAL REPORT
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. The accompanying financial
statements should be read in conjunction with FVOP's Annual Report on Form 10-K
for the year ended December 31, 1996 for additional disclosures, including a
summary of FVOP's accounting policies.
The following notes, insofar as they are applicable to the nine months ended
September 30, 1997, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results for the entire 1997 fiscal year.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified for comparative purposes.
23
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS
The Company has completed several acquisitions since its inception through
September 30, 1997. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon fair values
at the respective dates of acquisition. The following table lists the
acquisitions and the purchase price allocation for each.
<TABLE>
PRIMARY LOCATION
PREDECESSOR OWNER OF SYSTEMS DATE ACQUIRED ACQUISITION COST (A)
<S> <C> <C> <C>
United Video Cablevision, Inc. ("UVC") Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. ("Longfellow") Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. ("Americable") Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC ("Grassroots") Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $85,700
American Cable Entertainment of Kentucky-Indiana, Inc. Kentucky and Indiana October 9, 1996 $147,300
("ACE")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. ( "Penn/Ohio") Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. ( "Deep Creek") Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. ("Bluegrass") Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,900
("Clear/B&G")
Milestone Communications of New York, L.P. ("Milestone") Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,700
Phoenix Front Row Cablevision ("Front Row") Ohio May 30, 1997 $6,900
PCI Incorporated ("Bedford") Michigan August 29, 1997 $13,500 *
SRW, Inc.'s Blue Ridge Cable Systems, L.P. ("Blue Tennessee and North September 3, 1997 $4,100 *
Ridge") Carolina
- ---------------
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
September 30, 1997.
* Subject to adjustment.
</TABLE>
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
---------------------------------
Acquisitions Acquisitions
for the Nine for the Nine
Months Ended Months Ended
September 30, 1997(a) September 30, 1996(a)
--------- ---------
<S> <C> <C>
Property and equipment $ 25,000 $ 89,837
Franchise cost and other intangible assets 49,184 110,412
--------- ---------
Subtotal 74,184 200,249
--------- ---------
Net working capital deficit (982) (2,631)
Less - Earnest money deposits applied (800) (9,502)
--------- ---------
Total cash paid for acquisitions $ 72,402 $ 188,116
========= =========
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
</TABLE>
24
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(2) ACQUISITIONS AND DISPOSITIONS (continued)
The Company has reported the operating results of its acquired cable systems
from the dates of their respective acquisition. Unaudited pro forma summarized
operating results of the Company for the nine months ended September 30, 1996,
assuming the C4, Cox, Triax and ACE acquisitions (the "Acquisitions") had been
consummated on January 1, 1996, are as follows:
<TABLE>
--------------------------------------------------------
Nine Months Ended September 30, 1996
--------------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
-------- -------- --------
<S> <C> <C> <C>
Revenue $ 46,207 $ 45,072 $ 91,279
Operating, selling, general and administrative expenses (25,628) (23,626) (49,254)
Depreciation and amortization (22,386) (22,954) (45,340)
-------- -------- --------
Operating income (loss) (1,807) (1,508) (3,315)
Interest and other expenses (11,716) (23,065) (34,781)
-------- -------- --------
Net loss $(13,523) $(24,573) $(38,096)
======== ======== ========
</TABLE>
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the Acquisitions been consummated
on the dates indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregate basis.
On May 8, 1997, the Company entered into an asset purchase agreement with A-R
Cable Services - ME, Inc., a wholly-owned subsidiary of Cablevision Systems,
Corporation, to acquire certain cable television assets in Maine, for a cash
purchase price of approximately $78,260. As of September 30, 1997, the Company
had advanced $7,816 as an earnest money deposit related to this transaction.
This transaction was consummated on October 31, 1997.
On May 12, 1997, the Company entered into an asset purchase agreement with TCI
Cablevision of Vermont, Inc., and Westmarc Development Joint Venture to acquire
certain cable television assets in New Hampshire and Vermont for a cash purchase
price of $34,500.
As of September 30, 1997, the Company had advanced $30 and $113 to Bluegrass and
Phoenix, respectively, in the form of letters of credit in connection with the
transfer of certain franchises in favor of the Company.
On October 15, 1997, the Company entered into an asset purchase agreement with
Harold's Home Furnishings, Inc., to acquire certain cable television assets in
Maryland, for a cash purchase price of approximately $1,500. This transaction
was consummated on October 31, 1997.
25
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT
The Company's debt was comprised of the following:
<TABLE>
--------------------------
September 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Bank Credit Facility (a) --
Term loans, due June 30, 2004, interest based on various floating rate
options (8.52% and 8.60% weighted average at September
30, 1997 and December 31, 1996, respectively), payable monthly $170,000 $190,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
11 7/8% Senior Discount Notes due 2007 (c) 150,545 --
Subordinated promissory note to UVC, due December 31,
2004, with interest as described below (d) 8,845 8,124
Capital lease obligations, monthly payments of $3, including average
interest at 9.1%, due November 1998 and May 1999 -- 70
-------- --------
Total debt $529,390 $398,194
======== ========
</TABLE>
(a) Bank Credit Facility.
The Company has an Amended and Restated Credit Facility (the "Senior
Credit Facility") which includes a $75.0 million revolving credit
facility ("Revolving Credit Facility"), a $100.0 million term loan
("Facility A Term Loan") and a $90.0 million term loan ("Facility B
Term Loan"). The Facility A Term Loan and the Revolving Credit Facility
both mature on June 30, 2004. Escalating principal payments are due
quarterly beginning September 30, 1998 under the Facility A Term Loan
with quarterly principal reductions of the Revolving Credit Facility
also beginning September 30, 1998. The Facility B Term Loan matures
June 30, 2005 with 91% of the principal being repaid in the last four
quarters of the term of the facility.
Under the terms of the Senior Credit Facility, with certain exceptions,
the Company has a mandatory prepayment obligation upon any sale of new
partnership interests and the sale of any of its operating systems.
Further, beginning with the year ending December 31, 1998, the Company
is required to make prepayments equal to 50% of its excess cash flow,
as defined in the Senior Credit Facility. The Company also pays
commitment fees of 1/2% per annum on the average unborrowed portion of
the total amount available under the Senior Credit Facility.
The Senior Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio, fixed charges ratio, and capital expenditures. In
addition, the Senior Credit Facility has restrictions on certain
partnership distributions by the Company. As of September 30, 1997, the
Company was in compliance with the financial covenants of the Senior
Credit Facility.
All partnership interests in FVOP and all assets of FVOP and its
subsidiary are pledged as collateral for the Senior Credit Facility.
26
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT (continued)
In order to convert certain of the interest payable at variable rates
under the Senior Credit Facility to interest at fixed rates, the
Company has entered into interest rate swap agreements for notional
amounts totaling $170,000, and maturing between November 15, 1999 and
October 7, 2000. According to these agreements, the Company pays or
receives the difference between (1) an average fixed rate of 5.932% and
(2) various available floating rate options applied to the same
$170,000 notional amount every three months during the term of the
interest rate swap agreement. For the nine-month period ended September
30, 1997, the Company had recognized an increase in interest expense of
approximately $267 as a result of these interest rate swap agreements.
On September 15, 1997, the Company received a commitment from its
principal lenders under the Senior Credit Facility to enter into a new
replacement senior credit facility (the "New Credit Facility"), which
will refinance and replace the Senior Credit Facility. The commitment
will provide that the lenders will extend up to $650,000 aggregate
principal amount of revolving credit and term loan financing to the
Company. The Company expects to enter into the New Credit Facility in
the fourth quarter of 1997.
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.
(b) Senior Subordinated Notes
On October 7, 1996, FVOP 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 FVOP on October 7, 1996.
In connection with the anticipated issuance of the Notes in connection
with the Offering, FVOP entered into deferred interest rate setting
agreements to reduce FVOP'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 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.
(c) Senior Discount Notes
On September 19, 1997, the Company issued, pursuant to a private
offering, $237,650 aggregate principal amount at maturity of 11 7/8%
Senior Discount Notes. The Discount Notes were sold at approximately
27
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(3) DEBT (continued)
63.1% of the stated maturity and provided net proceeds of $144,750,
after underwriting fees of approximately $5,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital (collectively the "Issuers"), ranking pari passu in right of
payment to all existing and future unsecured indebtedness of the
Issuers and will mature on September 15, 2007. The discount on the 11
7/8% Discount Notes is being accreted using the interest method over
four years until September 15, 2001, the date at which cash interest
begins to accrue. Cash interest will accrue at a rate of 11 7/8% per
annum and will be payable on a semiannual basis on each March 15 and
September 15, commencing on March 15, 2002.
The Discount Notes are redeemable at the option of Issuers, in whole or
in part, at any time on or after September 15, 2001, at redemption
prices set forth in the Indenture for the Discount Notes (the "Discount
Indenture"), plus any unpaid interest, if any, at the date of the
redemption. The Issuers may redeem, prior to September 15, 2001, up to
35% of the principal amount at maturity of the Discount Notes with the
net cash proceeds received from one or more public equity offerings or
strategic equity investments at a redemption prices set forth in the
agreement, plus any unpaid interest, if any, at the date of the
redemption.
The Discount Indenture has certain restrictions on incurrence of
indebtedness, distributions, mergers, asset sales and changes in
control of Holdings.
(d) Subordinated Promissory Note to UVC
The subordinated promissory note to UVC, dated November 9, 1995 (the
"UVC Note"), bears interest at 9% for the first three years. At the end
of each subsequent year, the annual interest rate increases 2% per
year. Under the terms of the UVC Note, the Company may issue additional
subordinated promissory notes rather than making cash interest
payments. In this event, the UVC Note bears interest equal to the
annual interest of the original promissory note plus 2.5% for the first
three years and 3% for each of the subsequent years. Further, in the
event the Company's leverage ratio exceeds certain specified amounts,
the interest rate also increases by 2%. Under the terms of the UVC
Note, the Company can prepay the balance at any time.
The debt of the Company matures as follows:
Year Ended December 31 --
1997 $ --
1998 3,289
1999 8,368
2000 11,947
2001 15,527
Thereafter 490,259
--------
$529,390
========
28
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(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,
1997 and 1996 was $2,897 and $1,509, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to September 30, 1997 are as follows:
Year Ended December 31 --
1997 $ 150
1998 384
1999 238
2000 144
2001 120
Thereafter 220
------
$1,256
======
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services which allowed cable operators to justify regulated
rates in excess of the FCC benchmarks through cost of service showings at both
the franchising authority level for basic service and at the FCC level in
response to complaints on rates for cable programming services. The FCC also
adopted comprehensive and restrictive regulations allowing operators to modify
their regulated rates on a quarterly or annual basis using various methodologies
that account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula. For a more detailed
discussion of these matters, see "Legislation and Regulation" and Note 7 to the
Company's consolidated financial statements in its Form 10-K for the fiscal year
ended December 31, 1996.
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 5% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
29
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(5) SUBSEQUENT EVENTS
As of November 14, 1997, the Company had entered into additional letters of
intent to acquire certain cable television systems, primarily located in Ohio,
Michigan, Massachusetts and Kentucky, in four separate transactions, for
aggregate consideration of approximately $104,400.
30
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the financial condition and results of operations of
the Company, the description of the Company's business as well as other sections
of this Form 10-Q contain certain forward-looking statements. The Company's
actual results could differ materially from those discussed herein and its
current business plans could be altered in response to market conditions and
other factors beyond the Company's control. Important factors that could cause
or contribute to such differences or changes include those discussed under "Risk
Factors" in the Company's Post-Effective Amendment No. 1 to Form S-1 filed March
28, 1997 (File No. 333-9535).
The Company commenced operations in November 1995 with the acquisition of
certain cable television systems. The following table summarizes the Company's
acquisitions since inception:
<TABLE>
PRIMARY LOCATION
PREDECESSOR OWNER OF SYSTEMS DATE ACQUIRED ACQUISITION COST (A)
<S> <C> <C> <C>
United Video Cablevision, Inc. ("UVC") Maine and Ohio November 9, 1995 $121,800
Longfellow Cable Company, Inc. ("Longfellow") Maine November 21, 1995 $6,100
C4 Media Cable Southeast, Limited Partnership ("C4") Virginia and Tennessee February 1, 1996 $47,600
Americable International Maine, Inc. ("Americable") Maine March 29, 1996 $4,800
Cox Communications, Inc. ("Cox") Ohio April 9, 1996 $135,900
Phoenix Grassroots Cable Systems, LLC ("Grassroots") Maine and New Hampshire August 29, 1996 $9,700
Triax Southeast Associates, L.P. ("Triax") Kentucky and Ohio October 7, 1996 $85,700
American Cable Entertainment of Kentucky-Indiana, Inc. Kentucky and Indiana October 9, 1996 $147,300
("ACE")
SRW, Inc.'s Penn/Ohio Cablevision, L.P. ( "Penn/Ohio") Pennsylvania and Ohio October 31, 1996 $3,800
SRW, Inc.'s Deep Creek Cable TV, L.P. ( "Deep Creek") Maryland December 23, 1996 $3,000
Bluegrass Cable Partners, L.P. ("Bluegrass") Kentucky March 20, 1997 $10,400
Clear Cable T.V., Inc. and B&G Cable T.V. Systems, Inc. Kentucky March 31, 1997 $1,900
("Clear/B&G")
Milestone Communications of New York, L.P. ("Milestone") Ohio March 31, 1997 $3,000
Triax Associates I, L.P. ("Triax I") Ohio May 30, 1997 $34,700
Phoenix Front Row Cablevision ("Front Row") Ohio May 30, 1997 $6,900
PCI Incorporated ("Bedford") Michigan August 29, 1997 13,500 *
SRW, Inc.'s Blue Ridge Cable Systems, L.P. ("Blue Tennessee and North September 3, 1997 4,100 *
Ridge") Carolina
- -------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
September 30, 1997.
* Subject to adjustment.
During the third quarter of 1996, the Company sold systems serving, in the
aggregate, approximately 10,400 basic subscribers located in Chatsworth, Georgia
and Woodstock and New Market, Virginia for aggregate disposition proceeds of
approximately $15.0 million.
As of September 30, 1997, the Company's currently owned cable television systems
(the "Existing Systems") passed approximately 579,500 homes and served
approximately 401,300 basic subscribers. The Company has operated the Existing
Systems for a limited period of time and had no operations prior to November 9,
1995. All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's
31
<PAGE>
historical results of operations include the results of operations for each
acquired system subsequent to its respective acquisition date.
On October 31, 1997, the Company completed the acquisition of certain cable
television assets from A-R Cable Services-ME, Inc., serving approximately 52,900
subscribers in Maine for an aggregate purchase price of approximately $78.3
million. Also on October 31, 1997, the Company completed the acquisition of
certain cable television assets from Harold's Home Furnishings, Inc., serving
approximately 1,400 subscribers in Maryland for approximately $1.5 million.
As of November 14, 1997, the Company had entered into additional letters of
intent or asset purchase agreements to acquire certain cable television systems,
primarily located in Ohio, Vermont, New Hampshire, Michigan and Massachusetts,
in six separate transactions, for aggregate consideration of approximately
$331.9 million. The transactions are expected to close during the fourth quarter
of 1997 and during the first quarter of 1998. These transactions are subject to
customary closing conditions and certain regulatory approvals that are not
completely within the Company's control. See Note 2 to the unaudited
consolidated financial statements of FVOP for more detailed descriptions of the
transactions under asset purchase agreement and Note 5 of such financial
statements for more detailed descriptions of the transactions under letter of
intent. The Company has raised additional equity capital and has secured
additional debt commitments needed to consummate these acquisitions.
RESULTS OF OPERATIONS
The three-month period ended September 30, 1997 is the only period in which the
Company operated all of the Existing Systems, although certain systems (the
Bedford Systems and the Blue Ridge Systems) were purchased during the period and
are reflected only for that portion of the period that such systems were owned
by the Company. The three-month period ended June 30, 1997 represents the
integration of all of the Existing Systems (except for the Bedford Systems and
the Blue Ridge Systems), although certain systems (the Front Row Systems and the
Triax I Systems) were purchased during the period and are reflected only for
that portion of the period that such systems were owned by the Company.
As a result of the Company's limited operating history, the Company believes
that its results of operations for the three-month periods ended September 30,
1997 and June 30, 1997 are not indicative of the Company's results of operations
in the future.
<TABLE>
------------------------ ----------------------
Three Months Ended Three Months Ended
September 30, 1997 June 30, 1997
% of % of
Amount Revenue Amount Revenue
------- ---- ------ ----
Amounts in thousands
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $36,750 100.0% $34,081 100.0%
Expenses
Operating expenses 18,332 49.9% 17,679 51.8
Corporate expenses 1,071 2.9% 1,048 3.1
------- ---- ------ ----
EBITDA (a) $17,347 47.2% 15,354 45.1%
======= ==== ====== ====
Basic Subs 401,300 390,350
Pay Units 172,850 164,500
</TABLE>
32
<PAGE>
(a) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's Senior
Credit Facility and Note Indenture contain certain covenants, compliance
with which is measured by computations substantially similar to those used
in determining EBITDA. However, EBITDA is not intended to be a performance
measure that should be regarded as an alternative to either operating income
or net income as an indicator of operating performance or to cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
Revenue increased 7.8%, or approximately $2.7 million, to approximately $36.7
million for the three months ended September 30, 1997 from approximately $34.1
million for the three months ended June 30, 1997. Operating and corporate
expenses increased approximately 3.7% and 2.2%, respectively, for the three
months ended September 30, 1997 from the three months ended June 30, 1997. The
number of basic subscribers increased approximately 2.8% from 390,350 at June
30, 1997 to 401,300 as of September 30, 1997, while the number of pay units
increased approximately 5.1% from 164,500 to 172,850 over the three-month
period. Growth over the second quarter of 1997 in revenue, operating and
corporate expenses, basic subscribers and pay units is primarily attributable to
the Company's acquisition of cable systems during August and September of 1997.
As its operations base has developed, the Company has increased its focus on
integration of business operations to achieve efficiencies, significant
investment in technical plant and promotion of new and existing services to
enhance revenues. The impact of certain of these efforts has resulted in an
increase in EBITDA margin during the third quarter of 1997 to 47.2% from 45.1%
for the three months ended June 30, 1997, and 43.6% for the three months ended
March 31, 1997. On a pro forma basis, adjusted to include the results of
operations of the systems acquired during 1997, the Company's revenue has
increased approximately 2.2% and EBITDA has increased approximately 5.4% when
compared with the quarter ended June 30, 1997, and 4.6% and 9.8%, respectively,
when compared with the quarter ended March 31, 1997.
The Company consummated two acquisitions during the third quarter of 1997,
acquiring cable systems serving, in the aggregate, approximately 12,100 basic
subscribers in Michigan, Tennessee and North Carolina. The Company is
integrating employees from the predecessor owners and is in the process of
reducing employee staffing from pre-acquisition levels. The Company has
completed the conversion of separate billing systems for each of these
acquisitions into its automated billing system and centralized database and will
serve the customers associated with these systems from its regional customer
service centers in Chillicothe, Ohio and Greenville, Tennessee.
Marketing initiatives for the quarter ended September 30, 1997 included new
premium service promotions, sales audits and remarketing, and channel additions
and service rate increases in selected cable systems. During the quarter ended
September 30, 1997, the Company's centralized telemarketing center contacted
approximately 50,500 of its subscribers, marketing the "Ultimate TV" package: a
premium service package consisting of two to four premium channels. As a result
of its marketing efforts, the Company increased the number of pay units
purchased by those subscribers by approximately 10.6% during the third quarter.
The Company has also continued its sales audit and door-to-door marketing
program, inspecting selected systems to clean up its billing data base, verify
homes passed data, market services to potential customers and identify
unauthorized subscribers, which the Company attempts to convert to paying
subscribers. During the third quarter, the Company increased basic and tiered
basic rates to approximately 55,400 subscribers, or approximately 35% of its
subscribers, in the Ohio cluster. The service rate increases were generally
accompanied by selective channel additions; the combined basic and tiered basic
rate was increased an average of 5.8%. Although there can be no assurance as to
the long-term effect of the rate adjustments, the Company believes that its
strategy of increasing service rates while simultaneously offering more services
and greater customer choice will have a positive impact on its financial
results.
33
<PAGE>
The Company continues the process of rebuilding and upgrading certain systems,
completing line extensions and consolidating headends. The Company had capital
expenditures of approximately $8.7 million during the third quarter of 1997
related to its technical enhancement activities. Approximately one-half of third
quarter capital expenditures are related to the process of system rebuild and
upgrade activity, primarily in the New England and Ohio operating clusters.
During the third quarter, the Company has commenced six new rebuild and upgrade
projects. The Company is at varying stages of completion on fourteen separate
rebuild and upgrade projects in systems serving, in the aggregate, approximately
52,700 basic subscribers. The Company is also in the process of eliminating
additional headend facilities. Approximately 39 new miles of plant were
activated in the third quarter, passing approximately 1,300 new homes.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
The following table sets forth, for the three-month period ended September 30,
1997 and 1996, certain statement of operations and other data of the Company. As
a result of the Company's limited operating history, the Company believes that
its results of operations for the periods presented in this table are not
indicative of the Company's future results.
<TABLE>
---------------------- ----------------------
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
% of % of
Amount Revenue Amount Revenue
------- ---- ------- ----
Amounts in thousands
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $36,750 100.0% $18,668 100.0%
Expenses
Operating expenses 18,332 49.9 9,989 53.5
Corporate expenses 1,071 2.9 706 3.8
------- ---- ------- ----
EBITDA $17,347 47.2% $ 7,973 42.7%
======= ==== ======= ====
Basic Subscribers 401,300 215,300
Pay Units 172,850 91,300
</TABLE>
Revenue increased 96.9%, or approximately $18.1 million, to approximately $36.8
million for the three months ended September 30, 1997 from approximately $18.7
million for the three months ended September 30, 1996. Operating and corporate
expenses increased approximately 83.5% and 51.7%, respectively, for the three
months ended September 30, 1997 from the three months ended September 30, 1996.
The number of basic subscribers increased approximately 86.4% from 215,300 at
September 30, 1996 to 401,300 as of September 30, 1997, while the number of pay
units increased approximately 89.3% from 91,300 to 172,850 over the twelve-month
period.
Significant growth in revenue, operating and corporate expenses, basic
subscribers and pay units is primarily attributable to the Company's acquisition
of cable systems in eleven separate transactions. The Company's primary focus
over the twelve-month period ended September 30, 1997 has been to achieve
critical mass through acquisitions, to establish its core geography and to begin
the consolidation of operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
The following table sets forth, for the nine-month period ended September 30,
1997 and 1996, certain statement of operations and other data of the Company. As
a result of the Company's limited operating history, the Company believes that
its results of operations for the periods presented in this table are not
indicative of the Company's future results.
34
<PAGE>
<TABLE>
----------------------- -----------------------
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
% of % of
Amount Revenue Amount Revenue
-------- ---- -------- ----
Amounts in thousands
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $102,386 100.0% $ 46,207 100.0%
Expenses
Operating expenses 52,794 51.6 23,657 51.2
Corporate expenses 3,120 3.0 1,971 4.3
-------- ---- -------- ----
EBITDA $ 46,472 45.4% $ 20,579 44.5%
======== ==== ======== ====
</TABLE>
Revenue increased 121.6%, or approximately $56.2 million, to approximately
$102.4 million for the nine months ended September 30, 1997 from approximately
$46.2 million for the nine months ended September 30, 1996. Operating and
corporate expenses increased approximately 123.2% and 58.3%, respectively, for
the nine months ended September 30, 1997 from the nine months ended September
30, 1996. Significant growth in revenue, operating and corporate expenses is
primarily attributable to the Company's acquisition of cable systems in ten
separate acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for the
construction, expansion and maintenance of the delivery system. In addition, the
Company has pursued, and intends to pursue in the future, a business strategy
which includes selective acquisitions. The Company has financed these
expenditures to date through a combination of cash from operations, indebtedness
and equity capital. The Company intends to continue to finance such expenditures
in the future through these same sources.
The Company has entered into a $265.0 million Amended and Restated Credit
Agreement (the "Senior Credit Facility") with The Chase Manhattan Bank, as
Administrative Agent, J.P. Morgan Securities Inc., as Syndication Agent, CIBC
Inc., as Managing Agent, and the other lenders signatory thereto. The Senior
Credit Facility includes a $75.0 million, 8.25-year reducing revolving credit
facility (the "Revolving Credit Facility"), a $100.0 million, 8.25-year term
loan (the "Facility A Term Loan") and a $90.0 million, 9.25-year term loan (the
"Facility B Term Loan"). At September 30, 1997, the Company had no amount
outstanding under the Revolving Credit Facility, $89.5 million outstanding under
the Facility A Term Loan and $80.5 million outstanding under the Facility B Term
Loan. The weighted average interest rates at September 30, 1997, on the
outstanding borrowings under the Facility A Term Loan and the Facility B Term
Loan were approximately 8.16% and 8.91%, respectively. The Company has entered
into interest rate protection agreements to hedge the underlying LIBOR rate
exposure for $170.0 million of borrowings through November 1999 and October
2000. For the nine-month period ended September 30, 1997, the Company had
recognized an increase to interest expense of approximately $267,000 as a result
of these interest rate swap agreements.
In general, the Senior Credit Facility requires the Company to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the Senior Credit Facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting the Company to use such proceeds to fund certain permitted
acquisitions, provided that the Company is otherwise in compliance with the
terms of the Senior Credit Facility.
The Senior Credit Facility is secured by a pledge of all limited and general
partnership interests in the Company and in any subsidiaries of the Company and
a first priority lien on all the tangible and intangible assets of the Company
35
<PAGE>
and each of its subsidiaries. In addition, in the event of the occurrence and
continuance of an event of default under the Senior Credit Facility, the
Administrative Agent is entitled to replace the general partner of the Company
with its designee.
On September 15, 1997, the Company received a commitment from its principal
lenders under the Senior Credit Facility to enter into a new replacement senior
credit facility (the "New Credit Facility"), which will refinance and replace
the Senior Credit Facility. The commitment will provide that the lenders will
extend up to $650,000 aggregate principal amount of revolving credit and term
loan financing to the Company. The Company expects to enter into the New Credit
Facility in the fourth quarter of 1997.
On October 7, 1996, the Company issued $200.0 million aggregate principal amount
of 11% Senior Subordinated Notes due 2006 (the "Notes"). The Notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The Company paid its first interest
payment of $11.5 million on April 15, 1997. The Notes are general unsecured
obligations of the Company and rank subordinate in right of payment to all
existing and any future senior indebtedness. In anticipation of the issuance of
the Notes, the Company entered into deferred interest rate setting agreements to
reduce the interest rate exposure related to the Notes. The financial statement
effect of these agreements will be to increase the effective interest rate which
the Company incurs over the life of the Notes.
In addition, in connection with the acquisition of the ACE Systems and the Triax
Systems, FrontierVision Partners, L.P. ("FVP"), the Company's previous general
partner, received additional equity commitments of approximately $76.0 million.
As of September 30, 1997, all of such equity commitments had been invested in
FVP and FVP had contributed substantially all of such equity investments to the
Company.
On September 19, 1997, FrontierVision Holdings, L.P. ("Holdings"), a Delaware
limited partnership, issued $237,650 aggregate principal amount at maturity of
11 7/8% Senior Discount Notes due 2007 (the "Discount Notes"). Holdings is a
newly-organized holding company and is the new general partner of FVOP. Holdings
acquired, directly or 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 have
become wholly owned consolidated subsidiaries of Holdings. Net proceeds from the
issuance of the Discount Notes of $142.3 million were contributed by Holdings to
FVOP as a capital contribution on September 19, 1997. The capital contribution
from Holdings was used by FVOP to repay existing certain bank indebtedness of
$65.5 million with the remainder placed in escrow to finance pending
acquisitions. The escrow proceeds have been fully invested as of November 14,
1997.
During the nine-month period ended September 30, 1997, the Company received
approximately $179.9 million of equity contributions from its partners, which
amount includes contributions from Holdings. Such equity contributions and
senior debt, along with cash flow generated from operations, has been sufficient
to finance capital improvement projects as well as acquisitions. The Company has
adequately serviced its debt in accordance with the provisions of the Senior
Credit Facility from EBITDA of approximately $46.5 million generated by the
Company for the nine-month period ended September 30, 1997.
In connection with the acquisition of the UVC Systems, the Company issued a
subordinated note to UVC in the aggregate principal amount of $7.2 million (the
"UVC Note"). The Company may repay the UVC Note at any time. However, as of
November 14, 1997, the UVC Note had not yet been repaid.
36
<PAGE>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities for the nine months ended September 30,
1997 were $18.6 million compared to $10.1 million for the nine months ended
September 30, 1996. The increase was primarily due to cable television system
operations acquired during 1996 and 1997.
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-month period
ended September 30, 1997 were approximately $18.6 million compared to
approximately $5.8 million for the nine-month period ended September 30, 1996.
Capital expenditures primarily consisted of expenditures for the construction
and expansion of the delivery system, and additional costs were incurred related
to the expansion of customer service facilities. In addition, the Company
capitalized approximately $0.5 million attributable to the cost of obtaining
certain franchise, leasehold and other long-term agreements. The Company expects
to spend in excess of $53 million over the next two years for capital
improvement related projects consisting primarily of (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 HITS 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. The Company invested
approximately $72.4 million in acquisitions during the nine months ended
September 30, 1997 compared with approximately $188.1 million for the same
period in 1996.
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisitions during the nine months ended September 30, 1997 were financed
primarily with equity contributions from the Company's partners; acquisitions
during the nine months ended September 30, 1996, were financed primarily with
borrowings under the Senior Credit Facility and, to a lesser extent, with equity
contributions from the Company's partners.
37
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6
(a) Exhibits
<TABLE>
<S> <C>
3.1 Amended and Restated Agreement of Limited Partnership for FrontierVision Operating Partners, L.P.
(3)
3.2 Certificate of Limited Partnership for FrontierVision Operating Partners, L.P. (1)
3.9 Certificate of Incorporation for FrontierVision Capital Corporation. (1)
3.10 Bylaws for FrontierVision Capital Corporation. (1)
4.1 Indenture dated as of October 7, 1996, among FrontierVision Operating Partners, L.P.,
FrontierVision Capital Corporation and Colorado National Bank, as Trustee. (2)
10.20 Amendment No. 4 to Senior Credit Facility.
27.6 Financial Data Schedule as of and for the nine-month period ended September 30, 1997 and
Financial Data Schedule as of and for the three-month period ended September 30, 1997.
---------------
</TABLE>
Footnote References
(1) Incorporated by reference to the exhibits to the Registrants'
Registration Statement on Form S-1, File No. 333-9535.
(2) Incorporated by reference to the exhibits of the Registrants'
Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, File No. 333-9535.
(3) Incorporated by reference to the exhibits to FrontierVision
Holdings,L.P.Registration Statement on Form S-4,File No.333-36519.
(b) Reports on Form 8-K
A Form 8-K was filed on September 22, 1997 relating to FrontierVision
Holdings, L.P.'s consummation of a private offering.
A Form 8-K was filed on November 10, 1997 relating to the release of
preliminary earnings for the quarterly period ended September 30, 1997.
38
<PAGE>
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/ JAMES W. McHose
---------------------------------
James W. McHose
Vice President and Treasurer
Date: November 14, 1997 By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION CAPITAL CORPORATION
Date: November 14, 1997 By: /s/ JAMES W. MCHOSE
-------------------
James W. McHose
Vice President and Treasurer
By: /s/ JAMES W. MCHOSE
---------------------
James W. McHose
Vice President and Treasurer
(Principal Accounting Officer)
