SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of August 13, 1998: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore
filing with the reduced disclosure format.
Documents Incorporated by Reference: None.
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
PART I. Financial Information PAGE
<S> <C>
Item 1. Consolidated Financial Statements of FrontierVision Operating Partners,
L.P. and Subsidiaries.................................................................... 3
Notes to Consolidated Financial Statements............................................... 7
Financial Statements of FrontierVision Capital Corporation............................... 15
Note to Financial Statements............................................................. 19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................... 20
PART II. Other Information........................................................................ 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
---------------------------------------
June 30, December 31,
1998 1997
------------------ ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 10,762 $ 3,413
Accounts receivable, net of allowance for doubtful accounts
of $328 and $640 8,145 8,071
Prepaid expenses and other 3,114 2,785
Investment in cable television systems, net:
Property and equipment 272,179 247,724
Franchise costs and other intangible assets 670,659 637,725
----------- -----------
Total investment in cable television systems, net 942,838 885,449
----------- -----------
Deferred financing costs, net 17,064 17,990
Earnest money deposits 9,500 2,000
----------- -----------
Total assets $ 991,423 $ 919,708
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 6,969 $ 2,647
Accrued liabilities 20,041 15,126
Subscriber prepayments and deposits 2,594 1,828
Accrued interest payable 5,398 5,064
Deferred income taxes 14,783 -
Debt 710,000 632,000
----------- -----------
Total liabilities 759,785 656,665
----------- -----------
Partners' capital:
FrontierVision Holdings, L.P. 231,406 262,780
FrontierVision Operating Partners, Inc. 232 263
----------- -----------
Total partners' capital 231,638 263,043
Commitments
----------- -----------
Total liabilities and partners' capital $ 991,423 $ 919,708
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
<TABLE>
-------------------------------------------------------------------------------
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 59,776 $ 34,081 $ 113,595 $ 65,636
Expenses:
Operating expenses 30,396 17,679 58,089 34,462
Corporate administrative expenses 1,945 1,048 3,511 2,049
Depreciation and amortization 25,230 15,132 48,871 29,191
Storm related costs -- -- 705 --
--------- --------- --------- ---------
Total expenses 57,571 33,859 111,176 65,702
--------- --------- --------- ---------
Operating income/(loss) 2,205 222 2,419 (66)
Interest expense, net (16,620) (10,824) (31,784) (21,302)
Other expense (1,912) 5 (2,040) (47)
--------- --------- --------- ---------
Net loss $ (16,327) $ (10,597) $ (31,405) $ (21,415)
========= ========= ========= =========
Net loss allocated to:
FrontierVision Holdings, L.P.
(General Partner) $ (16,311) $ (10,587) $ (31,374) $ (21,394)
FrontierVision Operating Partners, Inc.
(Limited Partner) (16) (10) (31) (21)
--------- --------- --------- ---------
$ (16,327) $ (10,597) $ (31,405) $ (21,415)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
----------------------------------------------------------
FrontierVision
FrontierVision Operating
Holdings, L.P. Partners, Inc.
(General Partner) (Limited Partner) Total
------------------- -------------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 262,780 $ 263 $ 263,043
Net loss (Unaudited) (31,374) (31) (31,405)
------------ ----------- ----------
Balance, June 30, 1998 (Unaudited) $ 231,406 $ 232 $ 231,638
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
<TABLE>
---------------------------------------
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997
----------------- ------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (31,405) $ (21,415)
Adjustment to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 48,871 29,191
Net loss on disposal of assets 2,038 --
Amortization of deferred debt issuance costs 1,045 1,020
Accretion of indebtedness -- 472
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (78) (462)
Prepaid expenses and other (56) (352)
Accounts payable and accrued liabilities 8,864 1,310
Subscriber prepayments and deposits 1,393 (66)
Accrued interest payable 334 (598)
--------- ---------
Total adjustments 62,411 30,515
--------- ---------
Net cash flows from operating activities 31,006 9,100
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures (23,274) (9,881)
Pending Acquisition costs (2) (132)
Cash paid for franchise costs (4) (437)
Earnest money deposits (9,500) (8,259)
Cash paid in acquisitions of cable television systems (68,758) (55,494)
--------- ---------
Net cash flows from investing activities (101,538) (74,203)
--------- ---------
Cash Flows From Financing Activities:
Debt borrowings 78,000 41,500
Debt payments -- (11,000)
Principal payments on capital lease obligations -- (70)
Increase in deferred financing fees (118) (14)
Offering costs related to Senior Subordinated Notes (1) (129)
Partner capital contributions -- 37,676
--------- ---------
Net cash flows from financing activities 77,881 67,963
--------- ---------
Net Increase in Cash and Cash Equivalents 7,349 2,860
Cash and Cash Equivalents, beginning of period 3,413 3,639
--------- ---------
Cash and Cash Equivalents, end of period $ 10,762 $ 6,499
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 30,610 $ 20,448
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
Organization and Capitalization
FrontierVision Operating Partners, L.P. (the "Company" or "FVOP") is a Delaware
limited partnership formed on July 14, 1995 for the purpose of acquiring and
operating cable television systems. The Company owns and operates cable
television systems in three primary operating clusters - New England, Ohio and
Kentucky - with a fourth, smaller group of cable television systems in the
Southeast. The Company was initially capitalized in November 1995 with
approximately $38 from its sole limited partner, FrontierVision Operating
Partners, Inc. ("FVOP Inc."), a Delaware corporation, and approximately $38,300
from its, at the time, sole general partner, FrontierVision Partners, L.P.
("FVP"), a Delaware limited partnership.
On September 19, 1997, FrontierVision Holdings, L.P. ("Holdings"), a Delaware
limited partnership, and FrontierVision Holdings Capital Corporation ("Holdings
Capital") co-issued $237,650 aggregate principal amount at maturity of 11 7/8%
Senior Discount Notes due 2007 (the "Discount Notes"). Holdings, a
newly-organized holding company, was formed to be the co-issuer of the Discount
Notes and to be the new general partner of FVOP. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests in
FVOP immediately prior to the issuance of the Discount Notes, and 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.
Capital, a Delaware corporation, is a wholly-owned subsidiary of the Company,
and was organized on July 26, 1996 for the sole purpose of acting as co-issuer
with the Company of $200 million aggregate principal amount of 11% Senior
Subordinated Notes due 2006 (the "Notes"). Capital has nominal assets and does
not have any material operations.
Reference to Annual Report
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
10-K"), for additional disclosures, including a summary of the Company's
accounting policies.
The following notes, insofar as they are applicable to the six months ended June
30, 1998, are not audited. In management's opinion, all adjustments considered
necessary for a fair presentation of such financial statements are included and
all such adjustments are of a normal and recurring nature. The results for the
six-month period ended June 30, 1998 are not necessarily indicative of the
results for the entire 1998 fiscal year.
Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("Statement 109"), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
7
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(1) STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION (continued)
period that includes the enactment date. The Company's deferred tax liability at
June 30, 1998 is primarily the result of temporary differences on property and
equipment and intangible assets arising from the acquisition of the stock of New
England Cablevision of Massachusetts, Inc.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
Storm Related Costs
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the six months ended June 30, 1998
the Company has recognized a loss due to service outages and increased labor
costs of approximately $705 due to the ice storms. Additionally, the Company has
incurred approximately $540 of capital expenditures to repair damaged subscriber
drops. The Company expects the loss to be isolated to the first quarter of 1998,
although the long-term financial effect of the ice storms cannot be determined.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 will not be material.
(2) ACQUISITIONS
Acquisitions
The Company has completed several acquisitions during the periods presented. All
of the acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based upon the estimated fair values at
the respective dates of acquisition. Such allocations are subject to adjustments
as final appraisal information is received by the Company. Amounts allocated to
property, plant and equipment and to intangible assets will be respectively
depreciated and amortized, prospectively from the date of acquisition based upon
the Company's useful lives and amortization periods. The following table lists
the acquisitions and the purchase price for each.
8
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) ACQUISITIONS (continued)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition
Cost(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $34,900
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,900
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 $34,700
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $204,200
TVC-Sumpter Limited Partnership and North Oakland Cablevision
Partners Limited Partnership Michigan March 6, 1998 $14,400*
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $9,800*
New England Cablevision of Massachusetts, Inc.("NECMA") Massachusetts April 3, 1998 $44,900*
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
June 30, 1998.
* Subject to adjustment.
The combined purchase price of certain of these acquisitions have been allocated
to the acquired assets and liabilities as follows:
<TABLE>
---------------------------------------------
Acquisitions Acquisitions
for the Six for the Six
Months Ended Months Ended
June 30, 1998 (a) June 30, 1997 (a)
-------------------- -----------------------
<S> <C> <C>
Property, plant and equipment $ 22,922 $ 17,980
Franchise costs and other intangible assets 62,096 38,928
----------- -----------
Subtotal 85,018 56,908
----------- -----------
Net working capital (deficit) 523 (914)
Deferred income taxes (14,783) -
Less - Earnest money deposits applied (2,000) (500)
----------- -----------
Total cash paid for acquisitions $ 68,758 $ 55,494
=========== ===========
- ------------
</TABLE>
(a) The combined purchase price includes purchase price adjustments for certain
acquisitions consumed prior to the respective periods.
The Company has reported the operating results of its acquired cable systems
from the date of their respective acquisition. Unaudited pro forma summarized
operating results of the Company, assuming the Triax I, Cablevision, TCI-VT/NH,
Cox-Central Ohio and NECMA acquisitions (the "Acquisitions") had been
consummated on January 1, 1997, are as follows:
9
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) ACQUISITIONS (continued)
<TABLE>
-----------------------------------------------------
Six Months Ended June 30, 1998
-----------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 113,595 $ 2,639 $ 116,234
Operating, selling, general and administrative expenses (62,305) (1,966) (64,271)
Depreciation and amortization (48,871) (2,020) (50,891)
---------- ----------- -----------
Operating income (loss) 2,419 (1,347) 1,072
Interest and other expenses (33,824) (1,304) (35,128)
---------- ----------- -----------
Net loss $ (31,405) $ (2,651) $ (34,056)
========== =========== ===========
-----------------------------------------------------
Six Months Ended June 30, 1997
-----------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
---------- ------------ -----------
Revenue $ 65,636 $ 38,500 $ 104,136
Operating, selling, general and administrative expenses (36,511) (20,778) (57,289)
Depreciation and amortization (29,191) (13,521) (42,712)
---------- ----------- ----------
Operating income (loss) (66) 4,201 4,135
Interest and other expenses (21,349) (15,038) (36,387)
---------- ----------- ----------
Net loss $ (21,415) $ (10,837) $ (32,252)
========== =========== ==========
</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 date indicated. Furthermore, the above pro forma financial information
does not include the effect of certain acquisitions and dispositions of cable
systems because these transactions were not material on an individual or
aggregated basis.
On December 12, 1997, the Company entered into an agreement with the
shareholders of New England Cable Television of Massachusetts, Inc. ("NECMA") to
acquire all of the outstanding stock of NECMA for a price of approximately
$44,700. NECMA is a Massachusetts S-Corporation which owns cable television
assets in Massachusetts. The Company had advanced $2,000 as an earnest money
deposit related to this transaction as of December 31, 1997, and the stock
purchase was completed on April 3, 1998.
On January 16, 1998, the Company entered into an asset purchase agreement with
Ohio Cablevision Network, Inc. to acquire certain cable television assets in
Ohio for a cash purchase price of $38,000. This transaction was consummated on
July 31, 1998.
10
<PAGE>
FRONTIERVISION OPERATING PARTNERS, 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>
----------------------------------
June 30, December 31,
1998 1997
---------------- ----------------
Bank Credit Facility (a) --
<S> <C> <C>
Revolving Credit Facility, due September 30, 2005, interest based $ 10,000 $ -
on various floating rate options (7.91% average at June 30, 1998)
payable monthly
Term loans, due June 30, 2004, interest based on various floating
rate options (7.91% and 8.04% weighted average at June
30, 1998 and December 31, 1997, respectively), payable monthly 500,000 432,000
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
------------ -----------
Total debt $ 710,000 $ 632,000
============= ===========
</TABLE>
(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 June 30, 2006 with 95% of
the principal being repaid in the last two quarters of the term of the
facility.
Under the terms of the Amended Credit Facility, with certain
exceptions, the Company has a mandatory prepayment obligation upon a
change of control of the Company and the sale of any of its operating
systems. Further, beginning with the year ending December 31, 2001, the
Company is required to make prepayments equal to 50% of its excess cash
flow, as defined in the Amended Credit Facility. The Company also pays
commitment fees ranging from 1/2% - 3/8% per annum on the average
unborrowed portion of the total amount available under the Amended
Credit Facility.
The Amended Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company. As of June 30, 1998, the Company was in compliance with the
financial covenants of the Amended Credit Facility.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
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 $170,000, and maturing between November 15, 1999 and
October 7, 2000. According to these
11
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) DEBT (continued)
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 six months
during the term of the interest rate swap agreement. For the six months
ended June 30, 1998 and 1997, the Company had recognized an increase in
interest expense of approximately $121 and $232, respectively, as a
result of these interest rate swap agreements.
On October 3, 1997, in order to convert certain of the future interest
payable at various rates under future indebtedness, the Company entered
into a forward interest rate swap agreement, commencing October 15,
1998, for a notional amount totaling 150,000, maturing on October 15,
2001. According to this agreement, the Company will pay or receive the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every six 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, the Company
entered into deferred interest rate setting agreements to reduce the
Company's interest rate exposure in anticipation of issuing the Notes.
The cost of such agreements amounting to $1,390 will be recognized as a
component of interest expense over the term of the Notes.
The Notes are unsecured subordinated obligations of the Company
(co-issued by Capital) that mature on October 15, 2006. Interest
accrues at 11% per annum beginning from the date of issuance, and is
payable each April 15 and October 15, commencing April 15, 1997.
FrontierVision Cable New England, Inc. is a subsidiary guarantor of the
Notes.
The Subordinated Notes Indenture has certain restrictions on incurrence
of indebtedness, distributions, mergers, asset sales and changes in
control of the Company.
J.P. Morgan Investment Corporation and First Union Capital Partners, Inc.
("Equity Holders") are affiliates of the Company, owning in the aggregate, a
37.6% limited partnership interest in FVP. Affiliates of the Equity Holders
received underwriting fees of approximately $3.6 million in connection with the
issuance of the Notes.
The debt of the Company matures as follows:
<TABLE>
Year ended December 31 --
<S> <C> <C>
1998 $ 1,875
1999 11,144
2000 24,575
2001 34,575
2002 44,575
Thereafter 593,256
------------
$ 710,000
============
</TABLE>
12
<PAGE>
FRONTIERVISION OPERATING PARTNERS, 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 six month periods ended June 30, 1998 and
1997 was $2,736 and $1,907, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to June 30, 1998 are as follows:
<TABLE>
Year ended December 31 --
<S> <C> <C>
1998 $ 750
1999 1,151
2000 871
2001 598
2002 447
Thereafter 419
----------
$ 4,236
==========
</TABLE>
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. In April 1993, the Federal
Communications Commission ("FCC") adopted comprehensive regulations, effective
September 1, 1993, governing rates charged to subscribers for basic cable and
cable programming services which allowed cable operators to justify regulated
rates in excess of the FCC benchmarks through cost of service showings at both
the franchising authority level for basic service and to the FCC in response to
complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% of system franchise revenue, as defined in the
franchise. Such franchises are generally nonexclusive and are granted by local
governmental authorities for a specified term of years, generally for extended
period of up to fifteen years.
For a more detailed discussion of the federal, state and local regulations
affecting the Company, see "Legislation and Regulation" in the 1997 10-K.
13
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in Thousands
(4) COMMITMENTS AND CONTINGENCIES (continued)
The Company and its affiliates have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is reasonably possible the Company may incur losses upon conclusion
of such matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
(5) SUBSEQUENT EVENTS
On June 24, 1998, the Company entered into an agreement with State Cable TV Corp
("State") to acquire all of State's cable television system assets in Maine and
New Hampshire, for a purchase price of $188,800. As of June 30, 1998, the
Company had advanced $9,500 as an earnest money deposit related to this
transaction. This transaction is expected to close by the fourth quarter of
1998.
14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
------------------------------------
June 30, December 31,
1998 1997
---------------- ----------------
(Unaudited)
ASSETS
Cash $ - $ 143
---------- --------
Total assets $ - $ 143
========== ========
LIABILITIES AND OWNER'S EQUITY
<S> <C> <C>
Payable to FrontierVision Operating Partners, L.P. $ 100 $ 100
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding 1 1
Additional paid-in capital 99 99
Retained deficit (200) (57)
---------- --------
Total owner's equity (100) 43
---------- --------
Total liabilities and owner's equity $ - $ 143
========== ========
</TABLE>
See accompanying note to the financial statements.
15
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
------------------------------------------------------------------------------------
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------------- -------------------- ----------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
General and administrative expenses 101 11 143 22
---------- ---------- ---------- ----------
Net loss $ (101) $ (11) $ (143) $ (22)
========== ========== ========== ==========
</TABLE>
See accompanying note to financial statements.
16
<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, December 31, 1997 $ 1 $ 99 $ (57) $ 43
Net loss (Unaudited) - - (143) (143)
---------- --------- ------- ----------
Balance, June 30, 1998 (Unaudited) $ 1 $ 99 $ (200) $ (100)
========== ========= ======= ==========
</TABLE>
See accompanying note to financial statements.
17
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
--------------------------------
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997
--------------- ----------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (143) $ (22)
Decrease in receivable from affiliate - -
--------- ---------
Net cash flows used in operating activities (143) (22)
--------- ---------
Cash flows from investing activities - -
--------- ---------
Cash flows from financing activities:
Advance from FVOP - -
--------- ---------
Net cash flows from financing activities - -
--------- ---------
Net increase in cash and cash equivalents (143) (22)
Cash and cash equivalents, beginning of period 143 188
--------- ---------
Cash and cash equivalents, end of period $ - $ 166
========= =========
</TABLE>
See accompanying note to financial statements.
18
<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
due 2006.
19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company, the description of the Company's business as well as other sections
of this Form 10-Q contain certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934. The Company's actual
results could differ materially from those discussed herein and its current
business plans could be altered in response to market conditions and other
factors beyond the Company's control. Important factors that could cause or
contribute to such differences or changes include those discussed under "Risk
Factors" in the Company's Post-Effective Amendment No. 2 to Form S-1 filed April
6, 1998 (File no. 333-9535).
Introduction and Recent Developments
The Company's objective is to increase its subscriber base and operating cash
flow through: i) selective acquisitions of cable television systems that can be
integrated with existing operations and ii) more efficient operations and
internal revenue growth. The Company continues the process of acquiring and
integrating cable systems with its current systems and continues to invest
significant capital for their technical enhancement.
The Company commenced operations in November 1995 with the acquisition of
certain cable television systems. The following table summarizes the Company's
acquisitions since inception:
<TABLE>
------------------------------------------------------------
Purchase Basic Purchase
Price(1) Subscribers Price Per
Predecessor Owner Date Acquired in millions) Acquired(2) Subscriber
------------------------------------------------------------
<S> <C> <C> <C> <C>
United Video Cablevision, Inc. (the "UVC Systems ")....... November 9, 1995 $ 120.8 87,400 $1,382
Longfellow Cable Company, Inc. (the "Longfellow Systems ") November 21, 1995 6.1 5,100 1,196
C4 Media Cable Southeast, Limited Partnership (the "C4
Systems")............................................. February 1, 1996 47.6 40,400 1,178
Americable International Maine, Inc. (the "Americable
Systems ")............................................ March 29, 1996 4.8 3,350 1,433
Cox Communications (the "Cox Systems ")................... April 9, 1996 136.0 77,200 1,762
Phoenix Grassroots Cable Systems, LLC (the "Grassroots
Systems")............................................. August 29, 1996 9.3 7,400 1,257
Triax Southeast Associates, L.P. (the "Triax Systems ")... October 7, 1996 84.7 53,200 1,592
American Cable Entertainment of Kentucky-Indiana, Inc. (the
"ACE Systems")............................................ October 9, 1996 146.0 83,250 1,754
SRW, Inc.'s Penn/Ohio Cablevision, L.P. (the "Penn/Ohio
Systems ")............................................ October 31, 1996 3.8 3,225 1,178
SRW, Inc.'s Deep Creek Cable TV, L.P. (the "Deep Creek
System").............................................. December 23, 1996 3.0 2,175 1,379
Bluegrass Cable Partners, L.P. (the "Bluegrass Systems "). March 20, 1997 9.9 7,225 1,370
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc. (the "Clear/B&G Systems ")...................... March 31, 1997 1.7 1,450 1,172
Milestone Communications of New York, L.P. (the "Milestone
Systems")............................................. March 31, 1997 2.8 2,125 1,318
Triax Associates I, L.P. (the "Triax I Systems ")......... May 30, 1997 34.5 20,700 1,667
Phoenix Front Row Cablevision (the "Front Row Systems ").. May 30, 1997 6.8 5,250 1,295
PCI Incorporated (the "Bedford System").................... August 29, 1997 13.5 7,750 1,742
SRW, Inc.'s Blue Ridge Cable Systems, L.P. (the "Blue Ridge
Systems")............................................. September 3, 1997 4.1 4,550 901
Harold's Home Furnishings, Inc. (the "Harold's System").... October 31, 1997 1.5 1,480 1,014
A-R Cable Services - ME, Inc. (the "Cablevision Systems").. October 31, 1997 78.2 54,300 1,440
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture (the "TCI-VT/NH Systems")............... December 2, 1997 34.5 22,100 1,561
Cox Communications, Inc. (the "Cox-Central Ohio Systems").. December 19, 1997 203.0 84,400 2,405
TVC-Sumpter Linked Partnership and North Oakland
Cablevision Partners Limited Partnership (the
"Televista Systems")....................................... March 6, 1998 14.2 8,100 1,753
TCI Cablevision of Ohio, Inc. (the "TCI - Pt. Clinton
Systems")............................................. April 1, 1998 10.0 6,000 1,667
New England Cablevision of Massachusetts, Inc. (the "NECMA
Systems")............................................. April 3, 1998 44.7 26,500 1,687
-------- ------- ------
Total...................................................... $1,021.5 614,630 $1,662
======== ======= ======
- --------------------
</TABLE>
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that were sold by the Company in
1996.
20
<PAGE>
On April 1, 1998, the Company completed the acquisition of certain cable
television system assets in Ohio from TCI Cablevision of Ohio, Inc. for the cash
purchase price of $10.0 million. On April 3, 1998, the Company consummated the
stock purchase of all of the outstanding shares of New England Cable Television
of Massachusetts, Inc. ("NECMA") for an aggregate purchase price of
approximately $44.7 million. NECMA is a Massachusetts S-Corporation which owns
cable television assets in Massachusetts.
As of June 30, 1998, the Company's currently owned cable television systems (the
"Existing Systems") passed approximately 876,050 homes and served approximately
610,800 basic subscribers. The Company expects to consummate acquisitions of
additional cable television systems during 1998 and to serve over 700,000 basic
subscribers within its current operating clusters by year-end.
On June 24, 1998, the Company entered into an agreement with State Cable TV Corp
("State") to acquire all of State's cable television system assets in Maine and
New Hampshire for $188.8 million. The eight State systems served approximately
75,000 basic subscribers as of June 30, 1998, in communities contiguous to
certain of the Existing Systems in southern Maine and central New Hampshire. The
Company expects to operate the State systems as part of its New England cluster.
Over 70% of State's customers are served from two headend facilities, with its
largest system, Augusta, Maine, currently serving over 40,000 customers. With
the acquisition of the State systems, the Company expects to increase the size
of its New England cluster to over 250,000 basic subscribers, serving over
150,000 basic customers and four of the five largest cities in the state of
Maine. Additionally, up to ten headend facilities serving the Existing Systems
are expected to be combined with existing State systems; consequently, the
Company expects to significantly increase the size of its New England cluster
while reducing the number of headend facilities.
As of August 13, 1998, the Company had entered into three additional asset
purchase or exchange agreements to acquire cable television systems located in
Ohio and Maine for aggregate consideration of approximately $4.2 million.
All of these pending transactions are expected to close by year-end 1998 and are
subject to customary closing conditions, and certain regulatory approvals that
are not completely within the Company's control.
See Note 2 to the financial statements for a more detailed description of the
Company's acquisitions.
Results Of Operations
Following is a discussion of the Company's results of operations for the three
months ended June 30, 1998 compared to the three months ended June 30, 1997. The
Company has operated the Existing Systems for a limited period of time and had
no operations prior to November 9, 1995. The three month period ended June 30,
1998, is the only period in which the Company operated all of the Existing
Systems, although certain systems (the NECMA Systems) were purchased during the
period and are reflected only for that portion of the period that such systems
were owned by the Company.
21
<PAGE>
The following table illustrates the Company's operating activities on a
comparative basis:
Three Months Ended June 30, 1998 Compared to
Three Months Ended June 30, 1997 (Unaudited)
<TABLE>
---------------------------------------------------
Three Months Ended Three Months Ended
June 30, 1998 (a) June 30, 1997 (a)
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
----------- ------- --------- --------
In thousands
<S> <C> <C> <C> <C>
Revenue................................... $ 59,776 100.0% $ 34,081 100.0 %
Expenses
Operating expenses.................... 30,396 50.8 17,679 51.8
Corporate expenses.................... 1,945 3.3 1,048 3.1
Depreciation and amortization......... 25,230 42.2 15,132 44.4
----------- ------- --------- --------
Total expenses................. 57,571 96.3 33,859 99.3
----------- ------- --------- --------
Operating income/(loss)................... 2,205 3.7 222 0.7
Interest expense, net..................... (16,620) (27.8) (10,824) (31.7)
Other expense............................. (1,912) (3.2) 5 -
----------- ------- --------- --------
Net loss.................................. $ (16,327) (27.3)% $ (10,597) (31.0)%
=========== ======= ========= ========
EBITDA (c)................................ $ 27,435 45.9% $ 15,354 45.1%
=========== ======= ========= ========
Basic subscribers......................... 610,800 390,350
Premium units............................. 265,400 164,500
- ------------
</TABLE>
(a) All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's historical results of operations
include the results of operations for each acquired system subsequent to
its respective acquisition date.
(b) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's senior bank
indebtedness (the "Amended Credit Facility") and Note Indenture contain
certain covenants, compliance of which is measured by computations
substantially similar to those used in determining EBITDA. However, EBITDA
is not intended to be a performance measure that should be regarded as an
alternative to either operating income or net income as an indicator of
operating performance or to cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
The Company's revenues increased significantly in the three months ended June
30, 1998, to $59.8 million versus $34.1 million for the same period in 1997, an
increase of $25.7 million, or 75.4%. Revenue growth was driven primarily by an
increase in cable subscribers to 610,800 basic subscribers at June 30, 1998 from
390,350, at June 30, 1997, an increase of 56.5%. Premium units grew from 164,500
to 265,400, or 61.3%, in the same period. Subscriber growth was largely the
result of acquisitions made in nine separate transactions during the twelve
months ending June 30, 1998. The Existing Systems also generated internal growth
in basic subscribers of approximately 2.5% during the second quarter of 1998,
after adjustments for seasonal subscribers. This internal growth represents the
initial effects of larger-scale marketing efforts, including launches of new and
repackaged programming services, sales audit remarketing, and direct marketing
to subscribers through flyer campaigns, newspaper inserts, and telemarketing
programs. The Company also believes that its significant investment in technical
plant and its promotion of new and enhanced services have begun, and will
continue, to attract more subscribers, and more monthly revenue per subscriber.
Although operating expenses and corporate expenses grew in the three months
ended June 30, 1998 versus the same period a year earlier (by 71.9% and 85.6%,
respectfully), those expenses fell as a percentage of revenue. As a percentage
of revenue, operating and corporate expenses fell to 54.1% of revenues in the
three months ended June 30, 1998, from 54.9% in the year-earlier period. The
Company continues to focus on integration of business operations to achieve
efficiencies and lower operating costs.
The combination of subscriber and revenue growth with operating efficiencies led
to an increase in EBITDA in the second quarter of 1998, to $27.4 million from
$15.4 million in the same period a year earlier, a 78.7% increase. The EBITDA
margin as a percentage of revenue also increased, to 45.9% in the period ended
June 30, 1998, from 45.1% for the same period in 1997.
22
<PAGE>
Depreciation and amortization increased 66.7% as a result of acquisition
activity that occurred in 1997 and 1998. Net interest expense increased to $16.6
million from $10.8 million primarily as a result of the higher weighted average
drawings on the Company's senior bank indebtedness. Other expenses for the three
months ended June 30, 1998 include the retirement of $1.9 million of plant
assets in connection with completed upgrade and rebuild projects.
Six Months Ended June 30, 1998 Compared to
Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
---------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1998 (a) June 30, 1997 (a)
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
----------- ------- --------- -------
In thousands
<S> <C> <C> <C> <C>
Revenue................................... $ 113,595 100.0% $ 65,636 100.0 %
Expenses
Operating expenses.................... 58,089 51.1 34,462 52.5
Corporate expenses.................... 3,511 3.1 2,049 3.1
Depreciation and amortization......... 48,871 43.0 29,191 44.4
Storm related costs (b) .............. 705 0.6 - -
----------- ------- --------- -------
Total expenses................. 111,176 97.8 65,702 100.0
----------- ------- --------- --------
Operating income/(loss)................... 2,419 2.2 (66) 0.0
Interest expense, net..................... (31,784) (28.0) (21,302) (32.5)
Other expense............................. (2,040) (1.8) (47) (0.1)
----------- ------- --------- --------
Net loss.................................. $ (31,405) (27.6)% $ (21,415) (32.6)%
=========== ======= ========= ========
EBITDA (b)................................ $ 51,290 45.2% $ 29,125 44.4%
=========== ======= ========= ========
Basic subscribers......................... 610,800 390,350
Premium units............................. 265,400 164,500
</TABLE>
- ------------
(a) All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's historical results of operations
include the results of operations for each acquired system subsequent to
its respective acquisition date.
(b) For the six months ended June 30, 1998 the Company has recognized a loss
due to service outages and increased labor costs of approximately $705,000
due to mid January ice storms experienced by certain of the communities
served by the Company in Maine. Additionally, the Company has incurred
approximately $540,000 of capital expenditures to repair subscriber drops
damaged in the storms. The Company expects the loss to be isolated to the
first quarter of 1998, although the long-term financial effect of the ice
storms cannot be determined.
(c) EBITDA is defined as net income before interest, taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Company's senior bank
indebtedness (the "Amended Credit Facility") and Note Indenture contain
certain covenants, compliance of which is measured by computations
substantially similar to those used in determining EBITDA. However, EBITDA
is not intended to be a performance measure that should be regarded as an
alternative to either operating income or net income as an indicator of
operating performance or to cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Revenue increased 73.1%, or approximately $48.0 million, to approximately $113.6
million for the six months ended June 30, 1998 from approximately $65.6 million
for the six months ended June 30, 1997. Operating expenses (including storm
related costs) and corporate expenses increased approximately 70.6% and 71.4%,
respectively, for the six months ended June 30, 1998 from the six months ended
June 30, 1997. Decreases in the relative percentage of operating expenses to
revenue was primarily attributable to the cost efficiencies achieved through the
integration of cable systems and increased revenue per subscriber per month. The
EBITDA margin, which when adjusted to exclude the storm related costs, improved
from 44.4% for the six months ended June 30, 1997 to 45.8% for the six months
ended June 30, 1998.
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the six months ended June 30, 1998
the Company has recognized a loss due to service outages and increased labor
costs of approximately $705,000 due these storms. Additionally, the Company has
incurred
23
<PAGE>
approximately $540,000 of capital expenditures to repair subscriber drops
damaged in the storms. The Company expects the loss to be isolated to the first
quarter of 1998, although the long-term financial effect of the ice storms
cannot be determined.
Depreciation and amortization increased 67.4% as a result of acquisition
activity that occurred in 1997 and 1998. Net interest expense increased to $31.8
million from $21.3 million primarily as a result of the higher weighted average
drawings on the Company's senior bank indebtedness. Other expenses for the six
months ended June 30, 1998 include the retirement of $2.0 million of plant
assets in connection with completed upgrade and rebuild projects.
Liquidity And Capital Resources
The cable television business generally requires substantial capital for the
construction, maintenance and expansion of cable plant and distribution
equipment. In addition, the Company has pursued, and intends to pursue in the
future, selective acquisitions. Since its founding in 1995, the Company's cash
from equity investments, bank borrowings and other debt issued by FVOP has been
sufficient to finance the Company's acquisitions and, together with cash
generated from operating activities, also has been sufficient to meet the
Company's debt service, working capital and capital expenditure requirements.
The Company intends to continue to finance such debt service, working capital
and capital expenditure requirements in the future through a combination of cash
from operations, indebtedness and equity capital sources, and the Company
believes that it will continue to generate cash and be able to obtain financing
sufficient to meet such requirements. The ability of the Company to meet its
debt service and other obligations will depend upon the future performance of
the Company which, in turn, is subject to general economic conditions and to
financial, political, competitive, regulatory and other factors, many of which
are beyond the Company's control.
Amended Credit Facility
Drawings on the Amended Credit Facility, along with cash flow generated from
operations, have been sufficient to finance capital improvement projects as well
as acquisitions. The Company has adequately serviced its debt in accordance with
the provisions of the Amended Credit Facility from EBITDA of approximately $51.3
million generated by the Company for the six months ended June 30, 1998.
On December 19, 1997 the Company amended its existing senior bank indebtedness
and entered into an $800.0 million Amended Credit Facility with The Chase
Manhattan Bank, as Administrative Agent, J.P. Morgan Securities Inc., as
Syndication Agent, CIBC Inc., as Documentation Agent, and the other lenders
signatory thereto. The Amended Credit Facility includes a $300.0 million,
7.75-year reducing revolving credit facility (the "Revolving Credit Facility"),
a $250.0 million, 7.75-year term loan (the "Facility A Term Loan") and a $250.0
million, 8.25-year term loan (the "Facility B Term Loan").
At June 30, 1998, the Company had $10.0 million outstanding under the Revolving
Credit Facility, $250.0 million outstanding under the Facility A Term Loan and
$250.0 million outstanding under the Facility B Term Loan. The weighted average
interest rates at June 30, 1998 on the outstanding borrowings under the
Revolving Credit Facility were approximately 7.91%, and under the Facility A
Term Loan and the Facility B Term Loan were approximately 7.91% and 8.04%,
respectively. The Company has entered into interest rate swap agreements to
hedge the underlying LIBOR rate exposure for $170.0 million of borrowings
through November 1999 and October 2000. For the six months ended June 30, 1998,
the Company had recognized an increase to interest expense of approximately $121
as a result of these interest rate swap agreements.
In general, the Amended Credit Facility requires the Company to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the Amended Credit Facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting the
24
<PAGE>
Company to use such proceeds to fund certain permitted acquisitions, provided
that the Company is otherwise in compliance with the terms of the Amended Credit
Facility.
The Amended Credit Facility is secured by a pledge of all limited and general
partnership interests in the Company and in any subsidiaries of the Company and
a first priority lien on all the tangible and intangible assets of the Company
and each of its subsidiaries. In addition, in the event of the occurrence and
continuance of an event of default under the Amended Credit Facility, the
Administrative Agent is entitled to replace the general partner of the Company
with its designee.
FrontierVision Holdings, L.P. ("Holdings"), as the general partner of FVOP,
guarantees the indebtedness under the Amended Credit Facility on a limited
recourse basis. The Amended Credit Facility is also secured by a pledge of all
limited and general partnership interests in FVOP and a first priority lien on
all the assets of FVOP and its subsidiaries.
Senior Subordinated Notes
On October 7, 1996, FVOP issued $200.0 million aggregate principal amount of 11%
Senior Subordinated Notes due 2006 (the "FVOP Notes"). The FVOP Notes mature on
October 15, 2006 and bear interest at 11%, with interest payments due
semiannually commencing on April 15, 1997. The FVOP Notes are general unsecured
obligations of the Company and rank subordinate in right of payment to all
existing and any future senior indebtedness. In anticipation of the issuance of
the FVOP Notes, the Company entered into deferred interest rate setting
agreements to reduce the interest rate exposure related to the FVOP Notes. The
financial statement effect of these agreements will be to increase the effective
interest rate which the Company incurs over the life of the FVOP Notes.
Senior Discount Notes
Holdings and FrontierVision Holdings Capital Corporation ("Holdings Capital")
were formed for the purpose of acting as co-issuers of $237.7 million aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes due 2007 (the
"Discount Notes"). FrontierVision Partners, L.P. ("FVP"), FVOP's sole general
partner, contributed to Holdings, both directly and indirectly, all of the
outstanding partnership interests of FVOP prior to the issuance of the Discount
Notes on September 19, 1997 and therefore, at that time, FVOP and Capital became
wholly-owned consolidated subsidiaries of Holdings. Holdings contributed the
proceeds of the Discount Notes to FVOP as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the six months ended June 30, 1998 were
$31.0 million compared to $9.1 million for the six months ended June 30, 1997.
The increase was primarily a result of cable television system operations
acquired during the twelve months ended June 30, 1998.
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the six months ended
June 30, 1998 were approximately $23.3 million compared to approximately $9.9
million for the six months ended June 30, 1997. Capital expenditures primarily
consisted of expenditures for the construction and expansion of cable plant and
distribution equipment, and additional costs were incurred related to the
expansion of customer service facilities. The Company invested approximately
$68.8 million in acquisitions during the six months ended June 30, 1998 compared
with approximately $55.5 million for the same period in 1997.
The Company expects to spend a total of approximately $84.4 million over the
next two years for capital expenditures with respect to the Existing Systems.
These expenditures will primarily be used for (i) installation of fiber optic
cable and microwave links which will allow for the consolidation of headends,
(ii) analog and digital
25
<PAGE>
converter boxes which will allow the Company to more effectively market premium
and pay-per-view services, (iii) the continued deployment of coaxial cable to
build-out the Existing Systems, (iv) headend equipment for the digital
television system and (v) the upgrade of a portion of the Company's cable
television distribution systems to, among other things, increase bandwidth and
channel capacity.
Cash Flows From Financing Activities
Acquisitions during the six months ended June 30, 1998 were financed with
borrowings under the Company's senior bank indebtedness. Acquisitions during the
six months ended June 30, 1997 were financed with equity contributions from the
Company's partners and borrowings under the company's senior bank indebtedness.
During the six months ended June 30, 1997, the Company received approximately
$37.7 million of equity contributions from its partners.
From inception through June 30, 1998, FVP received a total of $199.4 million of
equity contributions from its partners, all of which has been invested in
Holdings and down streamed to the Company.
Year 2000
The Company is in the process of a comprehensive review of its computer systems
and related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated include
all internal use software and devices and those systems and devices that manage
the distribution of cable television service to customers. Furthermore, the
Company is in the process of initiating a program of communications with its
significant suppliers and service providers to determine the readiness of third
parties and the impact on the Company if those third parties fail to remediate
their own year 2000 issues.
The Company's assessment of the impact of the year 2000 date change should be
complete by the end of fiscal year 1998. Management of the Company has not yet
determined the cost associated with its year 2000 readiness efforts and the
related potential impact on the results of operations. There can be no assurance
that costs ultimately required to be paid to ensure the Company's year 2000
readiness will not have an adverse effect on the Company's financial position.
Additionally, there can be no assurance that the systems of other companies on
which the Company relies will be converted in time or that any such failure to
convert by another company will not have an adverse effect on the Company.
26
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6
(a) Exhibits
3.1 Amended and Restated Agreement of Limited Partnership of FVOP.
(3)
3.2 Certificate of Limited Partnership of FVOP. (1)
3.9 Certificate of Incorporation for FrontierVision Capital
Corporation. (1)
3.10 Bylaws for FrontierVision Capital Corporation. (1)
4.1 Indenture dated as of October 7, 1996, among FrontierVision
Operating Partners, L.P.,
FrontierVision Capital Corporation and Colorado National Bank,
as Trustee. (2)
27.4 Financial Data Schedule as of and for the six month period ended
June 30, 1998.
---------------
Footnote References
(1) Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-1, File No. 333-9535.
(2) Incorporated by reference to the exhibits of the Registrant's
Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, File No. 333-9535.
(3) Incorporated by reference to the exhibits to Holdings and Holdings
Capital's Registration Statement on Form S-4, Registration No.
333-36519.
(b) Reports on Form 8-K
None
27
<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/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
Date: August 13, 1998 By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION CAPITAL CORP.
Date: August 13, 1998 By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
-----------------------
Albert D. Fosbenner
Vice President and Treasurer
(Principal Accounting Officer)
28
<PAGE>
