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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 NUMBER 333-11893
INTERMEDIA CAPITAL PARTNERS IV, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-3247750
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
235 MONTGOMERY STREET, SUITE 420
SAN FRANCISCO, CA 94104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 616-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___ No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
This report, including exhibits, consists of 134 pages. The Index of
Exhibits is found on page 122.
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INTERMEDIA CAPITAL PARTNERS IV, L.P.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I
ITEM 1. Business.................................................................... 1
ITEM 2. Properties.................................................................. 22
ITEM 3. Legal Proceedings........................................................... 22
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 22
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 22
ITEM 6. Selected Financial Data..................................................... 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 27
PART III
ITEM 8. Financial Statements and Supplementary Data................................. 44
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 114
ITEM 10. Directors and Executive Officers of the Registrant.......................... 114
ITEM 11. Executive Compensation...................................................... 117
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 118
ITEM 13. Certain Relationships and Related Transactions.............................. 118
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 121
SIGNATURES............................................................................. 125
SUPPLEMENTAL INFORMATION...............................................................
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INFORMATION CONTAINED IN THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE SECURITIES LAWS. ALL STATEMENTS, OTHER THAN STATEMENTS
OF HISTORICAL FACT, REGARDING ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE
COMPANY EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE,
INCLUDING SUCH MATTERS AS, THE COMPANY'S CLUSTERING AND OPERATING STRATEGIES,
CAPITAL EXPENDITURES, THE DEVELOPMENT OF NEW SERVICES, THE EFFECTS OF
COMPETITION, AND OTHER SUCH MATTERS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON
CERTAIN ASSUMPTIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, AND
THE COMPANY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN
CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM SUCH EXPECTATIONS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM
1 "CERTAIN FACTORS AFFECTING FUTURE RESULTS."
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PART I
ITEM 1. BUSINESS
THE COMPANY
InterMedia Capital Partners IV, L.P., a California limited partnership
("ICP-IV") was formed on March 19, 1996 as a successor to InterMedia Partners
IV, L.P. ("IP-IV") which was formed in October 1994, to acquire and consolidate
various cable television systems located in high-growth areas of the
southeastern United States ("Southeast"). ICP-IV (together with its
subsidiaries, the "Company") has one of the largest concentrations of basic
subscribers in the Southeast and is the largest cable television service
provider in Tennessee. The Company's operations are composed of three clusters
that, in the aggregate, served approximately 573,700 basic subscribers and
passed approximately 852,000 homes as of December 31, 1996.
Acquisitions
During the year ended December 31, 1996 the Company acquired cable
television systems (the "Acquisitions") serving approximately 573,700 basic
subscribers as of December 31, 1996 in Tennessee, South Carolina and Georgia
through the following transactions:
(i) The Company acquired on February 1, 1996 the cable television
systems of Time Warner Entertainment Company, L.P. ("Time Warner") in
Kingsport, Tennessee ("Kingsport System") and of ParCable, Inc.
("ParCable") in Hendersonville, Waverly and Monterey, Tennessee, and in
Fort Campbell, Kentucky ("ParCable System") for a total purchase price of
$62.4 million and $30.3 million, respectively. Also on January 29, 1996,
May 2, 1996, July 1, 1996 and August 6, 1996 the Company acquired several
small cable television systems located near Nashville, Knoxville and
central Tennessee ("Miscellaneous Systems") for a total purchase price of
$10.0 million.
The acquisitions of the Miscellaneous Systems and the acquisitions of
the Kingsport System and the ParCable System (collectively, the
"Miscellaneous Acquisitions") have been accounted for as purchases and
results of operations are included in the Company's consolidated results
only from the dates these systems were acquired.
(ii) The Company acquired on July 30, 1996 the controlling equity
interest in InterMedia Partners West Tennessee, L.P. ("IPWT") and Robin
Media Group, Inc. ("RMG") from affiliates. Also on July 30, 1996,
Tele-Communications, Inc. ("TCI"), an affiliate, contributed certain cable
television systems located in the Greenville/Spartanburg metropolitan area
in South Carolina ("Greenville/Spartanburg System") to the Company.
In connection with the Company's acquisitions of RMG and IPWT, the
Company paid cash of $0.3 million for its equity interests in RMG and
repaid in cash $365.5 million of the acquired entities' indebtedness,
including $14.9 million of accrued interest. The Company also paid cash to
TCI of $119.8 million in connection with TCI's contribution of the
Greenville/Spartanburg System to the Company.
The Company extinguished $36.7 million of IPWT's indebtedness in
exchange for non-cash consideration consisting of limited partner interests
in ICP-IV of $11.7 million and a preferred limited partner interest in
ICP-IV of $25.0 million. In exchange for its contribution of the
Greenville/Spartanburg System to the Company, TCI received non-cash
consideration of $117.6 million in the form of a limited partner interest
in ICP-IV.
(iii) The Company purchased the Houston, Texas cable television assets
of Prime Cable of Fort Bend, L.P. and Prime Cable Income Partners, L.P.
("Prime Houston System") and exchanged with TCI on August 1, 1996 the Prime
Houston System for the Nashville, Tennessee cable television system
purchased by TCI from Viacom, Inc. ("Viacom") immediately prior to the
exchange ("Nashville System").
The Company paid cash of approximately $315.3 million for the
Nashville System, including related acquisition costs and fees, and $300.0
million paid in May 1996 for the Prime Houston System. The
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Company financed the purchase of the Prime Houston System with non-recourse
debt and owned the Prime Houston System temporarily in contemplation of
exchanging the Prime Houston System with TCI for the Nashville System. TCI
managed the Prime Houston System during the Company's ownership period and
there was no economic effect to the Company as a result of owning the
system. Accordingly, the accounts of the Prime Houston System and the
related debt and interest expense have been excluded from the Company's
consolidated financial statements for the year ended December 31, 1996. The
acquisition of the Nashville System has been accounted for as a purchase
and results of operations are included in the Company's consolidated
results only from the date the system was acquired.
Prior to the Acquisitions, the Company had no operations.
The Financing
In connection with the Acquisitions, the Company obtained a $475.0 million
revolving credit facility (the "Credit Facility") and a $220.0 million term loan
and issued $292.0 million of senior subordinated notes (the "Notes"). The
Company has also obtained capital contributions from its general and limited
partners of $360.0 million, including the non-cash contributions of the
Greenville/Spartanburg System and IPWT.
Relationship with TCI and InterMedia Capital Management IV, L.P.
TCI, through wholly owned subsidiaries, directly owns 49.0% of ICP-IV's
non-preferred equity. TCI is the largest cable television operator in the United
States, with wholly owned and affiliated systems serving more than 14.0 million
subscribers.
As a result of its relationship with TCI, the Company has the ability to
purchase its programming and certain equipment at rates approximating those
available to TCI. The Company has a contract with Satellite Services, Inc.
("SSI"), a subsidiary of TCI, to obtain basic and premium programming. SSI
contracts with various programmers to purchase programming for TCI and its
related companies. The Company has the option to purchase its programming
through its contract with SSI for which it pays SSI's cost, plus an
administrative fee. See "Certain Factors Affecting Future Results -- Loss of
Beneficial Relationship with TCI."
Pursuant to ICP-IV's agreement of limited partnership executed as of March
19, 1996 (the "Partnership Agreement"), InterMedia Capital Management IV, L.P.
("ICM-IV") manages all aspects of the day-to-day business and operations of the
Company. See Item 13 "Certain Relationships and Related Transactions --
Management by ICM-IV."
OVERVIEW OF CABLE TELEVISION SYSTEMS
The Company's operations are located in three clusters of the Southeast.
The "Nashville/Mid-Tennessee Cluster" serves seven contiguous counties
(Robertson, Sumner, Wilson, Rutherford, Williamson, Cheatham and Davidson) that
encompass Nashville and its suburbs ("Nashville Metropolitan Market"). The
Nashville/Mid-Tennessee Cluster also serves rural and suburban areas located in
other counties in middle Tennessee, and an area of western Tennessee between
Nashville and Memphis.
The "Greenville/Spartanburg Cluster" is located in the northwest corner of
South Carolina and the northeast corner of Georgia and serves five counties
(Greenville, Spartanburg, Cherokee, Union and Pickens) that encompass the
combined metropolitan area of Greenville/Spartanburg ("Greenville/Spartanburg
Metropolitan Market").
The "Knoxville/East Tennessee Cluster" serves the suburbs of Knoxville,
which include parts of Blount, Knox, Loudon and Sevier counties, and rural areas
west and south of Knoxville ("Knoxville Metropolitan Market"). In addition, the
cluster serves the city of, and certain areas surrounding, Kingsport.
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As of December 31, 1996, operating data for the Company's three clusters
was as follows:
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PREMIUM
BASIC HOMES BASIC SERVICE PREMIUM
SUBSCRIBERS PASSED PENETRATION UNITS PENETRATION
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Nashville/MidTennessee Cluster.......... 329,022 510,067 64.5% 270,637 82.3%
Greenville/Spartanburg Cluster.......... 146,431 206,673 70.9% 119,331 81.5%
Knoxville/East Tennessee Cluster........ 98,202 135,303 72.6% 50,281 51.2%
------- ------- -------
Total................................. 573,655 852,043 67.3% 440,249 76.7%
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Revenues and Services
The Company earns revenues primarily from monthly service rates and related
charges to its subscribers. The Company offers to its subscribers various types
of programming, which include basic service, tier service, premium service,
pay-per-view programs and various program packages which include several of
these services at combined rates.
Basic cable television service generally consists of signals of all four
national television networks, various independent and educational television
stations, PBS (the Public Broadcasting System) and certain satellite-delivered
programs. The expanded basic or cable programming services ("CPS") tier
generally includes satellite-delivered cable networks such as ESPN, CNN, TNT,
the Family Channel, Discovery and others. In certain of its Systems, the Company
also offers a second tier of non-premium services which qualifies as a
non-regulated new product tier ("NPT"). NPT programming generally consists of 5
to 8 additional satellite-delivered cable network channels such as The History
Channel, Turner Classic Movies and FxM.
Premium services consist of feature films, sporting events and other
special features that are presented without commercial interruption. Premium
services are offered to subscribers at a separate monthly charge for each pay
unit and at discounted prices for combinations or packages of pay services.
Certain of the Company's cable television systems also provide extra or
"multiplexed" channels of premium services such as HBO, Cinemax and Showtime
free of charge to its premium service subscribers. Pay-per-view services allow
subscribers to receive single programs, frequently consisting of feature movies,
special events, sporting events and adult programming on a per-day or per-event
basis.
For the year ended December 31, 1996, of the Company's total revenues,
basic and tier services generated 69.0%, premium service fees 14.6%,
pay-per-view revenues 2.3%, advertising revenues 4.1% and equipment rentals and
installation fees, home shopping commissions and other miscellaneous fees 10.0%.
OPERATING STRATEGY
The Company's strategy is to own, operate and develop cable television
systems in geographically clustered, high-growth markets in the Southeast. The
operating strategy was developed by the Company's senior management team, which
includes experienced operating, engineering, marketing and financial executives.
The operating strategy includes the following key elements:
Cluster Subscribers. Management believes the Company can derive
significant economies of scale and operating efficiencies by clustering its
operations. Operational advantages and cost savings associated with
clustering include centralizing management, billing, marketing, customer
service, technical and administrative functions, and reducing the number of
headends. The Company intends to (i) create regional customer service
centers in each of the operating regions, which should allow the Company to
staff, train and monitor its customer service operations more effectively,
and (ii) substantially reduce the number of its headends, engineering
support facilities and associated maintenance costs. Management believes
that clustering also provides the Company with significant revenue
opportunities including the ability to attract additional advertising and
to offer a broader platform for data services.
Focus on Regions with Attractive Demographics. Management believes
that the Company will continue to benefit from the household growth in, and
the outward expansion of, the metropolitan areas served by the Company.
Furthermore, management believes that households located in areas with
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attractive demographics are more likely to subscribe to cable television
services, premium service packages and new service offerings.
Upgrade Cable Television Systems. Management believes that the
Company's "Capital Improvement Program," which is designed to
comprehensively upgrade the Company's distribution network, will further
the Company's efforts to reduce costs, create additional revenue
opportunities, increase customer satisfaction and enhance system
reliability. Successfully upgrading the Company's cable television plant
will expand channel capacity, enhance network quality and dependability,
augment addressability and, in certain systems, provide the capability to
carry digitally compressed signals and allow the Company to offer two-way
transmission.
Target Additional Revenue Sources. Management believes that the
Company's geographic clustering, the demographic profile of its subscribers
and its Capital Improvement Program afford the Company the opportunity to
pursue revenue sources incremental to its core business. Management also
believes that the Company can create additional revenue growth
opportunities through further development of existing cable network,
premium, pay-per-view, advertising and home shopping services. With the
upgrade of its cable television plant, the Company is actively launching
additional cable and premium channels and NPTs, and is expanding
pay-per-view choices through addressable converters. Possible future
services include high-speed data transmission (including Internet access),
near video-on-demand ("NVOD"), and interactive services such as video
games. On January 17, 1997, the Company entered into an agreement with
@Home Network ("@Home") to provide high-speed Internet access over the
Company's broadband network in certain of the Company's cable television
systems. With the use of a cable modem, @Home customers can access the
Internet at speeds substantially in excess of conventional modems. The
@Home service will provide audio and full motion video, as well as virtual
reality web sites. The service is scheduled to be beta tested in the
Nashville System in 1997.
Emphasize Customer Service. Management believes that the Company
provides quality customer service and attractive programming packages at
reasonable rates. As part of its customer service efforts, the Company
provides training and incentive programs for all of its employees and also
provides same-day, evening and weekend installation and repair visit
options in several of its service areas.
Increase Penetration Levels and Revenue per Subscriber. The Company
continues to seek to increase its penetration levels for basic service,
expanded basic service and premium service and to increase revenue per
household through marketing strategies such as (i) targeted promotions
using database marketing techniques, (ii) retention marketing campaigns,
(iii) augmenting the channel lineup for expanded basic services in certain
systems based on customer surveys, (iv) offering multiplexed premium
services in certain rebuilt systems and (v) increasing pay-per-view
offerings in certain rebuilt systems.
In addition, the cable systems are active members of the communities
they serve. As an active participant in Cable in the Classroom, a nonprofit
organization sponsored by cable multiple system operators, the Company
provides area schools with cable television services free of charge and
educators receive a satellite feed of commercial-free programming that can
be taped and used at their convenience. The cable systems are also involved
in various community events.
UPGRADE STRATEGY AND CAPITAL EXPENDITURES
The Company is upgrading its cable television operations (the "Systems")
pursuant to its Capital Improvement Program, which is based in large part on
TCI's specifications. The Capital Improvement Program is designed to (i) deploy
fiber optic cable, (ii) consolidate and upgrade headends, (iii) increase the use
of addressable technology, (iv) install two-way transmission capability in
selected markets and (v) introduce digital compression capability. Through 2001,
the Company currently expects to spend approximately $200.0 million in
additional capital on the Capital Improvement Program that it expects to finance
with internally generated cash flow and working capital available from
borrowings under the Bank
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Facility. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
To make the most efficient use of its capital, management continually
reassesses the need for modifications in system architecture and detailed
technical specifications by considering (i) additional revenue potential, (ii)
competition, (iii) cost effectiveness, (iv) the most recent information
available regarding the Company's progress on the Capital Improvement Program,
(v) technological changes in the cable industry and (vi) requirements under
franchise agreements. The timing of the installation of various elements of the
network depends upon local market demand, economics, competition and other
factors. Maintaining flexibility in the timing of upgrades will enable the
Company to delay certain expenditures until revenue sources justify the capital
outlay. The Capital Improvement Program is intended to:
Deploy fiber optic cable. Fiber optic cable makes it possible to divide a
system into a number of discrete service areas, or "nodes" of homes. The number
of homes per node will vary, depending on the population density of the area
covered by that section of the system. This design is expected to make it
immediately possible to (i) narrow-cast advertising and programming to specific
groupings of subscribers, (ii) significantly reduce ongoing maintenance and
repair expenses, as it reduces the number of active electronic devices in
cascade, (iii) isolate the number of subscribers affected by most types of
system malfunction or failure thus enhancing reliability and (iv) deliver data
and interactive services. The Company's extensive deployment of fiber optic
cable is also expected to reduce the number of headends operated by the Company,
resulting in a decrease in the Company's headend-related capital and maintenance
expenditures.
Consolidate and upgrade headends with backup power and remote network
monitoring. Where feasible, neighboring systems are expected to be
interconnected via fiber optic cable into a single, upgraded headend.
Refinements planned for all headends are designed to deliver high system
reliability and improved operating efficiency. Network monitoring is expected to
make it possible to identify and correct many types of system malfunctions
before they become evident to the subscriber.
Increase use of addressable technology. Addressable technology is widely
available in the Greenville/Spartanburg System and the Nashville System. The
Company also intends to increase the number of addressable converters deployed
in its other systems. Addressable technology provides subscribers with the
ability to purchase the monthly, daily or per-event programs they desire and
eliminates the need to send an installer to the subscriber's home when a
subscriber changes his or her selection of services. Additional revenues are
expected to be realized both from the rental of addressable converters and the
sale of additional programming services. Addressable technology could also
provide substantial improvement in securing signals from theft of service.
Install two-way transmission capability. Cable television systems
traditionally have been designed to transmit in a single direction from the
headend. The Capital Improvement Program is expected to make two-way
transmission possible throughout several of the Systems. Initially, it is
expected that this capability will be used to provide "impulse" pay-per-view,
which would permit a subscriber to order an event via a remote-control device.
Currently, the Company's pay-per-view services must be ordered over the
telephone. Two-way capability is also expected to support the introduction of
data services and interactive services.
Provide the capability to carry digitally compressed signals. The Company
intends to deploy digital technology in certain of its systems. Digital
compression is expected to enable a system to carry up to twenty times as many
channels as it can today. For example, if an 8-to-1 digital compression system
were employed, a system with 10 available analog channels today could add up to
80 channels.
New and Enhanced Services
The Capital Improvement Program is expected to provide for, among other
benefits, the immediate addition of channel capacity. This would enable the
Company to offer greater programming variety to subscribers and provide the
opportunity to increase revenue from existing as well as new services.
Opportunities for revenue growth include: (i) offering additional services,
which are technically possible but which the Company has been unable to provide
because of channel constraints, including (a) a la carte programming
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offerings and the multiplexing of premium services, (b) additional pay-per-view
selections and (c) additional channels dedicated to advertising, home shopping
and infomercials; and (ii) offering other new services to the extent they become
financially and technologically feasible, such as data and interactive services.
The Company does not currently plan to engineer its distribution network to be
capable of providing telephone services.
COMPETITION
Cable television systems face competition from other sources of news and
entertainment such as newspapers, movie theaters, live sporting events, internet
services, interactive computer programs and home video products, including
videotape cassette recorders and alternative methods of receiving and
distributing video programming. Competing sources of video programming include,
but are not limited to, off-air broadcast television, direct broadcast satellite
("DBS") service, multipoint multichannel distribution service ("MMDS") systems,
satellite master antenna television ("SMATV") systems and, potentially,
telephone and utility companies. In addition, the federal government in recent
years has sought and continues to seek ways in which to increase competition in
the cable industry. See "Legislation and Regulation." The extent to which cable
service is competitive depends upon the ability of the cable system to provide
at least the same quantity and quality of programming at competitive prices and
service levels as competitors.
DBS. DBS involves the transmission of an encoded signal directly from a
satellite to the home user. DBS provides video service using a dish located at
each subscriber's premises. In 1994, two companies offering high-power DBS video
service utilizing an 18-inch satellite receiver dish, DIRECTV, Inc. ("DIRECTV")
and United States Satellite Broadcasting, began operations over DIRECTV's DBS
satellites. PrimeStar Partners, L.P. ("PrimeStar") is a medium-power DBS service
provider, but has announced that it will be providing a high power DBS service
and will use 18-inch dishes later this year. This will allow PrimeStar to offer
the same number of channels as other DBS providers. DIRECTV currently requires
the consumer to purchase home dish equipment, while PrimeStar, which is owned
primarily by a consortium of cable television operators (including TCI), leases
its dishes to consumers. Both of these services provide the consumer with access
to most satellite-delivered cable television programming, including premium
channels, pay-per-view and national sporting events. Some of the services
offered by DBS are not available through the Systems, including special events
and packages of Major League Baseball, National Basketball Association, National
Football League and National Hockey League games. The DBS systems use video
compression technology to increase their channel capacity and are able to use
18-inch or 36-inch dish antennae to receive the satellite signals directly.
EchoStar Communications Corp. and The News Corporation Limited intend to launch
expanded channel offerings within the next two years which are to include local
broadcast stations delivered by satellite.
DBS service similar to the Company's basic expanded service starts at
approximately $30 per month nationally. Prices for DBS systems have fallen
dramatically over the last year. A DBS satellite dish can be purchased for
approximately $200.0 under promotional offers from certain DBS service
providers. The Company is experiencing increased competition from DBS, although
the product is still in its early stages of implementation. While it is
difficult to assess the magnitude of the impact that DBS will have on the
Company's operations and revenues, there can be no assurance that it will not
have a material adverse effect on the Company. Prior to the advent of the high-
to medium-power satellite services, several satellite companies were offering
and continue to offer low-power service (also known as direct to the home or
DTH) requiring a much larger dish and higher upfront costs without many of the
service offerings that currently exist on high- to medium-power systems (i.e.,
sports packages and pay-per-view).
MMDS/Wireless Cable. Wireless program distribution services such as MMDS,
commonly called wireless cable television systems, use low-power microwave
frequencies to transmit video programming to subscribers. These systems
typically offer 20 to 34 channels of programming, which may include local
programming. Because MMDS is a first generation technology in its early stages
of implementation, it is difficult to assess the magnitude of the impact MMDS
will have on the cable industry or upon the Company's operations and revenue.
Advancement in MMDS distribution technology, including the proposed use of
digital compression, could permit MMDS wireless operators to offer over 80
channels of programming. See "Certain Factors Affecting Future
Results -- Competition in the Cable Television Industry; Rapid Technological
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Change." Certain wireless cable companies may become more competitive as a
result of recently announced transactions with certain telephone companies.
SMATV. SMATV systems may also present potential competition for cable
television operators. SMATV operators typically enter into exclusive agreements
with apartment building owners or homeowners' associations to service
condominiums, apartment complexes, hospitals, hotels, commercial complexes and
other multiple dwelling units ("MDUs"). This often precludes franchised cable
operators from serving residents of such private complexes. Due to widespread
availability of reasonably priced earth stations, SMATV systems can offer many
of the same satellite-delivered program services that are offered by franchised
cable television systems.
In most of the Company's markets there are few MDUs. Also, under the 1996
Act, the Company can engage in competitive pricing in response to pricing
offered by SMATV systems. However, it is unclear, in particular because of a
constantly changing regulatory environment, what the future impact of SMATV
operators will be on the Company's operations and revenues. See "Certain Factors
Affecting Future Results -- Competition in the Cable Television Industry; Rapid
Technological Change."
Telephone Companies. The Company is subject to competition from local
telephone companies. The federal law that banned the cross-ownership of cable
television and telephone companies in the same service area has been repealed so
that potentially strong competitors, including telephone companies, which were
previously subject to various restrictions against entering the cable television
industry, may now provide cable television service in their service areas under
certain circumstances. The 1996 Act permits telephone companies to provide cable
television service through cable television systems and open video systems
("OVS"), and by leasing capacity as common carriers to other cable television
service providers. Telephone companies may also provide video programming over
wireless cable television systems. Assuming telephone companies begin to provide
programming and other services to their customers on a commercial basis, they
have competitive advantages which include an existing relationship with
substantially every household in their service areas, substantial financial
resources, an existing infrastructure and the potential ability to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home. Given the financial resources of the local telephone
companies and the changing legislative and regulatory environment, it is
expected that the local telephone companies will provide increased competition
for the cable television industry, including the Company, which could have a
material adverse effect on the Company. BellSouth Telecommunications, Inc.
("BellSouth") has applied for cable franchises in certain of the Company's
franchise areas and is acquiring a number of wireless cable companies in regions
where the Company operates. However, BellSouth has since publicly acknowledged
it is postponing its request for cable franchises in these areas. On October 22,
1996 the Tennessee Cable Telecommunications Association ("TCTA") and the Cable
Television Association of Georgia ("CTAG") filed a formal complaint with the
Federal Communications Commission ("FCC") challenging certain alleged acts and
practices that Bell South is taking in certain areas of Tennessee and Georgia,
including, among others, subsidizing its deployment of cable television
facilities with regulated services revenues that are not subject to competition.
The Company is joined by several other cable operators as the "Complainant Cable
Operators" in the complaint. The cross-subsidization claims are currently
pending before the FCC's Common Carrier Bureau. In addition, the TCTA filed a
petition with the Tennessee Regulatory Authority ("TRA") on November 27, 1996
seeking an investigation and audit by the TRA into BellSouth's activities
concerning the construction and deployment of video distribution facilities in
Tennessee. Specifically, the petition requests that the TRA review the TCTA's
allegations regarding cross-subsidization, anti-competitive conduct and unlawful
construction activities in light of Tennessee law and the TRA's rules and
policies on promoting competition. The Company is joined by several other cable
operators, who are also TCTA members, in bringing the petition.
The Company cannot predict the extent to which competition will materialize
or, if competition materializes, the extent of its effect on the Company.
Overbuilds. Since the Systems generally operate under non-exclusive
franchises, other operators may obtain franchises to build competing cable
television systems. The 1992 Cable Act prohibits franchising authorities from
unreasonably refusing to award additional franchises and permits the authorities
to operate cable television systems themselves without franchises. Currently the
Company is not aware of any material
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overbuild, or any pending applications for overbuilds, in any of its franchise
areas except as noted above. However, the Company is unable to predict whether
any of the Systems will be subject to an overbuild by franchising authorities or
other cable operators in the future, or what effect, if any, such an overbuild
may have on the Company.
Other Competition. Other new technologies, such as the proposed Local
Multipoint Distribution Service, may become competitive with services that cable
communications systems can offer. In addition, with respect to non-video
services, the FCC has authorized television broadcast stations to transmit, in
subscriber frequencies, text and graphic information useful both to consumers
and to businesses. Congress is currently debating whether to provide
broadcasters with additional spectrum to broadcast high definition television
("HDTV") signals for no additional cost, or to require an auction for such
additional spectrum. The FCC is currently undergoing a rulemaking to determine
the HDTV standard. With additional bandwidth to provide HDTV signals, a
broadcaster could be a potential competitor providing multiple channels of
digital video programming. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services,
including data transmissions. The FCC recently established an over-the-air
interactive video and data service that will permit two-way interaction with
commercial and educational programming, along with informational and data
services. Telephone companies and other common carriers also provide facilities
for the transmission and distribution of data and other non-video services.
Additionally, the 1996 Act permits registered public utility holding companies,
subject to regulatory approval, to diversify into telecommunications,
information services and related services through a single-purpose subsidiary.
Such utilities have substantial resources and could pose substantial competition
to the cable industry. Prior to the passage of the 1996 Act, utility holding
companies were required to obtain approval from the FCC before entering into any
telecommunication business ventures.
Technological advances and changes in the legislative and regulatory
environment have made it very difficult to predict the effect that ongoing and
future developments may have on the cable television industry in general or on
the Company in particular. While the Company's upgrade strategy is intended to
enhance its ability to respond effectively to competition, there can be no
assurance that the Company will be successful in meeting competition.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
typically contain many conditions, such as system upgrade or rebuild
requirements, time limitations on commencement and completion of construction;
general construction requirements; conditions of service, including number of
channels, broad categories of programming, minimum customer service and
technical performance standards; the provision of free public, educational and
governmental channel access and support requirements; institutional network
requirements; and maintenance of insurance and indemnity bonds. Certain
provisions of local franchises are subject to federal regulation under the Cable
Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the
Telecommunications Act of 1996 (the "1996 Act"). In connection with the renewal
of a franchise, the franchise authority may require the cable operator to comply
with different and more stringent conditions than those originally imposed,
subject to the 1984 Cable Act and other applicable federal, state and local
laws. Under the 1996 Act, however, a franchising authority may not require a
cable operator to provide telecommunications services or facilities, other than
an institutional network, as a condition to a grant, renewal, or transfer of a
cable franchise, and franchising authorities are preempted from regulating
telecommunications services provided by cable operators and from requiring cable
operators to obtain a franchise to provide such services.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof. Under the 1984 Cable Act, if a franchise
is lawfully terminated, and if the franchising authority acquires ownership of
the cable television system or effects a transfer of ownership to a third party,
such acquisition or transfer must be at an equitable price or, in the case of a
franchise existing on the effective date of the 1984 Cable Act, at a price
determined in accordance with the terms of the franchise, if any.
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As of December 31, 1996, the Systems held approximately 174 franchises.
These franchises, all of which are non-exclusive, provide for the payment of
fees to the issuing authority. Annual franchise fees imposed on the Systems
range from 3.0% to 5.0% of the gross revenues generated by the system. The 1984
Cable Act prohibits franchising authorities from imposing franchise fees in
excess of 5.0% of gross revenues and also permits the cable operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances. Under the 1992 Cable Act, cable operators are permitted to
itemize the franchise fee and any costs pertaining to franchise-imposed
requirements on a subscriber's bill and may pass through such costs to
subscribers.
As of December 31, 1996, eleven franchises relating to approximately 3.0%
of the Systems' basic subscribers have expired. The terms of these franchises
require the Company to negotiate the renewals of such franchises with the local
franchising authorities, and all eleven franchises are currently in informal
renewal negotiations. The Company and the local franchising authority are
operating under extensions of previous franchises while renewal negotiations
continue. During the next five years the renewal process must commence for
approximately 28% of the Company's franchises relating to approximately 18% of
the Systems' basic subscribers. In connection with a renewal of a franchise, the
franchising authority may require the Company to comply with different
conditions with respect to franchise fees, channel capacity and other matters,
which conditions could increase the Company's cost of doing business. The 1984
Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet the standards established
by the 1984 Cable Act. Management believes that it has generally met the terms
of its franchises and it anticipates that its future franchise renewal prospects
generally will be favorable. Historically, the Company has never had a franchise
revoked or failed to have a franchise renewed.
In February of this year Leo J. Hindery, Jr. was appointed president of TCI
and, pursuant to his appointment, Mr. Hindery will be selling all or part of his
interest in the managing general partner of the Company. See Item 13 "Certain
Relationships and Related Transactions." In connection with the withdrawal of
Mr. Hindery as the managing general partner of the general partner of the
Company, the Company will need to obtain a number of franchise consents. There
can be no assurance that the Company will receive these consents or that the
franchising authorities will not attempt to increase the Company's franchise
obligations as a part of receiving the consents.
LEGISLATION AND REGULATION
The cable television industry is regulated at the federal level through a
combination of legislation and FCC regulations, by some state governments and by
substantially all local government franchising authorities. Various legislative
and regulatory proposals under consideration from time to time by the Congress
and various federal agencies have in the past, and may in the future, materially
affect the Company and the cable television industry. Additionally, many aspects
of regulation at the federal, state and local level are currently subject to
judicial review or are the subject of administrative or legislative proposals to
modify, repeal or adopt new laws and administrative regulations and policies.
Federal legislation includes the Cable Communications Policy Act of 1984 (the
"1984 Cable Act"), Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), the Telecommunications Act of 1996 (the "1996
Act"), Copyright Act of 1976 (the "Copyright Act") and regulations implementing
these statutes. The following summarizes significant regulations and legislation
affecting the growth and operation of the cable television industry.
Rate Regulation. On September 1, 1993, rate regulation was instituted
under the 1992 Cable Act for certain cable television services and equipment in
communities that are not subject to effective competition as defined in the
legislation. "Effective competition" is defined by the 1992 Cable Act to exist
only where (i) fewer than 30% of the households in the franchise area subscribe
to a cable service; or (ii) at least 50% of the homes in the franchise area are
passed by at least two unaffiliated multichannel video programming distributors
where the penetration of at least one distributor other than the largest exceeds
15%; or (iii) a multichannel video programming distributor operated by the
franchising authority for that area passes at least 50% of the homes in the
franchise area. A local franchising authority seeking to regulate basic service
rates
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must certify to the FCC, among other matters, that it has adopted regulations
consistent with the FCC's rate regulation guidelines and criteria. The 1992
Cable Act also requires the FCC to resolve complaints about rates for CPS (i.e.,
rates other than for programming offered on the basic service tier or on a per
channel or per program basis) and to reduce any such rates found to be
unreasonable. The 1992 Cable Act eliminates the automatic 5.0% annual basic
service rate increase permitted by the 1984 Cable Act without local approval.
In April 1993, the FCC adopted regulations governing the determination of
rates for basic tier and cable programming tier services and equipment. The
regulations became effective on September 1, 1993. Cable operators may elect to
justify regulated rates for both tiers of service under either a benchmark or
cost-of-service methodology. Except for those operators that filed
cost-of-service showings, cable operators with rates that were above September
30, 1992 benchmark levels generally reduced those rates to the benchmark level
or by 10.0%, whichever was less, adjusted forward for inflation. Cable operators
that have not adjusted rates to permitted levels could be subject to refund
liability including applicable interest.
In February 1994, the FCC revised its benchmark regulations. Effective May
1994, cable television systems not seeking to justify rates with a
cost-of-service showing were to reduce rates up to 17.0% of the rates in effect
on September 30, 1992, adjusted for inflation, channel adjustments and changes
in equipment and programming costs. Under certain conditions systems were
permitted to defer these rate adjustments until July 14, 1994. Further rate
reductions for cable systems whose rates were below the revised benchmark
levels, as well as reductions that would require operators to reduce rates below
benchmark levels in order to achieve a 17.0% rate reduction, were held in
abeyance pending completion of cable system cost studies. Based on its cost
studies, the FCC could decide to defer permanently any further rate reductions,
or require the additional 7.0% rate roll back for some or all of these systems.
The FCC also adopted a cost of service rate form to permit operators to recover
the costs of upgrading their plant.
The Company elected the benchmark or cost-of-service methodologies to
justify its basic and CPS tier rates in effect prior to May 15, 1994, but relied
primarily upon the cost-of-service methodology to justify regulated service
rates in effect after May 14, 1994. The FCC released in 1996 a series of orders
in which it found the Company's rates in the majority of cases to be reasonable,
but several cost of service cases are still pending before the FCC. Although the
Company generally believes that its rates are justified under the FCC's
benchmark or cost-of-service methodologies, it cannot predict the ultimate
resolution of these remaining cases.
In November 1994, the FCC also revised its regulations governing rate
adjustments due to channel changes and additions. Commencing on January 1, 1995,
and continuing through December 31, 1996, cable operators may charge basic
subscribers up to $.20 per channel for channels added after May 14, 1994.
Adjustments to monthly rates are capped at $1.20 plus an additional $.30 to
cover programming license fees for those channels. In 1997, cable operators may
increase rates by $.20 for one additional channel. Rates may also increase in
the third year to cover any additional costs for the programming for any of the
channels added during the entire three-year period.
Additionally, the FCC will permit cable operators to exercise their
discretion in setting rates for New Product Tiers ("NPTs") containing new
programming services, so long as, among other conditions, the channels that are
subject to rate regulation are priced in conformance with applicable regulations
and cable operators do not remove programming services from existing
rate-regulated service tiers and offer them on the NPT.
In September 1995, the FCC authorized a new, alternative method of
implementing rate adjustments which will allow cable operators to increase rates
for programming annually on the basis of projected increases in external costs
(inflation, costs for programming, franchise-related obligations, and changes in
the number of regulated channels) rather than on the basis of cost increases
incurred in the preceding quarter. Cable operators that elect not to recover all
of their accrued external costs and inflation pass-throughs each year may
recover them (with interest) in the subsequent year.
In December 1995, the FCC adopted final cost-of-service rate regulations
requiring, among other things, cable operators to exclude 34.0% of system
acquisition costs related to intangible and tangible assets used to
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provide regulated services. The FCC also reaffirmed the industry-wide 11.25%
after tax rate of return on an operator's allowable rate base, but initiated a
further rulemaking in which it proposes to use an operator's actual debt cost
and capital structure to determine an operator's cost of capital or rate of
return. In the FCC orders released in 1996 which found certain of the Company's
rates to be reasonable, the FCC based its determinations on the final
cost-of-service rules. The Company generally excluded 34.0% or more of system
acquisition costs from its cost of service filings and, therefore, found the
final rules, with few exceptions, to follow the Company's filing methodology.
After a rate has been set pursuant to a cost-of-service showing, rate increases
for regulated services are indexed for inflation, and operators are permitted to
increase rates in response to increases in costs including increases in
programming, retransmission, franchise, copyright and FCC user fees and
increases in cable specific taxes and franchise related costs.
The 1996 Act amends the rate regulation provisions of the 1992 Cable Act.
The FCC has issued interim regulations implementing these amendments and has
requested comments on its proposed final regulations. Under the 1996 Act, CPS
tier rates are deregulated on March 31, 1999. The 1996 Act allows cable
operators to aggregate equipment costs into broad categories, such as converter
boxes, regardless of the varying levels of functionality of the equipment within
each such broad category, on a franchise, system, regional, or company level.
The statutory changes also facilitate the rationalizing of equipment rates
across jurisdictional boundaries. These cost-aggregation rules do not apply to
the limited equipment used by basic service-only subscribers. Regulation of
basic cable service continues in effect until a cable television system becomes
subject to effective competition. In addition to the existing definition of
effective competition, a new effective competition test permits deregulation of
both basic and CPS tier rates where a telephone company offers cable service by
any means (other than direct-to-home satellite services) provided that such
service is comparable to the services provided in the franchise area by the
unaffiliated cable operator. Subscribers are no longer permitted to file
programming service complaints with the FCC, and complaints may only be brought
by a franchising authority if, within 90 days after a rate increase becomes
effective, it receives more than one subscriber complaint. The FCC is required
to act on such complaints within 90 days. The uniform rate provision of the 1992
Cable Act is amended to exempt bulk discounts to multiple dwelling units so long
as a cable operator that is not subject to effective competition does not charge
predatory prices to a multiple dwelling unit.
Although regulation under the 1992 Cable Act has been detrimental to the
Company, it is still not possible to predict the 1992 Cable Act's full impact on
the Company. Its impact will be dependent, among other factors, on the
continuing interpretation to be afforded by the FCC and the courts to the
statute and the implementing regulations, as well as the actions of the Company
in response thereto. The Company expects to continue to sustain higher operating
costs in order to administer the additional regulatory burdens imposed by the
1992 Cable Act.
Cable Television Entry Into Telephony. The 1996 Act is intended, in part,
to promote substantial competition in the marketplace for telephone local
exchange service and in the delivery of video and other services and permits
cable television operators to enter the local telephone exchange market. The
Company's ability to competitively offer telephone services may be adversely
affected by the degree and form of regulatory flexibility afforded to local
telephone companies (also known as local exchange carriers or "LECs"), and in
part, will depend upon the outcome of various FCC rulemakings, including the
current proceeding dealing with the interconnection obligations of
telecommunications carriers. On August 8, 1996 the FCC adopted a national
framework for interconnection but left to the individual states the task of
implementing the FCC's rules. Although the FCC's interconnection order is
intended to benefit new entrants in the local exchange market, it is uncertain
how effective its order will be until the FCC completes all of its rulemaking
proceedings under the 1996 Act and state regulators begin to implement the FCC's
regulations. On October 15, 1996, the U.S. Court of Appeals for the Eighth
Circuit stayed key portions of the FCC's interconnection order concerning mainly
intrastate issues, pending the outcome of the appeal. The Court did not stay the
basic interconnection obligations for incumbent LECs, nor the statutory
deadlines for state commission arbitration decisions.
The telephony provisions of the 1996 Act promote local exchange competition
as a national policy by eliminating legal barriers to competition in the local
telephone business and setting standards to govern the
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relationships among telecommunications providers, establishing uniform
requirements and standards for entry, competitive carrier interconnection and
unbundling of LEC monopoly services. The statute expressly preempts any legal
barriers to competition under state and local laws. The 1996 Act also
establishes new requirements to maintain and enhance universal telephone service
and new obligations for telecommunications providers to maintain the privacy of
customer information.
Competitive Entry Into Video. Federal cross-ownership restrictions have
previously limited entry into the cable television business by potentially
strong competitors such as telephone companies. The 1996 Act repeals the
cross-ownership ban and provides that telephone companies may operate cable
television systems within their own service areas.
The 1996 Act will enable telephone companies to provide video programming
services as cable operators or as common carriers through open video systems
("OVS"), a regulatory vehicle that may give them more flexibility than
traditional cable systems. If OVS systems become widespread in the future, cable
television systems could be placed at a competitive disadvantage because, unlike
OVS operators, cable television systems are required to obtain local franchises
to provide cable television service and must comply with a variety of
obligations under such franchises. The FCC has determined that a cable operator
may operate an OVS only if it is subject to effective competition within its
franchise area and this determination has been appealed; but, an operator that
elects to operate an OVS continues to be subject to the terms of any current
franchise or other contractual agreements. Under the 1996 Act, common carriers
leasing capacity for the provision of video programming services over cable
systems or as OVS operators are not bound by the interconnection obligations of
Title II of the Communications Act of 1934, as amended, which otherwise would
require the carrier to make capacity available on a nondiscriminatory basis to
any other person for the provision of cable service directly to subscribers.
Additionally, under the 1996 Act, common carriers providing video programming
are not required to obtain a Section 214 certification to establish or operate a
video programming delivery system. This will limit the ability of cable
operators to challenge telephone company entry into the video market. With
certain exceptions, the 1996 Act also restricts buying out incumbent cable
operators in the LEC's service area.
Common carriers that qualify as OVS operators are exempt from many of the
regulatory obligations that currently apply to cable operators. However, certain
restrictions and requirements that apply to cable operators will still be
applicable to OVS operations. Common carriers that elect to provide video
services over an OVS may do so upon obtaining certification by the FCC. The 1996
Act requires the FCC to adopt rules governing the manner in which OVS operators
provide video programming services. Among other requirements, the 1996 Act
prohibits OVS operators from discriminating in the provision of video
programming services and requires OVS operators to limit carriage of video
services selected by the OVS operator to one-third of the OVS's capacity. OVS
operators must also comply with the FCC's sports exclusivity, network
nonduplication and syndicated exclusivity restrictions, public, educational, and
government channel use requirements, the "must-carry" requirements of the 1992
Cable Act, and regulations that prohibit anticompetitive behavior or
discrimination in the prices, terms and conditions of providing vertically
integrated satellite-delivered programming. The U.S. Copyright Office has
pending a rulemaking proceeding to determine whether an OVS operator may be
treated as a cable operator for purposes of copyright liability. Upon compliance
with such requirements, an OVS operator will be exempt from various statutory
restrictions which apply to cable operators, such as broadcast-cable ownership
restrictions, commercial leased access requirements, franchising, rate
regulation, and consumer electronics compatibility requirements. Although OVS
operators are not subject to franchise fees, as defined by the 1996 Act, they
may be subject to fees charged by local franchising authorities or other
governmental entities in lieu of franchise fees. Such fees may not exceed the
rate at which franchise fees are imposed on cable operators and may be itemized
separately on subscriber bills.
The 1996 Act generally restricts common carriers from holding greater than
a 10.0% financial interest or any management interest in cable operators which
provide cable service within the carrier's telephone exchange service area or
from entering joint ventures or partnerships with cable operators in the same
market subject to four general exceptions which include population density and
competitive market tests. The FCC may waive the buyout restrictions if it
determines that, because of the nature of the market served by the cable
television system or the telephone exchange facilities, the cable operator or
LEC would be subject to undue
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economic distress by enforcement of the restrictions, the system or LEC
facilities would not be economically viable if the provisions were enforced, the
anticompetitive effects of the proposed transaction clearly would be outweighed
by the public interest in serving the community, and the local franchising
authority approves the waiver.
The 1992 Cable Act seeks to encourage competition with existing cable
television systems by: (i) allowing municipalities to own and operate their own
cable television systems without having to obtain a franchise; (ii) preventing
franchising authorities from granting exclusive franchises or unreasonably
refusing to award additional franchises covering an existing cable system's
service area; and (iii) prohibiting the common ownership of co-located MMDS or
SMATV systems. See "-- Ownership."
Ownership. The 1996 Act eliminates the statutory ban on the
cross-ownership of a cable system and a television station, and permits the FCC
to amend or revise its own regulations regarding the cross-ownership ban. The
FCC recently lifted its ban on the cross-ownership of cable television systems
by broadcast networks and revised its regulations to permit broadcast networks
to acquire cable television systems serving up to 10.0% of the homes passed in
the nation, and up to 50.0% of the homes passed in a local market. The local
limit would not apply in cases where the network-owned cable system competes
with another cable operator.
In order to encourage competition in the provision of video programming,
the FCC adopted a rule in 1993 prohibiting the common ownership, affiliation,
control or interest in cable television systems and MMDS facilities having
overlapping service areas, except in very limited circumstances. The 1992 Cable
Act also codified this restriction and extended it to co-located SMATV systems,
except that a cable system may acquire a co-located SMATV system if it provides
cable service to the SMATV system in accordance with the terms of its cable
television franchise. Permitted arrangements in effect as of October 5, 1992
were grandfathered. The 1992 Cable Act permits states or local franchising
authorities to adopt certain additional restrictions on the transfer of
ownership of cable television systems. The 1996 Act amended the MMDS/SMATV
co-ownership ban to permit co-ownership of MMDS or SMATV systems and cable
television systems in areas where the cable operator is subject to effective
competition.
The cross-ownership prohibitions would preclude investors from holding
ownership interests in the Company if they simultaneously served as officers or
directors of, or held an attributable ownership interest in, these other
businesses, and would also preclude the Company from acquiring a cable
television system when the Company's officers or directors served as officers or
directors of, or held an attributable ownership in, these other businesses which
were located within the same area as the cable system which was to be acquired.
Carriage of Broadcast Television Signals -- Must Carry/Retransmission
Consent. The 1992 Cable Act contained new signal carriage requirements. The
FCC's regulations implementing these provisions allow commercial television
broadcast stations which are "local" to a cable system, i.e., the system is
located in the station's Area of Dominant Influence ("ADI"), to elect every
three years whether to require the cable system to carry the station, subject to
certain exceptions, or whether the cable system will have to negotiate for
"retransmission consent" to carry the station. The first such election by local
broadcast stations was made on June 17, 1993 and the second election was made on
October 6, 1996. Local noncommercial television stations are also given
mandatory carriage rights, subject to certain exceptions, but are not given the
option to negotiate retransmission consent for the carriage of their signal. The
constitutionality of the must-carry rules is currently under review by the
United States Supreme Court, which is expected to issue a decision by June 30,
1997. In addition, cable systems are required to obtain retransmission consent
for the carriage of all "distant" commercial broadcast stations (except for
certain "superstations," i.e., commercial satellite-delivered independent
stations such as WTBS), commercial radio stations and certain low powered
television stations carried by such cable systems after October 5, 1993.
Generally, a cable operator is required to dedicate up to one-third of its
activated channel capacity for the carriage of commercial television broadcast
stations, as well as additional channels for non-commercial television broadcast
stations. The Company currently carries all broadcast stations pursuant to the
FCC's must-carry rules and has obtained permission from all broadcasters who
elected retransmission consent. The Company has not been required to pay cash
compensation to
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broadcasters for retransmission consent nor been required by broadcasters to
remove broadcast stations from cable television channel lineups. The Company
has, however, agreed to carry some services (e.g. ESPN 2, Home & Garden TV,
America's Talking and fX) in specified markets pursuant to retransmission
consent arrangements for which it will pay monthly fees to the service providers
(as it does with other satellite delivered services).
Leased Access. In addition to the obligation to set aside certain channels
for public, educational and governmental access programming, the 1984 Cable Act
also requires a cable television system with 36 or more channels to designate a
portion of its channel capacity for commercial leased access by third parties to
provide programming that may compete with services offered by the cable
operator. As required by the 1992 Cable Act, the FCC has adopted rules
regulating the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity and the terms and conditions
for commercial use of such channels. On February 4, 1997 the FCC released
amended rules for leased access which become effective 30 days after the rules
are published in the Federal Register. The rules, among other provisions, reduce
the maximum rate cable operators can charge for leased access programming
carried on a tier. It limits the circumstances under which cable operators are
required to open additional leased access channels to accommodate part-time
leases, permits resale of leased access time, and establishes a new procedure
for complaint resolution.
Content Provisions. Under the V-chip provisions of the 1996 Act, cable
operators and other video providers are required to carry any program rating
information that programmers include in video signals. Cable operators also are
subject to new scrambling requirements for sexually explicit programming. On
March 24, 1997, the Supreme Court turned down the appeal of Playboy and Spice
who were seeking a preliminary injunction to prevent the 1996 Act rules
requiring cable operators to either scramble the audio and video feeds of
sexually explicit adult programming or other indecent programming, or only carry
such programming in "safe harbor" hours. The case will return to the District
Court in Delaware for a decision on the merits. In addition, cable operators
that provide Internet access or other online services are subject to new
indecency limitations. Legal proceedings have been instituted which challenge
these scrambling requirements and indecency limitations on constitutional
grounds.
Copyright Laws. Cable television systems are subject to federal copyright
licensing requirements under the Copyright Act, covering the carriage of
broadcast signals. In exchange for filing certain reports and making semi-annual
payments (based upon a percentage of revenues) to a federal copyright royalty
pool, cable operators obtain a statutory blanket license to retransmit
copyrighted material on broadcast signals. The Federal Copyright Royalty
Tribunal, which made several adjustments in copyright royalty rates, was
eliminated by Congress in 1993. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Under the provisions of the Copyright Act petitions were filed
in December 1995 by parties seeking to raise and lower the copyright royalty
rates.
The Copyright Office has pending proceedings aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television system
mergers and acquisitions. While it is not possible to predict the outcome of
this proceeding, any changes adopted by the Copyright Office in its current
policies may have the effect of reducing the copyright impact of certain
transactions involving cable company mergers and cable television system
acquisitions.
Various bills have been introduced in Congress over the past several years
that would eliminate or modify the cable television compulsory license. Without
the compulsory license, cable operators might need to negotiate rights from the
copyright owners for each program carried on each broadcast station in the
channel lineup. Such negotiated agreements could increase the cost to cable
operators of carrying broadcast signals. The 1992 Cable Act's retransmission
consent provisions expressly provide that retransmission consent agreements
between television broadcast stations and cable operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
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Copyright music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers ("ASCAP") and
BMI, Inc. ("BMI"), the two major performing rights organizations in the United
States. ASCAP and BMI offer "through to the viewer" licenses to the cable
networks which cover the retransmission of the cable networks' programming by
cable television systems to their customers. In 1996 the cable industry
concluded negotiations on licensing fees with BMI for the use of music performed
in programs locally originated by cable television systems for years 1990
through 1996. In July 1996 the Company and BMI signed the industry agreement.
The National Cable Television Association ("NCTA") is negotiating new contracts
for 1997 and future years. ASCAP has filed an infringement suit against several
cable operators as representatives of cable systems using its music in the pay
programming and cable programming networks provided to subscribers.
Deletion of Network and Syndicated Programming. Cable television systems
that have 1,000 or more customers must, upon the appropriate request of a local
television station, delete the simultaneous or non-simultaneous network
programming of a distant station when such programming has also been contracted
for by the local station on an exclusive basis. FCC regulations also enable
television broadcast stations that have obtained exclusive distribution rights
for syndicated programming in their market to require a cable system to delete
or "black out" such programming from other television stations which are carried
by the cable system. The FCC also has commenced a proceeding to determine
whether to relax or abolish the geographic limitations on program exclusivity
contained in its rules, which would allow parties to set the geographic scope of
exclusive distribution rights entirely by contract, and to determine whether
such exclusivity rights should be extended to non-commercial educational
stations. It is possible that the outcome of these proceedings will increase the
amount of programming that cable operators are requested to black out.
Equal Employment Opportunity. The 1984 Cable Act includes provisions to
ensure that minorities and women are provided equal employment opportunities
within the cable television industry. Pursuant to the statute, the FCC has
adopted reporting and certification rules that apply to all cable system
operators with more than five full-time employees. Failure to comply with the
Equal Employment Opportunity requirements can result in the imposition of fines
and/or other administrative sanctions, or may, in certain circumstances, be
cited by a franchising authority as a reason for denying a franchisee's renewal
request.
Technical and Customer Service Standards. The 1984 Cable Act empowers the
FCC to set certain technical standards governing the quality of cable signals
and to preempt local authorities from imposing more stringent technical
standards. The 1992 Cable Act requires the FCC to establish minimum technical
standards relating to system technical operation and signal quality and to
update such standards periodically. A franchising authority may require that an
operator's franchise contain provisions enforcing such federal standards.
Pursuant to the 1992 Cable Act, the FCC has adopted new customer service
standards with which cable operators must comply, upon their adoption by a local
franchising authority. Franchising authorities may, through the franchising
process or state and/or local ordinance, impose more stringent customer service
standards. The 1984 Cable Act also prescribes a standard of privacy protection
for cable subscribers.
Pole Attachments. The 1984 Cable Act requires the FCC to regulate the
rates, terms and conditions imposed by certain public utilities for cable
systems' use of utility pole and conduit space unless the Federal Pole
Attachment Act provides that state authorities can demonstrate that they
adequately regulate cable television pole attachment rates, terms and
conditions. In some cases utility companies have increased pole attachment fees
for cable systems that have installed fiber optic cables that are using such
cables for the distribution of non-video services. The FCC recently concluded
that, in the absence of state regulation, it has jurisdiction to determine
whether utility companies have justified their demand for additional rental
fees, and that the 1984 Cable Act does not permit disparate rates based on the
type of service provided over the equipment attached to the utility's pole.
Further, in the absence of state regulation, the FCC administers such pole
attachment rates through use of a formula which it has devised and from time to
time revises. The 1996 Act extends the regulation of rates, terms and conditions
of pole attachments to telecommunications service providers, and requires the
FCC to prescribe regulations to govern the charges for pole attachments used by
telecommunications carriers to provide telecommunications services when the
parties fail to resolve the dispute over such charges. The 1996 Act, among other
provisions, significantly increases future pole
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<PAGE> 18
attachment rates for cable systems which use pole attachments in connection with
the provision of telecommunications services as a result of a new rate formula
charged to telecommunications carriers for the non-useable space of each pole.
These rates are to be phased in after a five-year period. The FCC is currently
conducting a rulemaking to amend the existing formula for the calculation of
pole attachment and conduit occupancy rates charged to cable system operators.
Anti-trafficking Provisions. The 1996 Act also repeals the 1992 Cable
Act's anti-trafficking provision which generally required the holding of cable
television systems for three years.
Consumer Equipment. The 1996 Act requires the FCC, in consultation with
industry standard-setting organizations, to adopt regulations which would
encourage commercial availability to consumers of all services offered by
multichannel video programming distributors. The 1996 Act states that the
regulations adopted may not prohibit programming distributors from offering
consumer equipment, so long as the cable operator's rates for such equipment are
not subsidized by charges for the services offered. The 1996 Act further states
that the rules also may not compromise the security of the services offered, or
the efforts of service providers to prevent theft of service. The FCC may waive
these rules so as not to hinder the development of advanced services and
equipment. The 1996 Act requires the FCC to examine the market for closed
captioned programming and prescribe regulations which ensure that video
programming, with certain exceptions, is fully accessible through closed
captioning.
The 1992 Cable Act includes an "anti-buy-through prohibition" which
prohibits cable systems that have addressable technology and addressable
converters in place from requiring cable subscribers to purchase service tiers
above basic as a condition to purchasing premium movie channels. Cable systems
which are not addressable are allowed a 10-year phase-in period to comply.
Telephone and Cable Wiring. The FCC has initiated a rulemaking to
consider, among other issues, whether to adopt uniform regulations governing
telephone and cable inside wiring. The regulations ultimately adopted by the FCC
could affect the Company's ownership interests and access to inside wiring used
to provide telephony and video programming services. In a related rulemaking
proceeding, the FCC will consider the appropriate treatment of inside wiring in
multiple dwelling unit buildings. The outcome of that rulemaking could affect
cable operators' access to inside wiring in MDUs.
FCC Authority and Fines. The Communications Act specifically empowers the
FCC to enforce FCC rules and regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations.
State and Local Regulation. Various proposals have been introduced at the
state and local levels with regard to the regulation of cable television
systems, and a number of states have adopted legislation subjecting cable
television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a
public utility. State or local franchising authorities, as applicable, have the
right to enforce various regulations, impose fines or sanctions, issue orders or
seek revocation subject to the limitations imposed upon such franchising
authorities by federal, state and local laws and regulations.
GENERAL
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
requirements and, in many jurisdictions, state and local franchise requirements,
currently are the subject of a variety of judicial proceedings, legislative
hearings and administrative and legislative proposals which could change, in
varying degrees, the manner in which cable television systems operate. Neither
the outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
Legislative, administrative or judicial action may change all or portions
of the foregoing statements relating to competition and regulation.
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The Company has not expended material amounts during the last fiscal year
on research and development activities.
There is no one customer or affiliated group of customers to whom sales are
made in an amount which exceeds 10% of the Company's revenue.
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Company.
As of December 31, 1996, the Company has approximately 991 full-time
employees. The Company's operational headquarters is located at 424 Church
Street, Suite 1600, Nashville, Tennessee 37219, and its phone number there is
(615) 244-2300. The Company considers its relationship with its current
employees to be good.
The Company does not have foreign operations or export sales.
CERTAIN FACTORS AFFECTING FUTURE RESULTS
SUBSTANTIAL LEVERAGE; DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company has indebtedness that is substantial in relation to partners'
capital. On December 31, 1996, the Company's total debt balance was
approximately $846.0 million and partners' capital balance was approximately
$73.8 million. Under the Financing Plan, ICP-IV received $360.0 million of new
equity from its partners, comprised of cash and in-kind contributions. Pro forma
earnings, as adjusted for the Financing Plan and the Acquisitions, were
inadequate to cover pro forma fixed charges by approximately $119.2 million for
the year ended December 31, 1996. See Item 8 "Financial Statements and
Supplementary Data -- InterMedia Capital Partners IV, L.P. -- Notes to
Consolidated Financial Statements." In addition, subject to the restrictions in
the indenture for the Notes (the "Indenture"), ICP-IV and its subsidiaries
(other than IPCC) may incur additional indebtedness from time to time to finance
acquisitions and capital expenditures or for general corporate purposes. The
high level of the Company's indebtedness will have important consequences,
including: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for general
corporate purposes or for the Capital Improvement Program; (ii) the Company's
ability to obtain additional debt financing in the future for working capital,
capital expenditures, acquisitions or for the Capital Improvement Program may be
limited; and (iii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in the industry and economic conditions
generally. See "-- Future Capital Requirements."
There can be no assurance that the Company will generate earnings in future
periods sufficient to cover its fixed charges, including its debt service
obligations with respect to the Notes. In the absence of such earnings or other
financial resources, the Company could face substantial liquidity problems.
ICP-IV's ability to pay interest on the Notes and to satisfy its other debt
obligations will depend upon its future operating performance, including the
successful implementation of the Capital Improvement Program (which the Company
currently anticipates will require approximately $200.0 million in additional
capital through 2001), and will be affected by prevailing economic conditions
and financial, business and other factors, many of which are beyond the
Company's control. Based upon expected increases in revenue and cash flow, the
Company anticipates that its cash flow, together with available borrowings,
including borrowings under the Credit Facility, will be sufficient to meet its
operating expenses and capital expenditure requirements and to service its debt
requirements for the next several years. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." However, in order to
satisfy its repayment obligations with respect to the Notes, ICP-IV may be
required to refinance the Notes on their maturity. There can be no assurance
that financing will be available at that time in order to accomplish any
necessary refinancing on terms favorable to the Company or at all. If the
Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no
17
<PAGE> 20
assurance that any of these strategies could be effected on satisfactory terms,
if at all. Management believes that substantial growth in revenues and operating
cash flows is not achievable without implementing at least a significant portion
of the Capital Improvement Program. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
The Notes are the general obligations of ICP-IV and IPCC and rank pari
passu with all senior indebtedness of ICP-IV and IPCC, if any. The Company's
operations are conducted through the direct and indirect subsidiaries of
InterMedia Partners IV L.P. ("IP-IV"). ICP-IV and IPCC hold no significant
assets other than their investments in and advances to ICP-IV's subsidiaries and
ICP-IV and IPCC have no independent operations and, therefore, are dependent on
the cash flow of ICP-IV's subsidiaries and other entities to meet their own
obligations, including the payment of interest and principal obligations on the
Notes when due. Accordingly, ICP-IV's and IPCC's ability to make interest and
principal payments when due and their ability to purchase the Notes upon a
Change of Control or Asset Sale (as defined in the Indenture) is dependent upon
the receipt of sufficient funds from ICP-IV's subsidiaries and will be severely
restricted by the terms of existing and future indebtedness of ICP-IV's
subsidiaries. The Bank Facility was entered into by IP-IV and prohibits payment
of distributions by any of ICP-IV's subsidiaries to ICP-IV or IPCC prior to
February 1, 2000, and permits such distributions thereafter only to the extent
necessary for ICP-IV to make cash interest payments on the Notes at the time
such cash interest is due and payable, provided that no default or event of
default with respect to the Bank Facility exists or would exist as a result.
RESTRICTIONS IMPOSED BY LENDERS
The Bank Facility and, to a lesser extent, the Indenture contain a number
of significant covenants that, among other things, restrict the ability of the
Company to dispose of assets or merge, incur debt, pay distributions, repurchase
or redeem capital stock, create liens, make capital expenditures and make
certain investments or acquisitions and otherwise restrict corporate activities.
The Bank Facility also contains, among other covenants, requirements that IP-IV
maintain specified financial ratios, including maximum leverage and minimum
interest coverage and prohibits IP-IV and its subsidiaries from prepaying the
Company's other indebtedness (including the Notes). The ability of the Company
to comply with such provisions may be affected by events that are beyond the
Company's control. The breach of any of these covenants could result in a
default under the Bank Facility. In the event of any such default, lenders party
to the Bank Facility could elect to declare all amounts borrowed under the Bank
Facility, together with accrued interest and other fees, to be due and payable.
If the indebtedness under the Bank Facility were to be accelerated, all
indebtedness outstanding under such Bank Facility would be required to be paid
in full before IP-IV would be permitted to distribute any assets or cash to
ICP-IV. There can be no assurance that the assets of ICP-IV and its subsidiaries
would be sufficient to repay all borrowings under the Bank Facility and the
other creditors of such subsidiaries in full. In addition, as a result of these
covenants, the ability of the Company to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted, and the Company may be prevented from engaging in
transactions that might otherwise be considered beneficial to the Company.
FUTURE CAPITAL REQUIREMENTS
Consistent with the Company's business strategy, and in order to comply
with requirements imposed by certain of its franchising authorities and to
address existing and potential competition, the Company has implemented the
Capital Improvement Program. Pursuant to the Capital Improvement Program, the
Company is expanding and upgrading the Systems' plant to improve channel
capacity and system reliability and to allow for interactive services such as
enhanced pay-per-view, home shopping, data transmission (including Internet
access) and other interactive services to the extent they become technologically
viable and economically practicable. The Company expects to upgrade certain of
its existing systems with a digital-capable, high-capacity, broadband hybrid
fiber/coaxial network architecture to accomplish these objectives. The Company
currently plans to spend approximately $200.0 million in additional capital
through 2001 to fully implement the Capital Improvement Program. See Item 7
"Management's Discussion and Analysis of
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<PAGE> 21
Financial Condition and Results of Operations." Although the Company anticipates
that it will continue to upgrade portions of its systems over the next several
years, there can be no assurance that the Company will be able to upgrade its
cable television systems at a rate that will allow it to remain competitive with
competitors that either do not rely on cable into the home (e.g., MMDS and DBS)
or have access to significantly greater amounts of capital and an existing
communications network (e.g., certain telephone companies). In addition, the
Company currently estimates that it will make other capital expenditures through
2001 of approximately $120.0 million, principally for maintenance of its plant
and other fixed assets. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company's business requires
continuing investment to finance capital expenditures and related expenses for
expansion of the Company's subscriber base and system development. There can be
no assurance that the Company will be able to fund its Capital Improvement
Program or any of its other capital expenditures. The Company's inability to
upgrade its cable television systems or make its other planned capital
expenditures could have a material adverse effect on the Company's operations
and competitive position and could have a material adverse effect on the
Company's ability to service its debt, including the Notes. See "The
Company -- Upgrade Strategy and Capital Expenditures."
LIMITED OPERATING HISTORY; DEPENDENCE ON MANAGEMENT
ICP-IV was organized in March 1996. The partners of IP-IV transferred their
partnership interests to ICP-IV in 1996. Therefore, there is limited historical
financial information about the Company upon which to base an evaluation of its
performance. Pursuant to the Acquisitions, the Company substantially increased
the size of its operations. Therefore, the historical financial data of the
Company may not be indicative of the Company's future results of operations.
Further, there can be no assurance that the Company will be able to successfully
implement its business strategy. The future success of the Company will be
largely dependent upon the efforts of senior management of its general partner,
ICM-IV. Leo J. Hindery, Jr., the Company's founder who is the managing general
partner of the general partner of the Company, will be selling his controlling
interest in ICM-IV as well as other affiliates of the Company and the Related
InterMedia Entities pursuant to his appointment as President of TCI. See Item 13
"Certain Relationships and Related Transactions -- Management by ICM-IV."
Although ICM-IV as general partner of ICP-IV may acquire systems on behalf of
the Company, there is no obligation to do so.
COMPETITION IN CABLE TELEVISION INDUSTRY; RAPID TECHNOLOGICAL CHANGE
Cable television systems face competition from other sources of news,
information and entertainment, such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive computer programs
and home video products, including video tape cassette recorders. Competing
sources of video programming include, but are not limited to, off-air broadcast
television, DBS, MMDS, SMATV and other new technologies. Furthermore, the cable
television industry is subject to rapid and significant changes in technology.
The effect of any future technological changes on the viability or
competitiveness of the Company's business cannot be predicted. See
"Competition."
In addition, the Telecommunications Act of 1996 has repealed the
cable/telephone cross-ownership ban, and telephone companies will now be
permitted to provide cable television service within their service areas.
Certain of such potential service providers have greater financial resources
than the Company, and in the case of local exchange carriers seeking to provide
cable service within their service areas, have an installed plant and switching
capabilities, any of which could give them competitive advantages with respect
to cable television operators such as the Company.
BellSouth has applied for cable franchises in certain of the Company's
franchise areas and is acquiring a number of wireless cable companies in regions
where the Company operates. However, BellSouth has since acknowledged it is
postponing its request for cable franchises in these areas. On October 22, 1996
the Tennessee Cable Telecommunications Association and the Cable Television
Association of Georgia filed a formal complaint with the FCC challenging certain
acts and practices that BellSouth is taking in connection with its deployment of
video distribution facilities in certain areas of Tennessee and Georgia. In
addition, the TCTA also filed a petition for investigation with the Tennessee
Regulatory Authority concerning certain
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alleged acts and practices that BellSouth is taking in connection with its
construction and deployment of cable facilities in Tennessee. The Company is
joined by several other cable operators in the complaint. The Company cannot
predict the likelihood of success in this complaint or the petition nor can
there be any assurance that the Company will be successful with either the
complaint or the petition. Furthermore, the Company cannot predict either the
extent to which competition from Bell South or other potential service providers
will materialize or, if such competition materializes, the extent of its effect
on the Company. See "Competition."
REGULATION OF THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, state and local levels, and many aspects of such regulation are
currently the subject of judicial proceedings and administrative or legislative
proposals. In February 1996, Congress passed, and the President signed into law,
major telecommunications reform legislation, the Telecommunications Act of 1996.
Among other things, the 1996 Act reduces in some circumstances and by 1999 will
eliminate, rate regulation for CPS packages for all cable television systems and
immediately eliminates regulation of this service tier for small cable
operators. The FCC is undertaking numerous rulemaking proceedings to interpret
and implement the provisions of the 1996 Act. The 1996 Act and the FCC's
implementing regulations could have a significant effect on the cable television
industry. In addition, the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") imposed substantial regulation on the cable
television industry, including rate regulation, and significant portions of the
1992 Act remain in effect despite the enactment of the 1996 Act and remain
highly relevant to the Company's operations.
The Company elected the benchmark or cost-of-service methodologies to
justify its basic and CPS tier rates in effect prior to May 15, 1994, but relied
primarily upon the cost-of-service methodology to justify regulated service
rates in effect after May 14, 1994. The Company's cost-of-service cases
justifying certain rates for the CPS tier of service are currently pending
before the FCC. Additionally, pursuant to the FCC's regulations, several local
franchising authorities are reviewing the Company's basic rate justifications
and several other franchising authorities have requested that the FCC review the
Company's basic rate justifications. Although the Company generally believes
that its rates are justified under the FCC's benchmark or cost-of-service
methodologies, it cannot predict the ultimate resolution of these cases.
Management believes that the regulation of the cable television industry
will remain a matter of interest to Congress, the FCC and other regulatory
bodies. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on the
industry or the Company. See "Legislation and Regulation."
RELATED PARTY TRANSACTIONS
Conflicts of interests may arise due to certain contractual relationships
of the Company and the Company's relationship with InterMedia Partners, a
California limited partnership, InterMedia Partners II, L.P., InterMedia
Partners III, L.P., and their consolidated subsidiaries (the "Related InterMedia
Entities") and its other affiliates. InterMedia Management, Inc. ("IMI"), which
is wholly owned by Leo J. Hindery, Jr., provides administrative services at cost
to the Company and to the operating companies of the Related InterMedia
Entities. Mr. Hindery will be selling his interest in IMI pursuant to his
appointment as president of TCI. Conflicts of interest may arise in the
allocation of management and administrative services as a result of such
relationships. In addition, the Related InterMedia Entities and their respective
related management partnerships have certain relationships, and will likely
develop additional relationships in the future with TCI, which could give rise
to conflicts of interest. See Item 13 "Certain Relationships and Related
Transactions."
EXPIRATION OF FRANCHISES
Eleven franchises relating to approximately 3.0% of the basic subscribers
served by the Systems, have expired as of December 31, 1996. The terms of these
franchises require the Company to negotiate the
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renewals of such franchises with the local franchising authorities, and all
eleven franchises are currently in informal renewal negotiations. In connection
with a renewal of a franchise, the franchising authority may require the Company
to comply with different conditions with respect to franchise fees, channel
capacity and other matters, which conditions could increase the Company's cost
of doing business. Although management believes that it generally will be able
to negotiate renewals of its franchises, there can be no assurance that the
Company will be able to do so and the Company cannot predict the impact of any
new or different conditions that might be imposed by franchising authorities in
connection with such renewals. In connection with the withdrawal of Leo J.
Hindery, Jr. as the managing general partner of the general partner of the
Company, the Company will need to obtain a number of franchise consents. There
can be no assurance that the Company will receive these consents or that the
franchising authorities will not attempt to increase the Company's franchise
obligations as a part of receiving the consents. See "Franchises."
LOSS OF BENEFICIAL RELATIONSHIP WITH TCI
The Company's relationship with TCI currently enables the Company to (i)
purchase programming services and equipment from a subsidiary of TCI at rates
that management believes are generally lower than the Company could obtain
through arm's-length negotiations with third parties, (ii) share in TCI's
marketing test results, (iii) share in the results of TCI's research and
development activities and (iv) consult with TCI's operating personnel with
expertise in engineering, technical, marketing, advertising, accounting and
regulatory matters. While the Company expects the relationship to continue, TCI
is under no obligation to offer such benefits to the Company, and there can be
no assurance that such benefits will continue to be available in the future
should TCI's ownership in the Company significantly decrease or should TCI for
any other reason decide not to continue to offer such benefits to the Company.
The loss of the relationship with TCI could adversely affect the financial
position and results of operations of the Company. Further, the Bank Facility
provides that an event of default will exist if TCI does not own beneficially
35.0% or more of ICP-IV's non-preferred partnership interests. See "The
Company -- Relationship with TCI and InterMedia Capital Management IV, L.P.";
Item 13 "Certain Relationships and Related Transactions -- Certain Other
Relationships" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Transactions with Affiliates."
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the ICP-IV and IPCC are
required to make an offer to purchase all outstanding Notes at a purchase price
equal to 101.0% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. There can be no assurance that
ICP-IV and IPCC will have available funds sufficient to purchase the Notes upon
a Change of Control. In addition, any Change of Control, and any repurchase of
the Notes required under the Indenture upon a Change of Control, would
constitute an event of default under the Bank Facility, with the result that the
obligations of the borrowers thereunder could be declared due and payable by the
lenders. Any acceleration of the obligations under the Indenture or the Bank
Facility would make it unlikely that IP-IV could make adequate distributions to
ICP-IV in order to service the Notes and, accordingly, that IP-IV could make
adequate distributions to ICP-IV as required to permit ICP-IV and IPCC to effect
a purchase of the Notes upon a Change of Control.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF EXCHANGE NOTE PRICE
The Notes registered pursuant to the exchange offer completed in January
(the "Exchange Notes") are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for the inclusion of the Exchange Notes in any
automated quotation system. Although the Company was advised by NationsBanc
Capital Markets, Inc. ("NationsBanc") and Toronto Dominion Securities (USA) Inc.
("Toronto Dominion") that, following completion of the private offering in July
1996, NationsBanc and Toronto Dominion intend to make a market in the Notes,
they are not obligated to do so and any such market making activities may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Notes. If a
market for the Exchange Notes were to develop, the Exchange Notes could trade at
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prices that may be higher or lower than their initial offering price depending
upon many factors, including prevailing interest rates, the Company's operating
results and the markets for similar securities. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Exchange
Notes. There can be no assurance that, if a market for the Exchange Notes were
to develop, such a market would not be subject to similar disruptions.
ITEM 2. PROPERTIES
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headends and distribution systems and customer drop equipment for each
of its cable television systems. The Company's cable distribution plant and
related equipment generally are attached to utility poles under pole rental
agreements with local public utilities and telephone companies, and in certain
locations are buried in underground ducts or trenches.
The Company owns or leases real property for signal reception sites and
business offices in many of the communities served by the Systems and for its
principal operating offices in Nashville, Tennessee and San Francisco,
California. The Company owns all of its service vehicles.
Management believes that its properties are in good operating condition and
are suitable and adequate for the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which the Company's properties are subject. The Company knows of no
threatened or pending material legal action against it or its properties.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for ICP-IV's units of
partnership interests, and it is not expected that such a market will develop in
the future.
ITEM 6. SELECTED FINANCIAL DATA
The historical financial and operating data of the Company as of December
31, 1995 and as of and for the year ended December 31, 1996 include the results
of operations of the Kingsport System, the ParCable System, IPWT, Robin Media
Holdings, Inc. ("RMH"), the Greenville/Spartanburg System, the Nashville System
and the Miscellaneous Systems only from the dates the systems were acquired by
the Company in 1996. Prior to its acquisition of the Systems, the Company had no
operating results to report. Selected financial data has not been provided for
IPCC because its financial position and results of operations are insignificant.
As a result of the substantial continuing interest in the Company of the
former owners of IPWT, RMH and the Greenville/Spartanburg System (the
"Previously Affiliated Entities" or the "Predecessors"), which the Company
acquired on July 30, 1996, the historical financial information of the
Previously Affiliated Entities has been combined on a historical cost basis
through the date of the Company's acquisitions of these systems as if the
Previously Affiliated Entities had always been members of the same operating
group, except for the Greenville/Spartanburg System, which has been included
from January 27, 1995, the date such system was acquired by TCI from an
unrelated former cable operator.
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The selected financial data of the Previously Affiliated Entities presented
below include the historical financial information of IPWT and of RMH for each
of the three years in the period ended December 31, 1995, for the seven months
ended July 31, 1995 and for the period from January 1, 1996 through July 30,
1996, and of the Greenville/Spartanburg System for the period from January 27,
1995 through December 31, 1995, for the period from January 27, 1995 through
July 31, 1995 and for the period from January 1, 1996 through July 30, 1996.
The selected financial data of RMH's predecessor business for periods prior
to May 1, 1992 are not included in the combined financial information of the
Previously Affiliated Entities presented below. The predecessor business
consisted of the combined operations of certain cable operations in middle and
east Tennessee acquired by RMH on April 30, 1992. Selected consolidated
financial information for periods prior to the date the systems were acquired by
RMH is not available or not practicable to obtain, except for total revenues
which were $22,412 and $7,923 for the year ended December 31, 1991 and the
period from January 1, 1992 through April 30, 1992, respectively.
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THE COMPANY
(IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1995 1996
------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................................ $ -- $ 106,417
Operating expenses:
Program fees..................................................... -- (22,881)
Other operating costs............................................ -- (35,043)
Depreciation and amortization.................................... -- (64,707)
-------- --------
Loss from operations............................................... -- (16,214)
Interest and other income.......................................... -- 6,398
Gain on sale of investments........................................ -- 286
Interest expense................................................... -- (37,742)
Other income (expense)............................................. -- (1,216)
-------- --------
Loss before income taxes........................................... -- (48,488)
Income tax benefit................................................. -- 2,596
-------- --------
Net loss before extraordinary items................................ -- (45,892)
Extraordinary gain on early extinguishment of debt, net of tax..... -- 18,483
Minority interest.................................................. -- (320)
-------- --------
Net loss........................................................... $ -- $ (27,729)
======== ========
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets....................................................... $ 707 $ 996,699
Total debt......................................................... -- 846,000
Total partners' capital (deficit).................................. (625) 73,816
FINANCIAL RATIOS AND OTHER DATA
EBITDA(1).......................................................... $ -- $ 48,493
EBITDA margin(1)................................................... -- 45.6%
Cash flows from operating activities............................... -- 37,697
Cash flows from investing activities............................... -- (557,013)
Cash flows from financing activities............................... -- 528,086
Capital expenditures (excluding acquisitions)...................... -- 38,167
Ratio of earnings to fixed charges(2).............................. -- --
OPERATING STATISTICAL DATA (AT END OF PERIOD, EXCEPT AVERAGES):
Homes passed....................................................... -- 852,043
Basic subscribers.................................................. -- 573,655
Basic penetration.................................................. -- 67.3%
Premium services units............................................. -- 440,249
Premium penetration................................................ -- 76.7%
Average monthly revenue per basic subscriber(3).................... $ -- $ 30.71
</TABLE>
24
<PAGE> 27
PREVIOUSLY AFFILIATED ENTITIES (4)
(IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS PERIOD
------------------------------------------------------- ENDED JULY 31, 1/1/96-
1991 1992 1993 1994 1995 1995 7/30/96
-------- -------- --------- --------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 9,616 $ 32,581 $ 57,685 $ 73,049 $ 128,971 $ 72,578 $ 81,140
Operating expenses:
Program fees................ (1,644) (4,933) (9,376) (13,189) (24,684) (13,923) (17,080)
Other operating costs....... (4,536) (12,766) (20,215) (25,675) (47,360) (25,663) (30,720)
Management and consulting
fees...................... -- (177) (465) (585) (815) (530) (398)
Depreciation and
amortization.............. (15,884) (56,511) (66,940) (68,216) (70,154) (41,141) (36,507)
-------- -------- --------- --------- --------- -------- --------
Total operating
expenses........... (22,064) (74,387) (96,996) (107,665) (143,013) (81,257) (84,705)
-------- -------- --------- --------- --------- -------- --------
Loss from operations.......... (12,448) (41,806) (39,311) (34,616) (14,042) (8,679) (3,565)
Interest and other income..... 7 8,793 8,898 1,442 1,172 888 209
Gain (loss) on disposal of
fixed assets................ -- (2) (1,967) (1,401) (63) 39 (14)
Interest expense.............. (8,640) (32,357) (44,760) (44,278) (48,835) (28,157) (47,545)
Other expense................. -- (8) (508) (194) (644) (656) (123)
Equity in net loss of
investee.................... -- (4,900) -- -- -- -- --
-------- -------- --------- --------- --------- -------- --------
Loss before income tax
benefit..................... (21,081) (70,280) (77,648) (79,047) (62,412) (36,565) (51,038)
Income tax benefit............ 13,756 21,656 19,020 17,502 8,642 14,490
-------- -------- --------- --------- --------- -------- --------
Net loss...................... $(21,081) $(56,524) $ (55,992) $ (60,027) $ (44,910) $(27,923) $(36,548)
======== ======== ========= ========= ========= ======== ========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.................. $ 67,732 $430,716 $ 357,652 $ 275,058 $ 590,494 $578,870
Total debt.................... 92,877 408,655 431,896 403,500 411,219 423,659
Total equity (deficit)........ (27,881) (73,808) (129,800) (166,977) 37,249 10,150
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(1)..................... $3,436... $ 14,705 $ 27,629 $ 33,600 $ 56,112 $ 32,462 $ 32,942
EBITDA margin(1).............. 35.7% 45.1% 47.9% 46.0% 43.5% 44.7% 40.6%
Cash flows from operating
activities.................. 3,627 4,993 (12,186) (112) 8,107 8,441 (8,169)
Cash flows from investing
activities.................. (3,460) (4,937) (30,838) 4,871 (24,614) (7,856) (18,737)
Cash flows from financing
activities.................. (37) -- 12,692 (4,784) 18,066 28 24,249
Capital expenditures
(excluding acquisitions).... 3,350 9,842 11,334 12,432 26,301 9,745 18,588
Ratio of earnings to fixed
charges(2).................. -- -- -- -- -- -- --
OPERATING STATISTICAL DATA (AT
END OF PERIOD, EXCEPT
AVERAGES):
Homes passed.................. 65,653 228,462 308,429 332,645 503,246 497,130 512,926
Basic subscribers............. 42,374 150,733 211,745 227,050 354,436 345,039 360,057
Basic penetration............. 64.5% 66.0% 68.7% 68.3% 70.4% 69.4% 70.2%
Premium service units......... 18,128 78,868 128,732 151,528 265,216 258,928 264,541
Premium penetration........... 42.8% 52.3% 60.8% 66.7% 74.8% 75.0% 73.5%
Average monthly revenue per
basic subscriber(3)......... $ 18.83 $ 25.20 $ 27.86 $ 27.85 $ 31.08 $ 31.67 $ 32.35
</TABLE>
25
<PAGE> 28
NOTES TO SELECTED FINANCIAL DATA
(1) Earnings before interest, income taxes, depreciation and amortization, gain
(loss) on disposal of fixed assets, other income (expense) and equity in net
loss of investee (which is applicable only to RMH in 1992, see Note 7 to RMH
Consolidated Financial Statements). EBITDA margin is EBITDA divided by total
revenue. EBITDA and EBITDA margin are commonly used in the cable industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, EBITDA and EBITDA margin do
not purport to represent cash flows from operating activities in related
Statements of Cash Flows or cash flow as a percentage of revenue and should
not be considered in isolation or as a substitute for or superior to
measures of performance in accordance with generally accepted accounting
principles ("GAAP").
(2) In computing the ratio of earnings to fixed charges, earnings consist of
income (loss) before income tax expense (benefit) and fixed charges. Fixed
charges include interest on long-term borrowings, related amortization of
debt issue costs and the portion of rental expense under operating leases
deemed to be representative of the interest factor. The Company's earnings
for the year ended December 31, 1996 were inadequate to cover fixed charges
by $48,488. For the Previously Affiliated Entities, earnings for the years
ended December 31, 1991, 1992, 1993, 1994 and 1995, for the seven months
ended July 31, 1995 and for the period from January 1, 1996 through July 30,
1996 were inadequate to cover fixed charges by $21,081, $70,280, $77,648,
$79,047, $62,412, $36,565 and $51,038, respectively. RMH's ratio of earnings
to fixed charges for 1991 is not included in the amounts listed above for
the Previously Affiliated Entities as the information is not practicable to
obtain. The 1992 amount for RMH represents earnings inadequate to cover
fixed charges for the period from May 1, 1992 to December 31, 1992.
(3) Average monthly revenue per basic subscriber is calculated as the sum of
total revenue per average number of basic subscribers for each month divided
by the number of months during the period presented. The average number of
basic subscribers for each month is calculated as the sum of the number of
basic subscribers as of the beginning of the month and the number of basic
subscribers as of the end of the month divided by two.
(4) The comparability of the operating data set forth above for the Previously
Affiliated Entities for 1992, 1993 and 1994 is affected by RMH's acquisition
of cable systems. The number of basic subscribers served by RMH increased by
approximately 26,800 and 47,300 during 1992 and 1993, respectively, as a
result of the cable television systems acquired.
26
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to assist in an
understanding of significant changes and trends related to the results of
operations and financial condition of the Company. This discussion contains, in
addition to historical information, forward-looking statements that are based
upon certain assumptions and are subject to a number of risks and uncertainties.
The Company's actual results may differ significantly from the results predicted
in such forward-looking statements. This discussion and analysis should be read
in conjunction with the separate financial statements of the Company, the
Previously Affiliated Entities and the Greenville/Spartanburg System. The
audited financial statements for the Previously Affiliated Entities present the
results of operations for IPWT, RMH and the Greenville/Spartanburg System on a
combined basis as if the entities had always been members of the same operating
group, except for the Greenville/Spartanburg System, which has been included
from January 27, 1995, the date such system was acquired by TCI from TeleCable
Corporation ("TeleCable").
OVERVIEW
Each of the Systems has generated substantially all of its revenues from
monthly subscription fees for basic, expanded basic (also referred to as cable
programming services, "CPS"), premium and ancillary services (such as rental of
converters and remote control devices) and installation charges. Additional
revenues have been generated from local and national advertising sales,
pay-per-view programming and home shopping commissions.
The Systems have generated increases in revenues during each of the past
three years ended December 31, 1996, primarily as a result of internal
subscriber growth. The Company's ability to increase its basic and expanded
basic service rates has been limited by the 1992 Cable Act, which generally
became effective on September 1, 1993. However, after 1994, channels have been
added in certain of the Company's cable television systems and rate increases
have been implemented on the expanded basic tier. Programming fees, which
comprise a substantial portion of total operating expenses, have experienced
significant industry-wide increases, particularly during 1995 and the first
quarter of 1996. Operating, general and administrative expenses have also
increased as a result of subscriber growth and costs related to implementing
rate regulation. The net effect of these factors has had a negative impact on
EBITDA margins. EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization and other income (expense). EBITDA margin is
defined as EBITDA divided by total revenues. EBITDA and EBITDA margin are
commonly used in the cable industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA and EBITDA margin do not purport to represent cash flows from
operating activities in related Statements of Cash Flows or cash flow as a
percentage of revenue and should not be considered in isolation or as a
substitute for or superior to measures of performance in accordance with GAAP.
Each of the Company, IPWT and RMH has reported net losses primarily caused
by high levels of depreciation and amortization and interest expense.
Depreciation and amortization expense also had a significant impact on the
operating results of the Greenville/Spartanburg System. Management believes that
net losses are common for cable television companies and that the Company will
incur net losses in the future.
Historically, certain programmers have periodically increased the rates
charged for their services. Management believes that such rate increases are
common for the cable television industry and that the Company will experience
program fee rate increases in the future.
Acquisitions
During the year ended December 31, 1996 the Company acquired cable
television systems serving approximately 573,700 basic subscribers in Tennessee,
South Carolina and Georgia through (i) the Company's acquisition on July 30,
1996 of controlling equity interests in IPWT and RMG, (ii) the equity
contribution on July 30, 1996 of the Greenville/Spartanburg System to the
Company by TCI, (iii) the purchase of the Prime Houston System and the exchange
with TCI on August 1, 1996 of the Prime Houston
27
<PAGE> 30
System for the Nashville System purchased by TCI from Viacom immediately prior
to the exchange, and (iv) the purchases on January 29, 1996, February 1, 1996,
May 2, 1996, July 1, 1996, and August 6, 1996 of the Miscellaneous Acquisitions.
The Company paid cash of approximately $418.0 million, including related
acquisition costs and fees, for the Miscellaneous Acquisitions and the purchase
of the Nashville System. The purchase price of the Nashville System of $315.3
million includes $300.0 million paid in May 1996 for the Prime Houston System.
The Company financed the purchase of the Prime Houston System with non-recourse
debt and owned the Prime Houston System temporarily in contemplation of
exchanging the Prime Houston System with TCI for the Nashville System. TCI
managed the Prime Houston System during the Company's ownership period and there
was no economic effect to the Company as a result of owning the system.
Accordingly, the accounts of the Prime Houston System and the related debt and
interest expense have been excluded from the Company's consolidated financial
statements for the year ended December 31, 1996. The Miscellaneous Acquisitions
and the purchase of the Nashville System have been accounted for as purchases
and results of operations are included in the Company's consolidated results
only from the dates the systems were acquired.
In connection with the Company's acquisitions of RMG and IPWT, the Company
paid cash of $0.3 million for its equity interests in RMG and repaid in cash
$365.5 million of the acquired entities' indebtedness, including $14.9 million
of accrued interest. The Company also paid cash to TCI of $119.8 million in
connection with TCI's contribution of the Greenville/Spartanburg System to the
Company. The cash payment to TCI has been recorded as an equity distribution in
the Company's December 31, 1996 consolidated financial statements.
The Company acquired IPWT and extinguished $36.7 million of IPWT's
indebtedness in exchange for non-cash consideration consisting of limited
partner interests in ICP-IV of $11.7 million and a preferred limited partner
interest in ICP-IV of $25.0 million. TCI received non-cash consideration of
$117.6 million in the form of a limited partner interest in ICP-IV in exchange
for its contribution of the Greenville/Spartanburg System to the Company.
IPWT, RMG and the Greenville/Spartanburg System were acquired from entities
in which TCI had a significant ownership interest. Because of TCI's substantial
continuing interest in these entities as a 49.0% limited partner in ICP-IV,
these acquisitions were accounted for at their historical cost basis as of the
acquisition date. Results of these entities are included in the Company's
consolidated results of operations only from the date of acquisition.
Rate Regulation and Competition
The 1992 Cable Act significantly changed the regulatory environment in
which the Company operates. Rate regulations adopted by the FCC in response to
the 1992 Cable Act generally became effective on September 1, 1993 and were
subsequently amended on several occasions. The 1996 Act eliminates rate
regulation on the CPS tier after March 31, 1999. In addition, rates are
deregulated on both the basic and CPS tiers when a cable system becomes subject
to effective competition, which under the 1996 Act would include the provision,
other than by direct broadcast satellite, of comparable video programming by a
local exchange carrier in the franchise area.
RMH and IPWT have elected to justify their existing basic and CPS tier
rates under FCC cost of service rules, which are subject to further revision and
regulatory interpretation. The Nashville System, the Greenville/Spartanburg
System and the Kingsport System have determined their rates based on a benchmark
established by the FCC. Certain of RMH's and IPWT's cost of service cases
justifying rates for the CPS tier of service have been found to be reasonable by
the FCC and certain other cases are still pending before the FCC. Pursuant to
FCC regulations, several local franchises have requested that the FCC review the
Systems' basic rate justifications. Management believes that the Systems have
substantially complied in all respects with related FCC regulations and the
outcome of these proceedings will not have a material adverse effect on the
financial statements of the Company. See Item 1 "Certain Factors Affecting
Future Results -- Regulation of the Cable Television Industry" and "Legislation
and Regulation."
The Company is subject to competition from alternative providers of video
services, including wireless service providers and local telephone companies.
BellSouth has applied for cable franchises in certain areas
28
<PAGE> 31
where the Company operates. However, BellSouth has since acknowledged it is
postponing its request for cable franchises in these areas. On October 22, 1996
the TCTA and the CTAG filed a formal complaint with the FCC challenging certain
alleged acts and practices that BellSouth is taking in certain areas of
Tennessee and Georgia including, among others, subsidizing its deployment of
cable television facilities with regulated services revenues that are not
subject to competition. The Company is joined by several other cable operators
as the "Complainant Cable Operators" in the complaint. The cross-subsidization
claims are currently pending before the FCC's Common Carrier Bureau. The Company
cannot predict the likelihood of success on this complaint.
The Company cannot predict the extent to which competition will materialize
or, if competition materializes, the extent of its effect on the Company. See
Item 1 "The Company -- Competition"; "Legislation and Regulation"; and "Certain
Factors Affecting Future Results -- Competition in Cable Television Industry;
Rapid Technological Change."
Transactions with Affiliates
TCI's indirect ownership of IPWT and RMH and its direct ownership of the
Greenville/Spartanburg System from January 27, 1995 enabled each of these
systems to purchase programming services from Satellite Services Inc. ("SSI"), a
subsidiary of TCI. During the two years ended December 31, 1995 and the period
from January 1, 1996 through July 30, 1996, IPWT and RMH paid, in the aggregate,
82.4% of their program fees to SSI. During the period from January 27, 1995 to
December 31, 1995 and the period from January 1, 1996 through July 30, 1996, the
Greenville/Spartanburg System paid, in the aggregate, 82.6% of its program fees
to SSI.
Due to TCI's equity ownership in the Company, the Company is also able to
purchase programming services from SSI. Management believes that the aggregate
programming rates obtained through this relationship are lower than the rates
the Company could obtain through arm's-length negotiations with third parties.
TCI is under no obligation to offer such benefits to the Company. The loss of
the relationship with TCI could adversely affect the financial position and
results of operations of the Company. During the year ended December 31, 1996,
the Company paid 76.7% of its program fees to SSI.
The Company and its affiliated entities InterMedia Partners, a California
limited partnership, InterMedia Partners II, L.P., InterMedia Partners III,
L.P., InterMedia Partners V, L.P. and their consolidated subsidiaries (together
the "Related InterMedia Entities") have entered into agreements ("Administrative
Agreements") with InterMedia Management Inc. ("IMI"), pursuant to which IMI
provides accounting, operational, marketing, engineering, legal, regulatory
compliance and other administrative services at cost. IMI is wholly owned by Leo
J. Hindery, Jr., who is the managing general partner of and owns the controlling
interest in ICM-IV, which is the general partner of ICP-IV. Generally, IMI
charges costs to the Related InterMedia Entities based on each entity's number
of basic subscribers as a percentage of total basic subscribers for all of the
Related InterMedia Entities. In addition to changes in IMI's aggregate cost of
providing such services, changes in the number of the Company's basic
subscribers and/or changes in the number of basic subscribers for the other
Related InterMedia Entities will affect the level of IMI costs charged to the
Company. IMI charged $3.0 million to the Company for the year ended December 31,
1996, $0.6 million, $0.6 million and $0.4 million to IPWT in 1994, 1995, and the
first seven months of 1996, respectively, and $2.0 million, $2.4 million and
$1.5 million to RMH in 1994, 1995, and the first seven months of 1996,
respectively.
ICM-IV manages the business of the Company for an annual fee of one percent
of non-preferred Contributed Equity.
In February of this year Leo J. Hindery, Jr. was appointed president of
TCI. As part of Mr. Hindery's transition to TCI, all or a part of Mr. Hindery's
interests in ICM-IV and its general partner IMI, as well as various other
management partnerships for the Related InterMedia Entities, will be converted
or sold. Upon completion of the transition, Mr. Hindery will no longer hold a
controlling interest in IMI or ICM-IV. The transition is expected to be
completed by mid-1997.
29
<PAGE> 32
It is currently contemplated that Mr. Hindery's interests in ICM-IV, the
general partner of the Company, will be converted as follows. Mr. Hindery will
sell his stock in IMI, the general partner of ICM-IV, to Robert J. Lewis.
ICM-IV's general partnership interest in the Company will be converted into a
limited partnership interest. A newly-formed limited liability corporation
("ICM-LLC"), for which IMI will be the managing member, will be admitted as the
Managing General Partner of the Company. The transactions described above are
subject to final negotiation and documentation, therefore the final structure of
these transactions may differ upon completion.
RESULTS OF OPERATIONS -- THE COMPANY
As described above, the Company acquired all of its cable television
systems during the year ended December 31, 1996. A significant portion of these
acquisitions occurred in July and August 1996. Results of operations of the
acquired cable television systems have been included in the Company's results of
operations only from the dates the systems were acquired. The Company had no
operations prior to its first acquisition on January 29, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------------
PERCENTAGE
AMOUNT OF REVENUE
-------- ----------
<S> <C> <C>
Statement of Operations Data:
Revenue................................................................ $106,417 100.0%
Costs and Expenses:
Program fees......................................................... (22,881) (21.5)
Other direct and operating expenses(1)............................... (13,148) (12.4)
Selling, general and administrative(2)............................... (20,337) (19.1)
Management and consulting fees....................................... (1,558) (1.5)
Depreciation and amortization........................................ (64,707) (60.8)
------- -----
Loss from operations................................................... (16,214) (15.3)
Interest and other income.............................................. 6,398 6.0
Gain on sale of investments............................................ 286 0.3
Interest expense....................................................... (37,742) (35.5)
Other expense.......................................................... (1,216) (1.1)
Income tax benefit..................................................... 2,596 2.4
Extraordinary gain on early extinguishment of debt, net of tax......... 18,483 17.4
Minority interest...................................................... (320) (0.3)
------- -----
Net loss............................................................... $(27,729) (26.1)
======= =====
Other Data:
EBITDA(3).............................................................. $ 48,493 45.6%
</TABLE>
- ---------------
(1) Other direct and operating expenses consist of expenses relating to
installations, plant repairs and maintenance and other operating costs
directly associated with revenues.
(2) Selling, general and administrative expenses consist mainly of costs related
to system offices, customer service representatives and sales and
administrative employees.
(3) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization, gain (loss) on sale of investments, extraordinary gain on
early extinguishment of debt, minority interest and other expense. EBITDA is
a commonly used measure of performance in the cable industry. However, it
does not purport to represent cash flows from operating activities in
related Consolidated Statements of Cash Flows and should not be considered
in isolation or as a substitute for measures of performance in accordance
with GAAP. For information concerning cash flows from operating, investing
and financing activities, see Audited Financial Statements included
elsewhere in this Prospectus.
30
<PAGE> 33
Revenues
For the year ended December 31, 1996, the Company generated total revenues
of $106.4 million. The Company's total revenues for the year ended December 31,
1996 consisted of $73.4 million of basic service revenues, or 69.0% of total
revenues. Pay service revenues of $17.9 million represented 16.9% of total
revenues for the year ended December 31, 1996. Other service revenues of $15.1
million represented 14.2% of total revenues.
The Company served approximately 573,700 basic subscribers who subscribed
to 440,250 pay units at December 31, 1996. Average basic service revenue per
basic subscriber for the year ended December 31, 1996 was $22.32. Average pay
service revenue per pay unit for the year ended December 31, 1996 was $8.75.
Program Fees
Program fees of $22.9 million for the year ended December 31, 1996
represent 25.1% of basic and pay service revenues.
Other Direct Expenses
Other direct expenses, which include costs related to technical personnel,
franchise fees and repairs and maintenance, amounted to $13.1 million for the
year ended December 31, 1996, or 12.4% of total revenues.
Depreciation and Amortization
Depreciation and amortization expense of $64.7 million for the year ended
December 31, 1996 represents 60.8% of total revenues. The significant amount of
depreciation and amortization expense results from cable television assets
purchased during the year ended December 31, 1996. Furthermore, depreciation is
computed using the double-declining balance method over estimated useful lives
which do not exceed ten years, and the Company's intangible assets are amortized
on a straight line basis over the lesser of the remaining franchise lives or the
base twelve-year term of ICP-IV.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 1996 amounted to $20.3 million or 19.1% of total revenues.
Management and Consulting Fees
Management and consulting fees of $1.6 million for the year ended December
31, 1996 represent fees charged by ICM-IV. ICM-IV manages the business of the
Company for a per annum fee of 1% of the Company's total non-preferred capital
contributions, or $3.4 million.
Interest and Other Income
Interest and other income of $6.4 million for the year ended December 31,
1996 includes the following: (i) equity distribution income of $2.9 million
received from a former investee of RMG in August 1996, (ii) $0.4 million of
interest income earned on a $15.0 million loan to RMH prior to the Company's
acquisition of RMH on July 30, 1996, (iii) $2.2 million of interest income
earned on the pledged securities, and (iv) other income and interest earned on
cash and cash equivalents of $0.9 million.
Gain on Sale of Investments
The gain on sale of investments resulted from the sale of certain limited
partner interests in August 1996.
Interest Expense
Interest expense for the year ended December 31, 1996 includes interest on
a bridge loan obtained by a subsidiary of ICP-IV for acquisitions of certain
cable television systems during the first seven months of the
31
<PAGE> 34
year and interest on borrowings outstanding under the 11.25% senior notes and
bank debt, which were incurred to finance the Company's acquisitions in July and
August 1996. See "Acquisitions" and "Liquidity and Capital Resources."
Other Expense
Other expense of $1.2 million for the year ended December 31, 1996
primarily represents (i) the write-off of directly related costs of $0.8 million
incurred in connection with the July 30, 1996 acquisitions, which were accounted
for on an historical cost basis and (ii) loss on disposal of fixed assets of
$0.3 million.
Income Tax Benefit
The income tax benefit has been recorded based on RMG's stand alone tax
provision. As partnerships, the tax attributes of ICP-IV and its subsidiaries
other than RMG and IPCC accrue to the partners.
Extraordinary Gain on Early Extinguishment of Debt, Net of Tax
The extraordinary gain on early extinguishment of debt includes (i) costs
paid in July 1996 associated with the prepayment of RMG's long-term debt, net of
tax benefit of $1,790, and (ii) the write-off in July 1996 of a debt
restructuring credit associated with the restructuring of IPWT's long-term debt
in 1994.
Minority Interest
Minority interest represents accrued dividends of $0.4 million on RMG's
mandatorily redeemable preferred stock, net of an allocation of $0.037 million
of RMG's net loss for the period from July 31, 1996 through December 31, 1996 to
a subsidiary of TCI as the minority shareholder of RMG's common stock.
Net Loss
Net loss for the year ended December 31, 1996 was significantly impacted by
the acquisitions and related debt financing in July and August and the
extraordinary gain on early extinguishment of long-term debt that was assumed in
connection with the acquisitions of RMG and IPWT.
RESULTS OF OPERATIONS -- THE PREVIOUSLY AFFILIATED ENTITIES
The comparability of results of operations for the Previously Affiliated
Entities for the seven months ended July 31, 1995 and the period from January 1,
1996 to July 30, 1996, and the years ended December 31, 1994 and 1995 is
affected by the combining of results of operations for the
Greenville/Spartanburg System from January 27, 1995 with results of operations
for IPWT and RMH (the "1995 Combination").
32
<PAGE> 35
The following tables set forth for the periods indicated statement of
operations and other data of the Previously Affiliated Entities expressed in
dollar amounts (in thousands) and as a percentage of revenue.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED JULY PERIOD FROM JANUARY 1,
31, 1995 1996 TO JULY 30, 1996
----------------------- -----------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 72,578 100.0% $ 81,140 100.0%
Costs and Expenses:
Program fees.................................. (13,923) (19.2) (17,080) (21.1)
Other direct and operating expenses(1)........ (9,499) (13.1) (10,177) (12.5)
Selling, general and administrative
expenses(2)................................ (16,164) (22.3) (20,543) (25.3)
Management and consulting fees................ (530) (0.7) (398) (0.5)
Depreciation and amortization................. (41,141) (56.7) (36,507) (45.0)
------- ----- ------- -----
Loss from operations............................ (8,679) (12.0) (3,565) (4.4)
Interest and other income....................... 888 1.2 209 0.3
Gain (loss) on disposal of fixed assets......... 39 0.1 (14) --
Interest expense................................ (28,157) (38.8) (47,545) (58.6)
Other expense................................... (656) (0.9) (123) (0.2)
Income tax benefit.............................. 8,642 11.9 14,490 17.9
------- ----- ------- -----
Net loss........................................ $(27,923) (38.5)% $(36,548) (45.0)%
======= ===== ======= =====
OTHER DATA:
EBITDA(3)....................................... 32,462 44.7% 32,942 40.6%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995
----------------------- -----------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 73,049 100.0% $128,971 100.0%
Costs and Expenses:
Program fees.................................. (13,189) (18.1) (24,684) (19.1)
Other direct and operating expenses(1)........ (9,823) (13.4) (16,851) (13.1)
Selling, general and administrative
expenses(2)................................ (15,852) (21.7) (30,509) (23.7)
Management and consulting fees.................. (585) (0.8) (815) (0.6)
Depreciation and amortization................... (68,216) (93.4) (70,154) (54.4)
------- ------ ------- -----
Loss from operations............................ (34,616) (47.4) (14,042) (10.9)
Interest and other income....................... 1,442 2.0 1,172 0.9
Loss on disposal of fixed assets................ (1,401) (1.9) (63) --
Interest expense................................ (44,278) (60.6) (48,835) (37.9)
Other expense................................... (194) (0.3) (644) (0.5)
Income tax benefit.............................. 19,020 26.0 17,502 13.6
------- ------ ------- -----
Net loss........................................ $(60,027) (82.2)% $(44,910) (34.8)%
======= ====== ======= =====
OTHER DATA:
EBITDA(3)....................................... $ 33,600 46.0% $ 56,112 43.5%
</TABLE>
- ---------------
(1) Other direct and operating expenses consist of expenses relating to
installations, plant repairs and maintenance and other operating costs
directly associated with revenues.
(2) Selling, general and administrative expenses consist mainly of costs related
to system offices, customer service representatives and sales and
administrative employees.
33
<PAGE> 36
(3) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization, gain (loss) on disposal of fixed assets and other income
(expense). EBITDA is a commonly used measure of performance in the cable
industry. However, it does not purport to represent cash flows from
operating activities in related Consolidated Statements of Cash Flows and
should not be considered in isolation or as a substitute for measures of
performance in accordance with GAAP. For information concerning cash flows
from operating, investing and financing activities, see Audited Financial
Statements included elsewhere in this Prospectus.
COMPARISON OF THE SEVEN MONTHS ENDED JULY 31, 1995 AND THE PERIOD FROM JANUARY 1
TO JULY 30, 1996
Revenues. The Previously Affiliated Entities' revenues increased $8.6
million, or by 11.8%, for the seven months ended July 30, 1996 compared with the
corresponding period in the prior year. The impact of comparing revenues for the
seven months ended July 30, 1996 with revenues for the period from January 27,
1995 to July 31, 1995 for the Greenville/Spartanburg System resulted in a $3.1
million increase in revenues. Additionally, revenues increased $2.8 million due
to subscriber growth and $3.6 million due to basic and expanded basic rate
increases. As of July 30, 1996, basic subscribers and premium units increased
from July 31, 1995 by approximately 15,000 subscribers, or 4.4%, and 5,600
units, or 2.2%, respectively. The increase in basic subscribers primarily
reflects the impact of an increase of approximately 15,800 homes passed and
higher basic penetration which grew from 69.4% at July 31, 1995 to 70.2% at July
30, 1996. During the three months ended March 31, 1996, each of the Previously
Affiliated Entities implemented basic and/or expanded basic rate increases. The
rate increases resulted in a 4.2% average increase in overall rates charged for
basic and expanded basic services combined. Partially offsetting these revenue
increases was a $0.6 million decrease in pay service revenues reflecting the
impact of premium discount packages which offer combinations of premium channels
at prices that represent significant savings over the price for an individual
channel and a $0.4 million decrease in ancillary service revenues.
Program Fees. Program fees increased $3.2 million, or by 22.7%, for the
seven months ended July 30, 1996 compared with the corresponding period in the
prior year. The impact of comparing program fees for the seven months ended July
30, 1996 with program fees for the period from January 27, 1995 to July 31, 1995
for the Greenville/Spartanburg System resulted in a $0.8 million increase in
program fees. Additionally, program fees increased $0.6 million due to
subscriber growth and $1.8 million due to the net impact of higher rates charged
by certain programmers and higher pay-per-view program costs. The increase in
program fees as a percentage of revenues reflects the impact of program fee
increases outpacing revenue growth for the period.
Other Direct and Operating Expenses. Other direct and operating expenses
increased $0.7 million, or by 7.1%, for the seven months ended July 30, 1996
compared with the corresponding period in the prior year. The impact of
comparing other direct and operating expenses for the seven months ended July
30, 1996 with the period from January 27, 1995 to July 31, 1995 for the
Greenville/Spartanburg System resulted in a $0.7 million increase in expense.
Increased labor costs for the RMH and IPWT systems contributed $0.5 million to
the increase in costs. RMH labor costs increased primarily due to an increase in
workforce driven by basic subscriber growth, and IPWT labor costs increased due
to an increase in the average salary per employee. These increases were offset
by a $0.5 million reduction in costs primarily due to lower labor costs for the
Greenville/Spartanburg System driven by a decrease in workforce and an increase
in construction-related activities. Also contributing to the decrease was a
reduction in repairs and maintenance expense for the RMH and IPWT systems. Other
direct and operating expenses as a percentage of revenues decreased due to
proportionately lower increases in costs relative to revenue growth.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased $4.4 million, or by 27.1%, for the
seven months ended July 30, 1996 compared with the corresponding period of the
prior year. The impact of comparing SG&A for the seven months ended July 30,
1996 with SG&A for the period from January 27, 1995 to July 31, 1995 for the
Greenville/Spartanburg System resulted in a $0.6 million increase in SG&A. Other
SG&A costs increased by an aggregate amount of $1.7 million due to subscriber
growth. Of the remaining increase, $0.4 million represents an increase in the
corporate overhead cost allocation from TCI to the Greenville/Spartanburg System
which TCI began allocating in May 1995. Also contributing to the higher costs
were increases in labor, marketing and
34
<PAGE> 37
advertising sales expense and professional services costs of approximately $0.6
million, $0.7 million, and $0.2 million, respectively. The labor cost increase
primarily resulted from increases in the workforce driven by basic subscriber
growth. The marketing and advertising sales expense increases resulted from
higher levels of marketing activities for each of the Previously Affiliated
Entities and an increase in advertising sales activities for the
Greenville/Spartanburg System. The increase in professional services reflects
increased utilization of outside labor for the RMH system.
SG&A as a percentage of revenues increased due to proportionately higher
costs for the Greenville/ Spartanburg System in relation to revenue growth.
Depreciation and Amortization. Depreciation and amortization decreased
$4.6 million, or by 11.3%, for the seven months ended July 30, 1996 compared
with the corresponding period of the prior year. The decrease reflects a
combined $4.8 million decrease for the IPWT and RMH systems due to their use of
an accelerated depreciation method that results in higher depreciation expense
being recognized in the earlier years and lower expense in the later years. This
decrease was offset by (i) an increase in property and equipment placed in
service between July 1995 and July 1996 and (ii) the $0.6 million impact of
comparing depreciation and amortization for the seven months ended July 30, 1996
with depreciation and amortization for the period from January 27, 1995 to July
31, 1995 for the Greenville/Spartanburg System.
Interest and Other Income. Interest and other income consist primarily of
interest on RMH notes receivable that were issued in connection with previous
sales of cable television systems (the "RMH Seller Notes") and interest earned
on cash equivalents. Interest and other income decreased $0.7 million, or by
76.5%, for the seven months ended July 30, 1996 compared with the corresponding
period of the prior year. The decrease reflects the effect of collection in June
1995 of the RMH Seller Notes.
Interest Expense. Interest expense increased $19.4 million, or by 68.9%,
for the seven months ended July 30, 1996 compared with the corresponding period
of the prior year because of a $16.4 million increase in interest expense
allocations from TCI for the Greenville/Spartanburg System and a $2.8 million
increase in interest expense for IPWT. The increase for IPWT primarily reflects
the recognition of $3.0 million for contingent interest. Upon completion of the
Transactions, conditions were met for an accrual of contingent interest under
the terms of IPWT's loan agreement with GECC.
Income Tax Benefit. Income tax benefit increased $5.8 million, or by
67.7%, for the seven months ended July 30, 1996 compared with the corresponding
period of the prior year primarily due to an increase in the taxable loss before
income tax benefit coupled with an increase in the effective tax benefit rate
for the RMH system, offset by a decrease in the effective tax benefit rate for
the Greenville/Spartanburg System.
RMH has not established a valuation allowance to reduce the deferred tax
assets related to its unexpired net operating loss carryforwards. Due to an
excess of appreciated asset value over the tax basis of RMH's net assets,
Management believes it is more likely than not that the deferred tax assets
related to the unexpired net operating losses will be realized.
Net Loss. Net loss increased $8.6 million, or by 30.9%, for the seven
months ended July 30, 1996 compared with the corresponding period of the prior
year primarily due to the increase in interest expense partially offset by an
increase in EBITDA and the income tax benefit.
EBITDA. EBITDA increased $0.5 million, or by 1.5%, for the seven months
ended July 30, 1996 compared with the corresponding period of the prior year. Of
the increase, $1.0 million represents the impact of comparing EBITDA for the
seven months ended July 30, 1995 with EBITDA for the period January 27, 1995 to
July 31, 1995 for the Greenville/Spartanburg System. The offsetting decrease is
primarily attributable to higher SG&A expenses for the Greenville/Spartanburg
System. EBITDA as a percentage of revenues decreased due to increases in program
fees and SG&A expenses as a percentage of revenues.
35
<PAGE> 38
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. The Previously Affiliated Entities' revenues increased $55.9
million, or 76.6%, for 1995 compared to 1994. The 1995 Combination accounted for
$47.2 million of the increase in revenues for 1995 compared to 1994.
Excluding the 1995 Combination, internal subscriber growth accounted for
approximately $4.8 million of the increase in revenues for 1995 compared to
1994. Basic subscribers increased by approximately 13,000, or 5.8%, for 1995
compared to 1994. The increase in basic subscribers primarily reflects the
impact of an increase in homes passed during the two year period and higher
basic penetration rates for 1995 compared to 1994. The number of premium units
increased by approximately 10,500 units, or 6.9%, for 1995 compared to 1994,
reflecting the impact of premium discount packages which offer combinations of
premium channels at prices that represent significant savings over the price for
individual channels. This volume increase was slightly offset by decreases in
revenues of approximately $0.1 million for 1995 compared to 1994, due to the
impact of lower rates per subscriber from the premium discount packages.
The impact of higher rates due to basic and expanded basic rate increases
accounted for approximately $3.9 million of the increase in revenues for 1995
compared to 1994. The FCC ordered a freeze on basic and expanded basic rates for
the period April 5, 1993 through May 15, 1994. In compliance with the rate
freeze, IPWT and RMH did not increase their basic and expanded basic rates
during this period, and chose to maintain their rates through December 30, 1994.
During the period from December 31, 1994 through the first quarter of 1995,
channels were added and rate increases were implemented on the expanded basic
tier. The rate increases resulted in a 7.6% average increase in RMH's and IPWT's
overall rates charged for basic and expanded basic services combined.
Program Fees. Program fees increased $11.5 million, or 87.2%, for 1995
compared to 1994. Program fees increased $9.1 million for 1995 compared to 1994
due to the 1995 Combination.
Excluding the impact of the 1995 Combination, program fees increased in
1995 compared to 1994 by $1.2 million due to subscriber growth and by $1.2
million due to the net impact of (i) new channel additions, (ii) higher rates
charged by certain programmers and (iii) higher pay-per-view program costs,
slightly offset by lower premium service effective rates due to volume
discounts.
In 1995, program fees as a percentage of revenues increased compared to
1994 reflecting the impact of the premium discount packages.
Other Direct and Operating Expenses. Other direct and operating expenses
increased $7.0 million, or 71.5%, for 1995 compared to 1994. The 1995
Combination accounted for $6.6 million of the increase for 1995 compared to
1994. Excluding the impact of the 1995 Combination, other direct and operating
expenses increased due to internal subscriber growth.
Other direct and operating expenses as a percentage of revenues remained
relatively constant for the three years ended December 31, 1995.
Selling, General and Administrative Expenses. SG&A expenses increased
$14.7 million, or 92.5%, for 1995 compared to 1994. The 1995 Combination
accounted for $12.1 million of the increase for 1995 compared to 1994.
The remainder of the 1995 increase resulted from increases in payroll, data
processing and marketing costs for IPWT and RMH reflecting the impact of an
increase in the average salary per employee, subscriber growth and customer
service initiatives.
SG&A as a percentage of revenue increased in 1995 compared to 1994
primarily due to proportionately higher costs for the Greenville/Spartanburg
System in relation to revenue.
Depreciation and Amortization. Depreciation and amortization expense
increased $1.9 million, or 2.8%, for 1995 compared to 1994.
36
<PAGE> 39
The increase in 1995 compared to 1994 is primarily due to the impact of the
1995 Combination, offset by (i) the impact of IPWT's and RMH's use of an
accelerated depreciation method that results in higher depreciation expense
being recognized in the earlier years and lower expense in later years and (ii)
the effect of the cost of certain IPWT and RMH franchise rights becoming fully
amortized during 1994.
Interest and Other Income. Interest and other income consist primarily of
interest on RMH notes receivable that were issued in connection with previous
sales of cable television systems (the "RMH Seller Notes") and interest earned
on cash equivalents. Interest and other income decreased $0.3 million, or 18.7%,
for 1995 compared to 1994. The decrease reflects the effect of collection in
1994 of the RMH Seller Notes.
Interest Expense. Interest expense increased by $4.6 million, or 10.3%,
for 1995 compared to 1994. The increase reflects the impact of (i) the 1995
Combination of $11.8 million and (ii) a $0.9 million increase for RMH due to
interest on additional borrowings, offset by an $8.2 million decrease for the
IPWT system reflecting the effect of the October 1994 debt restructuring.
Income Tax Benefit. The income tax benefit decreased $1.5 million, or
8.0%, for 1995 compared to 1994 due to the impact of a decrease in the taxable
loss before income tax benefit, partially offset by a higher effective tax
benefit rate.
Net Loss. The Previously Affiliated Entities' net loss decreased $15.1
million, or 25.2%, for 1995 compared to 1994 primarily due to an increase in
EBITDA and lower depreciation and amortization expense.
EBITDA. EBITDA increased $22.5 million, or 67.0%, for 1995 compared to
1994. The 1995 Combination accounted for $19.4 million of the increase for 1995
compared to 1994. The remainder of the 1995 increase reflects the impact of
revenue growth partially offset by increases in program fees, other direct and
operating expenses and SG&A for the RMH and IPWT systems.
EBITDA as a percentage of revenues decreased in 1995 compared to 1994
primarily because of the increases in program fees and SG&A as a percentage of
revenues.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
The following table sets forth certain statement of cash flows information
of the Company (in thousands) for the year ended December 31, 1996. The Company
consummated acquisitions of cable television systems in January, February, May,
July and August. Cash flows from operating activities of the acquired systems
have been included only from the dates of acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities.................................... $ 37,697
Cash flows from investing activities.................................... (557,013)
Cash flows from financing activities.................................... 528,086
</TABLE>
The Company's cash balance increased from zero as of January 1, 1996 to
$8.8 million as of December 31, 1996.
Cash Flows From Operating Activities
The Company generated cash flows from operating activities of $37.7 million
for the year ended December 31, 1996 reflecting (i) loss from operations of
$48.5 million before non-cash charges to income for depreciation and
amortization of $64.7 million; (ii) interest and other income received of $3.8
million; (iii) interest paid of $16.2 million; and (iv) other working capital
sources, net of other expenses of approximately $1.6 million.
37
<PAGE> 40
Cash Flows From Investing Activities
The Company used cash during the year ended December 31, 1996 of $418.0
million to fund its purchase of the Nashville System and the Miscellaneous
Acquisitions and $0.3 million to purchase a controlling common stock interest in
RMG. The Company also received cash of $2.2 million as part of IPWT's and RMG's
total assets acquired. In April 1996, prior to the Company's purchase of RMG, a
subsidiary of the Company loaned $15.0 million to RMG's parent, RMH. The loan is
still outstanding and has been eliminated in consolidation as of December 31,
1996.
The Company purchased property and equipment of $38.2 million during the
year ended December 31, 1996 consisting primarily of cable system upgrades and
rebuilds, plant extensions, converters and initial subscriber installations.
Under the terms of the related indenture, the Company purchased
approximately $88.8 million in pledged securities that, together with interest
thereon, represent funds sufficient to provide for payment in full of interest
on the Company's $292.0 million of 11.25% senior notes (the "Notes") through
August 1, 1999. Proceeds from the securities will be used to make interest
payments on the Notes through August 1, 1999.
Cash Flows From Financing Activities
The Company financed the acquisitions described above and its investment in
the pledged securities with proceeds from issuance of the Notes, a $220.0
million bank term loan (the "Term Loan") and borrowings of $338.0 million under
a bank revolving credit agreement (the "Revolving Credit Facility" together with
the Term Loan, the "Bank Facility"), and $190.6 million in cash contributions
from the partners of ICP-IV. The Company subsequently repaid borrowings under
the Revolving Credit Facility of $4.0 million. The Company paid debt issue costs
of $17.5 million in connection with the offering of the Notes and the bank
financing and paid syndication costs of $1.0 million in connection with raising
its contributed equity.
The Company repaid $365.5 million of RMH's and IPWT's indebtedness,
including $14.9 million of accrued interest, upon its acquisition of these
entities. The Company paid a call premium and other fees associated with the
repayment of RMH's indebtedness of $4.7 million.
The Company paid cash to TCI of $119.8 million as repayment of debt assumed
upon TCI's contribution of the Greenville/Spartanburg System to the Company. The
amount paid has been recorded as a distribution to TCI in the Company's December
31, 1996 consolidated financial statements.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES -- THE PREVIOUSLY AFFILIATED ENTITIES
The following table sets forth, for the periods indicated, certain
statement of cash flows data of the Previously Affiliated Entities (in
thousands).
The comparability of statement of cash flows data for the Previously
Affiliated Entities for the years ended December 31, 1993 and 1994 is affected
by the 1993 Acquisitions. The comparability of statement of cash flows data for
the seven months ended July 31, 1995, the period from January 1, 1996 to July
30, 1996, and the years ended December 31, 1994 and 1995 is affected by the 1995
Combination.
The Previously Affiliated Entities' most significant capital requirements
have been to finance purchases of property and equipment, consisting of cable
system upgrades and rebuilds, plant extensions, converters and initial
subscriber installations.
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED PERIOD FROM
JULY 31, JANUARY 1, 1996
1995 TO JULY 30, 1996
------------ ----------------
<S> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities................... $ 8,441 $ (8,169)
Cash flows from investing activities................... (7,856) (18,737)
Cash flows from financing activities................... 28 24,249
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
------- --------
<S> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities.................. $ (112) $ 8,107
Cash flows from investing activities.................. 4,871 (24,614)
Cash flows from financing activities.................. (4,784) 18,066
</TABLE>
SEVEN MONTHS ENDED JULY 31, 1995
The Previously Affiliated Entities showed an increase in cash of $0.6
million from $3.3 million as of January 1, 1995 to $3.9 million as of July 31,
1995.
Cash flows from operating activities
The Previously Affiliated Entities' cash flows from operating activities of
$8.4 million for the seven months ended July 31, 1995 reflect (i) income from
operations of $32.5 million before non-cash charges to income for depreciation
and amortization of $41.1 million; (ii) interest received of $3.7 million, (iii)
interest payments on long-term obligations of approximately $21.2 million; (iv)
intercompany interest charges of $6.4 million paid by the Greenville/Spartanburg
System to TCI; (v) advances to affiliates of $0.8 million; and (vi) a net
increase in cash of $0.6 million representing other working capital changes, net
of non-operating expense.
Cash flows from investing activities
The Previously Affiliated Entities used cash during the seven months ended
July 31, 1995 primarily to fund purchases of property and equipment of $5.6
million, $0.9 million and $3.3 million for RMH, IPWT and the
Greenville/Spartanburg System, respectively. Collections of $2.6 million were
received on the RMH Seller Notes.
Cash flows from financing activities
During the seven months ended July 31, 1995, the Previously Affiliated
Entities' cash flows from financing activities consisted primarily of net
borrowings of $1.0 and $0.6 million, respectively under RMH's and IPWT's
revolving credit notes payable and distributions to TCI by the
Greenville/Spartanburg System of $1.0 million.
SEVEN MONTHS ENDED JULY 30, 1996
The Previously Affiliated Entities showed a decrease in cash of $2.7
million from $4.9 million as of January 1, 1996 to $2.2 million as of July 30,
1996.
Cash flows from operating activities
The Previously Affiliated Entities reported a net deficit in cash flows
from operating activities of $8.2 million for the seven months ended July 30,
1996 reflecting (i) income from operations of $32.9 million before non-cash
charges to income for depreciation and amortization of $36.5 million; (ii)
interest received of $0.2 million, (iii) interest payments on long-term
obligations of approximately $21.7 million; (iv) intercompany interest charges
of $22.8 million paid by the Greenville/Spartanburg System to TCI; (v) advances
to affiliates of $1.0 million, (vi) income tax refunds of $6.4 million and (vii)
other working capital uses and non-operating expenses of $2.2 million, including
$2.3 million for increases in inventory primarily related to rebuild activity in
RMH's Tennessee systems.
39
<PAGE> 42
Cash flows from investing activities
The Previously Affiliated Entities used cash during the seven months ended
July 30, 1996 primarily to fund purchases of property and equipment of $13.1
million, $0.8 million and $4.7 million for RMH, IPWT and the
Greenville/Spartanburg System, respectively.
Cash flow from financing activities
For the seven months ended July 30, 1996, the Previously Affiliated
Entities' principal sources of cash consisted of a loan of $15.0 million from
the Company to RMH, and equity contributions from TCI to the
Greenville/Spartanburg System of $9.4 million.
YEAR ENDED DECEMBER 31, 1994
The Previously Affiliated Entities' cash balance of $3.3 million remained
constant at January 1, 1993 and December 31, 1994.
Cash flows from operating activities
The Previously Affiliated Entities reported a net deficit in cash flows
from operating activities of $0.1 million for the year ended December 31, 1994
reflecting (i) income from operations of $33.6 million before non-cash charges
to income for depreciation and amortization of $68.2 million; (ii) interest
received of $0.7 million; (iii) interest payments on long-term obligations of
$43.7 million; (v) payments received from affiliates of $9.7 million; and (vi)
other working capital uses and non-operating expenses of $0.4 million.
As of December 31, 1994 the Previously Affiliated Entities had negative
working capital of $13.8 million due to franchise fees and copyright fees that
are paid quarterly and semiannually and due to the timing of interest payments
on the RMG Notes. Interest is paid on the RMG Notes semiannually on April 1 and
October 1.
Cash flows from investing activities
During the year ended December 31, 1994, the Previously Affiliated Entities
collected $17.8 million on the RMH Seller Notes. The Previously Affiliated
Entities used cash primarily for purchases of property and equipment of $11.2
million and $1.3 million for RMH and IPWT, respectively.
Cash flows from financing activities
During the year ended December 31, 1994, the Previously Affiliated Entities
received a capital contribution from IPWT's majority owner of $20.1 million. The
Previously Affiliated Entities used cash of $22.1 million to repay IPWT's
long-term obligations under the terms of a debt restructuring and $2.6 million
to repay borrowings under IPWT's revolving credit note payable.
YEAR ENDED DECEMBER 31, 1995
The Previously Affiliated Entities' cash balance increased by $1.6 million
from $3.3 million as of January 1, 1995 to $4.9 million as of December 31, 1995.
Cash flows from operating activities
The Previously Affiliated Entities generated cash from operating activities
of $8.1 million for the year ended December 31, 1995 reflecting (i) income from
operations of $56.2 million before non-cash charges to income for depreciation
and amortization of $70.2 million; (iv) interest received of $4.1 million, (v)
interest payments on long-term obligations of $40.4 million; and (vi)
intercompany interest charges of $11.8 million paid by the
Greenville/Spartanburg System to TCI.
As of December 31, 1995 the Previously Affiliated Entities had negative
working capital of $13.8 million due to franchise fees and copyright fees that
are paid quarterly and semiannually and due to the timing of
40
<PAGE> 43
interest payments on the RMG Notes. Interest is paid on the RMG Notes
semiannually on April 1 and October 1.
Accounts receivable increased from December 31, 1994 to December 31, 1995
by $2.8 million or 49% as a result of the 1995 Combination. Inventory increased
$1.2 million or 71% during 1995 primarily related to rebuild activity in RMH's
Tennessee systems.
Cash flows from investing activities
During the year ended December 31, 1995, the Previously Affiliated Entities
received proceeds of $2.6 million from sale of the last RMH Seller Note. The
Previously Affiliated Entities used cash primarily to fund purchases of property
and equipment of $11.9 million, $1.4 million and $13.4 million for RMH, IPWT and
the Greenville/Spartanburg System, respectively.
Cash flows from financing activities
During the year ended December 31, 1995, the Previously Affiliated Entities
received net borrowings of $12.0 million under RMH's revolving credit note
payable, repaid $0.4 million under IPWT's revolving credit facility with GECC
and received a $6.5 million capital contribution made by TCI to the
Greenville/Spartanburg System.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The Company has plans to make substantial expenditures for technological
upgrades and rebuilds over the next several years under its Capital Improvement
Program, which is reviewed and modified periodically by management. Management
believes that substantial growth in revenues and operating cash flows is not
achievable without implementing at least a significant portion of the Capital
Improvement Program.
For each of the years through maturity of the Notes, the Company's
principal sources of liquidity are expected to be cash generated from operations
and borrowings under the Revolving Credit Facility. The Revolving Credit
Facility provides for borrowings up to $475.0 million in the aggregate, with
permanent annual commitment reductions beginning in 1999, and matures in 2004.
As of December 31, 1996, the Company had $334.0 million outstanding under the
Revolving Credit Facility, leaving availability of $141.0 million. Prior to
January 1, 1999, the Company has no mandatory amortization requirements under
the Bank Facility.
Management believes that the Company will be able to realize substantial
growth rates in revenue over the next several years through a combination of
household growth, increased penetration and new product offerings that the
Company will be able to make available as technological upgrades are completed
under the Capital Improvement Program.
Management believes that, with the Company's ability to realize operating
efficiencies and sustain substantial growth rates in revenue, it will be able to
generate cash flows from operating activities which, together with available
borrowing capacity under the Revolving Credit Facility, will be sufficient to
fund required interest payments and planned capital expenditures over the next
several years. However, the Company may not be able to generate sufficient cash
from operations or accumulate sufficient cash from other activities or sources
to repay in full the principal amounts outstanding under the Notes on maturity.
In order to satisfy its repayment obligations with respect to the Notes due
August 1, 2006, the Company may be required to refinance the Notes. There can be
no assurance that financing will be available at that time in order to
accomplish any necessary refinancing on terms favorable to the Company.
Borrowings under the Revolving Credit Facility are available under interest
rate options related to the base rate of the administrative agent for the Bank
Facility ("ABR") (which is based on the administrative agent's published prime
rate) and LIBOR. Interest rates vary under each option based on IP-IV's senior
leverage ratio. For ABR loans the rate varies from ABR to ABR plus 0.50%, and
for LIBOR loans the rate varies from LIBOR plus 0.75% to LIBOR plus 1.75%.
Interest periods are specified as one, two or three months for LIBOR loans. The
Bank Facility requires quarterly interest payments, or more frequent interest
41
<PAGE> 44
payments if a shorter period is selected under the LIBOR option. The Bank
Facility also requires IP-IV to pay quarterly a commitment fee of 0.25% or
0.375% per year, depending on the senior leverage ratio of IP-IV, on the unused
portion of available credit.
The obligations of IP-IV under the Bank Facility are secured by a first
priority pledge of the capital stock and/or partnership interests of IP-IV's
subsidiaries, a negative pledge on other assets of IP-IV and subsidiaries and a
pledge of any inter-company notes. The obligations of IP-IV under the Bank
Facility are guaranteed by IP-IV's subsidiaries.
The Bank Facility and the Indenture restrict, among other things, the
Company's ability to incur additional indebtedness, incur liens, pay
distributions or make certain other restricted payments, consummate certain
asset sales and enter into certain transactions with affiliates. In addition,
the Bank Facility and Indenture restrict the ability of a subsidiary to pay
distributions or make certain payments to ICP-IV, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company. The Bank Facility also
requires the Company to maintain specified financial ratios and satisfy certain
financial condition tests. Such restrictions and compliance tests, together with
the Company's substantial leverage and the pledge of substantially all of
IP-IV's equity interests in its subsidiaries, could limit the Company's ability
to respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities. As of December 31,
1996 the Company was in compliance with all of the debt covenants as provided by
the Bank Facility and the Indenture.
Capital Improvement Program
The Company's most significant capital needs are to finance cable system
upgrades and rebuilds, plant extensions and purchases of converters and other
customer premise equipment. Planned capital expenditures also provide for
initial subscriber installations, purchases of digital ad insertion equipment
and replacement purchases of machinery and equipment.
To make the most efficient use of its capital, management continually
reassesses the need for modifications in system architecture and detailed
technical specifications by considering the most recent information available
regarding the Company's progress on the Capital Improvement Program, the
technological changes in the cable industry, additional revenue potential,
competition, cost effectiveness and requirements under franchise agreements. The
Company currently estimates that it will spend an additional $200.0 million on
the Capital Improvement Program through 2001.
Management expects to fund capital expenditures from borrowings available
under the Revolving Credit Facility and cash generated from operations. However,
there can be no assurance that all of the funds required for these planned
capital expenditures will be available as needed.
The Capital Improvement Program is expected to allow the Company to expand
system capacity, provide the capability to offer new services including
additional premium packages, enhanced pay-per-view programming, additional
advertising and data services and to create the marketing flexibility to fund
revenue growth for existing services. Other expenditures will target new revenue
sources and be expended on an incremental basis when these revenue streams are
quantifiable. Management believes that substantial growth in revenues and
operating cash flows is not achievable without implementing at least a
significant portion of the Capital Improvement Program.
In addition to capital expenditures expected to be incurred in connection
with the Capital Improvement Program, the Company currently estimates that it
will make other capital expenditures through 2001 of approximately $120.0
million, principally for line extensions and other capital requirements. The
Company's business requires continuing investment to finance capital
expenditures and related expenses for expansion of the Company's subscriber base
and system development. The Company's inability to upgrade its cable television
systems or make its other planned capital expenditures would have a material
adverse effect on the Company's operations and competitive position and could
have a material adverse effect on the Company's ability to service its debt.
42
<PAGE> 45
Inflation
During the periods covered in this discussion, inflation did not have a
significant impact on results of operations and financial position of the cable
television systems. Periods of high inflation could have an adverse effect to
the extent that increased operating costs and increased borrowing costs for
variable interest rate debt may not be offset by increases in subscriber rates.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this report which are prefaced with words such as expects,
anticipates, believes and similar words and other statements of similar sense,
are forward-looking statements. These statements are based on the Company's
current expectations and estimates as to prospective events and circumstances
which may or may not be within the Company's control and as to which there can
be no firm assurances given. These forward-looking statements, like any other
forward-looking statements, involve risks and uncertainties that could cause
actual results to differ materially from those projected or anticipated.
In addition to other risks and uncertainties that may be described
elsewhere in this document, certain risks and uncertainties that could affect
the Company's financial results include the following; the development, market
acceptance and successful production of new products and enhancements;
competitors' product introductions and enhancements; and risks associated with
the Acquisitions, including the Company's ability to successfully integrate the
acquired cable television systems.
(For a description of the above risks and uncertainties, see the Certain
Factors that May Affect Future Results section under Item 1 of PART I.)
43
<PAGE> 46
PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REFERENCE PAGE
FORM 10-K
--------------
<S> <C>
INTERMEDIA CAPITAL PARTNERS IV, L.P.
Report of Independent Accountants............................................ 46
Consolidated Balance Sheets as of December 31, 1996 and 1995................. 47
Consolidated Statement of Operations for the year ended December 31, 1996.... 48
Consolidated Statement of Changes in Partners' Capital for the year ended
December 31, 1996......................................................... 49
Consolidated Statement of Cash Flows for the year ended December 31, 1996.... 50
Notes to Consolidated Financial Statements................................... 51
Schedule I -- Condensed Financial Information of Registrant.................. 126
Schedule II -- Valuation and Qualifying Accounts............................. 131
PREDECESSOR BUSINESSES:
PREVIOUSLY AFFILIATED ENTITIES
Report of Independent Accountants............................................ 64
Combined Balance Sheet as of December 31, 1995............................... 65
Combined Statements of Operations for the years ended December 31, 1994 and
1995, and the period from January 1, 1996 to July 30, 1996................ 66
Combined Statement of Changes in Equity for the years ended December 31, 1994
and 1995, and for the period from January 1, 1996 to July 30, 1996........ 67
Combined Statements of Cash Flows for the years ended December 31, 1994 and
1995 and the period from January 1, 1996 to July 30, 1996................. 68
Notes to Combined Financial Statements....................................... 69
ROBIN MEDIA HOLDINGS, INC.
Report of Independent Accountants............................................ 81
Consolidated Balance Sheet as of December 31, 1995........................... 82
Consolidated Statements of Operations for the years ended December 31, 1994
and 1995,
and the period from January 1, 1996 to July 30, 1996...................... 83
Consolidated Statement of Shareholder's Deficit for the years ended December
31, 1994 and 1995, and for the period from January 1, 1996 to July 30,
1996...................................................................... 84
Consolidated Statements of Cash Flows for the years ended December 31, 1994
and 1995, and the period from January 1, 1996 to July 30, 1996............ 85
Notes to Consolidated Financial Statements................................... 86
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
Report of Independent Accountants............................................ 94
Balance Sheet as of December 31, 1995........................................ 95
Statements of Operations for the years ended December 31, 1994 and 1995, and
the period from January 1, 1996 to July 30, 1996.......................... 96
Statement of Changes in Partners' Capital for the years ended December 31,
1994 and 1995, and for the period from January 1, 1996 to July 30, 1996... 97
Statements of Cash Flows for the years ended December 31, 1994 and 1995, and
the period from January 1, 1996 to July 30, 1996.......................... 98
Notes to Financial Statements................................................ 99
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
REFERENCE PAGE
FORM 10-K
--------------
<S> <C>
TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC.
AND TCI OF PIEDMONT, INC.
Independent Auditors' Report................................................. 106
Combined Balance Sheet as of December 31, 1995............................... 107
Combined Statements of Operations and Accumulated Deficit for the period from
January 27, 1995 to December 31, 1995 and for the period from January 1,
1996 to July 30, 1996..................................................... 108
Combined Statements of Cash Flows for the period from January 27, 1995 to
December 31, 1995 and for the period from January 1, 1996 to July 30,
1996...................................................................... 109
Notes to Combined Financial Statements....................................... 110
</TABLE>
45
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of InterMedia
Capital Partners IV, L.P.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of InterMedia Capital Partners IV, L.P. and its subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
March 28, 1997
46
<PAGE> 49
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------ --------
<S> <C> <C>
ASSETS
Cash..................................................................... $ $ 8,770
Accounts receivable, net of allowance for doubtful accounts of $2,130.... 17,539
Escrowed investments held to maturity.................................... 28,237
Interest receivable on escrowed investments.............................. 2,194
Receivable from affiliate................................................ 923
Prepaids................................................................. 2,768
Other current assets..................................................... 232
------- --------
Total current assets........................................... 60,663
Escrowed investments held to maturity.................................... 60,518
Intangible assets, net................................................... 707 634,087
Property & equipment, net................................................ 230,055
Deferred income taxes.................................................... 9,910
Other non-current assets................................................. 1,466
------- --------
Total assets................................................... $ 707 $996,699
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities................................. $ 265 $ 28,973
Payable to affiliates.................................................... 1,067 3,408
Deferred revenue......................................................... 11,753
Accrued interest......................................................... 20,322
------- --------
Total current liabilities...................................... 1,332 64,456
Long-term debt........................................................... 846,000
Other non-current liabilities............................................ 70
------- --------
Total liabilities.............................................. 1,332 910,526
------- --------
Commitments and contingencies
Minority interest
Mandatorily redeemable preferred shares.................................. 12,357
PARTNERS' CAPITAL
Preferred limited partnership interest................................... (43) 23,008
General and limited partners' capital.................................... (582) 52,658
Note receivable from general partner..................................... (1,850)
------- --------
Total partners' capital........................................ (625) 73,816
------- --------
Total liabilities and partners' capital........................ $ 707 $996,699
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
47
<PAGE> 50
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Basic and cable services.................................................... $ 73,392
Pay service................................................................. 17,932
Other service............................................................... 15,093
--------
106,417
--------
Program fees................................................................ 22,881
Other direct expenses....................................................... 13,148
Depreciation and amortization............................................... 64,707
Selling, general and administrative expenses................................ 20,337
Management and consulting fees.............................................. 1,558
--------
122,631
--------
Loss from operations........................................................ (16,214)
--------
Other income (expense):
Interest and other income................................................. 6,398
Gain on sale of investments............................................... 286
Interest expense.......................................................... (37,742)
Other expense............................................................. (1,216)
--------
(32,274)
--------
Loss before income tax benefit extraordinary items and minority interest.... (48,488)
Income tax benefit.......................................................... 2,596
--------
Net loss before extraordinary items and minority interest................... (45,892)
Extraordinary gain on early extinguishment of debt, net of tax.............. 18,483
Minority interest........................................................... (320)
--------
Net loss.................................................................... $(27,729)
========
</TABLE>
See accompanying notes to consolidated financial statements
48
<PAGE> 51
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED
LIMITED GENERAL LIMITED NOTES
PARTNER PARTNER PARTNERS RECEIVABLE TOTAL
--------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Syndication costs.................... $ (43) $ (7) $ (575) $ $ (625)
------ ------ ------ -------- --------
Balance at December 31, 1995......... (43) (7) (575) (625)
Cash contributions................... 1,913 188,637 190,550
Notes receivable from General
Partner............................ 1,850 (1,850)
In-kind contributions, historical
cost basis......................... 237,805 237,805
Conversion of GECC debt to equity.... 25,000 11,667 36,667
Allocation of RMG's and IPWT's
historical equity balances......... (2,719) (239,368) (242,087)
Distribution......................... (119,775) (119,775)
Syndication costs.................... (69) (10) (911) (990)
Net loss............................. (1,926) (290) (25,513) (27,729)
------ ------ ------ -------- --------
Balance at December 31, 1996......... $ 22,962 $ 737 $ 51,967 $ (1,850) $ 73,816
====== ====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
49
<PAGE> 52
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (27,729)
Minority interest.................................................... 320
Loss on disposal of fixed assets..................................... 324
Depreciation and amortization........................................ 65,905
Gain on sale of investment........................................... (286)
Extraordinary gain on early extinguishment of debt, net of tax....... (18,483)
Changes in assets and liabilities:
Accounts receivable............................................... (2,798)
Receivable from affiliates........................................ 151
Prepaids.......................................................... (1,922)
Interest receivable............................................... (2,633)
Other current assets.............................................. 8
Deferred income taxes............................................. (2,596)
Other non-current assets.......................................... 379
Accounts payable and accrued liabilities.......................... 4,826
Payable to affiliate.............................................. 1,531
Accrued interest.................................................. 20,322
Deferred revenue.................................................. 394
Other non-current liabilities..................................... (16)
---------
Cash flows from operating activities................................. 37,697
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of cable systems, net of cash acquired..................... (415,806)
Purchase of RMG Class A Common Stock................................. (329)
Property and equipment............................................... (38,167)
Intangible assets.................................................... (37)
Notes receivable..................................................... (15,000)
Purchases of escrowed investments.................................... (88,755)
Proceeds from sale of investment..................................... 1,081
---------
Cash flows from investing activities................................. (557,013)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from long-term debt....................................... 850,000
Repayment of long-term debt.......................................... (369,504)
Call premium and other fees on early extinguishment of debt.......... (4,716)
Contributed capital.................................................. 190,550
Partner distribution................................................. (119,775)
Debt issue costs..................................................... (17,479)
Syndication costs.................................................... (990)
---------
Cash flows from financing activities................................. 528,086
---------
Net change in cash..................................................... 8,770
Cash, beginning of period..............................................
---------
Cash, end of period.................................................... $ 8,770
=========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 53
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE COMPANY AND BASIS OF PRESENTATION:
InterMedia Capital Partners IV, L.P. ("ICP-IV" or the "Company"), a
California limited partnership, was formed on March 19, 1996, as a successor to
InterMedia Partners IV, L.P. ("IP-IV") which was formed in October 1994, for the
purpose of acquiring and operating cable television systems in three geographic
clusters, all located in the southeastern United States.
As of December 31, 1996, ICP-IV's systems served the following number of
basic subscribers and encompassed the following number of homes passed:
<TABLE>
<CAPTION>
BASIC HOMES
SUBSCRIBERS PASSED
----------- --------
(UNAUDITED)
<S> <C> <C>
Nashville/Mid-Tennessee Cluster................ 329,022 510,067
Greenville/Spartanburg Cluster................. 146,431 206,673
Knoxville/East Tennessee Cluster............... 98,202 135,303
------- -------
Total................................ 573,655 852,043
======= =======
</TABLE>
InterMedia Capital Management IV, L.P., a California limited partnership
("ICM-IV"), is the 1.1% general partner of ICP-IV. As of December 31, 1996,
ICP-IV has obtained capital contributions from its limited and general partners
of $360,000, including cable television properties and debt and equity interests
in InterMedia Partners of West Tennessee, L.P. ("IPWT"), an affiliated entity.
The limited partner contributions are from various institutional investors and
include a preferred limited partner interest of $25,000, which General Electric
Capital Corporation ("GECC") received in exchange for a portion of its note
receivable from IPWT.
ICP-IV is the successor partnership to IP-IV. Upon formation of ICP-IV, the
previous general and limited partners of IP-IV became the general and limited
partners of ICP-IV. Simultaneously, ICP-IV became the 99.99% limited partner of
IP-IV and ICM-IV became the .01% general partner of IP-IV. The accompanying
balance sheet as of December 31, 1995 represents the assets, liabilities and
equity of IP-IV.
The Company's acquisitions of its cable television systems were structured
as leveraged transactions and a significant portion of the assets acquired are
intangible assets which are being amortized over one to twelve years. Therefore,
as was planned, the Company has incurred substantial book losses. Of the total
pre-tax losses of $48,488, non-cash charges have aggregated $66,229. These
charges consist of $23,134 of depreciation of property and equipment, $42,771 of
amortization of intangible assets, predominately related to franchise rights and
goodwill, and $324 of loss on disposal of fixed assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated balance sheet includes the accounts of ICP-IV, and its
majority owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
51
<PAGE> 54
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Revenue recognition
Cable television service revenue is recognized in the period in which the
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
Investments in debt securities
Investments held to maturity are carried at amortized cost and consist of
U.S. Treasury Notes with maturities ranging from one to thirty-one months. The
investments are held in an escrow account to be used by the Company to make
interest payments on the Company's senior notes (see Note 8 -- Long-Term Debt).
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Capitalized
plant is written down to recoverable values whenever recoverability through
operations or sale of the system becomes doubtful.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Cable television plant.............................. 5-10
Buildings and improvements.......................... 10
Furniture and fixtures.............................. 3-7
Equipment and other................................. 3-10
</TABLE>
Intangible assets
The Company has franchise rights to operate cable television systems in
various towns and political subdivisions. Franchise rights are being amortized
over the lesser of the remaining lives of the franchises or the base twelve-year
term of ICP-IV which expires on December 31, 2007. Remaining franchise lives
range from one to twenty years.
Goodwill represents the excess of acquisition cost over the fair value of
net tangible and franchise assets acquired and liabilities assumed and is being
amortized on a straight line basis over the twelve-year term of ICP-IV.
Debt issue costs are included in intangible assets and are being amortized
over the terms of the related debt.
Cost associated with potential acquisitions are initially deferred. For
acquisitions which are completed, related costs are capitalized as part of the
acquisition costs. For those acquisitions not completed, related costs are
expensed in the period the acquisition is abandoned.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the system becomes doubtful. Each
year, the Company evaluates the recoverability of the carrying value of its
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized costs of these assets.
52
<PAGE> 55
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Interest Rate Swaps
Under an interest rate swap, the Company agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the
difference between the fixed and variable rates pursuant to the swap agreement.
The net interest received or paid as part of the interest rate swap is accounted
for as an adjustment to interest expense.
Long-lived assets and long-lived assets to be disposed of
ICP-IV has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." ICP-IV reviews property and equipment and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment losses have
been recognized by ICP-IV.
Income taxes
Income taxes reported in ICP-IV's financial statements represent the tax
effects of Robin Media Group, Inc.'s ("RMG") results of operations. RMG, a
subsidiary of ICP-IV, is the only entity within the Company's organization
structure which reports provision/benefit for income taxes. No provision or
benefit for income taxes is reported by any of ICP-IV's other subsidiaries or by
ICP-IV because, as partnerships, the tax effects of these entities' results of
operations accrue to the partners. ICP-IV and its partnership subsidiaries are
registered with the Internal Revenue Service as tax shelters under Internal
Revenue Code Section 6111(b).
RMG accounts for income taxes using the asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Partners' capital
Syndication costs incurred to raise capital have been charged to partners'
capital.
Allocation of profits and losses
Profits and losses are allocated in accordance with the provisions of
ICP-IV's partnership agreement, generally as follows:
Losses are allocated first to the partners other than the preferred
limited partner, and thereafter to the preferred limited partner, in each
case to the extent of and in accordance with relative capital
contributions; second, to the partners which loaned money to the
Partnership to the extent of and in accordance with relative loan amounts;
and third, to the partners in accordance with relative capital
contributions.
Profits are allocated first to the preferred limited partner in an
amount sufficient to yield an 11.75% return compounded semi-annually on its
capital contributions; second, to the partners which loaned money to the
Partnership to the extent of and proportionate to previously allocated
losses relating to such loans; third, among the partners, other than the
preferred limited partner, in accordance with relative capital
contributions, in an amount sufficient to yield a pre-tax return of 15% per
annum on their capital contributions; and fourth, 20% to the general
partner and 80% to the limited and general partners, other than the
preferred limited partner, in accordance with relative capital
contributions.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
53
<PAGE> 56
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
the fair value:
Current assets and current liabilities: The carrying value of
receivables, payables, deferred revenue, and accrued liabilities
approximates fair value due to their short maturity.
Long-term debt: The fair value of the Company's borrowings under the
bank term loan and revolving credit facility are estimated based on the
borrowing rates currently available to the Company for obligations with
similar terms. The fair value of the senior notes is based on recent
trading prices. Management believes that the fair value of the Company's
outstanding debt approximates the recorded value (see Note 8).
3. ACQUISITIONS
On July 30, 1996 and August 1, 1996, the Company borrowed $558,000 under a
new bank term loan and revolving credit agreement (the "Bank Facility"), issued
$292,000 in senior notes (the "Notes"), and received equity contributions from
its partners of $360,000, consisting of: $190,550 in cash; $117,600 representing
the fair market value of certain cable television systems (the
"Greenville/Spartanburg System") contributed, net of cash paid to the
contributing partner of $119,775; $13,333 representing the fair market value of
general and limited partner interests in IPWT, an affiliate; $36,667 in exchange
for notes receivable from IPWT; and $1,850 in the form of a note receivable from
ICM-IV. The Bank Facility, the Notes and the equity contributions are referred
to as the "Financing."
On July 30, 1996, the Company acquired cable television systems serving
approximately 360,400 basic subscribers in Tennessee, South Carolina and Georgia
through the Company's acquisition of controlling equity interests in IPWT and
Robin Media Holdings, Inc. ("RMH"), an affiliate, and through the equity
contribution of the Greenville/Spartanburg System to the Company by affiliates
of Tele-Communications, Inc. ("TCI").
The Company acquired all of the general and limited partner interests of
IPWT in exchange for a $13,333 limited partner interest in ICP-IV. Concurrently,
GECC transferred to ICP-IV its $55,800 note receivable from IPWT and related
interest receivable of $3,356 in exchange for an $11,667 limited partner
interest in ICP-IV, a $25,000 preferred limited partner interest in ICP-IV and
cash of $22,489.
InterMedia Partners V, L.P. ("IP-V"), a former affiliate, owned all of the
outstanding equity of RMH prior to the Company's acquisition of a majority of
the voting interests in RMH. In conjunction with a recapitalization of RMH,
ICP-IV purchased 3,285 shares of RMH's Class A Common Stock for $329.
Concurrently, a wholly owned subsidiary of TCI converted its outstanding loan to
IP-V into a limited partnership interest and, in dissolution of the IP-V
partnership, received 365 shares of RMH Class B Common Stock valued at $37 and
12,000 shares of RMH Redeemable Preferred Stock valued at $12,000. Upon
completion of the recapitalization, the Company has 60% of the voting interests
of RMH, with TCI owning the remaining 40%. In connection with the acquisition,
the Company assumed approximately $331,450 of long-term debt and $11,565 of
accrued interest, which was repaid with proceeds from the Financing. Upon
consummation of the acquisition, RMH merged into its wholly owned operating
subsidiary Robin Media Group, Inc. ("RMG"). All of the RMH stock just described
was converted as a result of the merger into capital stock of RMG with the same
terms.
54
<PAGE> 57
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Affiliates of TCI contributed cash and transferred their interests in the
Greenville/Spartanburg System to the Company in exchange for a 49.0% limited
partner interest in ICP-IV and an assumption of $119,775 of debt which was
simultaneously repaid by the Company with proceeds from the Financing. The cash
paid of $119,775 for debt assumed has been recorded as a distribution to TCI in
the accompanying consolidated financial statements.
TCI held substantial direct and indirect ownership interests in each of
RMH, IPWT and the Greenville/Spartanburg System. As a result of TCI's
substantial continuing interest in RMG, IPWT and the Greenville/Spartanburg
System after the Company's acquisitions, the acquired assets of these entities
have been accounted for at their historical basis as of the acquisition date.
Results of operations for these entities have been included in the Company's
consolidated results only from the acquisition date. The historical cost basis
of RMH's, IPWT's and the Greenville/Spartanburg System's assets purchased and
liabilities assumed as of July 30, 1996 was as follows:
<TABLE>
<S> <C>
Current assets.......................................... $ 19,368
Property and equipment.................................. 107,504
Franchise rights........................................ 270,593
Goodwill................................................ 59,532
Other non-current assets................................ 8,124
--------
Total assets.................................. $465,121
========
Current liabilities..................................... $ 33,283
Long-term debt.......................................... 543,434
Other non-current liabilities........................... 87
--------
Total liabilities............................. 576,804
--------
Mandatorily redeemable preferred stock.................. 12,000
Minority interest....................................... 37
Total equity............................................ (123,720)
--------
Total liabilities and equity.................. $465,121
========
</TABLE>
On May 8, 1996, the Company acquired the Houston, Texas cable television
assets of Prime Cable ("the Prime Houston System") with the intent of exchanging
with TCI the Prime Houston System for cable television systems of Viacom
currently serving approximately 151,100 basic subscribers in metropolitan
Nashville, Tennessee (the "Nashville System"). The purchase price for the Prime
Houston System of approximately $300,000 was financed entirely with non-recourse
debt from TCI Communications, Inc. ("TCIC"), a wholly owned subsidiary of TCI,
and Bank of America which was repaid with the proceeds from the Financing. As
was planned, on July 31, 1996, TCI and TCIC consummated the acquisition of all
of Viacom's cable television systems including the Nashville System. On August
1, 1996, the Company acquired the Nashville System in exchange for the Prime
Houston System and cash equal to the difference between the fair market values
of the systems. The aggregate purchase price of the Nashville System pursuant to
the exchange was $315,333. TCI managed the Prime Houston System during the
Company's ownership period, and, under the terms of the exchange agreement, the
Company was obligated to sell to TCIC and TCIC was obligated to purchase the
Prime Houston System from the Company for an amount in cash sufficient to repay
the outstanding balances of the TCIC and bank loans in the event that TCI had
been unable to complete the Viacom acquisition by October 1, 1996. Under the
terms of the various agreements with TCIC, the Company could not dispose of and
did not have effective control over the use of the Prime Houston assets, and
there was no economic effect to the Company from the Prime Houston assets during
the Company's ownership of the Prime Houston System. Accordingly, the accounts
of the Prime Houston System and the related debt and
55
<PAGE> 58
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
interest expense have been excluded from the Company's consolidated financial
statements. The Company's acquisition of the Nashville System has been accounted
for as a purchase in accordance with Accounting Principles Bulletin No. 16
("APB16") and the Nashville System's results of operations have been included in
the Company's consolidated results only from August 1, 1996, the date of the
exchange.
During the year ended December 31, 1996, the Company acquired other cable
television systems currently serving approximately 60,300 basic subscribers
primarily in central and eastern Tennessee for an aggregate purchase price of
$102,701 (the "Miscellaneous Acquisitions"). These acquisitions have also been
accounted for as purchases in accordance with APB16. Accordingly, results of
operations of the Miscellaneous Acquisitions have been included in the Company's
consolidated results only from the dates of acquisition.
Total acquisition costs of the Nashville System and the Miscellaneous
Tennessee Acquisitions are as follows:
<TABLE>
<S> <C>
Cash paid to sellers, net of liabilities assumed.......... $415,390
Other acquisition costs................................... 2,644
--------
Total acquisition costs......................... $418,034
========
</TABLE>
The Company's allocation of acquisition costs for the Nashville System and
the Miscellaneous Tennessee Acquisitions is as follows:
<TABLE>
<S> <C>
Current assets.......................................... $ 8,454
Property and equipment.................................. 90,421
Franchise rights........................................ 306,607
Goodwill................................................ 21,583
Other non-current assets................................ 376
--------
Total assets.................................. 427,441
Current liabilities..................................... 9,407
--------
Net assets acquired..................................... $418,034
========
</TABLE>
Had the acquisitions and the Financing been completed as of January 1,
1996, pro forma revenues, net loss before extraordinary gain on early
extinguishment of debt and minority interest and net loss for the year ended
December 31, 1996 would have been $228,272 (unaudited), $108,193 (unaudited) and
$90,530 (unaudited), respectively.
4. ESCROWED INVESTMENTS HELD TO MATURITY
The Company's escrowed investments (see Note 8) held to maturity consist of
U.S. Treasury Notes with fair value amounts and maturities as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Matures within 1 year........................... $ 28,237 $ 28,333
Matures between 1 and 3 years................... 60,518 61,019
------- -------
Total................................. $ 88,755 $ 89,352
======= =======
</TABLE>
The fair values of the investments are based on quoted market prices.
56
<PAGE> 59
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
---- --------
<S> <C> <C>
Franchise rights................................ $ $577,786
Goodwill........................................ 81,115
Debt issue costs................................ 3 17,479
Other........................................... 704 294
---- -------
707 676,674
Accumulated amortization........................ (42,587)
---- -------
$707 $634,087
==== =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Land.................................................. $ 2,217
Cable television plant................................ 192,888
Buildings and improvements............................ 1,494
Furniture and fixtures................................ 1,999
Equipment and other................................... 15,255
Construction in progress.............................. 38,489
------------
252,342
Accumulated depreciation.............................. (22,287)
------------
$230,055
==========
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
---- -------
<S> <C> <C>
Accounts payable................................. $ $ 1,391
Accrued program costs............................ 1,431
Accrued franchise fees........................... 4,895
Accrued capital expenditures..................... 8,720
Accrued payroll costs............................ 1,973
Accrued property and other taxes................. 2,829
Accrued legal fees............................... 196 8
Accrued accounting fees.......................... 16 179
Other accrued liabilities........................ 53 7,547
---- -------
$265 $28,973
==== =======
</TABLE>
57
<PAGE> 60
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Bank revolving credit facility, $475,000 commitment as
of December 31, 1996, interest currently at LIBOR
plus 1.625% payable quarterly, matures July 1,
2004................................................ $334,000
Bank term loan; interest at LIBOR plus 2.375% payable
quarterly, matures January 1, 2005.................. 220,000
11 1/4% senior notes, interest payable semi-annually,
due August 1, 2006.................................. 292,000
--------
$846,000
========
</TABLE>
The Company's bank debt is outstanding under the revolving credit facility
and term loan agreement executed by IP-IV and dated July 30, 1996. The revolving
credit facility currently provides for $475,000 of available credit. Starting
January 1, 1999, revolving credit facility commitments will be permanently
reduced semiannually by increments ranging from $22,500 to $47,500 through
maturity on July 1, 2004. The term loan requires semiannual principal payments
of $500 starting January 1, 1999 through January 1, 2004, and final principal
payments in two equal installments of $107,250 on July 1, 2004 and January 1,
2005. Advances under the Bank Facility are available under interest rate options
related to the base rate of the administrative agent for the Bank Facility
("ABR") or LIBOR. Interest rates on borrowings under the term loan are at LIBOR
plus 2.375% or ABR plus 1.125%. Interest rates vary on borrowings under the
revolving credit facility from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to
ABR plus 0.50% based on the Company's ratio of senior debt to annualized
quarterly operating cash flow. For purposes of this computation, senior debt, as
defined, excludes the 11 1/4% senior notes. The Bank Facility requires quarterly
interest payments, or more frequent interest payments if a shorter period is
selected under the LIBOR option, and quarterly payment of fees on the unused
portion of the revolving credit facility at 0.375% per annum when the senior
leverage ratio is greater than 4.0:1.0 and at 0.25% when the senior leverage
ratio is less than or equal to 4.0:1.0. At December 31, 1996, the interest rate
on borrowings outstanding under the revolving credit facility was 7.25%.
The Company has entered into interest rate swap agreements in the aggregate
notional principal amount of $120,000 to establish long-term fixed interest
rates on its variable senior bank debt. Under the swap agreements, the Company
pays quarterly interest at fixed rates ranging from 6.28% to 6.3225% and
receives quarterly interest payments equal to LIBOR. The differential to be paid
or received in connection with an individual swap agreement is accrued as
interest rates change over the period to which the payments or receipts relate.
The agreements expire between May 1999 and February 2000.
The estimated fair value of the interest rate swaps, which is gross of
unrealized market gains or losses, is based on the current value in the market
for transactions with similar terms and adjusted for the holding period. At
December 31, 1996, the fair market value of the interest rate swaps was
$(2,700).
Borrowings under the Bank Facility are secured by the capital stock and
partnership interests of IP-IV's subsidiaries.
The 11 1/4% senior notes will be redeemable at the option of the Company,
in whole or in part, subsequent to August 1, 2001 at specified redemption prices
which will decline in equal annual increments and range from 105.625% beginning
August 1, 2001 to 100.0% of the principal amount beginning August 1, 2004
through the maturity date, plus accrued interest.
58
<PAGE> 61
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
As of December 31, 1996, ICP-IV has $90,949 in pledged securities,
including interest, which represent sufficient funds to provide for payment in
full of interest on the Notes through August 1, 1999 and that are pledged as
security for repayment of the Notes under certain circumstances. Proceeds from
the pledged securities will be used by ICP-IV to make interest payments on the
Notes through August 1, 1999.
ICP-IV is the issuer of the Notes and, as a holding company, has no direct
operations. The Notes are structurally subordinated to borrowings of IP-IV under
the Bank Facility. The Bank Facility restricts IP-IV and its subsidiaries from
paying dividends and making other distributions to ICP-IV.
The debt agreements contain certain covenants which restrict the Company's
ability to encumber assets, make investments or distributions, retire
partnership interests, pay management fees currently, incur or guarantee
additional indebtedness and purchase or sell assets. The debt agreements include
financial covenants which require minimum interest and debt coverage ratios and
specify maximum debt to cash flow ratios.
Annual maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.................................................... $
1998....................................................
1999.................................................... 1,000
2000.................................................... 1,000
2001.................................................... 15,000
Thereafter.............................................. 829,000
--------
$846,000
========
</TABLE>
Based on recent trading prices of the Notes, the fair value of these
securities at December 31, 1996 is $297,665. Borrowings under the Bank
Facility's are at rates that would be otherwise currently available to the
Company. Accordingly, the carrying amounts of bank borrowings outstanding as of
December 31, 1996 approximate their fair value.
9. MANDATORILY REDEEMABLE PREFERRED STOCK
The RMG Redeemable Preferred Stock has an annual dividend of 10.0% and
participates in any dividends paid on the common stock at 10.0% of the dividend
per share paid on the common stock. The RMG Redeemable Preferred Stock bears a
liquidation preference of $12,000 plus any accrued but unpaid dividends at the
time of liquidation and is mandatorily redeemable on September 30, 2006 at the
liquidation preference amount. RMG also has the right, but not the obligation,
to redeem in whole or in part the RMG Redeemable Preferred Stock at the
liquidation preference amount on or after September 30, 2001. The accrued
dividend on the RMG Redeemable Preferred Stock is included in minority interest
as a charge against income (loss).
10. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Company and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from
59
<PAGE> 62
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
major network and certain local television stations. Among other provisions, the
1996 Act will eliminate rate regulation on the expanded basic tier effective
March 31, 1999.
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and require refunds measured from the date a
complaint is filed in some circumstances or retroactively for up to one year in
other circumstances. Management believes it has made a fair interpretation of
the 1992 Act and related FCC regulations in determining regulated cable
television rates and other fees based on the information currently available.
However, complaints have been filed with the FCC on rates for certain franchises
and certain local franchise authorities have challenged existing and prior
rates. Further complaints and challenges could be forthcoming, some of which
could apply to revenue recorded in 1996. Management believes, however, that the
effect, if any, of these complaints and challenges will not be material to the
Company's financial position or results of operations.
Many aspects of regulations at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC is required to conduct rulemaking proceedings over the next several months
to implement various provisions of the 1996 Act. It is not possible at this time
to predict the ultimate outcome of these reviews or proceedings or their effect
on the Company.
11. COMMITMENTS AND CONTINGENCIES
The Company is committed to provide cable television services under
franchise agreements with remaining terms of up to twenty years. Franchise fees
of up to 5% of gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Company has entered into long-term retransmission agreements with
all applicable stations in exchange for in-kind and/or other consideration.
The Company is subject to litigation and other claims in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material adverse effect on
the Company's financial condition or results of operations.
The Company has entered into pole rental agreements and leases certain of
its facilities and equipment under noncancelable operating leases. Minimum
rental commitments at December 31, 1996 for the next five years and thereafter
under these leases are as follows:
<TABLE>
<S> <C>
1997...................................................... $ 760
1998...................................................... 480
1999...................................................... 269
2000...................................................... 241
2001...................................................... 234
Thereafter................................................ 1,326
-------
$3,310
========
</TABLE>
Rent expense, including pole rental agreements, was $2,157 for the year
ended December 31, 1996.
12. RELATED PARTY TRANSACTIONS
ICM-IV manages the business of ICP-IV and its subsidiaries for a per annum
fee of 1% of the Company's total non-preferred capital contributions, or $3,350,
of which ICM-IV will defer 20% per annum, payable in each following year, in
order to support the Company's bank debt. However, pursuant to ICP-IV's Limited
Partnership Agreement, ICM-IV's first year management fees of $3,350 were
prepaid in July and August 1996, of which $1,558 was charged to expense during
1996..
60
<PAGE> 63
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
InterMedia Management, Inc. ("IMI") is wholly owned by the managing general
partner of ICM-IV. IMI has entered into agreements with all of ICP-IV's
subsidiaries to provide accounting and administrative services at cost. IMI also
provides such services to other cable systems which are affiliates of the
Company. During 1996, administrative fees charged by IMI were $3,036.
Receivables from affiliates represent advances to IMI, net of administration
fees charged by IMI, and operating expenses paid by IMI on behalf ICP-IV's
subsidiaries.
As an affiliate of TCI, ICP-IV is able to purchase programming services
from a subsidiary of TCI. Management believes that the overall programming rates
made available through this relationship are lower than ICP-IV could obtain
separately. The TCI subsidiary is under no obligation to continue to offer such
volume rates to ICP-IV, and such rates may not continue to be available in the
future should TCI's ownership in ICP-IV significantly decrease or if TCI or the
programmers should otherwise decide not to offer such participation to the
Company. Programming fees charged by the TCI subsidiary for the year ended
December 31, 1996 amount to $17,538. Payable to affiliate includes programming
fees payable to the TCI subsidiary of $3,353 at December 31, 1996.
On April 1, 1996, InterMedia Partners of Tennessee, L.P. ("IPTN"), a
subsidiary of IP-IV, loaned $15.0 million to RMH. Interest income for the year
ended December 31, 1996 includes $445 which IPTN earned on the note prior to the
Company's purchase of RMH on July 30, 1996. As of December 31, 1996 the note
balance outstanding including accrued interest has been eliminated in
consolidation.
13. INCOME TAXES
Income tax benefit is included in the financial statements as follows:
<TABLE>
<S> <C>
Continuing operations............................................. $2,596
Extraordinary loss (see Note 14).................................. 1,790
------
$4,386
======
</TABLE>
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Deferred federal tax benefit...................................... $4,257
Deferred state tax benefit........................................ 129
-------
$4,386
=======
</TABLE>
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Property and equipment........................................ $ 8,617
Intangible assets............................................. 11,287
-------
19,904
-------
Loss carryforwards............................................ (29,814)
-------
$ 9,910
=======
</TABLE>
At December 31, 1996, RMG had net operating loss carryforwards for federal
income tax purposes aggregating $87,689 which expire through 2011. RMG is a loss
corporation as defined in section 382 of the Internal Revenue Code. Therefore,
if certain substantial changes in RMG's ownership should occur, there could be a
significant annual limitation on the amount of loss carryforwards which can be
utilized. Because of TCI's continuing interest in RMG, management does not
believe that the recapitalization of RMG and the partial sale of the
recapitalized equity to ICP-IV will impair RMG's ability to utilize its net
operating loss carryforwards.
The Company's management has not established a valuation allowance to
reduce the deferred tax assets related to RMG's unexpired net operating loss
carryforwards. Due to an excess of appreciated asset value over
61
<PAGE> 64
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
the tax basis of RMG's net assets, management believes it is more likely than
not that the deferred tax assets related to the unexpired net operating losses
will be realized.
A reconciliation of the tax benefit computed at the statutory federal rate
and the tax benefit reported in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Tax benefit at federal statutory rate............................ $10,810
Partnership losses exempt from income taxes...................... (5,287)
State taxes, net of federal benefit.............................. 127
Goodwill amortization............................................ (1,209)
Tax reserves and other........................................... (55)
-------
$ 4,386
=======
</TABLE>
14. EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
As described in Note 3 Acquisitions, in connection with the Company's
acquisition of a majority of the voting interest in RMH, the Company assumed
approximately $331,450 of long-term debt, which was repaid with the proceeds
from the Financing. The repayment of RMH's long-term debt resulted in call
premium and fees associated with the defeasance of the debt. Costs associated
with the prepayment of the debt resulted in an extraordinary loss on early
extinguishment of debt of $2,926, net of tax benefit of $1,790.
Also, in connection with the Company's acquisition of the partner interests
of IPWT, GECC transferred to ICP-IV its note receivable from IPWT and related
interest receivable in exchange for a limited partner and a preferred limited
partner interest in ICP-IV and cash. The settlement of IPWT's long-term note
payable to GECC resulted in an extraordinary gain on early extinguishment of
debt of $21,409, which represented a debt restructuring credit balance as of
July 30, 1996. The debt restructuring credit was created in 1994 upon IPWT's
restructuring of its GECC debt.
15. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
During the year ended December 31, 1996, the Company paid interest of
$16,222.
As described in Note 3, during 1996 the Company acquired several cable
television systems located in Tennessee and Georgia. In conjunction with the
acquisitions, assets acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired........................... $418,987
Liabilities assumed, net of current assets.............. (953)
Cash acquired in connection in RMH and IPWT
acquisitions.......................................... (2,228)
--------
Net cash paid........................................... $415,806
========
</TABLE>
16. EMPLOYEE BENEFIT PLAN
The Company participates in the InterMedia Partners Tax Deferred Savings
Plan, which covers all full-time employees who have completed at least one year
of employment. Such Plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. The Company's matching contributions under such
Plan are at the rate of 50% of the employee's contributions, up to a maximum of
3% of compensation.
62
<PAGE> 65
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
17. SUBSEQUENT EVENT
In February 1997, Leo J. Hindery, Jr., the managing general partner of
ICM-IV and various other affiliated InterMedia partnerships, was appointed
President of TCI. As part of Mr. Hindery's transition, TCI is negotiating for
the purchase of Mr. Hindery's interests in IMI and ICM-IV as well as various
other affiliated InterMedia partnerships. Through ICM-IV, Mr. Hindery has
managed ICP-IV and its subsidiaries as well as other affiliated InterMedia
partnerships. Upon the completion of the transaction, Mr. Hindery will no longer
hold a controlling interest in any of the various InterMedia corporations or
partnerships. The transition is expected to be completed in 1997 and will
require amendments to ICP-IV and its subsidiaries' various senior debt and
partnership agreements.
63
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of InterMedia
Capital Partners IV, L.P.
In our opinion, based upon our audits and the report of other auditors, the
accompanying combined balance sheet and the related combined statements of
operations, of changes in equity and of cash flows present fairly, in all
material respects, the combined financial position of the Previously Affiliated
Entities, which are comprised of Robin Media Holdings, Inc., InterMedia Partners
of West Tennessee, L.P., TCI of Greenville, Inc., TCI of Spartanburg, Inc. and
TCI of Piedmont, Inc., at December 31, 1995 and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994 and the
period from January 1, 1996 through July 30, 1996, except TCI of Greenville,
Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc. which are included from
January 27, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the combined financial
statements of TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of
Piedmont, Inc., which statements reflect total assets of $361,812,000 at
December 31, 1995, total revenues of $47,214,000 for the period from January 27,
1995 to December 31, 1995 and total revenues of $30,290,000 for the period from
January 1, 1996 through July 30, 1996. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for TCI of
Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc., is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 1, on July 30, 1996, the Previously Affiliated
Entities were sold and/or contributed to InterMedia Capital Partners IV, L.P.
PRICE WATERHOUSE LLP
San Francisco, California
March 28, 1997
64
<PAGE> 67
PREVIOUSLY AFFILIATED ENTITIES
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Cash and cash equivalents..................................................... $ 4,883
Accounts receivable, net of allowance for doubtful accounts of $853........... 8,330
Receivable from affiliates.................................................... 303
Prepaids...................................................................... 391
Inventory..................................................................... 2,940
Other current assets.......................................................... 223
--------
Total current assets................................................ 17,070
Intangible assets, net........................................................ 468,713
Property and equipment, net................................................... 102,668
Investments................................................................... 795
Other assets.................................................................. 1,248
--------
Total assets........................................................ $590,494
========
LIABILITIES AND EQUITY
Current portion of long-term debt............................................. $ 4,043
Accounts payable and accrued liabilities...................................... 10,692
Deferred revenue.............................................................. 3,963
Payable to affiliates......................................................... 2,124
Accrued interest.............................................................. 10,086
--------
Total current liabilities........................................... 30,908
Long-term debt................................................................ 407,176
Deferred income taxes......................................................... 115,161
--------
Total liabilities................................................... 553,245
--------
Commitments and contingencies
Equity........................................................................ 37,249
--------
Total liabilities and equity........................................ $590,494
========
</TABLE>
See accompanying notes to the combined financial statements.
65
<PAGE> 68
PREVIOUSLY AFFILIATED ENTITIES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
--------------------- JULY 30,
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Basic and cable services................................ $ 52,829 $ 85,632 $ 56,658
Pay services............................................ 12,043 23,942 14,185
Other services.......................................... 8,177 19,397 10,297
-------- -------- --------
73,049 128,971 81,140
-------- -------- --------
Program fees............................................ 13,189 24,684 17,080
Other direct expenses................................... 9,823 16,851 10,177
Depreciation and amortization........................... 68,216 70,154 36,507
Selling, general and administrative expenses............ 15,852 30,509 20,543
Management and consulting fees.......................... 585 815 398
-------- -------- --------
107,665 143,013 84,705
-------- -------- --------
Loss from operations.................................... (34,616) (14,042) (3,565)
-------- -------- --------
Other income (expense):
Interest and other income............................. 1,442 1,172 209
Gain (loss) on disposal of fixed assets............... (1,401) (63) (14)
Interest expense...................................... (44,278) (48,835) (47,545)
Other expense......................................... (194) (644) (123)
-------- -------- --------
(44,431) (48,370) (47,473)
-------- -------- --------
Loss before income tax benefit.......................... (79,047) (62,412) (51,038)
Income tax benefit...................................... 19,020 17,502 14,490
-------- -------- --------
Net loss................................................ $(60,027) $(44,910) $ (36,548)
======== ======== ========
</TABLE>
See accompanying notes to the combined financial statements.
66
<PAGE> 69
PREVIOUSLY AFFILIATED ENTITIES
COMBINED STATEMENT OF CHANGES IN EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1993..................................................... $(129,800)
Capital contributions to InterMedia Partners of West Tennessee, L.P.............. 22,850
Net loss......................................................................... (60,027)
---------
Balance at December 31, 1994..................................................... (166,977)
January 27, 1995 combining with TCI of Greenville, Inc., TCI of Spartanburg, Inc.
and TCI of Piedmont, Inc....................................................... 249,136
Net loss......................................................................... (44,910)
---------
Balance at December 31, 1995..................................................... 37,249
Capital contribution to TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI
of
Piedmont, Inc.................................................................. 9,449
Net loss......................................................................... (36,548)
---------
Balance July 30, 1996............................................................ $ 10,150
=========
</TABLE>
See accompanying notes to the combined financial statements.
67
<PAGE> 70
PREVIOUSLY AFFILIATED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
------------------- JULY 30,
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(60,027) $(44,910) $ (36,548)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization............................ 68,644 70,278 36,585
Loss on sale of note receivable.......................... 376
Loss (gain) on disposal of fixed assets.................. 1,401 63
Deferred income taxes.................................... (19,020) (17,601) (8,084)
Changes in assets and liabilities:
Accounts receivable.................................... (455) (282) (345)
Receivable from affiliates............................. 8,148 80 (124)
Interest receivable.................................... (726) 2,569 --
Prepaids............................................... 7 (39) (94)
Inventory.............................................. (216) (1,221) (2,290)
Other assets........................................... 177 (212) (164)
Accounts payable and accrued liabilities............... 116 2,589 610
Cash overdraft......................................... 35
Deferred revenue....................................... 202 163 98
Payable to affiliates.................................. 1,531 (317) (834)
Accrued interest....................................... 106 (3,429) 2,986
-------- -------- --------
Cash flows from operating activities.......................... (112) 8,107 (8,169)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (12,432) (26,301) (18,588)
Proceeds from the sale of property and equipment............ 44
Investments................................................. (414) (360)
Collections and proceeds from sale of notes receivable...... 17,764 2,624
Other assets and intangibles................................ (47) (621) (149)
-------- -------- --------
Cash flows from investing activities.......................... 4,871 (24,614) (18,737)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Activity on revolving credit note payable................... (2,600) 11,600 (200)
Note payable to affiliate................................... 15,000
Repayment on long-term debt................................. (22,073)
Capital contributions....................................... 20,050 6,484 9,449
Debt issue costs............................................ (161) (18)
-------- -------- --------
Cash flows from financing activities.......................... (4,784) 18,066 24,249
-------- -------- --------
Net change in cash and cash equivalents....................... (25) 1,559 (2,657)
Cash and cash equivalents, beginning of period................ 3,275 3,324 4,883
-------- -------- --------
Cash and cash equivalents, end of period...................... $ 3,250 $ 4,883 $ 2,226
======== ======== ========
</TABLE>
See accompanying notes to the combined financial statements.
68
<PAGE> 71
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The combined financial statements include the financial statements of Robin
Media Holdings, Inc. ("Holdings"), InterMedia Partners of West Tennessee, L.P.
("IPWT") and TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of
Piedmont, Inc. (collectively "TCI Greenville/Spartanburg"). Holdings, IPWT, and
TCI Greenville/Spartanburg are collectively referred to as the "Previously
Affiliated Entities." TeleCommunications, Inc. ("TCI") holds substantial direct
and indirect ownership interests in each of the entities that comprise the
Previously Affiliated Entities. The individual financial statements of the
Previously Affiliated Entities have been combined on a historical cost basis for
the periods presented as if they had always been members of the same operating
group, except for the financial statements of TCI Greenville/Spartanburg, which
have been included from January 27, 1995, the date of acquisition by TCI. The
Previously Affiliated Entities own and operate cable television systems located
in Tennessee, South Carolina and Georgia.
The financial position and results of operations of the Previously
Affiliated Entities are being presented on a combined basis because of TCI's
substantial continuing ownership interests in the Previously Affiliated Entities
after the July 30, 1996 acquisitions of the Previously Affiliated Entities by
InterMedia Capital Partners IV, L.P. ("ICP-IV"), an affiliated entity formed for
the purpose of acquiring cable television systems and consolidating various
cable television systems owned by other affiliated entities.
As disclosed in Note 2, certain accounting policies of Holdings and IPWT
are different from those of TCI Greenville/Spartanburg.
ROBIN MEDIA HOLDINGS, INC.
Holdings is a Nevada corporation which was organized on August 27, 1991. On
April 30, 1992, Holdings commenced operations with the acquisition of all the
outstanding common stock of Robin Media Group, Inc. ("RMG") from Jack Kent Cooke
Incorporated. Prior to ICP-IV's July 30, 1996 acquisition of Holdings, Holdings
was wholly owned by InterMedia Partners V, L.P. ("IP-V"), a California limited
partnership. TCI is a limited partner in IP-V. Holdings is solely a holding
company with no operations and its only asset was its investment in RMG.
Holdings' acquisition of RMG was structured as a leveraged transaction and
a significant portion of the assets acquired are intangible assets which are
being amortized over one to ten years. Therefore, as was planned, RMG has
incurred substantial book losses which have resulted in a net shareholder's
deficit.
On July 30, 1996, IP-V sold a majority of the voting interests in Holdings
to ICP-IV for cash. In connection with the sale, Holding's capital structure was
reorganized to provide for three classes of capital stock. As part of the
recapitalization, a wholly owned subsidiary of TCI converted its outstanding
loan to IP-V into a partnership interest and the IP-V partnership was dissolved.
Additionally, ICP-IV provided Holdings with an intercompany loan in an amount
sufficient to repay all principal and interest on RMG's outstanding debt. Upon
funding on July 30, 1996 of the intercompany loan, Holdings repaid all amounts
due on its outstanding debt.
On July 31, 1996, Holdings merged with and into RMG, with RMG as the
surviving corporation.
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
IPWT is a California limited partnership which was formed on April 11, 1990
for the purpose of investing in and operating cable television properties.
Under the terms of the original partnership agreement, InterMedia Partners
("IP"), a California limited partnership, was the sole general partner, owning
an 89% interest in IPWT. The limited partners were IP and
69
<PAGE> 72
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Robin Cable Systems of Tucson, an Arizona limited partnership ("Robin-Tucson"),
holding interests in the Partnership of 10% and 1%, respectively. TCI is a
limited partner in IP.
On September 11, 1990 IPWT acquired the Western Tennessee properties of
U.S. Cable Partners, LP and its affiliates. Funding for this acquisition was
provided by General Electric Capital Corporation ("GECC") in the form of a
senior subordinated loan.
On October 3, 1994, IP sold its interests in Robin-Tucson to an affiliate
of TCI. IP contributed additional capital of $20,050 to IPWT from the net sales
proceeds and IPWT repaid $30,375 of the senior subordinated loan to GECC
including accrued interest. Under IPWT's Amended and Restated Agreement of
Limited Partnership entered into on October 3, 1994, GECC converted $2,800 of
its loan into a limited partnership interest in IPWT and restructured the
remaining balance of the loan (see Note 7). Under the amended partnership
agreement IP had an 80.1% general partner interest and a 9.9% limited partner
interest, and GECC had a 10% limited partner interest. Losses incurred prior to
October 3, 1994 were reallocated between the general and limited partners based
upon the change in ownership percentage resulting from the restructuring.
IPWT's acquisition of the West Tennessee cable television properties was
structured as a leveraged transaction and a significant portion of the assets
acquired were intangible assets which are being amortized over one to ten years.
Therefore, as was planned, IPWT has incurred substantial book losses, resulting
in negative partners' capital.
On July 30, 1996, IP and GECC contributed their partner interests in IPWT
to ICP-IV in exchange for cash and limited and preferred limited partnership
interests in ICP-IV.
TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC. AND TCI OF PIEDMONT, INC.
TCI Greenville/Spartanburg is an indirectly wholly owned subsidiary of TCI
Communications, Inc. ("TCIC") which is a wholly owned subsidiary of TCI.
TCI Greenville/Spartanburg was acquired by TCI from TeleCable Corporation
on January 27, 1995 and subsequently contributed to TCIC. These combined
financial statements include TCI Greenville/Spartanburg's assets, liabilities
and equity at December 31, 1995 and its results of operations for the period
from January 27, 1995, the date of TCI's acquisition.
On July 30, 1996, TCI consummated an agreement with ICP-IV to contribute
the TCI Greenville/Spartanburg systems to ICP-IV in exchange for a limited
partnership interest in ICP-IV.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combination
The combined financial statements include the accounts of Holdings, IPWT
and, from January 27, 1995, TCI Greenville/Spartanburg. All intercompany
accounts and transactions between Holdings and IPWT have been eliminated. There
are no intercompany accounts or transactions with TCI Greenville/Spartanburg.
Cash equivalents
The Previously Affiliated Entities consider all highly liquid investments
with original maturities of three months or less to be cash equivalents.
70
<PAGE> 73
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Revenue recognition
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
Inventory
Inventory consists primarily of supplies and is stated at the lower of cost
or market determined by the first-in, first-out method.
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Holdings and
IPWT include gains and losses from disposals and retirements in earnings. TCI
Greenville/Spartanburg recognizes gains and losses only in connection with sales
of properties in their entirety. At the time of ordinary retirements, sales or
other dispositions of property, TCI Greenville/Spartanburg charges the original
cost and cost of removal of such property, net of any realized salvage value, to
accumulated depreciation. Capitalized plant is written down to recoverable
values whenever recoverability through operations or sale of a system becomes
doubtful.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives for Holdings and IPWT:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Cable television plant....................................... 5-10
Buildings and improvements................................... 10
Furniture and fixtures....................................... 3-7
Equipment and other.......................................... 3-10
</TABLE>
Depreciation for TCI Greenville/Spartanburg is computed on a straight-line
basis using estimated useful lives of 3 to 15 years for cable distribution
systems and 3 to 40 years for buildings and support equipment.
Intangible assets
The Previously Affiliated Entities have franchise rights to operate cable
television systems in various towns and political subdivisions. Holdings' and
IPWT's franchise rights are being amortized on a straight-line basis over the
lesser of the remaining lives of the franchises or the base ten-year term of the
IP-V or IP partnership agreements. TCI Greenville/Spartanburg amortizes
franchise rights on a straight-line basis over 40 years. Remaining franchise
lives range from one to twenty-four years.
Goodwill represents the excess of acquisition cost over the fair value of
net tangible and franchise assets acquired and liabilities assumed for Holdings
and IPWT and is being amortized on a straight-line basis over the ten-year term
of IP-V and IP, respectively.
Debt issue costs are being amortized over the terms of the related debt.
Debt issue costs of $510 are stated net of accumulated amortization of $260 at
December 31, 1995.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the system becomes doubtful. Each
year, the Previously Affiliated Entities evaluate the recover-
71
<PAGE> 74
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
ability of the carrying value of intangible assets by assessing whether the
projected cash flows, including projected cash flows from sale of the systems,
is sufficient to recover the unamortized cost of these assets.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accounts payable........................................ $ 463
Accrued program costs................................... 358
Accrued franchise fees.................................. 3,545
Other accrued liabilities............................... 6,326
------
$ 10,692
======
</TABLE>
Income taxes
Holdings and TCI Greenville/Spartanburg account for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." The asset and liability approach used in SFAS 109
requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and
certain other subsidiaries of TCI was implemented effective July 1, 1995. The
Tax Sharing Agreement formalizes certain elements of the pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. Accordingly,
all tax attributes generated by TCIC's operations (which include TCI
Greenville/Spartanburg) after the effective date including, but not limited to,
net operating losses, tax credits, deferred intercompany gains, and the tax
basis of assets are inventoried and tracked for the entities comprising TCIC.
For the period January 27, 1995 to December 31, 1995 and January 1, 1996
through July 30, 1996, TCI Greenville/Spartanburg was included in the
consolidated federal income tax return of TCI. The income tax benefit for TCI
Greenville/Spartanburg is based on those items in the consolidated calculation
applicable to TCI Greenville/Spartanburg. For tax reporting purposes, the basis
in the underlying assets of TCI Greenville/Spartanburg were carried over at
their historical basis.
No provision or benefit for income taxes is recorded for IPWT because, as a
Partnership, the tax effects of IPWT's results of operations accrue to the
partners. IPWT is registered with the Internal Revenue Service as a tax shelter
under Internal Revenue Code Section 6111(b).
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
72
<PAGE> 75
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Franchise rights................................................ $ 578,445
Goodwill and other intangible assets............................ 104,260
--------
682,705
Accumulated amortization........................................ (213,992)
--------
$ 468,713
========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Land............................................................ $ 1,118
Cable television plant.......................................... 148,960
Buildings and improvements...................................... 866
Furniture and fixtures.......................................... 1,683
Equipment and other............................................. 10,810
Construction in progress........................................ 4,140
--------
167,577
Accumulated depreciation........................................ (64,909)
--------
$102,668
========
</TABLE>
5. INVESTMENTS
Holdings had a 49% limited partnership interest in InterMedia Partners II,
L.P. ("IP-II"), an affiliated entity, which was accounted for under the equity
method. Holding's original investment in IP-II was reduced to zero in 1992 as a
result of its equity in the net loss of IP-II. Holdings received distributions
from IP-II of $406 for the year ended December 31, 1995 which are included in
interest and other income in the accompanying Consolidated Statements of
Operations. No distributions were received from IP-II for the period from
January 1, 1996 through July 30, 1996. On August 30, 1996, Holdings sold its
interest in IP-II for cash resulting in a net gain of $2,859.
Holdings has a 15% limited partner interest in AVR of Tennessee, L.P.,
doing business as Hyperion of Tennessee, which is accounted for under the cost
method. Holdings contributed $360 to Hyperion of Tennessee during fiscal 1995.
During the period from January 1, 1996 through July 30, 1996, Holdings did not
make any contributions to Hyperion of Tennessee. On August 1, 1996, Holdings
sold a portion of its limited partner interest in Hyperion of Tennessee which
resulted in a gain of $286. Subsequent to the sale, Holdings retained a 0.01%
limited partner interest in Hyperion of Tennessee. As of December 31, 1995,
Holdings was committed to fund additional capital contributions to Hyperion of
Tennessee of $755 and to make term loan advances to Hyperion of Tennessee. These
future commitments were reduced in proportion to the reduction in Holding's
limited partner interest as a result of the sale. The term loan advances are
required to fund leasing arrangements for access to fiber optic distribution
owned by the respective partners.
73
<PAGE> 76
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. NOTES RECEIVABLE
Notes receivable were issued to Holdings in connection with previous sales
of cable television systems. In June 1995, Holdings sold its only remaining note
receivable including related accrued interest. At the time of the sale the note
had a balance of $5,980 which included $411 of interest earned in 1995. The sale
of the note resulted in a loss of $376 which is included in other expense.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
HOLDINGS:
Revolving credit note payable, $30,000 commitment, interest at
LIBOR plus 1.5% payable quarterly, due February 28, 1997... $ 25,000
11 1/8% senior subordinated notes, interest payable
semi-annually, due April 1, 1997........................... 271,400
11 5/8% subordinated debentures, interest payable
semi-annually, due April 1, 1999........................... 35,050
IPWT:
GECC revolving credit; $7,000 commitment; interest payable
quarterly at prime plus 1% or LIBOR plus 2% per annum;
matures June 30, 2001...................................... 2,000
GECC term loans payable; interest payable quarterly at 7% per
annum on $27,000 and at prime plus 1% or LIBOR plus 2% per
annum on $27,000; matures June 30, 2001.................... 54,000
Debt restructuring credit..................................... 23,769
411,219
Less current portion.......................................... 4,043
$407,176
</TABLE>
HOLDINGS
RMGs bank revolving credit agreement provided $30,000 of available
credit and bore interest either at the bank's reference rate plus 0.5% or
at LIBOR plus 1.5% which was payable quarterly. At December 31, 1995, the
interest rate on the revolving credit agreement was 7.5%. The revolving
credit agreement required RMG to pay a commitment fee of 0.375% per year,
payable quarterly, on the unused portion of available credit. The agreement
contained various restrictive covenants on Holdings and RMG, including
limitations on the payment of dividends.
The 11 1/8% senior subordinated notes (the "Notes") and the 11 5/8%
subordinated debentures (the "Debentures") were redeemable by RMG at a
redemption price of 101.0% and 101.4%, respectively, of the principal
amounts, together with accrued interest. The indentures with respect to the
Notes and the Debentures contained restrictive covenants on Holdings and
RMG including the limitations on dividends, additional debt and mergers and
acquisitions.
On July 30, 1996, ICP-IV made an intercompany loan to Holdings. The
proceeds were used to repay all amounts due on RMG's outstanding existing
debt.
74
<PAGE> 77
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
IPWT
On October 3, 1994, in connection with the sale of Robin-Tucson, IPWT
restructured its subordinated loan payable to GECC. Under the terms of the
restructuring, GECC reduced the face amount of the debt outstanding to
$59,000. Because the total estimated future payments on the restructured
debt exceeded the carrying amount of the debt at the time of restructuring,
no gain was recognized on the debt restructuring and no adjustments were
made to the carrying amount of IPWT's debt. The difference of $28,570
between the $59,000 refinanced and the amount of the note at the time of
the restructuring was recorded as a debt restructuring credit. During the
period from January 1, 1996 through July 30, 1996, a portion of future debt
service payments was recorded as reductions of the remaining debt
restructuring credit of $23,769 at December 31, 1995.
At December 31, 1995, $56,000 was outstanding under the Amended and
Restated Loan Agreement with GECC which provided for a revolving credit
facility in the amount of $7,000 and term loans in the aggregate amount of
$54,000. Borrowings under the revolving credit facility and the term loans
generally bore interest either at the Prime rate plus 1% or LIBOR plus 2%;
$27,000 of borrowings under the term loans bore interest at a fixed rate of
7%.
Interest periods corresponding to interest rate options were generally
specified as one, two, or three months for LIBOR loans. The loan agreement
required quarterly interest payments, or more frequent interest payments if
a shorter period was selected under the LIBOR option, and quarterly
payments of .5% per annum on the unused commitment.
The loan agreement provided for contingent interest payments generally
at 11.11% of excess cash flow, as defined. Contingent interest payments
were also required upon the sale of the West Tennessee system or the
partnership interest in IPWT.
The loan agreements contained non-financial covenants as well as
various restrictive covenants.
On July 30, 1996, all of IPWT's outstanding borrowings payable to GECC
were assumed by ICP-IV. As a result, approximately $3,000 was accrued for
contingent interest. ICP-IV subsequently settled all of the outstanding
debt and recognized a gain on early extinguishment of debt representing the
remaining debt restructuring credit balance as of July 30, 1996.
8. EQUITY
The combined equity of the Previously Affiliated Entities of $10,150, at
July 30, 1996, consists of the following components:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
HOLDINGS: STOCK CAPITAL DEFICIT TOTAL
- ----------------------------------------------- ------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................... $100 $ 10,498 $ (78,395) $ (67,797)
Net loss....................................... (46,588) (46,588)
---- -------- --------- ---------
Balance at December 31, 1994................... 100 10,498 (124,983) (114,385)
Net loss....................................... (37,729) (37,729)
---- -------- --------- ---------
Balance at December 31, 1995................... 100 10,498 (162,712) (152,114)
Net loss....................................... (19,767) (19,767)
---- -------- --------- ---------
Balance at July 30, 1996....................... $100 $ 10,498 $(182,479) (171,881)
==== ======== =========
---------
</TABLE>
75
<PAGE> 78
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
IPWT: PARTNER PARTNER
- ----------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................... $ (55,183) $ (6,820) (62,003)
Additional capital contributions............... 17,844 5,006 22,850
Adjustment to reallocate losses in connection
with the debt restructuring.................. 5,519 (5,519)
Net loss....................................... (10,765) (2,674) (13,439)
-------- --------- ---------
Balance at December 31, 1994................... (42,585) (10,007) (52,592)
Net loss....................................... (2,293) (569) (2,862)
-------- --------- ---------
Balance at December 31, 1995................... (44,878) (10,576) (55,454)
Net loss....................................... (2,701) (671) (3,372)
-------- --------- ---------
Balance at July 30, 1996....................... $ (47,579) $ (11,247) (58,826)
======== =========
---------
</TABLE>
<TABLE>
<CAPTION>
TCIC ACCUMULATED
TCI GREENVILLE/SPARTANBURG: INVESTMENT DEFICIT
- ----------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 27, 1995.................... $ 242,652 $ 242,652
Increase in TCIC contribution.................. 6,484 6,484
Net loss....................................... (4,319) (4,319)
-------- --------- ---------
Balance at December 31, 1995................... $ 249,136 $ (4,319) 244,817
Increase in TCIC contribution.................. 9,449 9,449
Net loss....................................... (13,409) (13,409)
-------- --------- ---------
Balance at July 30, 1996....................... $ 258,585 $ (17,728) 240,857
======== =========
---------
Total combined equity at July 30, 1996....... $ 10,150
=========
</TABLE>
On May 26, 1995, Holdings' Board of Directors approved (i) an increase in
the number of authorized shares of Holdings' common stock to 100,000,000 shares;
(ii) the issuance of up to 10,000,000 shares of Preferred Stock, par value of
$.01 per share, the rights, preferences and privileges of which to be determined
by the Board of Directors; and (iii) a 100,000 to 1 stock split in the form of a
stock dividend. As a result of the above actions, all share data included above
has been retroactively restated to give effect to these actions. At December 31,
1995, 10,000,000 shares of common stock were issued and outstanding and no
preferred stock was issued or outstanding. In connection with the sale of
Holdings to ICP-IV, Holdings' capital structure was reorganized (see Note 1).
9. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Previously Affiliated Entities and the
cable television industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
76
<PAGE> 79
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and to require refunds received from the
date a complaint is filed in some circumstances or retroactively for up to one
year in other circumstances. Management believes it has made a fair
interpretation of the 1992 Act and related FCC regulations in determining
regulated cable television rates and other fees based on the information
currently available. However, complaints have been filed with the FCC on rates
for certain franchises and certain local franchise authorities have challenged
existing and prior rates. Further complaints and challenges could be
forthcoming, some of which could apply to revenue recorded in 1996. Management
believes, however, that the effect, if any, of these complaints and challenges
will not be material to the Previously Affiliated Entities' financial position
or results of operations.
Many aspects of regulation at the federal and local level are currently the
subject of judicial review and administrative proceedings. In addition, the FCC
is required to conduct rulemaking proceedings over the next several months to
implement various provisions of the 1996 Act. It is not possible at this time to
predict the ultimate outcome of these reviews or proceedings or their effect on
the Previously Affiliated Entities.
10. COMMITMENTS AND CONTINGENCIES
The Previously Affiliated Entities are committed to provide cable
television services under franchise agreements with remaining terms of up to
twenty-four years. Franchise fees of up to 5% of gross revenues are payable
under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Previously Affiliated Entities have entered into long-term
retransmission agreements with all applicable stations in exchange for in-kind
and/or other consideration.
The Previously Affiliated Entities are subject to litigation and other
claims in the ordinary course of business. In the opinion of management, the
ultimate outcome of any existing litigation or other claims will not have a
material adverse effect on the Previously Affiliated Entities' financial
condition or results of operations.
The Previously Affiliated Entities have entered into pole rental agreements
and lease certain of their facilities and equipment under non-cancelable
operating leases. Minimum rental commitments at December 31, 1995 for the next
five years and thereafter under these leases are as follows:
<TABLE>
<S> <C>
1996................................................ $ 600
1997................................................ 375
1998................................................ 143
1999................................................ 133
2000................................................ 125
Thereafter.......................................... 483
------
$1,859
======
</TABLE>
Rent expense, including pole rental agreements, was $1,999 and $2,856 for
the years ended December 31, 1994 and 1995, respectively, and $1,722 for the
period from January 1, 1996 to July 30, 1996.
11. RELATED PARTY TRANSACTIONS
IP-V managed the business of Holdings for an annual management fee paid in
cash in equal monthly installments. The annual management fee was $465 for the
year ended December 31, 1994. Effective July 1,
77
<PAGE> 80
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1995, the annual fee decreased to $200, resulting in fees of $333 for the full
year of 1995 and $117 for the period from January 1, 1996 through July 30, 1996.
Management fees payable of $40 are included in payable to affiliates at December
31, 1995.
InterMedia Capital Management, a California limited partnership ("ICM"), is
the general partner of IP. Beginning October 1994, ICM managed the business of
IPWT for an annual fee of $482 of which 20% is deferred until each subsequent
year in support of IPWT's long-term debt. The remaining 80% is paid in cash in
equal monthly installments. Included in payable to affiliates at December 31,
1995 is $96, relating to the ICM annual fee.
InterMedia Management, Inc. ("IMI") is wholly owned by the managing general
partner of ICM and InterMedia Capital Management V, L.P., the general partners
of IP-V. IMI has entered into agreements with Holdings and IPWT to provide
accounting and administrative services at cost. During the years ended December
31, 1994 and 1995, administrative fees charged by IMI and paid in cash on a
monthly basis were $2,566 and $3,009, respectively. During the period from
January 1, 1996 to July 30, 1996, administrative fees changed by IMI and paid in
cash on a monthly basis were $1,831. Included in receivables from affiliates are
advances to IMI net of administrative fees charged by IMI and operating expenses
paid by IMI on behalf of Holdings and IPWT.
IPWT payables to IP of $943 were outstanding at December 31, 1995 primarily
related to professional fees incurred by IP on behalf of IPWT in connection with
the acquisition of the West Tennessee cable television system in 1990. IP will
be given a partnership interest in ICP-IV, as defined herein, in exchange for
its investment in IPWT including its receivable of $943 (see note 1).
TCI and certain subsidiaries provide certain corporate general and
administrative services and are responsible for TCI Greenville/Spartanburg's
operations. Costs related to these services were allocated on a per subscriber
and gross revenue basis that is intended to approximate TCI's proportionate cost
of providing such services. The amount presented in the combined statement of
operations as management fees represents the allocated expenses from January 27,
1995 to December 31, 1995 and from January 1, 1996 to July 30, 1996. The amounts
allocated by TCI are not necessarily representative of the costs that TCI
Greenville/Spartanburg would have incurred as stand-alone systems.
As affiliates of TCI, the Previously Affiliated Entities are able to
purchase programming services from a subsidiary of TCI. Management believes that
the overall programming rates made available through this relationship are lower
than the Previously Affiliated Entities could obtain separately. The TCI
subsidiary is under no obligation to continue to offer such volume rates to the
Previously Affiliated Entities, and such rates may not continue to be available
in the future should TCI's ownership in the Previously Affiliated Entities
significantly decrease or if TCI or the programmers should otherwise decide not
to offer such participation to the Previously Affiliated Entities. TCI is also
an owner of ICP-IV, therefore the transaction with ICP-IV is not expected to
affect the programming fees charged to the Previously Affiliated Entities by the
TCI affiliates. Programming fees charged by the TCI subsidiary for the years
ended December 31, 1994 and 1995 and the period from January 1, 1996 to July 30,
1996 amounted to $11,127, $19,545 and $14,638, respectively. Programming fees
are paid to TCI in cash on a monthly basis. Payable to affiliates includes
programming fees payable to the TCI subsidiary by Holdings and IPWT of $1,045 at
December 31, 1995.
TCI Greenville/Spartanburg's amount due to TCIC includes TCIC's funding of
current operations, as well as its initial contribution of capital. Interest
expense of $11,839 and $22,811 were allocated by TCIC for the period from
January 27, 1995 to December 31, 1995 and the period from January 1, 1996 to
July 30, 1996, respectively, based on actual interest costs incurred by TCIC
and, therefore, does not necessarily reflect the interest expense that TCI
Greenville/Spartanburg would have incurred on a stand alone basis. In addition,
78
<PAGE> 81
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
certain of TCIC's debt is currently secured by the assets of certain of its
subsidiaries including TCI Greenville/Spartanburg.
Also see Note 15 -- Subsequent Event.
12. INCOME TAXES
The benefit (expense) for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
--------------------- TO JULY 30,
1994 1995 1996
------- ------- ---------------
<S> <C> <C> <C>
Current state and local.......... $ (12)
Current intercompany tax
allocation..................... (87) $ 6,304
Deferred intercompany tax
allocation..................... 2,021 643
Deferred federal tax............. $16,192 14,324 7,007
Deferred state and local tax..... 2,828 1,256 536
------ ------ ------
$19,020 $17,502 $14,490
====== ====== ======
</TABLE>
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Property and equipment.......................................... $ 13,876
Intangible assets............................................... 125,762
Other........................................................... 638
--------
140,276
--------
Loss carryforwards.............................................. (23,570)
Other........................................................... (1,545)
--------
(25,115)
--------
$115,161
========
</TABLE>
At December 31, 1995, Holdings had net operating loss carryforwards for
federal income tax purposes aggregating $69,325 which expire through 2010.
Holdings is a loss corporation as defined in Section 382 of the Internal Revenue
Code. Therefore, if certain substantial changes in the Holdings' ownership
should occur, there could be a significant annual limitation on the amount of
loss carryforwards which can be utilized. Because of TCI's continuing interest
in Holdings, management does not believe that the recapitalization of Holdings
and the partial sale of the recapitalized equity to ICP-IV will impair Holdings'
ability to utilize its net operating loss carryforwards.
Holdings' management has not established a valuation allowance to reduce
the deferred tax assets related to its unexpired net operating loss
carryforwards. Due to an excess of appreciated asset value over the tax basis of
Holdings' net assets, management believes it is more likely than not that the
deferred tax assets related to the unexpired net operating losses will be
realized.
79
<PAGE> 82
PREVIOUSLY AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
A reconciliation of the tax benefit computed at the statutory federal rate
and the tax benefit reported in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
------------------- TO JULY 30,
1994 1995 1996
------- ------- ---------------
<S> <C> <C> <C>
Tax benefit at federal statutory rate.................. $22,963 $20,843 $16,377
State taxes, net of federal benefit.................... 1,737 1,140 638
Goodwill amortization.................................. (3,222) (2,914) (1,634)
Tax reserves and other................................. (2,458) (1,567) (891)
------- -------
$19,020 $17,502 $14,490
======= =======
</TABLE>
13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
During the years ended December 31, 1994 and 1995, the Previously
Affiliated Entities paid interest of approximately $43,744 and $40,301,
respectively. During the period from January 1, 1996 to July 30, 1996, the
Previously Affiliated Entities paid interest of approximately $22,192.
14. EMPLOYEE BENEFIT PLAN
Holdings and IPWT participate in the InterMedia Partners Tax Deferred
Savings Plan, which covers all full-time employees who have completed at least
one year of employment. Such Plan provides for a base employee contribution of
1% and a maximum of 15% of compensation. Matching contributions under such Plan
are at the rate of 50% of the employee's contributions, up to a maximum of 3% of
compensation.
15. SUBSEQUENT EVENT
In February 1997, Leo J. Hindery, Jr., the managing general partner of
InterMedia Capital Management IV ("ICM-IV") and various other affiliated
InterMedia partnerships, was appointed President of TCI. As part of Mr.
Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's
interests in IMI, InterMedia Capital Management, a California limited
partnership and the general partner of InterMedia ("ICM") and ICM-IV as well as
various other affiliated InterMedia partnerships. Through ICM-IV and ICM, Mr.
Hindery has managed IP, ICP-IV, IP-V and their subsidiaries as well as other
affiliated InterMedia partnerships. Upon the completion of the transaction, Mr.
Hindery will no longer hold a controlling interest in IMI, ICM-IV or any of the
various InterMedia corporations or partnerships. The transition is expected to
be completed in 1997.
80
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
of Robin Media Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholder's deficit, and of cash
flows present fairly, in all material respects, the financial position of Robin
Media Holdings, Inc. and its subsidiary at December 31, 1995 and the results of
their operations and their cash flows for the years ended December 31, 1995 and
1994 and the period from January 1, 1996 to July 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
As described in Note 2, on July 30, 1996, the Company was recapitalized and
a portion of the recapitalized equity was sold to InterMedia Capital Partners
IV, L.P.
PRICE WATERHOUSE LLP
San Francisco, California
March 28, 1997
81
<PAGE> 84
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995
------------
<S> <C>
ASSETS
Cash and cash equivalents..................................................... $ 1,832
Accounts receivable, net of allowance for doubtful accounts of $392........... 4,835
Receivable from affiliates.................................................... 387
Prepaids...................................................................... 373
Inventory..................................................................... 2,751
Other current assets.......................................................... 223
---------
Total current assets................................................ 10,401
Intangible assets, net........................................................ 134,020
Property and equipment, net................................................... 53,864
Investments................................................................... 795
Other assets.................................................................. 1,120
---------
Total assets........................................................ $ 200,200
=========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Accounts payable and accrued liabilities...................................... $ 5,817
Deferred revenue.............................................................. 3,114
Payable to affiliates......................................................... 968
Accrued interest.............................................................. 9,043
---------
Total current liabilities........................................... 18,942
Long-term debt................................................................ 331,450
Deferred income taxes......................................................... 1,922
---------
Total liabilities................................................... 352,314
---------
Commitments and contingencies
Shareholder's deficit:
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued
Common stock, $.01 par value; 100,000,000 shares authorized, 10,000,000
shares issued and outstanding............................................ 100
Additional paid-in capital.................................................. 10,498
Accumulated deficit......................................................... (162,712)
---------
(152,114)
---------
Total liabilities and shareholder's deficit......................... $ 200,200
=========
</TABLE>
See accompanying notes to the consolidated financial statements.
82
<PAGE> 85
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM
FOR THE YEAR ENDED JANUARY
DECEMBER 31, 1, 1996
--------------------- TO JULY
1994 1995 30, 1996
-------- -------- --------
<S> <C> <C> <C>
Basic and cable services................................. $ 42,910 $ 49,325 $ 31,427
Pay services............................................. 10,036 11,438 6,640
Other services........................................... 6,347 6,050 3,703
-------- -------- --------
59,293 66,813 41,770
-------- -------- --------
Program fees............................................. 10,667 12,620 8,231
Other direct expenses.................................... 7,887 8,358 5,267
Depreciation and amortization............................ 57,562 47,514 24,854
Selling, general and administrative expenses............. 12,623 14,904 8,871
Management and consulting fees........................... 465 333 117
-------- -------- --------
89,204 83,729 47,340
-------- -------- --------
Loss from operations..................................... (29,911) (16,916) (5,570)
-------- -------- --------
Other income (expense):
Interest and other income.............................. 1,386 1,090 176
Gain (loss) on disposal of fixed assets................ (1,344) (73) (14)
Interest expense....................................... (35,545) (36,462) (21,642)
Other expense.......................................... (194) (644) (163)
-------- -------- --------
(35,697) (36,089) (21,643)
-------- -------- --------
Loss before income tax benefit........................... (65,608) (53,005) (27,213)
Income tax benefit....................................... 19,020 15,276 7,446
-------- -------- --------
Net loss................................................. $(46,588) $(37,729) $(19,767)
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
83
<PAGE> 86
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................... $100 $ 10,498 $ (78,395) $ (67,797)
Net loss....................................... (46,588) (46,588)
---- ------- --------- ---------
Balance at December 31, 1994................... 100 10,498 (124,983) (114,385)
Net loss....................................... (37,729) (37,729)
---- ------- --------- ---------
Balance at December 31, 1995................... 100 10,498 (162,712) (152,114)
Net loss....................................... (19,767) (19,767)
---- ------- --------- ---------
Balance at July 30, 1996....................... $100 $ 10,498 $(182,479) $(171,881)
==== ======= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
84
<PAGE> 87
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
------------------- JULY 30,
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(46,588) $(37,729) $ (19,767)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization............................ 57,674 47,614 24,919
Loss on sale of note receivable.......................... 376
Loss (gain) on disposal of fixed assets.................. 1,344 73
Deferred income taxes.................................... (19,020) (15,276) (7,344)
Changes in assets and liabilities:
Accounts receivable.................................... 129 (584) (452)
Receivable from affiliates............................. (345) 33 (67)
Interest receivable.................................... (726) 2,569
Prepaids............................................... 11 (57) (57)
Inventory.............................................. (204) (1,246) (2,279)
Other current assets................................... 194 (130) (197)
Accounts payable and accrued liabilities............... 126 1,487 (38)
Deferred revenue....................................... 161 158 71
Payable to affiliates.................................. 334 40 143
Accrued interest 38 397 3,023
-------- -------- --------
Cash flows from operating activities.......................... (6,872) (2,275) (2,045)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (11,156) (11,877) (13,146)
Investments................................................. (435) (360)
Collections of and proceeds from sale of notes receivable... 17,764 2,624
Other assets and intangibles................................ (47) (621) (149)
-------- -------- --------
Cash flows from investing activities.......................... 6,126 (10,234) (13,295)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Activity on revolving credit note payable................... 12,000
Note payable to affiliate................................... 15,000
Debt issue costs............................................ (11)
-------- -------- --------
Cash flows from financing activities.......................... 11,989 15,000
-------- -------- --------
Net change in cash and cash equivalents....................... (746) (520) (340)
Cash and cash equivalents, beginning of period................ 3,098 2,352 1,832
-------- -------- --------
Cash and cash equivalents, end of period...................... $ 2,352 $ 1,832 $ 1,492
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
85
<PAGE> 88
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE COMPANY AND BASIS OF PRESENTATION
Robin Media Holdings, Inc., a Nevada corporation (the "Company"), was
organized on August 27, 1991. On April 30, 1992, the Company commenced
operations with the acquisition of all the outstanding common stock of Robin
Media Group, Inc. ("RMG") from Jack Kent Cooke Incorporated. Prior to the sale
of the Company on July 30, 1996 (see note 2), the Company was wholly owned by
InterMedia Partners V, L.P. ("IP-V"), a California limited partnership. The
Company's only asset is its investment in RMG. Therefore, the Company's
consolidated balance sheets for all periods presented reflect only RMG's assets
and liabilities and its consolidated statements of operations reflect only the
results of RMG's operations. RMG owns and operates cable television systems in
Tennessee and Georgia.
The Company's acquisition of RMG was structured as a leveraged transaction
and a significant portion of the assets acquired are intangible assets which are
being amortized on a straight-line basis over one to ten years. Therefore, as
was planned, the Company has incurred substantial book losses which have
resulted in a net shareholder's deficit.
2. CHANGES IN OWNERSHIP
On July 30, 1996, IP-V sold a majority of the voting interests in RMH to
InterMedia Capital Partners IV, L.P., a California limited partnership
("ICP-IV"). ICP-IV is an affiliated entity formed for the purpose of acquiring
cable television systems and consolidating various cable television systems
owned by other affiliated entities.
In connection with the sale, RMH's capital structure was reorganized to
provide for three classes of capital stock. As part of the recapitalization, a
wholly owned subsidiary of TeleCommunications, Inc. ("TCI") converted its
outstanding loan to IP-V into a partnership interest and the IP-V partnership
was dissolved. Additionally, ICP-IV provided RMH with an intercompany loan in an
amount sufficient to repay all principal and interest on the Company's
outstanding debt. Upon funding on July 30, 1996 of the intercompany loan, the
Company repaid all amounts due on its outstanding debt.
On July 31, 1996, RMH merged with and into RMG, with RMG as the surviving
corporation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary RMG. All intercompany accounts and transactions
have been eliminated.
Cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue recognition
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
Inventory
Inventory consists primarily of supplies and is stated at the lower of cost
or market determined by the first-in, first-out method.
86
<PAGE> 89
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Gains and
losses from disposals and retirements are included in earnings. Capitalized
plant is written down to recoverable values whenever recoverability through
operations or sale of the system becomes doubtful.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Cable television plant............................... 5-10
Buildings and improvements........................... 10
Furniture and fixtures............................... 3-7
Equipment and other.................................. 3-10
</TABLE>
Intangible assets
RMG has franchise rights to operate cable television systems in various
towns and political subdivisions. Franchise rights are being amortized on a
straight-line basis over the lesser of the remaining lives of the franchises or
the base ten-year term of IP-V which expires on December 31, 2002. Remaining
franchise lives range from one to seventeen years.
Goodwill represents the excess of acquisition cost over the fair value of
net tangible and franchise assets acquired and liabilities assumed and is being
amortized on a straight-line basis over the ten-year term of IP-V.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the system becomes doubtful. Each
year, the Company evaluates the recoverability of the carrying value of its
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized cost of these assets.
Debt issue costs are being amortized over the term of the related debt (see
Note 8). Debt issue costs of $358 are stated net of accumulated amortization of
$231 at December 31, 1995.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accounts payable.............................................. $ 179
Accrued program costs......................................... 315
Accrued franchise fees........................................ 1,615
Other accrued liabilities..................................... 3,708
------
$5,817
======
</TABLE>
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
87
<PAGE> 90
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Long-lived assets and long-lived assets to be disposed of
RMH has adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." RMH reviews property and equipment and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment losses have
been recognized by RMH.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Franchise rights................................................ $ 202,573
Goodwill........................................................ 92,978
Other........................................................... 370
------------
295,921
Accumulated amortization........................................ (161,901)
------------
$ 134,020
==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Land............................................................ $ 407
Cable television plant.......................................... 81,667
Buildings and improvements...................................... 659
Furniture and fixtures.......................................... 1,391
Equipment and other............................................. 5,251
Construction in progress........................................ 4,035
---------
93,410
Accumulated depreciation........................................ (39,546)
---------
$ 53,864
=========
</TABLE>
6. INVESTMENTS
RMG had a 49% limited partnership interest in InterMedia Partners II, L.P.
("IP-II"), an affiliated entity, which was accounted for under the equity
method. RMG's original investment in IP-II was reduced to zero in 1992 as a
result of its equity in the net loss of IP-II. The Company received
distributions from IP-II of $406 for the year ended December 31, 1995 which are
included in interest and other income in the accompanying Consolidated
Statements of Operations. No distributions were received from IP-II for the
period from January 1, 1996 through July 30, 1996. On August 30, 1996, the
Company sold its investment in IP-II for cash resulting in a net gain of $2,859.
88
<PAGE> 91
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
RMG has a 15% limited partner interest in AVR of Tennessee, L.P., doing
business as Hyperion of Tennessee, which is accounted for under the cost method.
RMG contributed $360 to Hyperion of Tennessee during fiscal 1995. During the
period from January 1, 1996 through July 30, 1996, the Company did not make any
contributions to Hyperion of Tennessee. On August 1, 1996, the Company sold a
portion of its limited partner interest in Hyperion of Tennessee which resulted
in a gain of $286. Subsequent to the sale, the Company retained a 0.01% limited
partner interest in Hyperion of Tennessee. As of December 31, 1995, the Company
was committed to fund additional capital contributions to Hyperion of Tennessee
of $755 and to make term loan advances to Hyperion of Tennessee. These future
commitments were reduced in proportion to the reduction in the Company's limited
partner interest as a result of the sale. The term loan advances are required to
fund leasing arrangements for access to fiber optic distribution owned by the
respective partners.
7. NOTES RECEIVABLE
Notes receivable were issued to RMG in connection with previous sales of
cable television systems. In June 1995, RMG sold its only remaining note
receivable including related accrued interest. At the time of the sale the note
had a balance of $5,980 which included $411 of interest earned in 1995. The sale
of the note resulted in a loss of $376 which is included in other expense.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Revolving credit note payable, $30,000 commitment,
interest at LIBOR plus 1.5% payable quarterly,
due February 28, 1997....................................... $ 25,000
11 1/8% senior subordinated notes, interest payable
semi-annually, due April 1, 1997............................ 271,400
11 5/8% subordinated debentures, interest payable
semi-annually, due April 1, 1999............................ 35,050
--------
$331,450
========
</TABLE>
RMG's bank revolving credit agreement provides $30,000 of available credit
and bore interest either at the bank's reference rate plus 0.5% or at LIBOR plus
1.5% which was payable quarterly. At December 31, 1995, the interest rate on the
revolving credit agreement was 7.5%. The revolving credit agreement required RMG
to pay a commitment fee of 0.375% per year, payable quarterly, on the unused
portion of available credit. The agreement contained various restrictive
covenants on the Company and RMG, including limitations on the payment of
dividends.
The 11 1/8% senior subordinated notes (the "Notes") and the 11 5/8%
subordinated debentures (the "Debentures") were redeemable by RMG at a
redemption price of 101.0% and 101.4%, respectively, of the principal amounts,
together with accrued interest. The indentures with respect to the Notes and the
Debentures contained restrictive covenants on RMG including limitations on
dividends, additional debt and mergers and acquisitions.
On July 30, 1996, ICP-IV made an intercompany loan to the Company. The
proceeds were used to repay all amounts due on the Company's outstanding debt.
89
<PAGE> 92
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. COMMON STOCK
On May 26, 1995, the Company's Board of Directors approved (i) an increase
in the number of authorized shares of the Company's common stock to 100,000,000
shares; (ii) the issuance of up to 10,000,000 shares of Preferred Stock, par
value of $.01 per share, the rights, preferences and privileges of which are to
be determined by the Board of Directors; and (iii) a 100,000 to 1 stock split in
the form of a stock dividend. As a result of the above actions, all share and
per share data included in the consolidated financial statements has been
retroactively restated to give effect to these actions.
In connection with the sale of the Company to ICP-IV, the Company's capital
structure was reorganized (see Note 2).
10. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect RMG and the cable television industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and require refunds measured from the date a
complaint is filed in some circumstances or retroactively for up to one year in
other circumstances. Management believes it has made a fair interpretation of
the 1992 Act and related FCC regulations in determining regulated cable
television rates and other fees based on the information currently available.
However, complaints have been filed with the FCC on rates for certain franchises
and certain local franchise authorities have challenged existing and prior
rates. Further complaints and challenges could be forthcoming, some of which
could apply to revenue recorded in 1996. Management believes, however, that the
effect, if any, of these complaints and challenges will not be material to the
Company's financial position or results of operations.
Many aspects of regulation at the federal and local level are currently the
subject of judicial review and administrative proceedings. In addition, the FCC
is required to conduct rulemaking proceedings over the next several months to
implement various provisions of the 1996 Act. It is not possible at this time to
predict the ultimate outcome of these reviews or proceedings or their effect on
the Company.
11. COMMITMENTS AND CONTINGENCIES
RMG is committed to provide cable television services under franchise
agreements with remaining terms of up to sixteen years. Franchise fees of up to
5% of gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. RMG has entered into long-term retransmission agreements with all
applicable stations in exchange for in-kind and/or other consideration.
90
<PAGE> 93
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company is subject to litigation and other claims in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material adverse effect on
the Company's financial condition or results of operations.
RMG has entered into pole rental agreements and leases certain of its
facilities and equipment under noncancelable operating leases. Minimum rental
commitments at December 31, 1995 for the next five years and thereafter under
these leases are as follows:
<TABLE>
<S> <C>
1996................................................ $ 537
1997................................................ 334
1998................................................ 118
1999................................................ 114
2000................................................ 110
Thereafter.......................................... 458
------
$1,671
======
</TABLE>
Rent expense, including pole rental agreements, was $1,612 and $1,821 for
the years ended December 31, 1994 and 1995 respectively, and $1,089 for the
period from January 1, 1996 to July 30, 1996.
12. RELATED PARTY TRANSACTIONS
IP-V managed the business of RMG for an annual management fee paid in cash
in equal monthly installments. During 1994, the annual management fee was $465.
Effective July 1, 1995, the annual fee decreased to $200, resulting in fees of
$333 for the full year of 1995 and $117 for the period from January 1, 1996 to
July 30, 1996. Management fees payable of $40 are included in payable to
affiliates at December 31, 1995.
InterMedia Management, Inc. ("IMI") is wholly owned by the managing general
partner of InterMedia Capital Management V, L.P., the general partner of IP-V.
IMI has entered into an agreement with RMG to provide accounting and
administrative services at cost. During the years ended December 31, 1994 and
1995, administrative fees charged by IMI and paid in cash on a monthly basis
were $2,000 and $2,385, respectively. During the period from January 1, 1996 to
July 30, 1996, administrative fees charged by IMI and paid in cash on a monthly
basis were $1,463. Receivables from affiliates represent advances to IMI net of
administrative fees charged by IMI and operating expenses paid by IMI on behalf
of RMG.
As an affiliate of TCI, RMG is able to purchase programming services from a
subsidiary of TCI. Management believes that the overall programming rates made
available through this relationship are lower than RMG could obtain separately.
The TCI subsidiary is under no obligation to continue to offer such volume rates
to RMG, and such rates may not continue to be available in the future should
TCI's ownership in RMG significantly decrease or if TCI or the programmers
should otherwise decide not to offer such participation to RMG. Because TCI is
also an owner of ICP-IV, the sale of a majority of the voting interests of the
Company to ICP-IV is not expected to affect the favorable rates available to the
Company through its relationship with TCI. Programming fees charged by the TCI
subsidiary for the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 to July 30, 1996 amounted to $8,977, $10,206, and $6,560,
respectively. Programming fees are paid to the TCI subsidiary in cash on a
monthly basis. Payable to affiliates includes programming fees payable to the
TCI subsidiary of $836 at December 31, 1995.
Also see Note 16 -- Subsequent Events.
91
<PAGE> 94
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. INCOME TAXES
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1996 TO
1994 1995 JULY 30, 1996
------- ------- ------------------
<S> <C> <C> <C>
Deferred federal tax benefit............ $16,192 $14,324 $ 7,007
Deferred state tax benefit.............. 2,828 952 439
------- ------- -------
$19,020 $15,276 $ 7,446
======= ======= =======
</TABLE>
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Property and equipment........................................ $ 10,461
Intangible assets............................................. 16,412
26,873
Loss carryforwards............................................ (23,570)
Other......................................................... (1,381)
(24,951)
$ 1,922
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes aggregating $69,325 which expire through 2010. The
Company is a loss corporation as defined in section 382 of the Internal Revenue
Code. Therefore, if certain substantial changes in the Company's ownership
should occur, there could be a significant annual limitation on the amount of
loss carryforwards which can be utilized. Because of TCI's continuing interest
in the Company, management does not believe that the recapitalization of the
Company and the partial sale of the recapitalized equity to ICP-IV will impair
the Company's ability to utilize its net operating loss carryforwards.
The Company's management has not established a valuation allowance to
reduce the deferred tax assets related to its unexpired net operating loss
carryforwards. Due to an excess of appreciated asset value over the tax basis of
the Company's net assets, management believes it is more likely than not that
the deferred tax assets related to the unexpired net operating losses will be
realized.
A reconciliation of the tax benefit computed at the statutory federal rate
and the tax benefit reported in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED PERIOD FROM
------------------- JANUARY 1, 1996 TO
1994 1995 JULY 30, 1996
------- ------- ------------------
<S> <C> <C> <C>
Tax benefit at federal statutory
rate................................ $22,963 $18,552 $ 9,218
State taxes, net of federal benefit... 1,737 950 575
Goodwill amortization................. (3,222) (2,914) (1,634)
Tax reserves and other................ (2,458) (1,312) (713)
------- ------- -------
$19,020 $15,276 $ 7,446
======= ======= =======
</TABLE>
92
<PAGE> 95
ROBIN MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
During the years ended December 31, 1994 and 1995, the Company paid
interest of approximately $35,395 and $35,965, respectively. During the period
from January 1, 1996 to July 30, 1996, the Company paid interest of
approximately $19,064.
15. EMPLOYEE BENEFIT PLAN
The Company participates in the InterMedia Partners Tax Deferred Savings
Plan, which covers all full-time employees who have completed at least one year
of employment. Such Plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. The Company's matching contributions under the
Plan are at the rate of 50% of the employee's contributions, up to a maximum of
3% of compensation.
16. SUBSEQUENT EVENTS
In February 1997, Leo J. Hindery, Jr., the managing general partner of
InterMedia Capital Management IV ("ICM-IV") and various other affiliated
InterMedia partnerships, was appointed President of TCI. As part of Mr.
Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's
interests in IMI, InterMedia Capital Management, a California limited
partnership and general partner of InterMedia ("ICM") and ICM-IV as well as
various other affiliated InterMedia partnerships. Through ICM-IV and ICM-V, Mr.
Hindery has managed ICP-IV, IP-V and their subsidiaries as well as other
affiliated InterMedia partnerships. Upon the completion of the transaction, Mr.
Hindery will no longer hold a controlling interest in any of the various
InterMedia corporations or partnerships. The transition is expected to be
completed in 1997.
93
<PAGE> 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of InterMedia Partners
of West Tennessee, L.P.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of InterMedia Partners of West
Tennessee, L.P., (the "Partnership") at December 31, 1995 and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1994 and
the period from January 1, 1996 to July 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
As described in Note 1, on July 30, 1996 the Partnership was contributed to
InterMedia Capital Partners IV, L.P.
PRICE WATERHOUSE LLP
San Francisco, California
March 28, 1997
94
<PAGE> 97
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Cash and cash equivalents..................................................... $ 1,115
Accounts receivable, net of allowance for doubtful accounts of $33............ 924
Receivable from affiliates.................................................... 24
Prepaids...................................................................... 18
Inventory..................................................................... 189
--------
Total current assets................................................ 2,270
Intangible assets, net........................................................ 14,930
Property and equipment, net................................................... 11,344
Other assets.................................................................. 46
--------
Total assets........................................................ $ 28,590
========
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt............................................. $ 4,043
Accounts payable and accrued liabilities...................................... 1,119
Deferred revenue.............................................................. 849
Payable to affiliates......................................................... 1,264
Accrued interest.............................................................. 1,043
--------
Total current liabilities........................................... 8,318
Long-term debt................................................................ 75,726
--------
Total liabilities................................................... 84,044
--------
Commitments and contingencies
PARTNERS' CAPITAL
General partner............................................................... (44,878)
Limited partner............................................................... (10,576)
--------
Total partners' capital....................................................... (55,454)
--------
Total liabilities and partners' capital............................. $ 28,590
========
</TABLE>
See accompanying notes to the financial statements.
95
<PAGE> 98
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY
FOR THE YEAR ENDED 1, 1996
DECEMBER 31, TO JULY
-------------------- 30,
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Basic and cable services................................... $ 9,919 $10,830 $ 6,783
Pay services............................................... 2,007 2,263 1,289
Other services............................................. 1,830 1,851 1,008
-------- ------- ------
13,756 14,944 9,080
-------- ------- ------
Program fees............................................... 2,522 2,980 1,896
Other direct expenses...................................... 1,936 1,897 1,199
Depreciation and amortization.............................. 10,654 8,501 3,947
Selling, general and administrative expenses............... 3,229 3,504 2,110
Management and consulting fees............................. 120 482 281
-------- ------- ------
18,461 17,364 9,433
-------- ------- ------
Loss from operations....................................... (4,705) (2,420) (353)
-------- ------- ------
Other income (expense):
Interest and other income................................ 33
Gain (loss) on disposal of fixed assets.................. (57) 10
Interest expense......................................... (8,733) (534) (3,092)
Other income............................................. 56 82 40
-------- ------- ------
(8,734) (442) (3,019)
-------- ------- ------
Net loss................................................... $(13,439) $(2,862) $(3,372)
======== ======= ======
Net loss allocation
General partner.......................................... $(10,765) $(2,293) $(2,701)
Limited partner.......................................... (2,674) (569) (671)
-------- ------- ------
$(13,439) $(2,862) $(3,372)
======== ======= ======
</TABLE>
See accompanying notes to the financial statements.
96
<PAGE> 99
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1993............................... $(55,183) $ (6,820) $(62,003)
Additional capital contributions........................... 17,844 5,006 22,850
Adjustment to reallocate losses in connection
with the debt restructuring (see Note 5)................. 5,519 (5,519)
Net loss................................................... (10,765) (2,674) (13,439)
-------- -------- --------
Balance at December 31, 1994............................... (42,585) (10,007) (52,592)
Net loss................................................... (2,293) (569) (2,862)
-------- -------- --------
Balance at December 31, 1995............................... (44,878) (10,576) (55,454)
Net loss................................................... (2,701) (671) (3,372)
-------- -------- --------
Balance at July 30, 1996................................... $(47,579) $(11,247) $(58,826)
======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
97
<PAGE> 100
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
-------------------- JULY 30,
1994 1995 1996
-------- ------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(13,439) $(2,862) $ (3,372)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization......................... 10,970 8,525 3,960
Loss (gain) on disposal of fixed assets............... 57 (10)
Changes in assets and liabilities:
Accounts receivable................................. (584) 400 113
Receivable from affiliates.......................... 8,493 39 (57)
Prepaids............................................ (4) 18 (37)
Inventory........................................... (12) 25 (11)
Other assets........................................ (17) (2) --
Accounts payable and accrued liabilities............ (10) (13) 997
Deferred revenue.................................... 41 5 27
Payable to affiliates............................... 1,197 (349) (977)
Accrued interest and debt restructuring credit...... 68 (3,826) (37)
-------- -------- -------
Cash flows from operating activities....................... 6,760 1,950 606
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment...................... (1,276) (1,370) (787)
Proceeds from sale of property and equipment............. 44
Other assets............................................. 21
-------- -------- -------
Cash flows from investing activities....................... (1,255) (1,326) (787)
-------- -------- -------
Cash flows from financing activities:
Activity on revolving credit note payable................ (2,600) (400) (200)
Debt issue costs......................................... (161) (7)
Repayment on long-term debt.............................. (22,073)
Capital contributions.................................... 20,050
-------- -------- -------
Cash flows from financing activities....................... (4,784) (407) (200)
-------- -------- -------
Net change in cash and cash equivalents.................... 721 217 (381)
Cash and cash equivalents, beginning of period............. 177 898 1,115
-------- -------- -------
Cash and cash equivalents, end of period................... $ 898 $ 1,115 $ 734
======== ======== =======
</TABLE>
See accompanying notes to the financial statements.
98
<PAGE> 101
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE COMPANY AND BASIS OF PRESENTATION
InterMedia Partners of West Tennessee, L.P. (the "Partnership"), a
California limited partnership, was formed on April 11, 1990 for the purpose of
investing in and operating cable television properties. The Company owns and
operates cable television properties located in Tennessee.
Under the terms of the original partnership agreement, InterMedia Partners,
a California limited partnership ("IP"), was the sole general partner, owning an
89% interest in the Partnership. The limited partners were IP and Robin Cable
Systems of Tucson, an Arizona limited partnership ("Robin-Tucson"), holding
interests in the Partnership of 10% and 1%, respectively.
On September 11, 1990 the Partnership acquired the Western Tennessee
properties of U.S. Cable Partners, LP and its affiliates. Funding for this
acquisition was provided by General Electric Capital Corporation ("GECC") in the
form of a senior subordinated loan.
On October 3, 1994, IP sold its interest in Robin-Tucson to an affiliate of
Tele-Communications, Inc. ("TCI"). IP contributed additional capital of $20,050
from the net sales proceeds and the Partnership repaid $30,375 of the senior
subordinated loan to GECC including accrued interest. Under an Amended and
Restated Agreement of Limited Partnership entered into on October 3, 1994, GECC
converted $2,800 of its loan into a limited partnership interest in the
Partnership, and restructured the remaining balance of the loan (see Note 5).
Under the revised partnership agreement IP had an 80.1% general partner and 9.9%
limited partner interest, and GECC had a 10% limited partner interest. Losses
incurred prior to October 3, 1994 were reallocated between the general and
limited partners based upon the change in ownership percentage resulting from
the restructuring.
The Partnership's acquisition of the West Tennessee cable television
properties was structured as a leveraged transaction and a significant portion
of the assets acquired were intangible assets which are being amortized over one
to ten years. Therefore, as was planned, the Partnership has incurred
substantial book losses, resulting in negative partners' capital.
On July 30, 1996, IP and GECC contributed their partner interests in the
Partnership to InterMedia Capital Partners IV, L.P., a California limited
partnership ("ICP-IV") in exchange for cash and limited partner interests.
ICP-IV is an affiliated entity formed for the purpose of acquiring cable
television systems and consolidating various cable television systems owned by
other affiliated entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue recognition
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
Inventory
Inventory consists primarily of supplies and is stated at the lower of cost
or market determined by the first-in, first-out method.
99
<PAGE> 102
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Gains and
losses from disposals and retirements are included in earnings. Capitalized
plant is written down to recoverable values whenever recoverability through
operations or sale of the system becomes doubtful.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Cable television plant................................ 5-10
Buildings and improvements............................ 10
Furniture and fixtures................................ 3-7
Equipment and other................................... 3-10
</TABLE>
Intangible assets
The Partnership has franchise rights to operate cable television systems in
various towns and political subdivisions. Franchise rights are being amortized
on a straight-line basis over the lesser of the remaining lives of the
franchises or the base ten-year term of the IP partnership agreement which
expires in July 1998. Remaining franchise lives range from one to nineteen
years.
Goodwill represents the excess of acquisition cost over the fair value of
net tangible and franchise assets acquired and liabilities assumed and is being
amortized on a straight-line basis over the ten-year term of IP.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the system becomes doubtful. Each
year, the Partnership evaluates the recoverability of the carrying value of its
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized cost of these assets.
Debt issue costs are being amortized over the terms of the related debt.
Debt issue costs of $152 are stated net of accumulated amortization of $29 at
December 31, 1995.
Long-lived assets and long-lived assets to be disposed of
The Partnership has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Partnership reviews property and equipment and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. No
impairment losses have been recognized by the Partnership.
100
<PAGE> 103
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accounts payable.............................................. $ 14
Accrued program costs......................................... 43
Accrued franchise fees........................................ 208
Other accrued liabilities..................................... 854
------
$1,119
======
</TABLE>
Income taxes
No provision or benefit for income taxes is reported in the accompanying
financial statements because, as a partnership, the tax effects of the
Partnership's results of operations accrue to the partners. The Partnership is
registered with the Internal Revenue Service as a tax shelter under Internal
Revenue Code Section 6111(b).
Allocation of profits and losses
In accordance with the terms of the Partnership's partnership agreement,
profits and losses generally were allocated proportionately with each partner's
percentage interest in the Partnership. The percentage interest of the general
partner is 80.1%, and that of the limited partners is 19.9%.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Franchise rights.............................................. $ 48,610
Goodwill and other assets..................................... 10,912
--------
59,522
Accumulated amortization...................................... (44,592)
--------
$ 14,930
========
</TABLE>
101
<PAGE> 104
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Land.......................................................... $ 138
Cable television plant........................................ 28,742
Buildings and improvements.................................... 207
Furniture and fixtures........................................ 292
Equipment and other........................................... 1,971
Construction in progress...................................... 105
------------
31,455
Accumulated depreciation...................................... (20,111)
------------
$ 11,344
==========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
GECC revolving credit; $7,000 commitment; interest payable quarterly at prime
plus 1% or LIBOR plus 2% per annum; matures June 30, 2001................... $ 2,000
GECC term loan payable; interest payable quarterly at 7% per annum on $27,000
and at prime plus 1% or LIBOR plus 2% per annum on $27,000; matures June 30,
2001........................................................................ 54,000
Debt restructuring credit..................................................... 23,769
--------
Total debt and debt restructuring credit...................................... 79,769
--------
Less current portion.......................................................... 4,043
$ 75,726
========
</TABLE>
On October 3, 1994, in connection with the sale of Robin-Tucson, the
Partnership restructured its subordinated loan payable to GECC. Under the terms
of the restructuring, GECC reduced the face amount of the debt outstanding to
$59,000. Because the total estimated future payments on the restructured debt
exceeded the carrying amount of the debt at the time of restructuring, no gain
was recognized on the debt restructuring and no adjustments were made to the
carrying amount of the Partnership's debt. The difference of $28,570 between the
$59,000 refinanced and the amount of the note at the time of the restructuring
was recorded as a debt restructuring credit. During the period from January 1,
1996 through July 30, 1996, a portion of the future debt service payments was
recorded as reductions of the remaining debt restructuring credit of $23,769 at
December 31, 1995.
At December 31, 1995, $56,000 was outstanding under the Amended and
Restated Loan Agreement with GECC which provided for a revolving credit facility
in the amount of $7,000 and term loans in the aggregate amount of $54,000.
Borrowings under the revolving credit facility and the term loans generally bore
interest either at the Prime rate plus 1% or LIBOR plus 2%; $27,000 of the
borrowings under the term loans bore interest at a fixed rate of 7%.
Interest periods corresponding to interest rate options were generally
specified as one, two, or three months for LIBOR loans. The loan agreement
required quarterly interest payments, or more frequent interest
102
<PAGE> 105
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
payments if a shorter period was selected under the LIBOR option, and quarterly
payments of .5% per annum on the unused commitment.
The loan agreement provided for contingent interest payments generally at
11.11% of excess cash flow, as defined. Contingent interest payments were also
required upon the sale of the West Tennessee system or the partnership interest
in the Partnership.
The loan agreements contained non-financial covenants as well as various
restrictive covenants.
On July 30, 1996, all of the Partnership's outstanding borrowings payable
to GECC were assumed by ICP-IV. As a result, approximately $3,000 was accrued
for contingent interest. ICP-IV subsequently settled all of the outstanding debt
and recognized a gain on early extinguishment of debt representing the remaining
debt restructuring credit balance as of July 30, 1996.
6. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Partnership and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and require refunds measured from the date a
complaint is filed in some circumstances or retroactively for up to one year in
other circumstances. Management believes it has made a fair interpretation of
the 1992 Act and related FCC regulations in determining regulated cable
television rates and other fees based on the information currently available. No
complaints have been filed with the FCC on rates for expanded basic services and
local franchise authorities have not challenged existing and prior rates.
Complaints and challenges could be forthcoming, some of which could apply to
revenue recorded in 1996. Management believes, however, that the effect, if any,
of such complaints and challenges will not be material to the Partnership's
financial position or results of operations.
Many aspects of regulation at the federal and local level are currently the
subject of judicial review and administrative proceedings. In addition, the FCC
is required to conduct rulemaking proceedings over the next several months to
implement various provisions of the 1996 Act. It is not possible at this time to
predict the ultimate outcome of these reviews or proceedings or their effect on
the Partnership.
7. COMMITMENTS AND CONTINGENCIES
The Partnership is committed to provide cable television services under
franchise agreements with remaining terms of up to twenty-three years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
103
<PAGE> 106
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Partnership has entered into long-term retransmission agreements
with all applicable stations in exchange for in-kind and/or other consideration.
The Partnership is subject to litigation and other claims in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material adverse effect on
the Partnership's financial condition or results of operations.
The Partnership has entered into pole rental agreements and leases certain
of its facilities and equipment under non-cancelable operating leases. Minimum
rental commitments at December 31, 1995 for the next five years and thereafter
under these leases are as follows:
<TABLE>
<S> <C>
1996.......................................................... $ 63
1997.......................................................... 41
1998.......................................................... 25
1999.......................................................... 19
2000.......................................................... 15
Thereafter.................................................... 25
----
$188
====
</TABLE>
Rent expense, including pole rental agreements, was $387 and $525 for the
years ended December 31, 1994 and 1995, respectively, and $279 for the period
from January 1, 1996 to July 30, 1996.
8. RELATED PARTY TRANSACTIONS
InterMedia Capital Management, a California limited partnership ("ICM"), is
the general partner of IP. Beginning October 1994, ICM managed the business of
the Partnership for an annual fee of $482 of which 20% is deferred until each
subsequent year in support of the Partnership's long-term debt. The remaining
80% is paid in cash in equal monthly installments. Included in payable to
affiliates at December 31, 1995 is $96 relating to the ICM annual fee.
InterMedia Management, Inc. ("IMI") is wholly owned by the managing general
partner of ICM. IMI has entered into an agreement with the Partnership to
provide accounting and administrative services at cost. During the years ended
1994 and 1995, administrative fees charged by IMI were $566 and $625,
respectively. During the period from January 1, 1996 to July 30, 1996,
administrative fees charged by IMI and paid in cash on a monthly basis were
$368. Receivables from affiliates represent advances to IMI net of
administrative fees charged by IMI and operating expenses paid by IMI on behalf
of the Partnership. IMI charges are paid in cash on a monthly basis.
As an affiliate of TCI, the Partnership is able to purchase programming
services from a subsidiary of TCI. Management believes that the overall
programming rates made available through this relationship are lower than the
Partnership could obtain separately. The TCI subsidiary is under no obligation
to continue to offer such volume rates to the Partnership, and such rates may
not continue to be available in the future should TCI's ownership in the
Partnership significantly decrease or if TCI or the programmers should otherwise
decide not to offer such participation to the Partnership. Because TCI is also
an owner of ICP-IV, the contributions of the Partnership to ICP-IV are not
expected to affect the favorable rates available to the Partnership through its
relationship with TCI. Programming fees charged by the TCI subsidiary for the
years ended December 31, 1994 and 1995 amounted to $2,150 and $2,573,
respectively, and $1,605 for the period from January 1, 1996 to July 30, 1996.
Programming fees are paid to the TCI subsidiary in cash on a monthly basis.
Payable to affiliates includes programming fees payable to the TCI subsidiary of
$209 at December 31, 1995. Also see Note 11.
104
<PAGE> 107
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Payables to IP of $943 were outstanding at December 31, 1995, primarily
related to professional fees incurred by IP on behalf of IPWT in connection with
the acquisition of the West Tennessee cable television system in 1990. IP was
given a partnership interest in ICP-IV, as described herein, in exchange for its
investment in the Partnership including its receivable of $943.
9. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
During the years ended December 31, 1994 and 1995, the Partnership paid
interest of approximately $8,349 and $4,336, respectively. During the period
from January 1, 1996 to July 30, 1996, the Partnership paid interest of
approximately $3,128.
10. EMPLOYEE BENEFIT PLAN
The Partnership participates in the InterMedia Partners Tax Deferred
Savings Plan, which covers all full-time employees who have completed at least
one year of employment. Such Plan provides for a base employee contribution of
1% and a maximum of 15% of compensation. The Partnership's matching
contributions under such Plan are at the rate of 50% of the employee's
contributions, up to a maximum of 3% of compensation.
11. SUBSEQUENT EVENT
In February 1997, Leo J. Hindery, Jr., the managing general partner of
InterMedia Capital Management IV ("ICM-IV") and various other affiliated
InterMedia partnerships, was appointed President of TCI. As part of Mr.
Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's
interests in IMI, InterMedia Capital Management, a California limited
partnership and the general partner of InterMedia ("ICM") and ICM-IV as well as
various other affiliated InterMedia partnerships. Through ICM-IV and ICM, Mr.
Hindery has managed ICP-IV, IP and their subsidiaries as well as other
affiliated InterMedia partnerships. Upon the completion of the transaction, Mr.
Hindery will no longer hold a controlling interest in any of the various
InterMedia corporations or partnerships. The transition is expected to be
completed in 1997.
105
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TCI of Greenville, Inc.,
TCI of Spartanburg, Inc., and
TCI of Piedmont, Inc.:
We have audited the accompanying combined balance sheet of TCI of
Greenville, Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc. (the
"Systems") (indirect wholly-owned subsidiaries of TCI Communications, Inc.) as
of December 31, 1995, and the combined statements of operations and accumulated
deficit and cash flows for the periods from January 1, 1996 to July 30, 1996 and
from January 27, 1995 to December 31, 1995. These combined financial statements
are the responsibility of the Systems' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of TCI of Greenville,
Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc. as of December 31,
1995 and the results of their operations and their cash flows for the periods
from January 1, 1996 to July 30, 1996 and from January 27, 1995 to December 31,
1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 17, 1997
106
<PAGE> 109
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(AMOUNTS
IN
THOUSANDS)
<S> <C>
Cash...................................................... $ 1,936
Trade and other receivables, net of allowance for doubtful
accounts of $426,000.................................... 2,571
Property and equipment, at cost:
Land.................................................... 573
Cable distribution systems.............................. 38,551
Support equipment and buildings......................... 3,588
--------
42,712
Less accumulated depreciation........................... (5,252)
--------
37,460
--------
Franchise costs........................................... 327,262
Less accumulated amortization........................... (7,499)
--------
319,763
--------
Other assets.............................................. 82
--------
$361,812
========
LIABILITIES AND PARENT'S INVESTMENT
Accounts payable.......................................... $ 270
Accrued liabilities (note 2).............................. 3,486
Deferred income taxes (note 4)............................ 113,239
--------
Total liabilities............................... 116,995
--------
Parent's investment:
Due to TCI Communications, Inc. (TCIC) (note 3)......... 249,136
Accumulated deficit..................................... (4,319)
--------
244,817
--------
$361,812
========
Commitments and contingencies (note 5)
</TABLE>
See accompanying notes to combined financial statements.
107
<PAGE> 110
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 27 TO
JANUARY 1, 1996 DECEMBER 31,
TO JULY 30, 1996 1995
------------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revenue:
Basic and cable services...................... $ 18,448 $ 25,477
Pay services.................................. 6,256 10,241
Other services................................ 5,586 11,496
------- ------
30,290 47,214
Operating costs and expenses:
Program fees (note 3)......................... 6,953 9,084
Other direct expenses......................... 3,711 6,596
Selling, general and administrative........... 8,457 10,483
Allocated general and administrative costs
(note 3)................................... 1,105 1,618
Amortization.................................. 4,772 7,499
Depreciation.................................. 2,934 6,640
------- ------
27,932 41,920
------- ------
Operating income...................... 2,358 5,294
Interest expense to TCIC (note 3)............... (22,811) (11,839)
------- ------
Loss before income tax benefit........ (20,453) (6,545)
Income tax benefit (note 4)..................... 7,044 2,226
------- ------
Net loss.............................. (13,409) (4,319)
Accumulated deficit:
Beginning of period........................... (4,319) --
------- ------
End of period................................. $(17,728) $ (4,319)
======= ======
</TABLE>
See accompanying notes to combined financial statements.
108
<PAGE> 111
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 27 TO
JANUARY 1, 1996 TO DECEMBER 31,
JULY 30, 1996 1995
------------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(13,409) $ (4,319)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......... 7,706 14,139
Deferred tax benefit................... (740) (2,325)
Changes in assets and liabilities:
Change in receivables, net........... (6) (98)
Change in other assets............... 33 (80)
Change in cash overdraft............. 35 --
Change in accounts payable........... 313 150
Change in accrued liabilities........ (662) 965
------- -------
Net cash provided by (used in)
operating activities............ (6,730) 8,432
------- -------
Cash flows used in investing activities --
Capital expended for property and
equipment................................. (4,655) (13,054)
------- -------
Cash flows from financing activities --
Increase in due to TCIC................... 9,449 6,484
------- -------
Net increase (decrease) in cash........ (1,936) 1,862
Cash at beginning of period................. 1,936 74
------- -------
Cash at end of period....................... $ -- $ 1,936
======= =======
</TABLE>
See accompanying notes to combined financial statements.
109
<PAGE> 112
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The combined financial statements include the operations, assets and
liabilities of TCI of Greenville, Inc., TCI of Spartanburg, Inc., and TCI of
Piedmont, Inc. (the "Systems") which are indirect wholly-owned subsidiaries of
TCI Communications, Inc. ("TCIC" or "Parent") which is a subsidiary of
Tele-Communications, Inc. ("TCI"). The Systems develop and operate cable
television systems in South Carolina.
The Systems were acquired by TCI from TeleCable Corporation at the close of
business on January 26, 1995 and subsequently contributed to TCIC. These
combined financial statements include the Systems' results of operations after
January 26, 1995, the date of acquisition.
On July 30, 1996, TCIC contributed the Systems to a newly formed limited
partnership in exchange for an interest in InterMedia Partners IV, L.P.,
("IP-IV"). See note 6.
(b) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. Interest
capitalized for the periods from January 1, 1996 to July 30, 1996 and January
27, 1995 to December 30, 1995 was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for cable distribution systems and 3 to 40 years for
support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales, or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Systems adopted
Statement No. 121 effective January 1, 1996. Such adoption did not have a
significant effect on the financial position or results of operations of the
Systems. In accordance with Statement No. 121, the Systems periodically review
the carrying amounts of their long-lived assets, franchise costs and certain
other assets to determine whether current events or circumstances warrant
adjustments to such carrying amounts. The Systems consider historical and
expected future net operating losses to be their primary indicators of potential
impairment. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets ("Assets"). The Systems deem Assets to be
impaired if the Systems are unable to recover the carrying value of their assets
over their expected remaining useful life through a forecast of undiscounted
future operating cash flows directly related to the Assets. If Assets are deemed
to be impaired, the loss is measured as the amount by which the carrying amount
of the Assets exceeds their fair values. The Systems generally measure fair
value by considering sales prices for similar assets or by discounting estimated
future cash flows. Considerable management judgement is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
110
<PAGE> 113
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(c) FRANCHISE COSTS
Franchise costs include the difference between the cost of acquiring the
Systems and amounts allocated to the tangible assets. Franchise costs are
amortized on a straight-line basis over 40 years.
(d) INCOME TAXES
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and
certain other subsidiaries of TCI was implemented effective July 1, 1995. The
Tax Sharing Agreement formalizes certain elements of the pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. Federal, state, local, and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended,
and any applicable state, local, and foreign tax law and related regulations.
Beginning on the July 1, 1995 effective date, TCIC was responsible to TCI for
its share of current consolidated income tax liabilities. TCI was responsible to
TCIC to the extent that TCIC's income tax attributes generated after the
effective date are utilized by TCI to reduce its consolidated income tax
liabilities. Accordingly, all tax attributes generated by TCIC's operations
(which include the Systems) after the effective date including, but not limited
to, net operating losses, tax credits, deferred intercompany gains, and the tax
basis of assets are inventoried and tracked for the entities comprising TCIC.
(e) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. ACCRUED LIABILITIES
Accrued liabilities consists of the following at December 31, 1995 (amounts
in thousands):
<TABLE>
<S> <C>
Franchise fees payable...................................... $ 1,722
Property taxes payable...................................... 745
Salaries and benefits payable............................... 263
Sales taxes payable......................................... 187
Other....................................................... 569
-------
$ 3,486
=======
</TABLE>
3. TRANSACTIONS WITH RELATED PARTIES
Certain subsidiaries of TCIC provide certain corporate general and
administrative services and are responsible for the Systems' operations and
construction. Costs related to these services were allocated to TCIC's
subsidiaries on a per subscriber and gross revenue basis that is intended to
approximate TCI's proportionate cost of providing such services and are
presented in the combined statement of operations and accumulated deficit as
allocated general and administrative costs. The amounts allocated by TCIC are
not necessarily representative of the costs that the Systems would have incurred
on a stand-alone basis.
The Systems purchased, at TCIC's cost, certain pay television and other
programming through another TCIC subsidiary. Charges for such programming were
$6,473,000 for the period from January 1, 1996 to July 30, 1996 and $6,766,000
for the period from January 27, 1995 to December 31, 1995 and are included in
program fees.
111
<PAGE> 114
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The amount due to TCIC includes TCIC's funding of current operations as
well as the initial contribution of the Systems. The amount of interest expense
allocated by TCIC is based on the actual interest costs incurred by TCIC and
therefore, it does not necessarily reflect the interest expense that each
subsidiary would have incurred on a stand alone basis. In addition, certain of
TCIC's debt is secured by the assets of certain of its subsidiaries, including
the Systems.
4. INCOME TAXES
The Systems are included in the consolidated Federal income tax return of
TCI. Income tax benefit for the Systems is based on those items in the
consolidated calculation applicable to the Systems. The income tax benefit
during this period represents an apportionment of tax expense or benefit (other
than deferred taxes) among subsidiaries of TCIC in relation to their respective
amounts of taxable earnings or losses. The payable (receivable) arising from the
allocation of taxes for the period has been recorded as an increase (decrease)
to the due to TCIC account. For Federal income tax purposes, the tax basis in
the assets of the Systems were carried over at their historical tax basis.
The Systems recognize deferred tax assets and liabilities for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Income tax benefit (expense) attributable to loss before income taxes
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Period from January 1, 1996 to July 30, 1996:
Intercompany tax allocation.................... $ 6,304 $643 $6,947
State and local................................ -- 97 97
----- ---- ------
$ 6,304 $740 $7,044
===== ==== ======
Period from January 27, 1995 to December 30,
1995:
Intercompany tax allocation.................... $ (87) $2,021 $1,934
State and local................................ (12) 304 292
---- ----- ------
$ (99) $2,325 $2,226
==== ===== ======
</TABLE>
Income tax benefit attributable to earnings differs from the amount
computed by applying the Federal income tax rate of 35% as a result of the
following (amounts in thousands):
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1, 1996 PERIOD FROM JANUARY 27, 1995
TO JULY 30, 1996 TO DECEMBER 31, 1995
--------------------------- ----------------------------
<S> <C> <C>
Computed "expected" tax
benefit.................... $ 7,159 $2,291
State and local income taxes,
net of Federal income tax
benefit.................... 63 190
Other........................ (178) (255)
------- ------
$ 7,044 $2,226
======= ======
</TABLE>
112
<PAGE> 115
TCI OF GREENVILLE, INC.,
TCI OF SPARTANBURG, INC., AND
TCI OF PIEDMONT, INC.
(INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Deferred tax assets, primarily related to accounts
receivable............................................... $ 164
Deferred tax liabilities:
Franchise costs.......................................... 109,350
Property and equipment................................... 3,415
Other.................................................... 638
--------
Gross deferred tax liabilities........................ 113,403
--------
Net deferred tax liabilities.......................... $ 113,239
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
As a result of the Cable Television Consumer Protection and Competition Act
of 1992 (the "1992 Cable Act"), the Systems' 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. Basic and tier
service rates are evaluated against competitive benchmark rates as published by
the FCC, and equipment and installation charges are based on actual costs.
The Systems believe that they have complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting provisions.
However the Systems' rates for Regulated Services are subject to review by the
FCC, if a complaint has been filed, or the appropriate franchise authority, if
such authority has been certified. 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 the later of September 1,
1993 or one year prior to the certification date of the applicable franchise
authority. The amount of refunds, if any, which could be payable by the Systems
in the event that the Systems' rates are successfully challenged by franchising
authorities or the FCC is not considered to be material.
The Systems have entered into pole rental agreements and use other
equipment under lease arrangements. Rental expense under these arrangements was
$354,000 for the period from January 1, 1996 to July 30, 1996 and $510,000 for
the period from January 27, 1995 to December 31, 1995.
6. SUBSEQUENT EVENT
On July 30, 1996, TCI consummated an agreement with IP-IV to contribute the
Systems into a newly-formed limited partnership in exchange for a 49% limited
partnership interest in IP-IV. Management of the Systems' operations was assumed
by InterMedia Capital Management IV, L.P., the general partner of IP-IV as of
that date.
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<PAGE> 116
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has no directors or officers.
GENERAL PARTNER
ICM-IV, a California limited partnership, is the General Partner of ICP-IV.
Leo J. Hindery, Jr. has a controlling interest in ICM-IV. In February 1997 Mr.
Hindery was appointed President of TCI. As part of Mr. Hindery's transition TCI
is negotiating for the purchase of Mr. Hindery's interests in IMI and ICM-IV, as
well as various other management partnerships for the Related InterMedia
Entities. Through ICM-IV, Mr. Hindery has managed ICP-IV and its subsidiaries.
Upon completion of the transition, Mr. Hindery will no longer hold a controlling
interest in ICM-IV. As general partner, ICM-IV has responsibility for the
overall management of the business and operations of the Company. Pursuant to
the terms of ICP-IV's limited partnership agreement executed as of March 19,
1996 (the "Partnership Agreement"), ICM-IV receives an annual management fee for
services rendered as General Partner. The principal offices of ICM-IV are
located at 235 Montgomery Street, Suite 420, San Francisco, California 94104 and
the telephone number is (415) 616-4600.
ADVISORY COMMITTEE
ICP-IV has an advisory committee ("Advisory Committee") which consults with
and advises ICM-IV with respect to the business and affairs of the Company. The
Advisory Committee consists of one representative of each of the seven limited
partners of ICP-IV with the largest aggregate limited partnership interests in
ICP-IV. For this purpose, the partnership interest of a limited partner includes
actual capital contributions by a limited partner and any capital contributions
by such limited partner's affiliate.
EXECUTIVES
ICP-IV has no employees. Pursuant to the Partnership Agreement, ICM-IV,
through its affiliate InterMedia Capital Management, L.P. ("ICM"), provides
day-to-day management of the Company's business and operations. The six most
senior non-operating executives of ICM and IMI are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------
<S> <C> <C>
*Leo J. Hindery, Jr.............. 49 Managing General Partner
Edon V. Hartley.................. 37 Chief Financial Officer
**Derek Chang.................... 29 Treasurer
Rodney M. Royse.................. 30 Executive Director of Business Development
Thomas R. Stapleton.............. 42 Controller and Executive Director of
Financial Operations
Grace de Latour.................. 47 Executive Director of Human Resources
</TABLE>
The six officers of IPCC are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------
<S> <C> <C>
*Leo J. Hindery, Jr.............. 49 President
Edon V. Hartley.................. 37 Chief Financial Officer
**Derek Chang.................... 29 Secretary and Treasurer
Rodney M. Royse.................. 30 Vice President
Thomas R. Stapleton.............. 42 Vice President
Bruce J. Stewart................. 31 Vice President, Legal Affairs
</TABLE>
Leo J. Hindery, Jr. is the founder and Managing General Partner of ICM-IV
and ICM and President of IPCC. Mr. Hindery is also the founder and Managing
General Partner of InterMedia Partners, a California limited partnership, and
all of the other Related Intermedia Entities. Before launching InterMedia
Partners in
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<PAGE> 117
1988, Mr. Hindery was, from 1985 to 1988, Chief Officer for Planning and Finance
of The Chronicle Publishing Company of San Francisco ("Chronicle Publishing"),
which owns and operates substantial newspaper and television broadcast
properties and, at the time, cable television properties. Prior to joining
Chronicle Publishing, Mr. Hindery was, from 1983 to 1985, Chief Financial
Officer and a Managing Director of Becker Paribas Incorporated, a major New
York-based investment banking firm. Mr. Hindery is on the Board of Directors of
DMX, Incorporated, the NCTA, the Cable Telecommunications Association, Cable in
the Classroom and C-SPAN. He earned a B.A. with honors from Seattle University
and an M.B.A. with honors from Stanford University's Graduate School of
Business.
*In February 1997, Mr. Hindery was appointed president of TCI. Upon
completion of his transition to TCI, Mr. Hindery will no longer be Managing
General Partner of ICM-IV or any other management partnerships of the Related
InterMedia Entities. Mr. Hindery's transition to TCI is expected to be completed
by mid-1997. Robert J. Lewis is expected to acquire Mr. Hindery's interest in
the general partner of ICM-IV and other management partnerships of the Related
InterMedia Entities upon the departure of Mr. Hindery to TCI. See Item 13
"Certain Relationships and Related Transactions." Mr. Lewis is a recognized
pioneer in the cable television industry having started his career as a system
manager. Since that time he has held top level positions in the industry. Among
them are President of Cablecom-General, President and Chief Operating Officer of
Jones Intercable, Inc., President of Televents Group, Inc. and Senior Vice
President of TCI. Mr. Lewis retired from TCI in 1995 and since that time has
served as an Executive Director and Advisor for the Related InterMedia Entities.
He is also a Director of Online System Services, Inc., a Denver based internet
access and business solutions company.
Edon V. Hartley is Chief Financial Officer of ICM, IMI and IPCC. Ms.
Hartley joined ICM in 1996. From 1993 to 1995, Ms. Hartley was Finance Director
for TCI. From 1990 to 1993, Ms. Hartley was Finance Counsel for TCI. Ms. Hartley
earned a B.S. with honors in accounting from the University of Missouri and a
J.D. with honors from the University of Denver.
Derek Chang is Treasurer of ICM, IMI and IPCC, and Secretary of IPCC. Mr.
Chang joined ICM in 1994. From 1990 to 1992, Mr. Chang worked as a financial
analyst for The First Boston Corporation in the Mergers and Acquisitions Group.
Mr. Chang earned a B.A. from Yale University and an M.B.A. from Stanford
University's Graduate School of Business.
**Mr. Chang will be departing from ICM, IMI and IPCC in the second quarter of
this year.
Rodney M. Royse is Executive Director of Business Development of ICM, IMI
and IPCC, and Vice President of IPCC. Mr. Royse joined ICM in 1990. From 1988 to
1990, Mr. Royse was a financial analyst at Salomon Brothers Inc in the Corporate
Finance Group. Mr. Royse earned a B.A. in Economics from Stanford University.
Thomas R. Stapleton is Controller and Executive Director of Financial
Operations of ICM, IMI and IPCC, and Vice President of IPCC. Prior to joining
ICM in 1989, Mr. Stapleton was a Manager with Price Waterhouse LLP, the
Company's independent accountants. Mr. Stapleton was previously employed by Bank
of America in asset-based financing. Mr. Stapleton earned a B.S. degree with
honors in Business Administration from San Francisco State University.
Grace de Latour is the Executive Director of Human Resources of ICM, IMI
and IPCC. Ms. de Latour joined IMI in 1995. Prior to joining IMI, from 1994 to
1995, Ms. de Latour was Vice President of Human Resources for Expressly
Portraits. Before that, from 1972 to 1993, she was Corporate Vice President for
Human Resources for Carter Hawley Hale Stores, Inc. Ms. de Latour is on the
Board of Directors of the Independent Colleges of Northern California and the
Federated Employers of the Bay Area. Ms. de Latour earned a B.A. in sociology
from Trinity College in Washington, D.C.
115
<PAGE> 118
KEY OPERATING MANAGEMENT
The following persons hold key operating management positions with ICM or
IMI:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------
<S> <C> <C>
**Terry C. Cotten................ 48 Executive Director of Operations
F. Steven Crawford............... 48 Chief Operating Officer
Julaine A. Smith................. 40 Operations Controller
Bruce J. Stewart................. 31 General Counsel and Executive Director of
Communications
**Barbara J. Wood................ 45 Executive Director of Budgets and Regulatory
Affairs
Kenneth A. Wright................ 41 Executive Director of Engineering and
Telecommunications
Donna K. Young................... 47 Development Executive Director of Marketing
and Ad Sales
</TABLE>
Terry C. Cotten is Executive Director of Operations for IMI. He has over 30
years of experience in the cable television industry. Prior to joining IMI in
1989, Mr. Cotten was, from 1988 to 1989, President of Western Communications'
cable system in Ventura County, serving approximately 65,000 subscribers in
Southern California. Prior to this position, Mr. Cotten was President of Western
Communications' cable system in South San Francisco from 1986 to 1988. Mr.
Cotten earned a B.S. in Management from St. Mary's College.
F. Steven Crawford is the Chief Operating Officer for ICM. Prior to joining
ICM on October 1, 1996, Mr. Crawford was Senior Vice President of E. W. Scripps
Company from September 1992 to September 1996 and was Chief Operating Officer of
Scripps Cable serving approximately 750,000 subscribers. Mr. Crawford was Vice
President of Scripps Cable's operations in the Southeast from September 1990 to
September 1992. Mr. Crawford serves on the Board of Directors of the Cable
Advertising Bureau. Mr. Crawford earned a B.S. degree in business management and
a M.B.A. degree in finance from Valdosta State University.
Julaine A. Smith is Operations Controller of IMI. Ms. Smith joined IMI in
1994. Prior to joining IMI, Ms. Smith was, from 1993 to 1994, the Director of
Financial Reporting for Pacific Telesis Group. Ms. Smith also worked, from 1991
to 1992, as the Accounting Manager for the domestic cellular operations of
PacTel Corporation (now known as AirTouch Communications). Ms. Smith completed
her public accounting training at the San Francisco office of Price Waterhouse
LLP. Ms. Smith is a Certified Public Accountant and earned a B.S. in Business
Administration, Accounting from California State University at Hayward.
Bruce J. Stewart is General Counsel and Executive Director of
Communications of IMI. Mr. Stewart joined IMI as Counsel in January 1993, and
served in this position until August 1994, when he was appointed General
Counsel. Mr. Stewart is a member of the New York State Bar. Prior to joining
IMI, Mr. Stewart served as legal counsel from 1991 to 1993 at Scholastic
Productions, Inc., a subsidiary of Scholastic, Inc. located in New York City.
From 1990 to 1991, Mr. Stewart worked in New York with the Law Firm of Malcolm
A. Hoffman on commercial contract matters. Mr. Stewart earned a B.A from Holy
Cross College and a J.D. from Case Western Reserve University Law School.
Barbara J. Wood is the Executive Director of Budgets and Regulatory Affairs
of IMI. Ms. Wood has worked in the cable television industry since 1984. Prior
to joining IMI in 1992, she was, from 1991 to 1992, a regional financial manager
for Viacom handling budgeting, financial systems and internal controls. She was
in London with Videotron U.K. during its start-up from 1990 to 1991 as an
outside consultant managing the installation of financial cost accounting
systems and was a controller for Cox Communications from 1984 to 1989. Ms. Wood
is a Certified Public Accountant and earned an M.B.A. in Management from San
Diego State University.
**Mr. Cotten and Ms. Wood will be departing from IMI during the second
quarter of this year.
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<PAGE> 119
Kenneth A. Wright is the Executive Director of Engineering and
Telecommunications Development of IMI. He directs the engineering of the
Company's and Related InterMedia Entities' cable systems. Prior to joining IMI
in February 1995, Mr. Wright was, from 1991 to 1995, Director of Technology for
Jones Intercable which manages cable systems serving approximately 1.5 million
subscribers. Before joining Jones Intercable, Mr. Wright was Director of
Engineering for the Western Division of United Artists Cable which was comprised
of systems in 11 states serving approximately 700,000 subscribers. Prior to
that, he was a State Engineering Manager for Centel Cable. Mr. Wright earned a
B.S. from Western Michigan University and a Master of Telecommunications and a
Master level certificate in Global Business and Culture from the University of
Denver.
Donna K. Young is the Executive Director of Marketing and Ad Sales of IMI.
Ms. Young is responsible for national marketing programs, including customer
acquisition, customer retention and new product development. Prior to joining
IMI in November 1994, Ms. Young was Vice President for Business Development from
1989 to 1994 for KBLCOM, Inc., then an 800,000-subscriber MSO based in Houston.
Ms. Young is on the Board of Directors of the Cable Television Administration
and Markets Society. A native of Shelbyville, Tennessee, Ms. Young earned a
Ph.D. in educational and organizational psychology from the University of
Tennessee in Knoxville.
ITEM 11. EXECUTIVE COMPENSATION
None of the employees of the Company are deemed to be executives or
officers of the Company. Services of the non-operating executives, key operating
management and other employees of ICM or IMI are provided to the Company in
exchange for fees pursuant to ICP-IV's Partnership Agreement and other
agreements for services. The executives, key operating management and other
employees of ICM or IMI who provide services to the Company are compensated by
ICM or IMI and therefore receive no compensation from the Company. No portion of
the fees paid by the Company is allocated to specific employees for the services
performed by ICM or IMI for the Company. See Item 13 "Certain Relationships and
Related Transactions -- Management by ICM-IV" and "-- Services to be Rendered to
the Company by IMI."
117
<PAGE> 120
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
partnership interests in ICP-IV owned by each person known to ICP-IV to own
beneficially more than a five percent non-preferred equity interest and by the
executives of ICM-IV as a group.
<TABLE>
<CAPTION>
NAMES AND ADDRESSES OF BENEFICIAL OWNERS TYPE OF INTEREST PERCENTAGE
--------------------------------------------------------- ---------------- ----------
<S> <C> <C>
Tele-Communications, Inc................................. Limited Partner 49.0%
5619 DTC Parkway, 11th Floor
Englewood, CO 80111
NationsBanc Investment Corp.............................. Limited Partner 9.0%(1)
NationsBank Corporate Center
100 North Tryon Street
Charlotte, NC 28255
IP Holdings L.P.......................................... Limited Partner 7.5%
c/o Centre Partners
30 Rockefeller Plaza, Suite 5050
New York, NY 10020
Mellon Bank, N.A., as Trustee for
Third Plaza Trust and Fourth Plaza Trust............... Limited Partner 6.3%(2)
1 Mellon Bank Center
Pittsburgh, PA 15258-0001
Sumitomo Corp............................................ Limited Partner 5.7%
Sumitomo Kanda Building
24-4, Kanda Nishikicho 3-chome
Chiyoda-ku, Tokyo 101, Japan
Executives of ICM-IV as a Group (6 persons).............. General Partner 1.1%(3)
</TABLE>
- ---------------
(1) Includes investments in ICP-IV by NationsBanc Investment Corp. and
affiliates thereof.
(2) Mellon Bank, N.A., acts as the trustee (the "Plaza Trustee") for each of
Third Plaza Trust and Fourth Plaza Trust (collectively, the "Trusts"), two
trusts under and for the benefit of certain employee benefit plans of
General Motors Corporation ("GM") and its subsidiaries. The limited
partnership interests may be deemed to be owned beneficially by General
Motors Investment Management Corporation ("GMIMCo"), a wholly owned
subsidiary of GM. GMIMCo's principal business is providing investment advice
and investment management services with respect to the assets of certain
employee benefit plans of GM and its subsidiaries and with respect to the
assets of certain direct and indirect subsidiaries of GM and associated
entities. GMIMCo is serving as the Trusts' investment manager with respect
to the limited partnership interests and in that capacity, it has the sole
power to direct the Plaza Trustee as to the voting and disposition of the
limited partnership interests. Because of the Plaza Trustee's limited role,
beneficial ownership of the limited partnership interests by the Plaza
Trustee is disclaimed.
(3) Leo J. Hindery, Jr., is the general partner and holds the controlling
interest in ICM-IV. See Item 13 "Certain Relationships and Related
Transactions -- The Related InterMedia Entities." No executive of ICM-IV or
IPCC holds a direct interest in ICP-IV.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEO J. HINDERY, JR.
In February of this year Leo J. Hindery, Jr. was appointed president of
TCI. As part of Mr. Hindery's transition to TCI, all or a part of Mr. Hindery's
interests in ICM-IV and its general partner IMI, as well as various other
management partnerships for the Related InterMedia Entities, will be converted
or sold. Upon completion of the transition, Mr. Hindery will no longer hold a
controlling interest in IMI or ICM-IV. The transition is expected to be
completed by mid-1997.
118
<PAGE> 121
It is currently contemplated that Mr. Hindery's interests in ICM-IV, the
general partner or the Company, will be converted as follows. Mr. Hindery will
sell his stock in IMI, the general partner of ICM-IV, to Robert J. Lewis.
ICM-IV's general partnership interest in the Company will be converted into a
limited partnership interest. A newly-formed limited liability corporation
("ICM-LLC"), for which IMI will be the managing member, will be admitted as the
Managing General Partner of the Company. The transactions described above are
subject to final negotiation and documentation, therefore the final structure of
these transactions may differ upon completion.
THE RELATED INTERMEDIA ENTITIES
The Related InterMedia Entities and the Company are a series of
partnerships and corporations founded by Leo J. Hindery, Jr. to own and operate
cable television systems in the United States. Mr. Hindery formed the first of
the Related InterMedia Entities, IP-I, in early 1988 with the financial backing
of TCI. Through ICM-IV, Mr. Hindery has managed ICP-IV and its subsidiaries.
Upon completion of the transition, Mr. Hindery will no longer hold a controlling
interest in IMI, IPCC, ICM-IV, or any of the Related InterMedia Entities or
their respective management partnerships. The transition is expected to be
completed by mid-1997. See Item 10 "Directors and Executive Officers of the
Registrant -- General Partner" and "-- Executives."
Although each of the Related InterMedia Entities and the Company are
distinct legal entities, they are operated as a cohesive group. Accordingly,
they enjoy significant operating efficiencies and reduced overhead from
centralization of certain common functions and shared economies of scale.
Clustering of the Company's operations by geographic location is also intended
to contribute significantly to operating efficiencies and revenue opportunities.
In order to achieve certain operating economies of scale and to allocate
certain administrative services equitably to all of the Related InterMedia
Entities and the Company, Mr. Hindery formed IMI. Mr. Hindery is the sole
shareholder of IMI. IMI performs the accounting, marketing, engineering,
administrative, operations, legal and rate regulation functions for all of the
Related InterMedia Entities and the Company at cost. Generally, IMI's costs are
allocated to each of the Related InterMedia Entities and the Company on a per
subscriber basis.
SERVICES TO BE RENDERED TO THE COMPANY BY IMI
Certain of ICP-IV's subsidiaries have entered into agreements with IMI,
pursuant to which IMI provides accounting, operational, marketing, engineering,
legal, rate regulation and other administrative services to the Company at cost.
IMI provides similar services to all of the Related InterMedia Entities'
operating companies. IMI charges certain costs to the Company primarily based on
the Company's number of basic subscribers as a percentage of total basic
subscribers for all of the Related InterMedia Entities' systems. In addition to
changes in IMI's cost of providing such services, changes in the number of the
Company's basic subscribers and/or changes in the number of basic subscribers of
the Related InterMedia Entities' operating companies will affect the level of
IMI costs charged to the Company. The Company believes that the terms of the
Administrative Agreements are more favorable than the terms that could be
obtained by unaffiliated third parties in arm's-length negotiations with IMI.
The Partnership Agreement requires that to the extent amounts paid to
affiliates, including ICM-IV, IMI or partners, exceed the amounts that would be
paid under terms afforded by unrelated third parties, such excess will result in
corresponding reductions in the Management Fee (as defined herein) payable to
ICM-IV. The payment to such affiliate of any such amount in excess of the ICM-IV
Management Fee requires the approval of 70.0% in interest of the limited
partners.
MANAGEMENT BY ICM-IV
ICM-IV manages the Company's cable systems pursuant to ICP-IV's Partnership
Agreement. ICM-IV has assigned its rights and obligations to ICM with regard to
management of the Company's cable systems. The Partnership Agreement provides
that this management relationship continues in effect with respect to
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<PAGE> 122
each cable television system owned by the Company, including the systems
purchased by the Company pursuant to the Acquisitions. ICM-IV is authorized to
provide management services that include (i) entering into contracts and
performing the resulting obligations, (ii) managing the assets of the Company
and employing such personnel as may be necessary or appropriate, (iii)
controlling bank accounts and drawing orders for the payment of money, (iv)
collecting income and payments due, (v) keeping the books and records, and
hiring independent certified public accountants, (vi) paying payables and other
expenses, (vii) handling Company claims, (viii) administering the financial
affairs, making tax and accounting elections, filing tax returns, paying
liabilities and distributing profits to ICP-IV's partners, (ix) borrowing money
on behalf of the Company, (x) causing the Company to purchase and maintain
liability insurance, (xi) commencing or defending litigation that pertains to
the Company or any of its assets and investigating potential claims, (xii)
executing and filing fictitious business name statements and similar documents,
(xiii) admitting additional limited partners and permitting additional capital
contributions as provided in the Partnership Agreement and admitting an assignee
of an existing limited partner's interest to be a substituted limited partner
and (xiv) terminating ICP-IV pursuant to the terms of the Partnership Agreement.
The term of the Partnership Agreement is until December 31, 2007 unless
earlier dissolved under certain conditions specified in the Partnership
Agreement. For its services under the Partnership Agreement, ICM-IV receives a
fee (the "Management Fee") equal to 1.0% of the total non-preferred Contributed
Equity contributions that have been made to the Company determined as of the
beginning of each calendar quarter in each fiscal year; however, if the
acquisition of a cable television system is made with debt financing of more
than two-thirds of the purchase price of such cable television system, the
Partnership Agreement provides that capital contributions of one-third of such
purchase price will be deemed to have been made and the Management Fee will be
paid on such deemed contributions. When any such debt financing is replaced with
actual non-preferred capital contributions of the partners, the Partnership
Agreement provides that the Management Fee will be based on such actual capital
contributions rather than a deemed contribution for such amount. The Company
believes that the terms in the Partnership Agreement concerning ICM-IV's
management services are more favorable than the terms that could be obtained by
unaffiliated third parties in arm's-length negotiations.
Mr. Hindery is managing general partner of ICM-IV and holds the controlling
interest in ICM-IV. However, Mr. Hindery is currently in the process of selling
his controlling interest in ICM-IV pursuant to his appointment as President of
TCI.
CERTAIN OTHER RELATED TRANSACTIONS
IPWT. On July 30, 1996 pursuant to the IPWT Contribution Agreement, among
(i) ICP-IV, (ii) IP-I, formerly the 80.1% general partner and 9.9% limited
partner of IPWT and (iii) GECC, formerly the 10.0% limited partner of IPWT and
creditor as to a $55.8 million principal amount of debt owed by IPWT, ICP-IV
acquired the IPWT partnership interests and debt for total consideration of
$72.5 million. GECC transferred to the Company its $55.8 million note and
related interest receivables of approximately $3.4 million owed by IPWT to GECC
in exchange for (i) approximately $22.5 million in cash, (ii) a $25.0 million
Preferred Limited Partner Interest and (iii) a $11.7 million limited partnership
interest in ICP-IV. ICP-IV contributed the acquired partnership interests in
IPWT to the Operating Partnership, which, in turn, contributed a 1.0% limited
partnership interest in IPWT to IP-TN. See Item 1 "The Company -- Acquisitions."
RMH. On July 30, 1996 IP-IV acquired RMH and its wholly owned subsidiary,
RMG, pursuant to a stock purchase agreement between IP-IV and ICM-V, the general
partner of IP-V. Prior to the acquisition, IP-V owned the outstanding equity of
RMH. The total transaction is valued at approximately $376.3 million. As part of
the acquisition of RMH, TCID-IP V, Inc., which was the limited partner of IP-V
and is an affiliate of TCI, converted its outstanding loan to IP-V into a
partnership interest and received in dissolution thereof $12.0 million in RMH
Preferred Stock and approximately $0.037 million in RMH Class B Common Stock.
See Item 1 "The Company -- Acquisitions."
TCI Greenville/Spartanburg. The TCI Entities, which are wholly owned
subsidiaries of TCI, have contributed the Greenville/Spartanburg System to the
Company pursuant to the G/S Contribution Agree-
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<PAGE> 123
ment for total consideration of $238.9 million. The Company subsequently
contributed these assets to IP-TN, a subsidiary of ICP-IV. See Item 1 "The
Company -- Acquisitions."
IP-I. Pursuant to a letter agreement, ICP-IV has agreed to provide
InterMedia Partners, a California limited partnership ("IP-I"), tag along rights
if ICP-IV sells (i) substantially all of its assets in a single transaction, or
(ii) a portion of its assets constituting an identifiable cable television
system which has its primary headend site within fifty miles of the primary
headend site of a cable television system owned by IP-I, to an entity not
controlled by Leo J. Hindery, Jr.
ICM-IV. Pursuant to the Partnership Agreement, ICM-IV funded its capital
contributions of $3.8 million to ICP-IV with cash of $2.0 million and notes
payable to ICP-IV of $1.8 million. These $1.8 million notes were paid off with
proceeds from an intercompany loan for a like amount from IP-IV to ICM-IV. The
promissory note from IP-IV bears interest at an averaged rate based upon
interest rates accruing on all loans pursuant to which IP-IV has borrowed funds
and matures at the earlier of July 31, 1998 or the date on which IP-IV demands
payment.
CERTAIN OTHER RELATIONSHIPS
The Company is a party to an agreement with SSI, an affiliate of TCI,
pursuant to which SSI provides certain cable programming to the Company at the
rate available to TCI plus an administrative fee. Management believes that these
rates are at least as favorable as the rates that could be obtained through
arm's-length negotiations with third parties. The Company's programming fees
charged by SSI for the year ended December 31, 1996 amounted to $17,538. For the
year ended December 31, 1995 and the six months ended July 30, 1996, the cable
television systems owned by IPWT and RMH paid SSI, in aggregate, approximately
$12.8 million and $8.2 million, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
(1) Financial Statements -- See Index to Financial Statements on page
44 of this Form 10-K.
(2) Financial Schedules -- See Index to Financial Statements on page 44
of this Form 10-K.
(3) Exhibits -- See Index to Exhibits on page 122 of this Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fiscal quarter ended December 31, 1996.
121
<PAGE> 124
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
-------- ----------------------------------------------------------------- --------------
<C> <S> <C>
*2.1 Asset Purchase and Sale Agreement dated as of October 25, 1995 by
and between ParCable, Inc. and InterMedia Partners of Tennessee,
L.P. and amendment thereto. (Exhibits and schedules omitted. The
Company agrees to furnish a copy of any exhibit or schedule to
the Commission upon request).....................................
*2.2 Asset Purchase Agreement dated October 18, 1995 between Time
Warner Entertainment Company, L.P. and InterMedia Partners of
Tennessee, L.P. and amendment thereto. (Exhibits and schedules
omitted. The Company agrees to furnish a copy of any exhibit or
schedule to the Commission upon request).........................
*2.3 Stock Purchase Agreement dated as of July 26, 1996 between
InterMedia Capital Management V, L.P. and InterMedia Partners IV,
L.P..............................................................
*2.4 Contribution Agreement dated as of April 30, 1996 by and between
InterMedia Capital Partners IV, L.P., InterMedia Partners and
General Electric Capital Corporation and amendments thereto.
(Schedules omitted. The Company agrees to furnish a copy of any
schedule to the Commission upon request.)........................
*2.5 Contribution Agreement dated as of March 4, 1996 by and between
InterMedia Partners IV, L.P., TCI of Greenville, Inc., TCI of
Piedmont, Inc. and TCI of Spartanburg, Inc. and amendments
thereto. (Exhibits and schedules omitted. The Company agrees to
furnish a copy of any exhibit or schedule to the Commission upon
request).........................................................
*2.6 Exchange Agreement dated as of December 18, 1995 by and between
TCI Communications, Inc. and InterMedia Partners Southeast and
amendment thereto. (Exhibits and schedules omitted. The Company
agrees to furnish a copy of any exhibit or schedule to the
Commission upon request).........................................
*3.1 Agreement of Limited Partnership of InterMedia Capital Partners
IV, L.P. dated as of March 19, 1996 by and among InterMedia
Capital Management IV, L.P. and the various limited partners.
(Exhibits omitted. The Company agrees to furnish a copy of any
exhibit to the Commission upon request.).........................
*4.1 Registration Rights Agreement dated as of July 19, 1996 by and
among InterMedia Capital Partners IV, L.P., InterMedia Partners
IV, Capital Corp., NationsBanc Capital Markets, Inc. and Toronto
Dominion Securities (USA) Inc. ..................................
*4.2 Indenture dated as of July 30, 1996 by and among InterMedia
Capital Partners IV, L.P., InterMedia Partners IV, Capital Corp.
and The Bank of New York, as trustee, including the form of
Global Note......................................................
*4.3 Pledge and Escrow Agreement dated as of July 30, 1996 by and
among InterMedia Capital Partners IV, L.P., InterMedia Partners
IV, Capital Corp., NationsBanc Capital Markets, Inc. and The Bank
of New York, as trustee and as collateral agent. (Annex I
omitted. The Company agrees to furnish a copy of Annex I to the
Commission upon request.)........................................
</TABLE>
122
<PAGE> 125
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
-------- ----------------------------------------------------------------- --------------
<C> <S> <C>
*10.1 Revolving Credit and Term Loan Agreement dated as of July 30,
1996 among InterMedia Partners IV, L.P. and The Bank of New York,
as Administrative Agent, and The Bank of New York, NationsBank of
Texas, N.A., Toronto Dominion (Texas), Inc., as Arranging Agents,
and NationsBank of Texas, N.A. and Toronto Dominion (Texas),
Inc., as Syndication Agents, and the Financial Institution
Parties thereto..................................................
*10.2 Security and Hypothecation Agreement dated as of July 30, 1996 by
InterMedia Partners of West Tennessee, L.P. in favor of The Bank
of New York in its capacity as Agent for the benefit of the
Lenders. (InterMedia Partners IV, L.P., InterMedia Capital
Partners IV, L.P., InterMedia Partners of Tennessee, InterMedia
Partners Southeast, Robin Media Holdings, Inc. and Robin Media
Group each have entered into agreements which are substantially
identical in all material respects to Exhibit 10.2)..............
*10.3 General Guarantee dated July 30, 1996 by and among InterMedia
Partners of West Tennessee, L.P. in favor of The Bank of New
York, as agent to the financial institutions. (InterMedia Capital
Partners IV, L.P., InterMedia Partners Southeast, InterMedia
Partners of Tennessee, Robin Media Holdings, Inc. and Robin Media
Group each have entered into agreements which are substantially
identical in all material respects to Exhibit 10.3)..............
**10.4 Satellite Services, Inc. Programming Supply Agreement dated
January 28, 1996, by and between Satellite Services, Inc. and
InterMedia Partners IV, L.P. ....................................
*10.5 Administration Agreement dated as of March 19, 1996 by and among
InterMedia Management, Inc., InterMedia Capital Partners IV, L.P.
and InterMedia Partners IV, L.P. ................................
*10.6 Administration Agreement dated as of July 30, 1996 by and between
InterMedia Management, Inc. and InterMedia Partners Southeast....
*10.7 Administration Agreement dated as of January 19, 1995 by and
between InterMedia Management, Inc. and InterMedia Partners of
Tennessee........................................................
*10.8 Administration Agreement dated as of April 30, 1992 by and
between InterMedia Management, Inc. and Robin Media Group,
Inc. ............................................................
*10.9 Amended and Restated Administration Agreement dated as of
December 27, 1990 by and between InterMedia Management, Inc. and
InterMedia Partners of West Tennessee, L.P. .....................
*10.10 Management Agreement dated as of July 30, 1996 by and between
InterMedia Capital Management IV, L.P. and InterMedia Partners of
West Tennessee, L.P. ............................................
*10.11 Management Agreement dated as of July 30, 1996 by and between
InterMedia Capital Management IV, L.P. and Robin Media Group,
Inc. ............................................................
*10.12 Exchange Agent Agreement by and among InterMedia Capital Partners
V, L.P., InterMedia Partners IV, Capital Corp. and The Bank of
New York, dated December 10, 1996................................
12.1 Computation of Ratios............................................
*21.1 List of Subsidiaries of InterMedia Capital Partners IV, L.P. ....
24.1 Power of Attorney (included on page 125).........................
27.1 Schedule of Financial Data for InterMedia Capital Partners IV,
L.P. ............................................................
</TABLE>
123
<PAGE> 126
- ---------------
* Incorporated by reference to the same exhibit number to the Company's Form
S-4 Registration Statement File No. 333-11893.
** Incorporated by reference to the same exhibit number to the Company's
Amendment No. 2 to Form S-4 Registration Statement File No. 333-11893.
Confidential treatment has been previously granted for portions which have
been omitted pursuant to Rule 406 and filed separately with the Commission.
124
<PAGE> 127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INTERMEDIA CAPITAL PARTNERS IV, L.P.
By: InterMedia Capital Management IV,
L.P., its General Partner
By: InterMedia Management, Inc., its
General Partner
By: /s/ LEO J. HINDERY, JR.
------------------------------------
Leo J. Hindery, Jr.
President
Date: March 28, 1997.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Leo J. Hindery, Jr. and Edon V. Hartley, and each
of them, his true and lawful attorneys-in-fact and agents, each with full power
of substation and resubstation, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this report, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, and
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ LEO J. HINDERY, JR. President, Chief Executive March 28, 1997
- ------------------------------------------ Officer and Sole Director of
Leo J. Hindery, Jr. InterMedia Management, Inc.
(principal executive officer)
/s/ EDON V. HARTLEY Chief Financial Officer of March 28, 1997
- ------------------------------------------ InterMedia Management, Inc.
Edon V. Hartley (principal financial officer)
/s/ THOMAS R. STAPLETON Vice President of InterMedia March 28, 1997
- ------------------------------------------ Management, Inc. (principal
Thomas R. Stapleton accounting officer)
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to holders of the Notes.
Subsequent to the filing of this annual report on Form 10-K a copy of the same
shall be furnished to the holders of the Notes.
125
<PAGE> 128
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
INTERMEDIA CAPITAL PARTNERS IV, L.P.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------ --------
<S> <C> <C>
ASSETS
Escrowed investments held to maturity.................................... $ $ 28,237
Interest receivable on escrowed investments.............................. 2,189
------- -------
-
Total current assets........................................... 30,426
Escrowed investments held to maturity.................................... 60,518
Intangible assets, net................................................... 707 11,833
Investment in IP-IV...................................................... 276,909
------- -------
-
Total assets................................................... $ 707 $379,686
======== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities................................. $ 265 $
Payable to affiliate..................................................... 1,067
Accrued interest......................................................... 13,870
------- -------
-
Total current liabilities...................................... 1,332 13,870
Long-term debt........................................................... 292,000
------- -------
-
Total liabilities.............................................. 1,332 305,870
------- -------
-
Commitments and contingencies
PARTNERS' CAPITAL
Preferred limited partnership interest................................... 23,008
General and limited partners' capital.................................... (625) 52,658
Note receivable from general partner..................................... (1,850)
------- -------
-
Total partners' capital........................................ (625) 73,816
------- -------
-
Total liabilities and partners' capital........................ $ 707 $379,686
======== =======
</TABLE>
See accompanying notes to the condensed financial information
126
<PAGE> 129
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
INTERMEDIA CAPITAL PARTNERS IV, L.P.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Revenues.................................................................... $
Loss from operations........................................................
Other income (expense):
Interest income........................................................... 2,189
Interest expense.......................................................... (14,138)
Equity in net loss of IP-IV............................................... (15,780)
--------
Net loss.................................................................... $(27,729)
========
</TABLE>
See accompanying notes to condensed financial information
127
<PAGE> 130
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
INTERMEDIA CAPITAL PARTNERS IV, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED
LIMITED GENERAL LIMITED NOTES
PARTNER PARTNER PARTNERS RECEIVABLE TOTAL
--------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Syndication costs.................... $ (43) $ (7) $ (575) $ $ (625)
------ ------ ------ -------- --------
Balance at December 31, 1995......... (43) (7) (575) (625)
Cash contributions................... 1,913 188,637 190,550
Notes receivable from General
Partner............................ 1,850 (1,850)
In-kind contributions, historical
cost basis......................... 237,805 237,805
Conversion of GECC debt to equity.... 25,000 11,667 36,667
Allocation of RMG's and IPWT's
historical equity balances......... (2,719) (239,368) (242,087)
Distribution......................... (119,775) (119,775)
Syndication costs.................... (69) (10) (911) (990)
Net loss............................. (1,926) (290) (25,513) (27,729)
------ ------ ------ -------- --------
Balance at December 31, 1996......... $ 22,962 $ 737 $ 51,967 $ (1,850) $ 73,816
====== ====== ====== ======== ========
</TABLE>
See accompanying notes to condensed financial information
128
<PAGE> 131
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
INTERMEDIA CAPITAL PARTNERS IV, L.P.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (27,729)
Equity in net loss of IP-IV.......................................... 15,780
Amortization expense................................................. 268
Changes in assets and liabilities:
Interest receivable............................................... (2,189)
Accounts payable and accrued liabilities.......................... (265)
Payable to affiliate.............................................. (1,067)
Accrued interest.................................................. 13,870
---------
Cash flows from operating activities................................... (1,332)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in IP-IV................................................. (259,600)
Purchases of escrowed investments.................................... (88,755)
---------
Cash flows from investing activities................................... (348,355)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from long-term debt....................................... 292,000
Contributed capital.................................................. 190,550
Partner distribution................................................. (119,775)
Debt issue costs..................................................... (12,098)
Syndication costs.................................................... (990)
---------
Cash flows from financing activities................................... 349,687
---------
Net change in cash.....................................................
---------
Cash, beginning of period
Cash, end of period.................................................... $
=========
</TABLE>
See accompanying notes to condensed financial information.
129
<PAGE> 132
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASES OF PRESENTATION
The condensed financial information presents the unconsolidated financial
statements of InterMedia Capital Partners IV, L.P. ("ICP-IV"). ICP-IV's
majority-owned subsidiaries are recorded using the equity basis of accounting.
Refer to the Notes to the consolidated financial statements for
descriptions of material contingencies and significant provisions of long-term
obligations and guarantees of ICP-IV.
130
<PAGE> 133
SCHEDULE II
THE COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, BAD DEBT OTHER DECEMBER 31,
DESCRIPTION 1996 EXPENSE ACCOUNTS(1) WRITE-OFFS 1996
- ----------------------------------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts.......... $ -- $1,937 $2,352 $ (2,159) $2,130
</TABLE>
- ---------------
(1) Represents allowance for doubtful accounts balance assumed in connection
with the Company's acquisitions of cable television systems during 1996.
131
<PAGE> 1
EXHIBIT 12.1
THE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pre-tax loss from continuing operations.............................................. (48,488)
-------
Fixed charges:
Interest expense and amortization of debt discount and premium on all
indebtedness.................................................................... 37,742
Rentals:
Rent expense(1).................................................................... 719
Preferred dividend requirement..................................................... 496
-------
Total fixed charges........................................................ 38,957
-------
Earnings before income taxes and fixed charges....................................... (9,531)
=======
Ratio of earnings to fixed charges................................................... --
=======
</TABLE>
- ---------------
(1) For leases where the interest factor can be specifically identified, the
actual interest factor was used. For all other leases, the interest factor
is estimated at one-third of total rent expense for the applicable period
which management believes represents a reasonable approximation of the
interest factor.
<PAGE> 2
PREVIOUSLY AFFILIATED ENTITIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996 TO
JULY 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax loss from continuing
operations.......................... (21,081) (70,280) (77,648) (79,047) (62,412) (51,038)
------- ------- ------- ------- ------- -------
Fixed charges:
Interest expense and authorization
of debt discount and premium on
all indebtedness................. 8,640 32,357 44,760 44,278 48,835 47,545
------- ------- ------- ------- ------- -------
Rentals:
Rent expense........................ 137 404 585 666 952 573
------- ------- ------- ------- ------- -------
Total fixed charges......... 8,777 32,761 45,345 44,944 49,787 48,118
------- ------- ------- ------- ------- -------
Earnings before income taxes and fixed
charges............................. (12,304) (37,519) (32,303) (34,103) (12,625) (2,920)
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges.... -- -- -- -- -- --
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
INTERMEDIA CAPITAL PARTNERS IV, L.P.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,770
<SECURITIES> 88,755
<RECEIVABLES> 17,539
<ALLOWANCES> (2,130)
<INVENTORY> 0
<CURRENT-ASSETS> 60,663
<PP&E> 230,055<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 996,699
<CURRENT-LIABILITIES> 64,456
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 73,816
<TOTAL-LIABILITY-AND-EQUITY> 996,699
<SALES> 106,417
<TOTAL-REVENUES> 106,417
<CGS> 22,881<F2>
<TOTAL-COSTS> 122,631
<OTHER-EXPENSES> (1,216)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,742
<INCOME-PRETAX> (48,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 18,483
<CHANGES> 0
<NET-INCOME> (27,729)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION.
<F2>INCLUDES PROGRAM FEES AND OTHER DIRECT EXPENSES
</FN>
</TABLE>
