UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission file numbers: 333-36519 and 333-36519-01 and 333-75567-01
FrontierVision Holdings, L.P.
FrontierVision Holdings Capital Corporation*
FrontierVision Holdings Capital II Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 84-1432334
Delaware 84-1432976
Delaware 84-1481765
(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 Holdings Capital
Corporation and FrontierVision Holdings Capital II Corporation outstanding as of
May 7, 1999: 100 and 100, respectively.
* FrontierVision Holdings Capital Corporation and FrontierVision Holdings
Capital II Corporation meet the conditions set forth in General
Instruction H(1)(a) and (b) to the Form 10-Q and are therefore filing
with the reduced disclosure format.
** FrontierVision Holdings Capital II Corporation has been subject to the
filing requirements of section 15(d)since April 22, 1999.
<PAGE>
FRONTIERVISION HOLDINGS, L.P.
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
PART I. Financial Information PAGE
Item 1. Consolidated Financial Statements of FrontierVision Holdings,
<S> <C>
L.P. and Subsidiaries...............................................................3
Notes to Consolidated Financial Statements..........................................7
Balance Sheet of FrontierVision Holdings Capital Corporation.......................17
Note to the Balance Sheet .........................................................18
Balance Sheet of FrontierVision Holdings Capital II Corporation....................19
Note to the Balance Sheet..........................................................20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................................21
PART II. Other Information..................................................................29
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In Thousands
<TABLE>
-------------------------------------
March 31, December 31,
1999 1998
---------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 11,425 $ 5,091
Accounts receivable, net of allowance for doubtful accounts
of $216 and $666 12,489 13,602
Other receivables 374 174
Prepaid expenses and other 4,122 4,046
Investment in cable television systems, net:
Property and equipment 344,548 342,754
Franchise cost and other intangible assets 802,581 820,524
------------ -----------
Total investment in cable television systems, net 1,147,129 1,163,278
------------ -----------
Deferred financing costs, net 23,555 24,080
Earnest money deposits 100 150
------------ -----------
Total assets $ 1,199,194 $ 1,210,421
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 11,413 $ 18,233
Accrued liabilities 21,048 17,169
Subscriber prepayments and deposits 3,480 3,312
Accrued interest payable 14,940 9,547
Deferred Income Taxes 11,161 11,856
Debt 1,128,567 1,121,142
------------ -----------
Total liabilities 1,190,609 1,181,259
------------ -----------
Partners' capital:
FrontierVision Partners, L.P. 8,576 29,133
FrontierVision Holdings, LLC 9 29
------------ -----------
Total partners' capital 8,585 29,162
Commitments
------------ -----------
Total liabilities and partners' capital $ 1,199,194 $ 1,210,421
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands
<TABLE>
-------------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Revenue $ 72,417 $ 53,819
Expenses:
Operating expenses 37,893 27,693
Corporate administrative expenses 1,740 1,566
Depreciation and amortization 30,319 23,769
Storm related costs - 705
------------ ------------
Total expenses 69,952 53,733
------------ ------------
Operating income 2,465 86
Interest expense, net (25,375) (19,922)
Other income (expense) 1,638 -
----------- -----------
Net loss before income tax benefit (21,272) (19,836)
Income tax benefit 695 -
------------ ------------
Net loss $ (20,577) $ (19,836)
============ ============
Net loss allocated to:
FrontierVision Partners, L.P. $ (20,557) $ (19,817)
(General Partner)
FrontierVision Holdings, LLC (20) (19)
------------ ------------
(Limited Partner) $ (20,577) $ (19,836)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
In Thousands
<TABLE>
--------------------------------------------------------------
FrontierVision FrontierVision
Partners, L.P. Holdings, LLC
(General Partner) (Limited Partner) Total
<S> <C> <C> <C>
Balance, December 31, 1998 $ 29,133 $ 29 $ 29,162
Net loss (Unaudited) (20,557) (20) (20,577)
------------- ------------- -------------
Balance, March 31, 1999 $ 8,576 $ 9 $ 8,585
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
<TABLE>
-----------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
1999 1998
------------------- -------------------
Cash Flows From Operating Activities:
Net loss $ (20,577) $ (19,836)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 30,319 23,769
Deferred tax benefit (695) -
Gain on disposal of assets (1,869) -
Amortization of deferred debt issuance costs 901 664
Accretion of interest on indebtedness 6,223 4,646
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 577 641
Prepaid expenses and other (80) (452)
Accounts payable and accrued liabilities (2,609) 1,073
Subscriber prepayments and deposits 168 424
Accrued interest payable 5,393 5,900
---------------- ----------------
Total adjustments 38,328 36,665
---------------- ----------------
Net cash flows from operating activities 17,751 16,829
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (18,407) (9,475)
Pending transaction costs (275) 42
Cash paid for franchise costs (115) (2)
Proceeds from disposition of real estate 1,470 -
Proceeds from disposition of cable television assets 5,228 -
Cash paid in acquisitions of cable television systems (144) (14,940)
---------------- ----------------
Net cash flows from investing activities (12,243) (24,375)
---------------- ----------------
Cash Flows From Financing Activities:
Debt borrowings 3,138 15,000
Repayment of indebtedness (1,875) -
Principal payments on capital lease obligations (61) -
Increase in deferred financing fees (369) -
Offering costs related to Senior Subordinated Notes (7) (23)
Offering costs related to Senior Discount Notes - (137)
---------------- ----------------
Net cash flows from financing activities 826 14,840
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 6,334 7,294
Cash and Cash Equivalents, beginning of period 5,091 4,728
---------------- ----------------
Cash and Cash Equivalents, end of period $ 11,425 $ 12,022
================ ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 12,894 $ 8,824
================ ================
See accompanying notes to consolidated financial statements.
6
<PAGE>
FRONTIERVISION HOLDINGS, 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 Holdings, L.P. ("Holdings" or the "Company"), wholly-owned by
FrontierVision Partners, L.P., a Delaware limited partnership ("FVP"), is a
Delaware limited partnership formed on September 3, 1997 for the purpose of
acting as co-issuer with its wholly-owned subsidiary, FrontierVision Holdings
Capital Corporation ("Holdings Capital"), of $237,650 aggregate principal amount
at maturity of 11 7/8% Senior Discount Notes due 2007 (the "Discount Notes").
FVP contributed to Holdings, both directly and indirectly, all of the
outstanding partnership interests of FrontierVision Operating Partners, L.P.
("FVOP") prior to the issuance of the Discount Notes on September 19, 1997 (the
"Formation Transaction") and, as a result FVOP and its wholly-owned subsidiary,
FrontierVision Capital Corporation ("Capital"), are wholly-owned, consolidated
subsidiaries of Holdings. The Formation Transaction was accounted for at
predecessor cost. As used herein, the "Company" collectively refers to Holdings,
Holdings Capital, Holdings Capital II (as defined below), FrontierVision
Operating Partners, Inc.
("FVOP Inc."), FVOP and Capital.
On December 2, 1998, Holdings along with it wholly-owned subsidiary,
FrontierVision Holdings Capital II Corporation ("Holdings Capital II"),
co-issued $91,298 aggregate principal amount at maturity of Discount Notes,
Series B. Net proceeds from the issuance were contributed to FVOP as a capital
contribution.
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.
FVOP was initially capitalized in November 1995 with approximately $38 from its
sole limited partner, FVOP Inc., a Delaware corporation, and approximately
$38,300 from at the time its sole general partner, FVP. During the year ended
December 31, 1997, the Company received additional capital contributions of
approximately $37,653 from its partners. These capital contributions and a
portion of the proceeds from the Discount Notes was used by FVOP to repay
certain bank indebtedness with the remainder placed in escrow to finance pending
acquisitions.
Allocation of Profits, Losses and Distributions
Generally, Holdings' 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.
Reference to Annual Report
The attached interim financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the disclosures
required by generally accepted accounting principles. The accompanying financial
statements should be read in conjunction with Holdings' Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 333-36519) (the "Holdings
10-K") for additional disclosures, including a summary of the Company's
accounting policies.
The following notes, insofar as they are applicable to the three months ended
March 31, 1999, are not audited. In management's opinion, all adjustments
considered necessary for a fair presentation of such financial statements are
included and all such adjustments are of a normal and recurring nature. The
results for the three-month period ended March 31, 1999 are not necessarily
indicative of the results for the entire 1999 fiscal year.
7
<PAGE>
FRONTIERVISION HOLDINGS, 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., FVOP Inc.,
Capital, Holdings Capital and Holdings Capital II, 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, FVOP, Inc., Capital, Holdings
Capital and Holdings Capital II, 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.
New Accounting Standard
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Under SFAS 133, changes in the fair values of derivative instruments are
recognized immediately in earnings unless those instruments qualify as hedges of
the (1) fair values of existing assets, liabilities, or firm commitments, (2)
variability of cash flows of forecasted transactions, or (3) foreign currency
exposures of net investments in foreign operations. Although management of the
Company has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management estimates
that the impact of SFAS 133 is not expected to be material.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
(2) STORM RELATED COSTS
During mid-January of 1998, certain of the communities served by the Company in
Maine experienced devastating ice storms. For the three months ended March 31,
1998, the Company has recognized a loss due to service outages and increased
labor costs of approximately $740 due to the ice storms. Additionally, the
Company has incurred approximately $540 of capital expenditures to replace
damaged subscriber drops. The Company received $183 during the three months
ended March 31, 1999 related to a claim on its business interruption insurance
for the storm damage. Such claim was recognized as a reduction of storm cost
expense in the fourth quarter of 1998.
8
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(3) ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company has completed several acquisitions since its inception through
December 31, 1998. All of the acquisitions have been accounted for using the
purchase method of accounting, and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based upon the
estimated fair values at the respective dates of acquisition. Such allocations
are subject to adjustments as final appraisal information is received by the
Company. Amounts allocated to property and equipment and to intangible assets
will be respectively depreciated and amortized, prospectively from the date of
acquisition based upon remaining useful lives and amortization periods. The
following table lists the acquisitions and the purchase price for transactions
occurring in the most recent two years.
- --------------------------------------------------------------------------------------------------------------------------------
Predecessor Owner Primary Location of Systems Date Acquired Acquisition Cost (a)
----------------- --------------------------- ------------- --------------------
<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 $34,800
Phoenix Front Row Cablevision Ohio May 30, 1997 $6,900
PCI Incorporated Michigan August 29, 1997 $13,600
SRW, Inc.'s Blue Ridge Cable Systems, L.P. Tennessee and North Carolina September 3, 1997 $4,100
A-R Cable Services - ME, Inc. ("Cablevision") Maine October 31, 1997 $78,600
Harold's Home Furnishings, Inc. Pennsylvania and Maryland October 31, 1997 $1,600
TCI Cablevision of Vermont, Inc. and Westmarc Development
Joint Venture ("TCI-VT/NH") Vermont and New Hampshire December 2, 1997 $34,800
Cox Communications, Inc. ("Cox-Central Ohio") Ohio December 19, 1997 $204,100
TVC-Sumpter Limited Partnership and North Oakland Cablevision
Partners Limited Partnership Michigan March 6, 1998 $14,400
TCI Cablevision of Ohio, Inc. Ohio April 1, 1998 $10,000
New England Cablevision of Massachusetts, Inc. ("NECMA") Massachusetts April 3, 1998 $44,900
Ohio Cablevision Network, Inc. ("TCI-Bryan") Ohio July 31, 1998 $37,400
Unity Cable Television, Inc. Maine September 30, 1998 $800
Appalachian Cablevision of Ohio Ohio September 1, 1998 $300
State Cable TV Corporation ("State") Maine, New Hampshire October 23, 1998 $190,200*
Paint Valley Cable Ohio October 30, 1998 $1,900
CASCO Maine November 30, 1998 $3,200
- ---------------
</TABLE>
(a) Acquisition cost represents the purchase price allocation between tangible
and intangible assets including certain purchase accounting adjustments as of
March 31, 1999.
* Subject to adjustment.
9
<PAGE>
FRONTIERVISION HOLDINGS, 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:
-----------------
Acquisitionsfor
the three months
ended March 31,
1998 (a)
--------
Property and equipment $ 3,550
Franchise costs and other intangible assets 11,440
-----------
Subtotal 14,990
Net working capital (deficit) (50)
-----------
Total cash paid for acquisitions $ 14,940
===========
- ------------
(a) The combined purchase price includes certain purchase price adjustments for
acquisitions consummated prior to the respective periods.
The Company has reported the operating results of its acquired cable systems
from the dates of their respective acquisition. Unaudited pro forma summarized
operating results of the Company, assuming the Triax I, Cablevision, TCI-VT/NH,
Cox-Central Ohio, NECMA, TCI-Bryan and State Cable acquisitions (the
"Acquisitions") had been consummated on January 1, 1997, are as follows:
<TABLE>
-------------------------------------------------
Three Months Ended March 31, 1998
-------------------------------------------------
Historical Pro Forma
Results Acquisitions Results
------- ------------ -------
<S> <C> <C> <C>
Revenue $ 53,819 $ 11,596 $ 65,415
Operating, selling, general and administrative expenses (29,964) (8,359) (38,323)
Depreciation and amortization (23,769) (5,880) (29,649)
----------- ------------ -------------
Operating income (loss) 86 (2,643) (2,557)
Interest and other expenses (19,922) (5,131) (25,053)
----------- ------------ -------------
Net loss $ (19,836) $ (7,774) $ (27,610)
=========== ============ =============
</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 HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT
The Company's debt was comprised of the following:
<TABLE>
-------------------------------
March 31, December 31,
1999 1998
---- ----
Bank Credit Facility (a) --
Revolving Credit Facility, interest based on various floating rate options (7.01%
<S> <C> <C>
average at March 31, 1999), payable monthly $ 172,000 $ 172,000
Term loans, interest based on various floating libor rate options
(7.01% and 7.39% weighted average at March 31, 1999 and December 1998,
respectively), payable monthly 496,250 498,125
11% Senior Subordinated Notes due 2006 (b) 200,000 200,000
11 7/8% Senior Discount Notes due 2007 (c) 255,755 249,532
Capital leases 4,562 1,485
------------ ------------
Total debt $ 1,128,567 $ 1,121,142
============ ============
</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.
The Amended Credit Facility also requires the Company to maintain
compliance with various financial covenants including, but not limited
to, covenants relating to total indebtedness, debt ratios, interest
coverage ratio and fixed charges ratio. In addition, the Amended Credit
Facility has restrictions on certain partnership distributions by the
Company.
All partnership interests in the Company and all assets of the Company
and its subsidiaries are pledged as collateral for the Amended Credit
Facility.
11
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
(b) Senior Subordinated Notes
On October 7, 1996, the Company issued, pursuant to a public offering
$200,000 aggregate principal amount of 11% Senior Subordinated Notes
due 2006 (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 for the Notes (the "Subordinated Notes Indenture") has
certain restrictions on incurrence of indebtedness, distributions,
mergers, asset sales and changes in control of the Company.
The fair market value of the Notes is estimated based on Portal Market
quotations of the issue. At March 31, 1999, the fair value of the Notes
was $224,500.
J.P. Morgan Investment Corporation and First Union Capital Partners,
Inc. are affiliates of the Company, owning in the aggregate, a 37.6%
limited partnership interest in FVP. Affiliates of such holders
received underwriting fees of approximately $3.6 million in connection
with the issuance of the Notes.
(c) Senior Discount Notes
On September 19, 1997, Holdings issued, pursuant to a private offering,
the Discount Notes. The Discount Notes were sold at approximately 63.1%
of the stated principal amount at maturity and provided net proceeds of
$144,750, after underwriting fees of approximately $5,250.
On December 2, 1998, Holdings issued, pursuant to a private offering,
the Discount Notes, Series B. The Discount Notes were sold at at
approximately 82.149% of the stated principal amount at maturity and
provided net proceeds of $72,750, after underwriting fees of
approximately $2,250.
The Discount Notes are unsecured obligations of Holdings and Holdings
Capital, or Holdings Capital II, as the case may be, ranking pari passu
in right of payment to all existing and future unsecured indebtedness
of the issuers and will mature on September 15, 2007. The discount on
the Discount Notes is being accreted using the interest method until
September 15, 2001, the date at which cash interest begins to accrue.
Cash interest will accrue at a rate of 11 7/8% per annum and will be
payable each March 15 and September 15, commencing March 15, 2002.
The Discount Notes are redeemable at the option of the Issuers, in
whole or in part, at any time on or after September 15, 2001, at
redemption prices set forth in the indenture for the Discount Notes
(the "Discount Notes Indenture"), plus any unpaid interest, if any, at
the date of the redemption. The issuers may redeem, prior to September
15, 2001, up to 35% of the principal amount at maturity of the Discount
Notes with the
12
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
net cash proceeds received from one or more public equity offerings or
strategic equity investments at a redemption prices set forth in the
Discount Notes Indenture, plus any unpaid interest, if any, at the date
of the redemption.
The Discount Notes Indenture has certain restrictions on incurrence of
indebtedness, distributions, mergers, asset sales and changes in
control of Holdings.
The fair value of the Discount Notes is estimated based on Portal
Market quotations of the issue. At March 31, 1999, the approximate fair
value of the Company's Discount Notes was approximately $198,600.
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 compensation in the aggregate of approximately $4.6 million in
connection with the issuance of the Discount Notes.
(d) Interest Rate Protection Agreements
In order to convert certain of the interest payable at variable rates
under the Amended Credit Facility to interest at fixed rates, the
Company has entered into interest rate swap agreements for notional
amounts totaling $187,500, and maturing between April 7, 1999 and
November 15, 1999. According to these agreements, the Company pays or
receives the difference between (1) an average fixed rate of 5.84% and
(2) a floating rate of the three month libor applied to the same
$187,500 notional amount every three months during the term of the
interest rate swap agreement. On April 7, 1999, the Company terminated
one of its interest rate swap agreements for a notional amount of
$100,000 and entered into a new interest rate collar agreement for
$100,000 maturing on April 8, 2002. There was no termination fee
associated with this transaction.
On January 8, 1999, the Company amended its collar interest rate swap
agreement that it had entered into on April 8, 1998 for a notional
amount of $100,000. The amended collar agreement matures on April 8,
2001. The collar agreement provides for different exchanges between the
Company and the counterparty depending on the level of the floating one
month LIBOR rate (5.00% at March 31, 1999). Such exchanges occur every
month during the term of the collar agreement. The different exchanges
are as follows:
(1) When LIBOR is below 4.65%, the Company pays to the counterparty the
difference between the fixed rate of 5.95% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 5.95% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 5.95% and
LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 5.95% and 4.65%, the
Collar Agreement has no financial effect.
On October 3, 1997, in order to convert certain of the interest payable
at variable rates under indebtedness, the Company entered into a
forward interest rate swap agreement. This commenced on October 15,
1998, for a notional amount totaling $150,000, maturing on October 15,
2001. According to this agreement, the Company pays or receives the
difference between (1) a fixed rate of 6.115% and (2) a floating rate
based on three month libor applied to the same $150,000 notional amount
every three months during the term of
13
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(4) DEBT (continued)
the interest rate swap agreement. This agreement was terminated on
January 15, 1999, at which time the company entered into a new collar
interest rate swap agreement for a notional amount of $150,000
("$150,000 Collar Agreement") maturing on April 15, 2002. There was no
termination fee associated with this transaction. The $150,000 Collar
Agreement provides for different exchanges between the Company and the
counterparty depending on the level of the floating three month LIBOR
rate (5.00% at March 31, 1999). Such exchanges occur every three months
during the term of the $150,000 Collar Agreement. The different
exchanges are as follows:
(1) When LIBOR is below 4.95%, the Company pays to the counterparty the
difference between the fixed rate of 6.15% and the LIBOR rate,
applied to the $100,000 notional amount;
(2) When LIBOR is between 6.15% and 6.65%, the Company receives from
the counterparty the difference between the fixed rate of 6.15% and
LIBOR rate, applied to the $100,000 notional amount;
(3) When LIBOR is in excess of 6.65% or between 6.15% and 4.95%, the
Collar Agreement has no financial effect.
For the three months ended March 31, 1999 and 1998, the Company
recognized an increase in interest expense of approximately $365 and
$56, respectively, as a result of the interest rate swap agreements.
Information concerning the Company's interest rate agreements at March
31, 1999 is as follows:
Amount to be
Notional paid upon
Expiration date amount termination (a)
--------------- ------ ---------------
April 7, 1999 $ 100,000 $ 219.8
November 15, 1999 65,000 380.4
November 15, 1999 22,500 5.1
April 8, 2001 100,000 610.1
April 8, 2002 100,000 1,699.5
April 15, 2002 150,000 2,422.0
------------ -------------
$ 537,500 $ 5,336.9
============ =============
(a) The estimated amount that the Company would pay to terminate
the agreements on March 31, 1999. This amount takes into
consideration current interest rates, the current
creditworthiness of the counterparties and represents the fair
value of the interest rate agreements.
The debt of the Company matures as follows:
Year Ended December 31 --
-------------------------
1999 $ 9,269
2000 24,575
2001 34,575
2002 44,575
2003 55,825
Thereafter 959,748
------------
$ 1,128,567
============
14
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(5) COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under lease agreements for office space,
equipment, pole rental and land upon which certain of its towers and antennae
are constructed. Rent expense for the three months ended March 31, 1999, and
1998 was $1,643, and $1,320, respectively.
Estimated future noncancelable lease payments under such lease obligations
subsequent to March 31, 1999 are as follows:
Year Ended December 31 --
-------------------------
1999 $ 1,175
2000 1,256
2001 934
2002 788
2003 537
Thereafter 777
------------
$ 5,467
============
In October 1992, Congress enacted the Cable Television Consumer and Competition
Act of 1992 (the "1992 Cable Act") which greatly expanded federal and local
regulation of the cable television industry. The Federal Communications
Commission ("FCC") adopted comprehensive regulations, effective September 1,
1993, governing rates charged to subscribers for basic cable and cable
programming services which allowed cable operators to justify regulated rates in
excess of the FCC benchmarks through cost of service showings at both the
franchising authority level for basic service and at the FCC level in response
to complaints on rates for cable programming services. The FCC also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for the changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated service and
equipment rates using a simplified cost-of-service formula.
As a result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. The Company believes
that it has complied in all material respects with the rate regulation
provisions of the federal law. However, the Company's rates for Regulated
Services are subject to review by the FCC, if a complaint has been filed, or by
the appropriate franchise authority if it is certified by the FCC to regulate
basic rates. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
The Company's agreements with franchise authorities require the payment of
annual fees which approximate 3% of system franchise revenue. Such franchises
are generally nonexclusive and are granted by local governmental authorities for
a specified term of years, generally for extended periods of up to fifteen
years.
15
<PAGE>
FRONTIERVISION HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts In Thousands
(6) YEAR 2000 COMPLIANCE
The Company has under way a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with third
parties having a substantial relationship to its business, including significant
suppliers and financial institutions, to determine the extent to which the
Company may be vulnerable to such third parties' failures to achieve Year 2000
compliance.
Failure to achieve Year 2000 compliance by the Company, its principal suppliers
and certain financial institutions with which it has relationship could
negatively affect the Company's ability to conduct business for an extended
period. There can be no assurances that all Company information technology
systems and components will be fully Year 2000 compliant; in addition, other
companies on which the Company's systems and operations rely may not be fully
compliant on a timely basis, and any such failure could have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(7) SALE OF COMPANY
On February 22, 1999, FVP entered into a definitive agreement with Adelphia
Communications Corporation to sell all outstanding partnership interests of FVP
in exchange for cash, the assumption of certain liabilities and 7 million shares
of Adelphia Class A common stock.
16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
BALANCE SHEET
<TABLE>
-----------------------------------
March 31, December 31,
1999 1998
---------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 100 $ 100
---------- --------
Total assets $ 100 $ 100
========== ========
OWNER'S EQUITY
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
--------- --------
Total owner's equity $ 100 $ 100
========= ========
</TABLE>
See note to accompanying balance sheet.
17
<PAGE>
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
NOTE TO THE BALANCE SHEET (Unaudited)
FrontierVision Holdings Capital Corporation, a Delaware corporation ("Holdings
Capital"), is a wholly owned subsidiary of FrontierVision Holdings, L.P.
("Holdings"), and was organized on August 22, 1997 for the sole purpose of
acting as co-issuer with Holdings of $237.7 million aggregate principal amount
at maturity of the 11 7/8% Senior Discount Notes. Holdings Capital had no
operations from September 18, 1997 through March 31, 1999.
18
<PAGE>
FRONTIERVISION HOLDINGS CAPITAL II CORPORATION
BALANCE SHEET
<TABLE>
--------------------------------------
March 31, December 31,
1999 1998
----------------- -----------------
ASSETS
<S> <C> <C>
Cash $ 1,000 $ 1,000
------------ -------------
Total assets $ 1,000 $ 1,000
============ =============
LIABILITIES AND OWNER'S EQUITY
Owner's equity:
Common stock, par value $.01; 1,000 shares authorized;
100 shares issued and outstanding $ 10 $ 10
Additional paid-in capital 990 990
------------ ------------
Total owner's equity 1,000 1,000
------------ ------------
Total liabilities and owner's equity $ 1,000 $ 1,000
============ ============
</TABLE>
See accompanying note to the balance sheet.
19
<PAGE>
FRONTIERVISION HOLDINGS CAPITAL II CORPORATION
NOTE TO THE BALANCE SHEET (Unaudited)
FrontierVision Holdings Capital II Corporation, a Delaware corporation
("Holdings Capital II"), is a wholly owned subsidiary of FrontierVision
Holdings, L.P. ("Holdings"), and was organized on December 2, 1998, for the sole
purpose of acting as co-issuer with Holdings of $91.3 million aggregate
principal amount at maturity of the 11 7/8% Senior Discount Notes, Series B.
Holdings Capital II had no operations from inception through March 31, 1999.
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 the Company's Post-Effective Amendment No. 2 to Form S-4 filed
April 2, 1998 (File No. 333-36519). 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 three months ended March
31, 1999 and 1998, why those revenues and expenses were different from the year
before and how all of this effects our overall financial position.
We commenced operations in November, 1995 with the acquisition of certain cable
television systems. Since that first acquisition, we have completed over 30
separate acquisitions and have grown to become one of the twenty largest
multiple system operators in the United States, serving over 696,000 subscribers
as of March 31, 1999. Our systems are located in three primary operating
clusters - New England, Ohio and Kentucky - with a fourth, smaller group of
systems in the Southeast.
21
<PAGE>
The following table summarizes our acquisitions through March 31, 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
</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 March 31, 1999, we completed eight acquisition
transactions, acquiring a total of approximately 140,000 basic subscribers.
These acquisitions significantly increased the size and scale of each of our
three primary operating clusters. Our October 1998 acquisition of eight cable
systems from State Cable TV Corporation added approximately 75,000 basic
subscribers to our New England cluster in attractive communities directly
contiguous to systems which we already owned in southern Maine and central New
Hampshire. With the State Cable systems, we have grown to serve over 248,000
subscribers in our New England cluster and over 168,000 subscribers in four of
the five largest cities in the state of Maine.
On January 7, 1999, we sold nine small cable television systems located in
eastern Tennessee and western North Carolina, which in the aggregate, served
approximately 4,400 basic subscribers.
22
<PAGE>
Results of Operations
In this section, we discuss our earnings for the three months ended March 31,
1999 and 1998 and the factors affecting them. The three month period ended March
31, 1999, is the only period in which we operated all of our cable television
systems, although certain systems were disposed of during the period and are
reflected only for that portion of the period that we owned such systems.
The following table illustrates the our operating activities on a comparative
basis:
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998 (Unaudited)
<TABLE>
----------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1999 (a) March 31, 1998 (a)
------------------------- -------------------------
% of % of
Amount Revenue Amount Revenue
------ ------- ------ -------
In thousands
<S> <C> <C> <C> <C>
Revenue................................... $ 72,417 100.0% $ 53,819 100.0%
Expenses
Operating expenses.................... 37,893 52.3 28,398 52.8
Corporate expenses.................... 1,740 2.4 1,566 2.9
Depreciation and amortization......... 30,319 41.9 23,769 44.2
----------- ------- ----------- -------
Total expenses................. 69,952 96.6 53,733 99.9
----------- ------- ----------- -------
Operating income.......................... 2,465 3.4 86 0.1
Interest expense, net..................... (25,375) (35.0) (19,922) (37.0)
Other income (expense).................... 1,638 2.3 - -
Income tax benefit....................... 695 1.0 - -
----------- ------- ----------- -------
Net loss.................................. $ (20,577) (28.3)% $ (19,836) (36.9)%
=========== ======= =========== =======
EBITDA ................................... $ 32,784 45.3% $ 23,855 44.3%
=========== ======= =========== =======
Basic subscribers......................... 696,000 570,500
Premium units............................. 291,500 266,700
- ------------
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Significant increases in the amounts of revenue, operating expense and EBITDA
are primarily attributable to acquisition activity during 1998, which increased
our size from 570,500 basic subscribers at March 31, 1998 to over 696,000 at
March 31, 1999. Revenue increased 34.6%, or approximately $18.6 million, to
approximately $72.4 million for the three months ended March 31, 1999 from
approximately $53.8 million for the three months ended March 31, 1998. Revenue
per subscriber, per month, increased to $34.50 in the three months ended March
31, 1999 from $31.85 in the same period a year earlier, reflecting acquisition
activity, increased service rates and new service offerings. Operating expenses
and corporate expenses increased approximately 33.4% and 11.1%, respectively,
for the three months ended March 31, 1999 from the three months ended March 31,
1998. The decrease in the percentage of operating expenses to revenue was
primarily attributable to the absense of one-time storm related costs as were
incurred during the three months ended March 31, 1998 and to cost efficiencies
achieved through the integration of acquired cable systems. Increases in
programming expenses and non-recurring expenses related to Year 2000 issues
offset these expense reductions. The EBITDA margin improved from 44.3% of
revenue for the three months ended March 31, 1998 to 45.3% in 1999.
Depreciation and amortization expense increased 27.6% as a result of acquisition
activity that occurred in 1998. Net interest expense increased to $25.4 million
from $19.9 million primarily as a result of the higher weighted average drawings
on our senior bank indebtedness.
23
<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 its
founding in 1995, our cash received from equity investments, bank borrowings and
other debt issued by FrontierVision Operating Partners, L.P. (which we refer to
as "FVOP") and FrontierVision Holdings, L.P. (which we refer to as "Holdings")
has been sufficient to finance our acquisitions and, together with cash
generated from operating activities, also has been sufficient to service our
debt, provide sufficient working capital and fund required capital expenditures.
We intend to continue to finance such debt service, working capital and capital
expenditure requirements through a combination of cash from operations,
indebtedness and equity capital sources. We believe that we will continue to
generate cash and be able to obtain financing sufficient to meet such
requirements. Our ability to meet our debt service and other obligations will
depend upon our future performance which, in turn, is subject to general
economic conditions and to financial, political, competitive, regulatory and
other factors, many of which are beyond our control.
Amended Bank Credit Facility
Drawings on our amended bank credit facility, along with cash flow generated
from operations and high yield debt financing, have been sufficient to finance
capital improvement projects as well as acquisitions. We have adequately
serviced our debt in accordance with the provisions of the amended bank credit
facility from EBITDA of approximately $32.8 million generated by FrontierVision
Operating Partners, L.P. for the three months ended March 31, 1999.
On December 19, 1997, we amended our existing senior bank indebtedness and
entered into an $800.0 million amended bank credit facility with The Chase
Manhattan Bank, as Administrative Agent, J.P. Morgan Securities Inc., as
Syndication Agent, CIBC Inc., as Documentation Agent, and the other lenders
signatory thereto. The amended bank credit facility includes a $300.0 million,
7.75-year reducing revolving credit facility, a $250.0 million, 7.75-year term
loan and a $250.0 million, 8.25-year term loan.
At March 31, 1999, we had $172.0 million outstanding under the revolving credit
facility, $246.3 million outstanding under the 7.75 year term loan and $250.0
million outstanding under the 8.25 year term loan. The weighted average interest
rates at March 31, 1999 on the outstanding borrowings under the revolving credit
facility were approximately 7.01%, and under the 7.75 year term loan and the
8.25 year term loan were approximately 7.01% and 7.39%, respectively. We have
entered into interest rate protection agreements to hedge the underlying LIBOR
rate exposure for $437.5 million of borrowings through November 1999 and October
2001. For the three months ended March 31, 1999, we recognized an increase to
interest expense of approximately $0.4 million as a result of these interest
rate swap agreements.
In general, the amended bank credit facility requires us to use the proceeds
from any equity or subordinated debt issuance or any cable system disposition to
reduce indebtedness for borrowings under the amended bank credit facility and to
reduce permanently commitments thereunder, subject to certain exceptions
permitting us to use such proceeds to fund certain permitted acquisitions,
provided that we are otherwise in compliance with the terms of the amended bank
credit facility.
The amended bank credit facility is secured by a pledge of all limited and
general partnership interests in FrontierVision Operating Partners, L.P. and in
any of our restricted subsidiaries and a first priority lien on all the tangible
and intangible assets of FrontierVision Operating Partners, L.P. 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.
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.
24
<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, FrontierVision
entered into deferred interest rate setting agreements to reduce the interest
rate exposure related to the notes. The financial statement effect of these
agreements will be to increase the effective interest rate which FrontierVision
incurs over the life of the notes.
Senior Discount Notes, Series A
Holdings and FrontierVision Holdings Capital Corporation were formed for the
purpose of acting as co-issuers of $237.7 million aggregate principal amount at
maturity of 11 7/8% senior discount notes due 2007. FVP contributed to Holdings,
both directly and indirectly, all of the outstanding partnership interests of
FrontierVision Operating Partners, L.P. prior to the issuance of the discount
notes on September 19, 1997 and as a result, FrontierVision Operating Partners,
L.P. and FrontierVision Capital Corporation are wholly-owned consolidated
subsidiaries of Holdings. Holdings contributed the majority of the net proceeds
of the discount notes totaling approximately $142.3 million to FVOP as a capital
contribution.
Senior Discount Notes, Series B
Holdings and FrontierVision Holdings Capital II Corporation acted as co-issuers
of $91.3 million aggregate principal amount at maturity of 11 7/8% senior
discount notes due 2007, Series B. Holdings II Capital was formed for the
purpose of acting as co-issuer on these discount notes. The discount notes were
issued on December 2, 1998. Holdings contributed the majority of the net
proceeds of approximately $72.8 million from the issuance of the discount notes
to FVOP as a capital contribution.
Cash Flows From Operating Activities
Cash flows from operating activities for the three months ended March 31, 1999
were $13.7 million compared to $16.8 million for the year ended March 31, 1998.
The increase was primarily a result of cable television system operations
acquired during 1998.
Cash Flows From Investing Activities
Investing cash flows were primarily used to fund capital expenditures and
acquire cable television systems. Capital expenditures for the three months
ended March 31, 1999 were approximately $18.4 million compared to approximately
$9.5 million for the three months ended March 31, 1998. Capital expenditures
primarily consisted of expenditures for the construction and expansion of cable
plant and distribution equipment, and additional costs were incurred related to
the expansion of customer service facilities. We invested approximately $14.9
million in acquisitions during the year ended December 31, 1998 compared with
net proceeds from the disposition of assets of approximately $6.5 million for
the three months ended March 31, 1999.
Cash Flows From Financing Activities
We financed acquisitions during the three months ended March 31, 1998 with
borrowings under our senior bank indebtedness.
Furthermore, 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.
25
<PAGE>
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. Additionally, we have joined an industry initiative whereby along
with other similar companies, we will achieve efficiencies in their individual
Year 2000 plans through the sharing of information and joint testing. We have
also entered into cooperative agreements with other multiple system operators to
share pertinent assessment information.
We have established a Year 2000 team which currently consists of a part-time
Project Manager, one full-time Project Administrator and one part-time
equivalent consultant. The Year 2000 team also involves certain individuals in
FrontierVision who are subject matter experts, for example, engineering and
information technology. The Project Manager is accountable directly to our
senior management team, who in turn is accountable to FrontierVision's general
partner.
The Year 2000 Compliance Plan, consists of an awareness program, a prevention
program and a find and fix program. The awareness program is designed to educate
employees and customers on the implications of Year 2000 Issues. Employees have
been trained on our Year 2000 Compliance Plan and their role in the success of
the Plan has been communicated. The prevention program is designed to prevent
new problems from arising while we
26
<PAGE>
resolve existing problems. For example, since October 30, 1998, we have required
a Year 2000 compliance warranty on all purchase orders to ensure that vendors
ship to FrontierVision only equipment that they have warranted is Year 2000
compliant. The find and fix program includes three phases: inventory, assessment
and remediation, and is initially focused on mission critical business
processes.
The inventory phase consists of a physical inventory of all susceptible business
components within each mission critical business process. A physical inventory
of the components used in certain of our mission critical business processes was
initiated during 1998. We substantially completed the inventory phase of the
mission critical items on January 31, 1999. We plan to initiate random inventory
verification audits during the last part of the second quarter of 1999. The
inventory consisted of specifically identifying each component/system (both
internal and external systems) of a mission critical business process. Internal
systems include computer systems and related software (information technology
systems) as well as systems and devices that manage the distribution of cable
television service to customers (non information technology systems). External
systems include our third party billing service provider and subscriber
management system, banking partners (including cash management, lockbox
providers and lenders) and programming providers.
An end product of the inventory phase is a comprehensive database which allows
us to review any of our business components by, among other attributes,
manufacturer/supplier, geographic location, compliance status or asset class.
This database allows us to electronically track the assessments for each item.
Once an assessment is made on a given item, the assessment is automatically
linked to the individual inventory piece. Furthermore, the database allows for
the tracking of remediation efforts at the inventory level, including the date
the item was ordered, the expected and actual cost, who the repair is made by,
when it is made and who tests the repair. This method of item management ensures
normalization of the descriptions of like items, enhancing the overall
efficiency of the project.
We are also in the process of communicating with our significant suppliers and
service providers of mission critical business processes to determine their
position with regard to Year 2000 Issues and evaluating the potential impact on
FrontierVision if those third parties fail to remediate their own Year 2000
Issues. We have received responses from or we have checked internet sites for
approximately 50% of such significant suppliers and service providers; the
majority of which are currently in their own assessment and remediation phases.
Material relationships with third parties include utility companies (providing
power to the cable plant), telephone companies (providing communication lines
for use in customer contact, employee communications and in data transfer
related to subscriber and billing management information systems) and
programming and equipment vendors (providing the product distributed by
FrontierVision as well as maintenance and construction materials).
Since the inventory phase was completed, the Year 2000 team has focused on
assessing each business component's vulnerability to Year 2000 Issues. The
assessment phase requires management to attain a high degree of confidence that
FrontierVision prevents Year 2000 problems with respect to components of mission
critical business processes and minimize such problems in other non-critical
areas, while controlling replacement costs. To ensure that the most at-risk
components/systems are assessed first, the initial task in the assessment stage
was the prioritization of each equipment/system in the project database. Items
of inventory have been reviewed for Year 2000 compatibility first by
cross-referencing the project database to materials received from vendors,
industry groups and other multiple systems operations, second by contacting
vendors as necessary and finally, by making an "in-house" determination of
compatibility where no other information is available. The end product of the
assessment phase for each item is the determination of whether a given
component/system is to be replaced or upgraded or whether specific contingency
plans are needed.
Approximately 95% of the total inventory components in our headends, plant
infrastructure and customer service infrastructure have proven to have no date
sensitive components. Of the remaining 5% subject to future investigation, we
have completed assessments on approximately 83% of the components and have
determined that less than 5% of these to be non-compliant with respect to Year
2000 issues. The majority of these non-compliant items relate to information
technology equipment. Upgrades are available to bring a majority of these
information technology items into Year 2000 compliance.
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After the assessment phase is completed for a given component and the component
is found to have a Year 2000 issue, the remediation phase begins. The
remediation phase includes the following activities:
o A decision is made as to the optimal remedy of the Year 2000
issue.
o A purchase order is placed for the new component or upgrade.
o Based upon the expected delivery date, the appropriate resources
are scheduled to complete the implementation.
o After the new component is implemented, dependent testing occurs
to verify that remediations do not introduce new Year 2000
problems.
If remediation is determined to be impossible with respect to a business
component, the Year 2000 team will create an appropriate contingency plan.
As of April 30, 1999, our overall progress in the find and fix program for our
mission critical systems as follows:
- --------------------------------------------------------------------------------
Percentage Complete Completion Date or
Phase of Phase Expected Completion Date
- --------------------------------------------------------------------------------
Inventory 99% January 31, 1999
Assessment 83% June 15, 1999
Remediation 30% November 30, 1999
The expected completion dates set forth above are based on our current
expectations. The assessment phase is expected to be completed by June 15, 1999
which is three and a half months behind our original estimate for completion. We
are also dependent on our suppliers for timely fulfillment of purchase orders
that will be made to replace non-compliant equipment and assistance in
installations. In addition, the current remediation timetable does not allow for
a significant amount of time for testing. Further delays in the assessment phase
and/or delays in the purchasing and receipt of replacement equipment further
reduces the time available for testing and places additional risk on the
successful completion of the remediation phase. As a result, no assurances can
be given as to whether each of the phases will be completed on schedule due to
uncertainties which are inherent in the remediation of Year 2000 Issues.
As we have not yet completed the assessment of each of our mission critical
systems (either internal or external), the total costs to address the Year 2000
issue are uncertain. To date, we have expended approximately $3,800,000 to
replace components with Year 2000 issues. The majority of this amount relates to
replacing certain advertising sales equipment. Based on the assessment results
to date, we plan to spend an additional $600,000 in replacing equipment with
known Year 2000 Issues. Furthermore, as of April 30, 1999, we have expended
approximately $320,000 in third-party consulting fees and expect to spend an
additional $150,000 in external fees in conjunction with the Year 2000 project
team through December 31, 1999.
We have budgeted in excess of $1,000,000 in incremental capital expenditures for
fiscal year 1999 to complete the Year 2000 compliance plan. It is not known, at
this point in time, if these budgeted amounts will be sufficient to identify and
correct our Year 2000 issues.
While management believes that the Year 2000 compliance plan will significantly
reduce the risks associated with the transition to the year 2000 through a
process of inventory, assessment and remediation, we have yet to develop or
implement any significant contingency plans. There can be no assurance that we
will identify all Year 2000 Issues or that we will be able to remedy each Year
2000 issue. A failure to sufficiently correct a material Year 2000 problem could
cause us to suffer an interruption or a failure of certain important business
operations. Additionally, the failure of a material external (third-party)
system may cause us to experience an interruption or a failure of certain
important business operations. The interruption or failure by FrontierVision in
an important business operation may cause a material, adverse impact on our
financial position. It is not management's intention that
28
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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 for
FrontierVision Operating Partners, L.P.(3)
3.2 Certificate of Limited Partnership for FrontierVision Operating
Partners, L.P. (1)
3.16 Agreement of Limited Partnership of Holdings. (3)
3.17 Certificate of Limited Partnership of Holdings. (3)
3.18 Certificate of Incorporation of FrontierVision Holdings Capital
Corporation. (3)
3.19 Bylaws of FrontierVision Holdings Capital Corporation. (3)
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)
4.2 Indenture dated as of September 19, 1997, among FrontierVision
Holdings, L.P., FrontierVision
Holdings Capital Corporation and U.S. Bank National Association
d/b/a Colorado National Bank, as Trustee. (3)
4.3 Indenture dated as of December 9, 1998, among FrontierVision
Holdings, L.P., FrontierVision Holdings Capital II Corporation
and U.S. Bank National Association, as Trustee. (4)
27.1 Financial Data Schedule as of and for the three-month period
ended March 31, 1999.
---------------
Footnote References
(1) Incorporated by reference to the exhibits to FrontierVision
Operating Partners, L.P.'s Registration Statement on Form S-1,
File No. 333-9535.
(2) Incorporated by reference to the exhibits of FrontierVision
Operating Partners, L.P.'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 the Registration
Statement on Form S-4, File No.333-36519.
(4) Incorporated by reference to the exibits to the Registration
Statement on Form S-4, File No. 333-75567.
(b) Reports on Form 8-K
A Form 8-K was filed on April 30, 1999 relating to Holding's commencement
of an exchange offer.
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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 HOLDINGS, L.P.
By: FrontierVision Partners, L.P., its general partner,
By: FVP GP, L.P., its general partner
By: FrontierVision Inc., its general partner
By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
Date: May 7, 1999 By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
Principal Accounting Officer)
FRONTIERVISION HOLDINGS CAPITAL CORPORATION
Date: May 7, 1999 By: /s/ ALBERT D. FOSBENNER
---------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
FRONTIERVISION HOLDINGS CAPITAL II CORPORATION
Date: May 7, 1999 By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
By: /s/ ALBERT D. FOSBENNER
-------------------------------------
Albert D. Fosbenner
Senior Vice President and Treasurer
(Principal Accounting Officer)
