UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-9535 and 333-9535-01
FrontierVision Operating Partners, L.P.
FrontierVision Capital Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1316775
Delaware 84-1353734
(States or other jurisdiction (IRS Employer Identification Numbers)
of incorporation or organization)
1777 South Harrison Street,
Suite P-200, Denver, Colorado 80210
(Address of principal executive offices) (Zip Code)
(303) 757-1588
(Registrants' telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock of FrontierVision Capital Corporation
outstanding as of August 13, 1999: 100.
* FrontierVision Capital Corporation meets the conditions set forth in
General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore
filing with the reduced disclosure format.
Documents Incorporated by Reference: None.
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P.
FRONTIERVISION CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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...............................16
Note to Financial Statements.............................................................20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.........................................21
PART II. Other Information........................................................................31
</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,
1999 1998
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,065 $ 4,890
Accounts receivable, net of allowance for doubtful accounts
of $825 and $666 12,467 12,678
Other receivables 560 174
Prepaid expenses and other 3,407 4,046
Investment in cable television systems, net:
Property and equipment 363,434 342,754
Franchise costs and other intangible assets 801,959 820,524
---------- ----------
Total investment in cable television systems, net 1,165,393 1,163,278
---------- ----------
Deferred financing costs, net 14,929 16,006
Earnest money deposits - 150
---------- ----------
Total assets $1,202,821 $1,201,222
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 11,250 $ 18,233
Accrued liabilities 14,561 17,169
Due to Adelphia 20,556 -
Subscriber prepayments and deposits 3,191 3,312
Accrued interest payable 9,590 9,547
Deferred income taxes 10,469 11,856
Debt 880,525 871,610
---------- ----------
Total liabilities 950,142 931,727
---------- ----------
Partners' capital:
FrontierVision Holdings, L.P. 252,426 269,226
FrontierVision Operating Partners, Inc. 253 269
---------- ----------
Total partners' capital 252,679 269,495
Commitments
---------- ----------
Total liabilities and partners' capital $1,202,821 $1,201,222
========== ==========
</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,
1999 1998 1999 1998
------------------ ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 74,296 $ 59,776 $ 146,713 $ 113,595
Expenses:
Operating expenses 40,657 30,396 78,550 58,089
Corporate administrative expenses 1,629 1,945 3,369 3,511
Depreciation and amortization 31,784 27,140 62,103 50,909
Storm related costs - - - 705
------------- ----------- ----------- ----------
Total expenses 74,070 59,481 144,022 113,214
------------- ----------- ----------- ----------
Operating income 226 295 2,691 381
Interest expense, net (20,295) (16,620) (39,113) (31,784)
Other income (expense) 7,542 (2) 9,180 (2)
------------- ----------- ----------- ----------
Net loss before income tax benefit (12,527) (16,327) (27,242) (31,405)
Income tax benefit 692 - 1,387 -
------------- ----------- ----------- ----------
Net loss $ (11,835) $ (16,327) $ (25,855) $ (31,405)
============= =========== =========== ==========
Net loss allocated to:
FrontierVision Holdings, L.P.
(General Partner) $ (11,824) $ (16,311) $ (25,830) $ (31,374)
FrontierVision Operating Partners, Inc.
(Limited Partner) (11) (16) (25) (31)
------------- ----------- ----------- ----------
$ (11,835) $ (16,327) $ (25,855) $ (31,405)
============= =========== =========== ==========
</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, 1998 $ 269,226 $ 269 $ 269,495
Net loss (Unaudited) (25,830) (25) (25,855)
Capital contributions (Unaudited) 9,030 9 9,039
--------- --------- ---------
Balance, June 30, 1999 (Unaudited) $ 252,426 $ 253 $ 252,679
========= ========= =========
</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,
1999 1998
----------------- ------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (25,855) $ (31,405)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 62,103 50,909
Income tax benefit (1,387) -
Gain on disposal of assets (9,193) -
Amortization of deferred debt issuance costs 1,163 1,045
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (1,952) (78)
Prepaid expenses and other 713 (56)
Accounts payable, accrued liabilities and due to Adelphia 11,269 8,864
Subscriber prepayments and deposits (116) 1,393
Accrued interest payable 43 334
------------ ------------
Total adjustments 62,643 62,411
------------ ------------
Net cash flows from operating activities 36,788 31,006
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (46,930) (23,274)
Pending Acquisition costs - (2)
Cash paid for franchise costs (388) (4)
Earnest money deposits - (9,500)
Proceeds from disposition of cable television systems 5,228 -
Proceeds from disposition of real estate 1,470 -
Cash paid in acquisitions of cable television systems (12,861) (68,758)
------------ ------------
Net cash flows from investing activities (53,481) (101,538)
------------ ------------
Cash Flows From Financing Activities:
Debt borrowings 12,982 78,000
Debt payments (3,750) -
Principal payments on capital lease obligations (317) -
Increase in deferred financing fees (64) (118)
Offering costs related to Senior Subordinated Notes (22) (1)
Partner capital contributions 9,039 -
------------ ------------
Net cash flows from financing activities 17,868 77,881
------------ ------------
Net Increase in Cash and Cash Equivalents 1,175 7,349
Cash and Cash Equivalents, beginning of period 4,890 3,413
------------ ------------
Cash and Cash Equivalents, end of period $ 6,065 $ 10,762
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest: $ 37,817 $ 30,610
============ ============
</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 (the "Formation
Transaction"), and therefore, FVOP and FrontierVision Capital Corporation
("Capital") became wholly owned-consolidated subsidiaries of Holdings. In
addition, FVOP Inc., previously a wholly-owned subsidiary of FVP, is now a
wholly-owned subsidiary of Holdings.
On December 2, 1998, Holdings and FrontierVision Holdings Capital II Corporation
co-issued $91,298 aggregate principal amount at maturity of Discount Notes,
Series B. During the year ended December 31, 1998, the Company received
additional capital contributions of approximately $72,648 from its partners.
This represents net proceeds received from the issuance of the Discount Notes,
Series B, which were contributed by Holdings to FVOP as a capital contribution.
The capital contribution from Holdings was used by FVOP to repay certain bank
indebtedness. Prior to the Formation Transaction, FVP allocated certain
administrative expenses to FVOP, which are included as capital contributions
from its partners. Such expense allocations were approximately $231 and $735 for
the years ended December 31, 1997 and 1996, respectively.
Capital, a Delaware corporation, is a wholly-owned subsidiary of the Company,
and was organized on July 26, 1996 for the sole purpose of acting as co-issuer
with the Company of $200 million aggregate principal amount of 11% Senior
Subordinated Notes due 2006 (the "Notes"). Capital has nominal assets and does
not have any material operations.
On June 1, 1999, Adelphia Communications Corporation loaned $9,039 to FVP to be
used by FVOP to fund an asset exchange with Intermedia Partners, LP IV. This
asset exchange was consummated on June 1, 1999. FVP contributed the $9,039 to
Holdings as a capital contribution. Holdings in turn contributed this amount to
FVOP as a capital contribution.
Allocation of Profits, Losses and Distributions
Generally, the Company's partnership agreement provides that profits, losses and
distributions will be allocated to the general partner and the limited partner
pro rata based on capital contributions.
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)
Income Taxes
The Company and its direct and indirect subsidiaries, except for FrontierVision
New England Cable, Inc. ("New England"), New England Cable Television of
Massachusetts, Inc. ("NECMA"), Main Security Surveillance, Inc. and Capital, are
limited partnerships or limited liability companies and pay no income taxes as
entities. All of the income, gains, losses, deductions and credits of the
Company are passed through to its partners. Nominal taxes are assessed by
certain state and local jurisdictions. The basis in the Company's assets and
liabilities differs for financial and tax reporting purposes.
New England, NECMA, Main Security Surveillance, and Capital are corporations and
are subject to federal and state income taxes which have not been significant.
Deferred taxes relate principally to the difference between book and tax basis
of the cable television assets owned by NECMA, partially offset by the tax
effect of related net operating loss carryforwards.
Reference to Annual Report
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998
10-K"), for additional disclosures, including a summary of the Company's
accounting policies.
The following notes, insofar as they are applicable to the six months ended June
30, 1999, are not audited. In management's opinion, all adjustments considered
necessary for a fair presentation of such financial statements are included and
all such adjustments are of a normal and recurring nature. The results for the
six-month period ended June 30, 1999 are not necessarily indicative of the
results for the entire 1999 fiscal year.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 is not expected to be material.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
8
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(2) STORM RELATED COSTS
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the three months ended March 31,
1998, the Company has recognized a loss due to service outages and increased
labor costs of approximately $740 due to the ice storms. Additionally, the
Company has incurred approximately $540 of capital expenditures to replace
damaged subscriber drops. The Company received $183 subsequent to December 31,
1998 related to a claim on its business interruption insurance for the storm
damage. Such claim was recognized as a reduction of storm cost expense in the
fourth quarter of 1998.
(3) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since its inception through June
30, 1999. All of the acquisitions have been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based upon the estimated fair values
at the respective dates of acquisition. Such allocations are subject to
adjustments as final appraisal information is received by the Company. Amounts
allocated to property and equipment and to intangible assets will be
respectively depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
following table lists the transactions and the acquisition cost for each
occurring in the most recent two years.
<TABLE>
- --------------------------------------------------------- ----------------------------- ------------------- --------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost (a)
TVC-Sumpter Limited Partnership and North Oakland Cablevision
<S> <C> <C> <C>
Partners Limited Partnership Michigan March 6, 1998 $14,400
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $10,000
New England Cablevision of Massachusetts, Inc. ("NECMA") Massachusetts April 3, 1998 $44,900
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $37,400
Unity Cable Television, Inc. Maine September 30, 1998 $800
Appalachian Cablevision of Ohio Ohio September 1, 1998 $300
State Cable TV Corporation ("State") Maine, New Hampshire October 23, 1998 $190,600
Paint Valley Cable Ohio October 30, 1998 $1,900
CASCO Maine November 30, 1998 $3,400
Intermedia Partners, LP IV Kentucky June 1, 1999 $13,700
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
June 30, 1999.
9
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) ACQUISITIONS AND DISPOSITIONS (continued)
The combined purchase price of certain of these acquisitions has been allocated
to the acquired assets and liabilities as follows:
<TABLE>
----------------------------------
Acquisitions for Acquisitions for
the six months the six months
ended June 30, ended June 30,
1999 (a) 1998 (a)
-------- --------
<S> <C> <C>
Property and equipment $ 4,675 $ 22,922
Franchise costs and other intangible assets 9,622 62,096
-------- ---------
Subtotal 14,297 85,018
-------- ---------
Net working capital (deficit) (1,386) 523
Deferred income taxes - (14,783)
Less - earnest money deposits applied (50) (2,000)
-------- ---------
Total cash paid for acquisitions $ 12,861 $ 68,758
======== =========
</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, assuming the NECMA, TCI-Bryan and State Cable
acquisitions (the "Acquisitions") had been consummated on January 1, 1998, are
as follows:
<TABLE>
----------------------------------------------
Six Months Ended June 30, 1998
----------------------------------------------
Historical Pro Forma
Results Acquisitions Results
------- ------------ -------
<S> <C> <C> <C>
Revenue $ 113,595 $ 21,037 $ 134,632
Operating, selling, general and administrative expenses (62,305) (11,747) (74,052)
Depreciation and amortization (50,909) (10,526) (61,435)
--------- --------- ---------
Operating income (loss) 381 (1,236) (855)
Interest and other expenses (31,786) (11,028) (42,814)
--------- --------- ---------
Net loss $ (31,405) $ (12,264) $ (43,669)
========= ========= =========
</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.
Dispositions
On January 7, 1999, the Company sold certain cable television system assets
located in the Southeast region to Helicon Partners I, LP for an aggregate sales
price of approximately $5,200.
10
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) ACQUISITIONS AND DISPOSITIONS (continued)
Asset Exchanges
On June 1, 1999, the Company exchanged five systems located in the Kentucky
region for five systems owned by Intermedia Partners, LP IV. The Company
received 16,600 subscribers, gave up 11,300 subscribers and transferred
aggregate cash of approximately $13,300. The asset exchange was recorded at fair
value and purchase accounting was applied. In connection with the asset
exchange, the Company recognized a gain of $7,324.
(4) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
June 30, December 31,
1999 1998
---- ----
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate options
(7.30% and 7.25% average at June 30, 1999 and December 31, 1998,
<S> <C> <C>
respectively), payable monthly $ 175,000 $ 172,000
Term loans, interest based on various floating libor rate options
(7.37% and 7.46% weighted average at June 30, 1999 and December 31, 1998,
respectively), payable monthly 494,375 498,125
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
Other 703 -
Capital leases 10,447 1,485
------------ ------------
Total debt $ 880,525 $ 871,610
============ ============
</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 March 31, 2006 with 95% of
the principal being repaid in the last two quarters of the term of the
facility.
Under the terms of the Amended Credit Facility, with certain
exceptions, the Company has a mandatory prepayment obligation upon a
change of control of the Company and the sale of any of its operating
systems. This obligation may be waived with the consent of the majority
of the lenders. Further, beginning with the year ending December 31,
2001, the Company is required to make prepayments equal to 50% of its
excess cash flow, as defined in the Amended Credit Facility. The
Company also pays commitment fees ranging from 1/2% - 3/8% per annum on
the average unborrowed portion of the total amount available under the
Amended Credit Facility.
11
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
The Amended Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering,
$200,000 aggregate principal amount of the Notes. Net proceeds from
this offering of $192,500, after costs of approximately $7,500, were
available to the Company on October 7, 1996.
In connection with the anticipated issuance of the Notes, the Company
entered into deferred interest rate setting agreements to reduce the
Company's interest rate exposure in anticipation of issuing the Notes.
The cost of such agreements, amounting to $1,390, are recognized as a
component of interest expense over the term of the Notes.
The Notes are unsecured subordinated obligations of FVOP (co-issued by
Capital) that mature on October 15, 2006. Interest accrues at 11% per
annum beginning from the date of issuance, and is payable each April 15
and October 15, commencing April 15, 1997.
The indenture governing the Notes (the "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. are affiliates of the Company, owning in the aggregate, a 37.6%
limited partnership interest in FVP. Affiliates of such holders
received underwriting fees of approximately $3.6 million in connection
with the issuance of the Notes.
(c) Interest Rate Protection Agreements
In order to convert certain of the interest payable at variable rates
under the Amended Credit Facility to interest at fixed rates, the
Company entered into interest rate swap agreements for notional amounts
totaling $187,500, and maturing between April 7, 1999 and November 15,
1999. According to these agreements, the Company pays or receives the
difference between (1) an average fixed rate of 5.84% and (2) a
floating rate of the three month libor applied to the same $187,500
notional amount every three months during the term of the interest rate
swap agreement. On April 7, 1999, the Company terminated one of its
interest rate swap agreements for a notional amount of $100,000 and
entered into a new interest rate collar agreement for $100,000 maturing
on April 8, 2002. There was no termination fee associated with this
transaction.
On January 8, 1999, the Company amended its collar interest rate swap
agreement that it had entered into on April 8, 1998 for a notional
amount of $100,000. The amended collar agreement matures on April 8,
2001. The collar agreement provides for different exchanges between the
Company and the counterparty
12
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
depending on the level of the floating one month LIBOR rate (5.24% at
June 30, 1999). Such exchanges occur every month during the term of the
collar agreement. The different exchanges are as follows:
(1) When LIBOR is below 4.65%, the Company pays to the counterparty
the difference between the fixed rate of 5.95% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 5.95% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.95%
and LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.95% and 4.65%, this
collar agreement has no financial effect.
The company terminated a previously existing collar agreement on June
21, 1999 for approximately $1,550. This cost is reflected in interest
expense in the accompanying statement of operations.
For the six months ended June 30, 1999 and 1998, the Company recognized
an increase in interest expense of approximately $2,081 and $121,
respectively, as a result of the interest rate swap agreements.
Information concerning the Company's interest rate agreements at June
30, 1999 is as follows:
<TABLE>
Amount to be
Notional paid upon
Expiration date amount termination (a)
--------------- ------ ---------------
<S> <C> <C>
November 15, 1999 $ 65,000 $ 178
November 15, 1999 22,500 (28)
April 8, 2001 100,000 189
April 8, 2002 100,000 801
------------ -----------
$ 287,500 $ 1,140
============ ===========
</TABLE>
(a) The estimated amount that the Company would pay to terminate the
agreements on June 30, 1999. This amount takes into consideration
current interest rates, the current creditworthiness of the
counterparties and represents the fair value of the interest rate
agreements.
The debt of the Company matures as follows:
Year Ended December 31 --
1999 $ 7,394
2000 25,278
2001 34,575
2002 44,575
2003 55,825
Thereafter 712,878
------------
$ 880,525
============
13
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(5) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate their fair value
due to the nature and length of maturity of the investments.
The estimated fair value of the Amended Credit Facility is based on floating
market rates at June 30, 1999; therefore, there is no material difference in the
fair market value and the carrying value of such debt instruments. The Notes
have an aggregate principal amount of $200,000 with an 11% coupon rate. The fair
value for the Notes at June 30, 1999 was $214,000. The fair value of the Notes
is estimated based on Portal Market quotations of the issue.
(6) 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 months ended June 30, 1999, and 1998
was $3,227, and $2,736, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to June 30, 1999 are as follows:
Year Ended December 31 --
1999 $ 632
2000 1,193
2001 893
2002 618
2003 425
Thereafter 896
------------
$ 4,657
============
Federal law, including the regulations and policies of the Federal
Communications Commission ("FCC"), limit the ability of cable systems to raise
rates for basic services and equipment. Until March 31, 1999, federal law also
allowed the FCC to regulate the rates cable operators charged for certain
non-basic cable services. Federal law allows local governmental regulation of
rates for basic cable services and customer equipment except in communities that
are subject to "effective competition," as defined by federal law. The FCC
adopted detailed rate regulations, guidelines and rate forms that the Company
and the local franchising authority must use in connection with the regulation
of the Company's basic service and equipment rates. The FCC has comprehensive
and restrictive regulations that allow the Company to modify its regulated basic
rates on a quarterly or annual basis using various methodologies that account
for changes in the number of regulated channels, inflation, and certain external
costs, such as franchise and other governmental fees, copyright and
retransmission consent fees, taxes, programming fees and franchise-related
obligations. The FCC also has regulations designed to reduce the substantive and
procedural burdens of rate regulation on qualified small cable systems, as
defined by federal law. The regulatory benefits accruing to qualified small
cable systems under certain circumstances remain effective even if such systems
are subsequently acquired by a larger cable operator. Many of the Company's
cable systems currently satisfy the FCC's small system eligibility criteria and
are eligible to use the FCC's simplified rate methodology and procedures to
justify cable service and equipment rates.
14
<PAGE>
FRONTIERVISION OPERATING PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(6) COMMITMENTS AND CONTINGENCIES (continued)
The Company's basic rates and its equipment and installation charges (the
"Regulated Services") are subject to the jurisdiction of local franchising
authorities. 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 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 all other Regulated Service rates would be retroactive to one year
prior to the implementation of the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
(7) YEAR 2000 COMPLIANCE
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with third
parties having a substantial relationship to its business, including significant
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
Failure to achieve Year 2000 compliance by the Company, its principal suppliers
and certain financial institutions with which it has relationship could
negatively affect the Company's ability to conduct business for an extended
period. There can be no assurances that all Company information technology
systems and components will be fully Year 2000 compliant; in addition, other
companies on which the Company's systems and operations rely may not be fully
compliant on a timely basis, and any such failure could have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(8) SALE OF COMPANY
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
Communications Corporation ("Adelphia") to sell all outstanding partnership
interests of FVP in exchange for cash, the assumption of certain liabilities and
7 million shares of Adelphia Class A common stock. Subsequent to the definitive
agreement, Adelphia assumed the liability for payment to the Company's
programming vendors. The Company has continued to accrue programming costs at
their existing contractual rates. This liability is reflected as an obligation
to Adelphia and will be settled at the closing of the sale of FVP as a purchase
price adjustment.
15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
-----------------------------------
June 30, December 31,
1999 1998
---------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ - $ -
---------- --------
Total assets $ - $ -
========== ========
LIABILITIES AND OWNER'S EQUITY
Payable to FrontierVision Operating Partners, L.P. $ 100 $ 100
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding 1 1
Additional paid-in capital 99 99
Retained deficit (200) (200)
---------- --------
Total owner's equity (100) (100)
---------- --------
Total liabilities and owner's equity $ - $ -
========== ========
</TABLE>
See accompanying note to the financial statements.
16
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<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,
1999 1998 1999 1998
-------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
General and administrative expenses - 101 - 143
---------- ---------- ---------- ----------
Net loss $ - $ (101) $ - $ (143)
========== ========== ========== ==========
</TABLE>
See accompanying note to financial statements.
17
<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, 1998 $ 1 $ 99 $ (200) $ (100)
Net loss (Unaudited) - - - -
---------- --------- ------- ----------
Balance, June 30, 1999 (Unaudited) $ 1 $ 99 $ (200) $ (100)
========== ========= ======= ==========
</TABLE>
See accompanying note to financial statements.
18
<PAGE>
FRONTIERVISION CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
--------------------------------
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998
---------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ - $ (143)
Decrease in receivable from affiliate - -
--------- ---------
Net cash flows used in operating activities - (143)
--------- ---------
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)
Cash and cash equivalents, beginning of period - 143
--------- ---------
Cash and cash equivalents, end of period $ - $ -
========= =========
</TABLE>
See accompanying note to financial statements.
19
<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.
20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations as
well as other sections of this Form 10-Q contain certain forward-looking
statements. Our actual results could differ materially from those discussed
herein and our current business plans may be altered in response to market
conditions and other factors beyond our control. Important factors that could
cause or contribute to such differences or changes include those discussed under
"Risk Factors" in our post-effective amendment no. 3 to Form S-1 filed April 2,
1999 (File no. 333-9535). Additionally, our investors' decision to sell their
ownership interest in our company to Adelphia Communications Corporation may
ultimately cause our business plan and results of operations to differ
materially from our current business plan and expected future operating results.
Introduction
In this section, we explain the general financial condition and the results of
operations for FrontierVision and its subsidiaries including what factors affect
our business, what our revenues and expenses were for the six months ended June
30, 1999 and 1998, why those revenues and expenses were different from the year
before and how all of this effects our overall financial position.
We commenced operations in November, 1995 with the acquisition of certain cable
television systems. Since that first acquisition, we have completed over 30
separate acquisitions and have grown to become one of the twenty largest
multiple system operators in the United States, serving approximately 710,200
subscribers as of June 30, 1999. Our systems are located in three primary
operating clusters - New England, Ohio and Kentucky - with a fourth, smaller
group of systems in the Southeast.
21
<PAGE>
The following table summarizes our acquisitions through June 30, 1999:
<TABLE>
--------------------------------------------------
Purchase Basic
Price(1) Subscribers
Predecessor Owner Date Acquired (in millions) Acquired(2)
- ----------------- ------------- ------------- -----------
<S> <C> <C> <C>
United Video Cablevision, Inc. ............................ November 9, 1995 $ 120.8 87,400
Longfellow Cable Company, Inc. ............................ November 21, 1995 6.1 5,100
C4 Media Cable Southeast, Limited Partnership.............. February 1, 1996 47.6 40,400
Americable International Maine, Inc........................ March 29, 1996 4.8 3,350
Cox Communications......................................... April 9, 1996 136.0 77,200
Phoenix Grassroots Cable Systems, LLC...................... August 29, 1996 9.3 7,400
Triax Southeast Associates, L.P............................ October 7, 1996 84.7 53,200
American Cable Entertainment of Kentucky-Indiana, Inc...... October 9, 1996 146.0 83,250
SRW, Inc.'s Penn/Ohio Cablevision, L.P..................... October 31, 1996 3.8 3,225
SRW, Inc.'s Deep Creek Cable TV, L.P. ..................... December 23, 1996 3.0 2,175
Bluegrass Cable Partners, L.P.............................. March 20, 1997 9.9 7,225
Clear Cable T.V., Inc. and B&G Cable T.V. Systems,
Inc..................................................... March 31, 1997 1.7 1,450
Milestone Communications of New York, L.P. ................ March 31, 1997 2.8 2,125
Triax Associates I, L.P.................................... May 30, 1997 34.5 20,700
Phoenix Front Row Cablevision ............................. May 30, 1997 6.8 5,250
PCI Incorporated........................................... August 29, 1997 13.5 7,750
SRW, Inc.'s Blue Ridge Cable Systems, L.P.(3).............. September 3, 1997 4.1 4,550
Harold's Home Furnishings, Inc............................. October 31, 1997 1.5 1,480
A-R Cable Services - ME, Inc............................... October 31, 1997 78.2 54,300
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture.......................................... December 2, 1997 34.5 22,100
Cox Communications, Inc.................................... December 19, 1997 203.0 85,400
TVC-Sumpter Linked Partnership and North Oakland Cablevision
Partners Limited Partnership ......................... March 6, 1998 14.2 8,100
TCI Cablevision of Ohio, Inc............................... April 1, 1998 10.0 6,000
New England Cablevision of Massachusetts, Inc. ............ April 3, 1998 44.7 26,500
Ohio Cablevision Network, Inc.............................. July 31, 1998 38.0 19,700
Appalachian Cablevision of Ohio............................ September 1, 1998 0.3 280
Unity Cable Television, Inc................................ September 30, 1998 0.8 590
State Cable TV Corporation ................................ October 23, 1998 188.2 75,000
Paint Valley Cable Company, Inc............................ October 30, 1998 1.7 1,300
Casco Cable Television, Inc................................ November 30, 1998 3.2 2,185
Intermedia Partners, LP IV................................. June 1, 1999 13.3 5,300
</TABLE>
____________
(1) Represents the contract purchase price excluding working capital purchase
adjustments and transaction costs.
(2) Includes 10,600 subscribers to systems that we sold in 1996.
(3) All systems were sold on January 7, 1999.
During the twelve months ended June 30, 1999, we completed seven acquisition
transactions, acquiring a total of approximately 104,000 basic subscribers.
These acquisitions significantly increased the size and scale of each of our
three primary operating clusters. Our October 1998 acquisition of eight cable
systems from State Cable TV Corporation added approximately 75,000 basic
subscribers to our New England cluster in attractive communities directly
contiguous to systems which we already owned in southern Maine and central New
Hampshire. With the State Cable systems, we have grown to serve over 248,000
subscribers in our New England cluster and over 168,000 subscribers in four of
the five largest cities in the state of Maine.
On January 7, 1999, we sold nine small cable television systems located in
eastern Tennessee and western North Carolina which, in the aggregate, served
approximately 4,400 basic subscribers.
On June 1, 1999, we completed the exchange of five of our systems located in
northern Kentucky for five Intermedia systems located in communities near
Lexington, Kentucky which are contiguous to other of our Kentucky systems. We
paid approximately $13.3 million as consideration for approximately 5,300
customers we gained in the transaction.
22
<PAGE>
Results of Operations
In this section, we discuss our earnings for the six months ended June 30, 1999
and 1998, the three months ended June 30, 1999 and 1998 and the factors
affecting them. The three month period ended June 30, 1999, is the only period
in which we operated all of our cable television systems, although certain
systems were exchanged during the period and are reflected only for that portion
of the period that we owned such systems.
The following table illustrates our operating activities on a comparative basis:
Three Months Ended June 30, 1999 Compared to
Three Months Ended June 30, 1998 (Unaudited)
<TABLE>
---------------------------------------------------
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
------ ------- ------ -------
In thousands
<S> <C> <C> <C> <C>
Revenue................................... $ 74,296 100.0% $ 59,776 100.0%
Expenses
Operating expenses.................... 40,657 54.7 30,396 50.8
Corporate expenses.................... 1,629 2.2 1,945 3.3
Depreciation and amortization......... 31,784 42.8 27,140 45.4
----------- ------- ----------- -------
Total expenses................. 74,070 99.7 59,481 99.5
----------- ------- ----------- -------
Operating income.......................... 226 0.3 295 0.5
Interest expense, net..................... (20,295) (27.3) (16,620) (27.8)
Other income (expense).................... 7,542 10.2 (2) -
Income tax benefit........................ 692 0.9 - -
----------- ------- ----------- -------
Net loss.................................. $ (11,835) (15.9)% $ (16,327) (27.3)%
=========== ======= =========== =======
EBITDA $ 32,010 43.1% $ 27,435 45.9%
=========== ======= =========== =======
Basic subscribers......................... 710,200 610,800
Premium units............................. 292,500 265,400
</TABLE>
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Increases in the amounts of revenue, operating expense and EBITDA are primarily
attributable to acquisition activity during 1998, which increased our size from
610,800 basic subscribers at June 30, 1998 to 710,200 at June 30, 1999. Revenue
increased 24.3%, or approximately $14.5 million, to approximately $74.3 million
for the three months ended June 30, 1999 from approximately $59.8 million for
the three months ended June 30, 1998. Revenue per subscriber, per month
increased to $35.11 in the three months ended June 30, 1999 from $33.73 in the
same period a year earlier, reflecting the acquisition of subscribers with
higher rates, increased service rates and new service offerings. Operating
expenses increased approximately 33.8% and corporate expenses decreased
approximately 16.2%, respectively, for the three months ended June 30, 1999 from
the three months ended June 30, 1998. The increase in the percentage of
operating expenses to revenue was primarily attributable to relative increases
in programming and personnel related costs and non-recurring marketing expenses
and expenses related to Year 2000 issues . As a result of the previous
discussion, the EBITDA margin decreased from 45.9% of revenue for the three
months ended June 30, 1998 to 43.1% in 1999.
23
<PAGE>
Depreciation and amortization expense increased 17.1% as a result of acquisition
activity in 1998 and asset retirements in the three months ended June 30, 1999.
Net interest expense increased to $20.3 million from $16.6 million primarily as
a result of the higher weighted average drawings on our senior bank indebtedness
and the termination of the collar agreement for $1.6 million.
Other income increased to $7.5 million in the three months ended June 30, 1999
from almost nothing in the corresponding period due to the Company's recognition
of the gain attributable to the asset exchange with Intermedia on June 1, 1999.
Six Months Ended June 30, 1999 Compared to
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
---------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------------------------------------------
% of % of
Amount Revenue Amount Revenue
------ ------- ------ -------
In thousands
<S> <C> <C> <C> <C>
Revenue................................... $ 146,713 100.0% $ 113,595 100.0%
Expenses
Operating expenses.................... 78,550 53.6 58,794 51.7
Corporate expenses.................... 3,369 2.3 3,511 3.1
Depreciation and amortization......... 62,103 42.3 50,909 44.8
----------- ------- ----------- -------
Total expenses................. 144,022 98.2 113,214 99.6
----------- ------- ----------- -------
Operating income.......................... 2,691 1.8 381 0.4
Interest expense, net..................... (39,113) (26.7) (31,784) (28.0)
Other income (expense).................... 9,180 6.3 (2) -
Income tax benefit........................ 1,387 0.9 - -
----------- ------- ----------- -------
Net loss.................................. $ (25,855) (17.7)% $ (31,405) (27.6)%
=========== ======= =========== =======
EBITDA $ 64,794 44.1% $ 51,290 45.2%
=========== ======= =========== =======
Basic subscribers......................... 710,200 610,800
Premium units............................. 292,500 265,400
</TABLE>
Revenue increased 29.2%, or approximately $33.1 million, to approximately $146.7
million for the six months ended June 30, 1999 from approximately $113.6 million
for the six months ended June 30, 1998. Revenue per subscriber, per month
increased to $35.11 in the three months ended June 30, 1999 from $33.73 in the
same period a year earlier, reflecting the acquisition of subscribers with
higher rates, increased service rates and new service offerings. Operating
expenses increased approximately 33.6% and corporate expenses decreased
approximately 4.0%, respectively, for the six months ended June 30, 1999 from
the six months ended June 30, 1998. The increase in the percentage of operating
expenses to revenue was primarily attributable to relative increases in
programming and personnel related costs and non-recurring marketing expenses and
expenses related to Year 2000 issues . As a result of the previous discussion,
the EBITDA margin decreased from 45.2% for the six months ended June 30, 1998 to
44.1% for the six months ended June 30, 1999.
Depreciation and amortization increased 22.0% as a result of acquisition
activity that occurred in 1998. Net interest expense increased to $39.1 million
from $31.8 million primarily as a result of the higher weighted average drawings
on the Company's senior bank indebtedness.
Other income increased to $9.2 million in the six months ended June 30, 1999
from almost nothing in the corresponding period due to the Company's recognition
of the gain attributable to the asset exchange with Intermedia on June 1, 1999,
the sale of cable television systems to Helicon on January 7, 1999 and the sale
of certain real estate during the period.
24
<PAGE>
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the
construction, maintenance and expansion of cable plant and distribution
equipment. In addition, we have pursued selective acquisitions. Since our
founding in 1995, our cash received from equity investments, bank borrowings and
other debt issued by FrontierVision Operating Partners, L.P. (which we refer to
as "FVOP") has been sufficient to finance our acquisitions and, together with
cash generated from operating activities, also has been sufficient to service
our debt, provide sufficient working capital and fund required capital
expenditures. We intend to continue to finance such debt service, working
capital and capital expenditure requirements through a combination of cash from
operations, indebtedness and equity capital sources. We believe that we will
continue to generate cash and be able to obtain financing sufficient to meet
such requirements. Our ability to meet our debt service and other obligations
will depend upon our future performance which, in turn, is subject to general
economic conditions and to financial, political, competitive, regulatory and
other factors, many of which are beyond our control.
Amended Bank Credit Facility
Drawings on our amended bank credit facility, along with cash flow generated
from operations and high yield debt financing, have been sufficient to finance
capital improvement projects as well as acquisitions. We have adequately
serviced our debt in accordance with the provisions of the amended bank credit
facility from EBITDA of approximately $64.8 million generated by FVOP for the
six months ended June 30, 1999.
On December 19, 1997, we amended our existing senior bank indebtedness and
entered into an $800.0 million amended bank credit facility with The Chase
Manhattan Bank, as administrative agent, J.P. Morgan Securities Inc., as
syndication agent, CIBC Inc., as documentation agent, and the other lenders
signatory thereto. The amended bank credit facility includes a $300.0 million,
7.75-year reducing revolving credit facility, a $250.0 million, 7.75-year term
loan and a $250.0 million, 8.25-year term loan.
At June 30, 1999, we had $175.0 million outstanding under the revolving credit
facility, $244.4 million outstanding under the 7.75 year term loan and $250.0
million outstanding under the 8.25 year term loan. The weighted average interest
rates at June 30, 1999 on the outstanding borrowings under the revolving credit
facility were approximately 7.30%, and under the 7.75 year term loan and the
8.25 year term loan were approximately 7.31% and 7.43%, respectively. We have
entered into interest rate protection agreements to hedge the underlying LIBOR
rate exposure for $287.5 million of borrowings through November 1999 and October
2001. For the three months ended June 30, 1999, we recognized an increase to
interest expense of approximately $2.1 million as a result of these interest
rate swap agreements and the termination of the collar agreement.
In general, the amended bank credit facility requires us to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the amended bank credit facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting us to use such proceeds to fund certain permitted acquisitions,
provided that we are otherwise in compliance with the terms of the amended bank
credit facility.
The amended bank credit facility is secured by a pledge of all limited and
general partnership interests in FVOP and in any of our restricted subsidiaries
and a first priority lien on all the tangible and intangible assets of FVOP and
each of its restricted subsidiaries. In addition, in the event of the occurrence
and continuance of an event of default under the amended bank credit facility,
the administrative agent is entitled to replace our general partner with its
designee.
FrontierVision Holdings, L.P. (which we refer to as "Holdings"), as the general
partner of FVOP, guarantees the indebtedness under the amended bank credit
facility on a limited recourse basis. The amended bank credit facility is also
secured by a pledge of all limited and general partnership interests in FVOP and
a first priority lien on all the assets of FVOP and its subsidiaries.
25
<PAGE>
Senior Subordinated Notes
On October 7, 1996, FVOP issued $200.0 million aggregate principal amount of 11%
senior subordinated notes due 2006. The notes mature on October 15, 2006 and
bear interest at 11%, with interest payments due semiannually commencing on
April 15, 1997. The notes are general unsecured obligations of FrontierVision
and rank subordinate in right of payment to all existing and any future senior
indebtedness. In anticipation of the issuance of the notes, we entered into
deferred interest rate setting agreements to reduce the interest rate exposure
related to the notes. The financial statement effect of these agreements will be
to increase the effective interest rate which FrontierVision incurs over the
life of the notes.
Senior Discount Notes, Series A
Holdings and FrontierVision Holdings Capital Corporation were formed for the
purpose of acting as co-issuers of $237.7 million aggregate principal amount at
maturity of 11 7/8% senior discount notes due 2007. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests of
FVOP prior to the issuance of the discount notes on September 19, 1997 and as a
result, FVOP and FrontierVision Capital Corporation are wholly-owned
consolidated subsidiaries of Holdings. Holdings contributed the majority of the
net proceeds of the discount notes, totaling approximately $142.3 million, to
FVOP as a capital contribution.
Senior Discount Notes, Series B
Holdings and FrontierVision Holdings Capital II Corporation acted as co-issuers
of $91.3 million aggregate principal amount at maturity of 11 7/8% senior
discount notes due 2007, series B. Holdings Capital II was formed for the
purpose of acting as co-issuer on these discount notes. The discount notes were
issued on December 2, 1998. Holdings contributed the majority of the net
proceeds of approximately $72.8 million from the issuance of the discount notes
to FVOP as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the six months ended June 30, 1999 were
$36.8 million compared to $31.0 million for the six months ended June 30, 1998.
The increase was primarily a result of cable television system operations
acquired during 1998.
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the six months ended
June 30, 1999 were approximately $46.9 million compared to approximately $23.3
million for the six months ended June 30, 1998. Capital expenditures primarily
consisted of expenditures for the construction and expansion of cable plant and
distribution equipment, and additional costs were incurred related to the
expansion of customer service facilities. We invested approximately $68.8
million in acquisitions during the six months ended June 30, 1998 compared with
approximately $12.9 million during the six months ended June 30, 1999. We also
had net proceeds from the disposition of assets of approximately $6.7 million
for the six months ended June 30, 1999.
Cash Flows From Financing Activities
We financed acquisitions during the six months ended June 30, 1998 with
borrowings under our senior bank indebtedness. An asset exchange and capital
expenditures were financed with borrowings under our senior bank indebtedness
for the six months ended June 30, 1999.
26
<PAGE>
For the six months ended June 30, 1999, FVOP received approximately $9.0 million
as a capital contribution. This amount represents the amount loaned to
FrontierVision Partners, L.P. (which we refer to as "FVP") by Adelphia
Communications Corporation as consideration for part of the asset exchange with
Intermedia Partners, LP IV. This amount was contributed by FVP to Holdings.
Holdings in turn contributed the amount to FVOP.
From inception through December 31, 1998, FVP received a total of $199.4 million
of debt and equity contributions from its partners, all of which has been
invested in Holdings and then contributed to FVOP. Such amount represents the
contractual maximum amount committed by FVP's partners.
Year 2000
Many existing hardware and software elements of computer systems and other
technologies represent the year as a two-digit number. Such representation may
cause software and hardware malfunctions to occur as a system date or
application date crosses the Year 2000 boundary. This might happen when the
actual century turns, the date of some input data exceeds January 1, 2000 and/or
the system or application must internally refer to a date that occurs on,
before, or after January 1, 2000.
During 1998 and into 1999, we continued a review of the Year 2000 issue with the
objective of formulating a plan to identify and correct any system malfunctions
which might occur due to Year 2000 issues. An informal task force, comprised
solely of FrontierVision employees, was established in the fourth quarter of
1997 to determine which of our mission critical business processes could be
impacted by Year 2000 issues. Those mission critical business processes that
were identified as subject to Year 2000 issues are as follows: Signal Delivery,
Franchise Services, Service Delivery and Revenue Collection.
The following table illustrates the primary components of each of the Year 2000
effected mission critical business processes:
<TABLE>
------------------------ ---------------------------------------- ----------------------------------
Mission Critical
Business Process Description Significant Components
------------------------ ---------------------------------------- ----------------------------------
<S> <C> <C>
Signal Delivery Process of receiving a video signal from Headend equipment
satellite or broadcast sources and Plant infrastructure
transmitting that signal via fiber-optic and Programming suppliers
co-axial cable to a customer's residence
or place of business.
Franchise Services The performance of tasks specifically Local origination
required by local or national regulatory Emergency broadcast
agencies.
Service Delivery The ongoing process of responding timely Customer call center infrastructure
to customer service requests. Dispatch equipment
Revenue Collection The process of collecting customer billings Subscriber management systems
and utilizing those cash receipts for Cash management
necessary corporate purposes.
</TABLE>
Since the task force was established, FrontierVision management has committed
additional internal and external resources to address Year 2000 issues. During
the third quarter of 1998, we engaged an external third-party Year 2000
consultant to review our informal task force's Year 2000 efforts to date and to
produce a formal, written Year 2000 project plan. This plan provides a work
schedule for us to address our Year 2000 Issues by December 31, 1999. Since that
date, we have formally adopted a Year 2000 Compliance Plan, discussed in more
detail below. We have entered into cooperative agreements with other multiple
system operators to share pertinent assessment information.
We have established a Year 2000 team which currently consists of a part-time
Project Manager and one full-time Project Administrator. The Year 2000 team also
involves certain individuals in FrontierVision who are subject
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matter experts, for example, engineering and information technology. The Project
Manager is accountable directly to our senior management team, who in turn is
accountable to FrontierVision's general partner.
The Year 2000 Compliance Plan, consists of an awareness program, a prevention
program and a find and fix program. The awareness program is designed to educate
employees and customers on the implications of Year 2000 Issues. Employees have
been trained on our Year 2000 Compliance Plan and their role in the success of
the Plan has been communicated. The prevention program is designed to prevent
new problems from arising while we resolve existing problems. For example, since
October 30, 1998, we have required a Year 2000 compliance warranty on all
purchase orders to ensure that vendors ship to FrontierVision only equipment
that they have warranted is Year 2000 compliant. The find and fix program
includes three phases: inventory, assessment and remediation, and is initially
focused on mission critical business processes.
The inventory phase consists of a physical inventory of all susceptible business
components within each mission critical business process. A physical inventory
of the components used in certain of our mission critical business processes was
initiated during 1998. We substantially completed the inventory phase of the
mission critical items on January 31, 1999. We initiated random inventory
verification audits during the last part of the second quarter of 1999. The
inventory consisted of specifically identifying each component/system (both
internal and external systems) of a mission critical business process. Internal
systems include computer systems and related software (information technology
systems) as well as systems and devices that manage the distribution of cable
television service to customers (non information technology systems). External
systems include our third party billing service provider and subscriber
management system, banking partners (including cash management, lockbox
providers and lenders) and programming providers.
An end product of the inventory phase is a comprehensive database which allows
us to review any of our business components by, among other attributes,
manufacturer/supplier, geographic location, compliance status or asset class.
This database allows us to electronically track the assessments for each item.
Once an assessment is made on a given item, the assessment is automatically
linked to the individual inventory piece. Furthermore, the database allows for
the tracking of remediation efforts at the inventory level, including the date
the item was ordered, the expected and actual cost, who the repair is made by,
when it is made and who tests the repair. This method of item management ensures
normalization of the descriptions of like items, enhancing the overall
efficiency of the project.
We are also in the process of communicating with our significant suppliers and
service providers of mission critical business processes to determine their
position with regard to Year 2000 issues and evaluating the potential impact on
FrontierVision if those third parties fail to remediate their own Year 2000
issues. We have received responses from or we have checked internet sites for
approximately 56% of such significant suppliers and service providers; the
majority of which are currently in their own assessment and remediation phases.
Material relationships with third parties include utility companies (providing
power to the cable plant), telephone companies (providing communication lines
for use in customer contact, employee communications and in data transfer
related to subscriber and billing management information systems) and
programming and equipment vendors (providing the product distributed by
FrontierVision as well as maintenance and construction materials).
Since the inventory phase was completed, the Year 2000 team has focused on
assessing each business component's vulnerability to Year 2000 issues. The
assessment phase requires management to attain a high degree of confidence that
FrontierVision prevents Year 2000 problems with respect to components of mission
critical business processes and minimize such problems in other non-critical
areas, while controlling replacement costs. To ensure that the most at-risk
components/systems are assessed first, the initial task in the assessment stage
was the prioritization of each equipment/system in the project database. Items
of inventory have been reviewed for Year 2000 compatibility first by
cross-referencing the project database to materials received from vendors,
industry groups and other multiple systems operations, second by contacting
vendors as necessary and finally, by making an "in-house" determination of
compatibility where no other information is available. The end product of the
assessment phase for each item is the determination of whether a given
component/system is to be replaced or upgraded or whether specific contingency
plans are needed. The company substantially completed the assessment phase on
June 15, 1999.
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Approximately 95% of the total inventory components in our headends, plant
infrastructure and customer service infrastructure have proven to have no date
sensitive components. Of the remaining 5% subject to future investigation, we
have completed assessments on 99% of the components and have determined that
less than 9% of these to be non-compliant with respect to Year 2000 issues. The
majority of these non-compliant items relate to information technology
equipment. Upgrades are available to bring a majority of these information
technology items into Year 2000 compliance.
After the assessment phase is completed for a given component and the component
is found to have a Year 2000 issue, the remediation phase begins. The
remediation phase includes the following activities:
o A decision is made as to the optimal remedy of the Year 2000
issue.
o A purchase order is placed for the new component or upgrade.
o Based upon the expected delivery date, the appropriate resources
are scheduled to complete the implementation.
o After the new component is implemented, dependent testing occurs
to verify that remediations do not introduce new Year 2000
problems.
If remediation is determined to be impossible with respect to a business
component, the Year 2000 team will create an appropriate contingency plan.
As of August 6, 1999, our overall progress in the find and fix program for our
mission critical systems as follows:
- ----------------------------- ------------------------ -------------------------
Percentage Complete Completion Date or
Phase of Phase Expected Completion Date
- ----------------------------- ------------------------ -------------------------
Inventory 100% January 31, 1999
Assessment 99% June 15, 1999
Remediation 72% November 30, 1999
The expected completion date set forth above for remediation is based on our
current expectations. We are also dependent on our suppliers for timely
fulfillment of purchase orders that will be made to replace non-compliant
equipment and assistance in installations. In addition, the current remediation
timetable does not allow for a significant amount of time for testing. Further
delays in the assessment phase and/or delays in the purchasing and receipt of
replacement equipment further reduces the time available for testing and places
additional risk on the successful completion of the remediation phase. As a
result, no assurances can be given as to whether each of the phases will be
completed on schedule due to uncertainties which are inherent in the remediation
of Year 2000 Issues.
To date, we have expended approximately $4,000,000 to replace components with
Year 2000 issues. The majority of this amount relates to replacing certain
advertising sales equipment. Based on the assessment results, we plan to spend
an additional $200,000 in replacing equipment with known Year 2000 Issues.
Furthermore, as of July 31, 1999, we have expended approximately $330,000 in
third-party consulting fees and expect to spend an additional $25,000 in
external fees in conjunction with the Year 2000 project team through December
31, 1999.
We have budgeted in excess of $1,000,000 in incremental capital expenditures for
fiscal year 1999 to complete the Year 2000 compliance plan. At this point in
time, these budgeted amounts appear to be sufficient to correct our Year 2000
issues.
While management believes that the Year 2000 compliance plan will significantly
reduce the risks associated with the transition to the year 2000 through a
process of inventory, assessment and remediation, we have yet to develop or
implement any significant contingency plans. There can be no assurance that we
will identify all Year 2000 issues or that we will be able to remedy each Year
2000 issue. A failure to sufficiently correct a material Year 2000 problem could
cause us to suffer an interruption or a failure of certain important business
operations. Additionally,
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the failure of a material external (third-party) system may cause us to
experience an interruption or a failure of certain important business
operations. The interruption or failure by FrontierVision in an important
business operation may cause a material, adverse impact on our financial
position. It is not management's intention that certain information technology
and technical enhancement projects planned will be deferred as a result of the
cost to address Year 2000 issues. Additionally, although management believes
that a combination of cash from operations and indebtedness will fund the costs
associated with correcting Year 2000 issues, no assurances can be given that
costs ultimately required to be paid to ensure the our Year 2000 readiness will
not have an adverse effect on our financial position and results of operations.
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PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6
(a) Exhibits
3.1 Amended and Restated Agreement of Limited Partnership of FVOP.
(3)
3.2 Certificate of Limited Partnership of FVOP. (1)
3.9 Certificate of Incorporation for FrontierVision Capital
Corporation. (1)
3.10 Bylaws for FrontierVision Capital Corporation. (1)
4.1 Indenture dated as of October 7, 1996, among FrontierVision
Operating Partners, L.P., FrontierVision Capital Corporation
and Colorado National Bank, as Trustee. (2)
27.1 Financial Data Schedule as of and for the six month period
ended June 30, 1999.
---------------
Footnote References
(1) Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-1, File No. 333-9535.
(2) Incorporated by reference to the exhibits of the Registrant's
Quarterly Report on Form 10-Q, for the quarter ended September
30, 1996, File No. 333-9535.
(3) Incorporated by reference to the exhibits to Holdings and
Holdings Capital's Registration Statement on Form S-4,
Registration No. 333-36519.
(b) Reports on Form 8-K
An Item 5, Form 8-K was filed on June 8, 1999 relating to Holdings'
completion of an exchange offer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FRONTIERVISION OPERATING PARTNERS, L.P.
By: FrontierVision Holdings, L.P., its general
partner,
By: FrontierVision Partners, L.P., its
general partner
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general
partner
By: /s/ ALBERT D. FOSBENNER
-----------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
Date: August 13, 1999 By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION CAPITAL CORP.
Date: August 13, 1999 By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
--------------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
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