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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-11893
INTERMEDIA CAPITAL PARTNERS IV, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
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 X No
--- ---
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 129 pages. The Index of
Exhibits is found on page 119.
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INTERMEDIA CAPITAL PARTNERS IV, L.P.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Business....................................................................... 3
ITEM 2. Properties..................................................................... 22
ITEM 3. Legal Proceedings.............................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders............................ 23
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................................ 23
ITEM 6. Selected Financial Data........................................................ 23
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 ...................................................... 110
ITEM 10. Directors and Executive Officers of the Registrant............................. 110
ITEM 11. Executive Compensation......................................................... 113
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management..................................................................... 114
ITEM 13. Certain Relationships and Related Transactions................................. 114
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............
118
SIGNATURES.......................................................................................... 121
SUPPLEMENTAL INFORMATION............................................................................ 121
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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." THESE FORWARD-LOOKING STATEMENTS
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION
OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE
COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS
OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
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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 577,600 basic subscribers and
passed approximately 873,800 homes as of December 31, 1997.
Acquisitions
During the year ended December 31, 1996 the Company acquired cable
television systems (the "Acquisitions") serving as of the acquisition dates
approximately 567,200 basic subscribers in Tennessee, South Carolina and
Georgia. The Acquisitions were accomplished 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 ("Nashville System") purchased by
TCI from Viacom, Inc. ("Viacom") immediately prior to the exchange.
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
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
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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 were excluded from the Company's consolidated
financial statements for the year ended December 31, 1996. The
acquisition of the Nashville System was 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 "Revolving Credit Facility") and a $220.0
million term loan (the "Term Loan," together with the Revolving Credit Facility,
the "Bank Facility") 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 and indirectly owns
48.7% 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 14.4 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 (the
"Partnership Agreement"), InterMedia Capital Management IV, L.P. ("ICM-IV"), the
former managing general partner of ICP-IV, provides certain management services
to the Company. See Item 13 "Certain Relationships and Related Transactions --
Change in Managing General Partner," "-- Management by ICM-IV LLC."
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, 1997, operating data for the Company's three
clusters was as follows:
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Basic Homes Basic
Subscribers Passed Penetration
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Nashville/MidTennessee Cluster 332,769 525,140 63.4%
Greenville/Spartanburg Cluster 144,484 203,519 71.0%
Knoxville/East Tennessee Cluster 100,380 145,162 69.2%
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Total 577,633 873,821 66.1%
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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.
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, 1997, of the Company's total
revenues, basic and tier services generated 68.2%, premium service fees 14.0%,
pay-per-view revenues 2.3%, advertising revenues 4.4%, equipment rentals 5.6%
and installation fees, home shopping commissions and other miscellaneous fees
5.5%.
OPERATING STRATEGY
The Company owns and operates 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 will
derive 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 has begun the process of
(i) creating 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)
reducing the number of its headends, engineering support facilities
and associated maintenance costs. During 1997 the Company incurred
additional expenses related to consolidating its regional operations.
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 attractive demographics are more
likely to subscribe to cable television services, premium service
packages and new product 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
continue to reduce costs, create
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additional revenue opportunities, increase customer satisfaction and
enhance system reliability. Through December 31, 1997, the Company
had spent $130.9 million on its Capital Improvement Program. The
implementation of the Capital Improvement Program has benefited the
Company by providing expanded channel capacity, enhanced network
quality and dependability, wider availability of addressable services
and, in certain systems, the capability to offer digital cable
service tiers and high speed Internet access.
Target Additional Revenue Sources. Management believes that
the Company's geographic clustering, the demographic profile of its
subscribers and its Capital Improvement Program have afforded 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 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 was beta tested and was commercially
launched by the Company in the Nashville Metropolitan Market in
September 1997. The Greenville/Spartanburg System began providing
high speed data services in February 1998. For a fixed monthly rate
@Home customers receive a cable modem, an e-mail account, unlimited
high speed Internet access, an "always on" Internet connection, as
well as access to proprietary @Home content and services.
In September 1997, the Company also made its first purchase
of digital set-top terminals in preparation for the launch of
InterMedia's Digital Cable Service ("I-DIG") in selected markets.
Pursuant to the Capital Improvement Program, several of the Company's
headends were upgraded in 1997 with equipment necessary to allow the
reception and transmission of digital signals over the cable network.
The Company plans to contract with National Digital Television
Center, Inc., an affiliate of TCI, to provide certain services
related to the transport and delivery of digitally compressed
programming services to the Company's headends.
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 both new product offerings and
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 proceeding with the upgrade and rebuild of its cable
television operations ("Systems") pursuant to its Capital Improvement Program. A
significant portion of the Capital Improvement Program is expected to be
completed by 1998. 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 $76.7 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 -- Pro Forma 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 and improve picture quality, 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 being 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
currently widely available in the Greenville/Spartanburg System and the
Nashville System. The Company also intends to continue to expand its number of
homes with access to addressable services, whether they are delivered in analog
or digital format. Addressable technology provides subscribers with the ability
to purchase the monthly, daily or per-event programs they desire and eliminates
the need to send a technician to the subscriber's home when a subscriber changes
his or her selection of services. Addressable technology can 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 making two-way transmission possible
throughout several of the Systems. Two-way capability has permitted the Company
to introduce digital cable tiers and high speed data services.
Provide the capability to carry digitally compressed signals. The
Company is beginning to deploy digital technology in certain of its systems.
Digital compression enables a system to carry additional channels. For example,
where a 12-to-1 digital compression system is employed, a system with 10
available analog channels today can add up to 120 channels of digital 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,
municipalities, 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. Programming is currently available to the owners of
home satellite dishes
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through conventional, medium and high-powered satellites. PrimeStar Partners,
L.P. ("PrimeStar"), a consortium comprised of cable operators and a satellite
company, commenced operation in 1990 of a medium-power DBS satellite system
using the Ku portion of the frequency spectrum and currently provides service
consisting of approximately 95 channels of programming, including broadcast
signals and pay-per-view services. In January 1997, PrimeStar launched a
replacement medium-power DBS satellite which will enable it to increase its
capacity to approximately 160 channels. The News Corporation Limited, MCI
Communications Corp. and American Sky Broadcasting recently announced several
agreements in which the three would sell to PrimeStar two high-powered DBS
satellites under construction. This sale, which is subject to various
governmental consents, has been challenged by several parties and is currently
under review by the Justice Department and the Federal Communications Commission
("FCC"). On February 19, 1998, the FCC initiated a DBS rulemaking proceeding,
which, among other issues, requests comments on whether the FCC should implement
cross-ownership restrictions between DBS and cable television operators and
whether the FCC's alien ownership restrictions should apply to DBS subscription
services.
Several other major companies are offering or are currently
developing nationwide high-power DBS services, including DirecTV, Inc.
("DirecTV") and EchoStar Communications Corporation ("EchoStar"). DirecTV began
offering nationwide high-power DBS service in 1994 accompanied by extensive
marketing efforts, along with United States Satellite Broadcasting Company which
uses capacity on DirecTV's satellite. Together, EchoStar and United States
Satellite Broadcasting Company offer over 200 channels of service using video
compression technology. EchoStar, which currently offers a similar package of
programming, recently announced plans to offer some local television signals in
a limited number of markets.
Currently, satellite program providers are only authorized to provide
the signals of television network stations to subscribers who live in areas
where over-the-air reception of such signals cannot be received. Efforts are
underway at the United States Copyright Office and in Congress to ensure that
local broadcast television offerings are permissible under the Copyright law.
Legislation was recently introduced which would permit DBS operators to
rebroadcast local television offerings upon compliance with certain
requirements, including market-specific must-carry requirements and compliance
with programming black-out obligations. The Company cannot predict whether such
legislation will be passed, or the effect that it will have on the Company's
business. The offering of local broadcast signals in DBS program packages would
provide substantial competition to the cable industry and the Company.
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 or less under promotional offers from certain DBS service
providers. The Company is experiencing increased competition from DBS for both
its single family home customers and its multiple dwelling unit ("MDU")
customers. For example, DBS services have begun targeting MDU complexes in the
Company's service areas. 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.
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. Additionally, the FCC recently adopted new regulations
allocating frequencies in the 28 GHz band for a new multichannel wireless video
service similar to MMDS called Local Multipoint Distribution Service ("LMDS"),
which is capable of transmitting voice as well as video transmissions. Spectrum
auctions for LMDS licenses commenced in February 1998. The FCC has imposed
cross-ownership restrictions of these frequencies by cable operators and
telephone companies which were recently upheld by the United States Court of
Appeals for the District of Columbia Circuit. For a three-year period, cable
operators and telephone companies will be precluded from operating on these
frequencies in the same authorized or franchised service areas in which they
provide service. See "Certain Factors Affecting Future Results -- Competition in
the Cable Television Industry; Rapid Technological Change." In addition, certain
wireless cable companies may be able to implement more competitive strategies
through their affiliations with 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 MDUs. This often precludes franchised cable operators from serving
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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
Telecommunications Act of 1996 ("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.
Telephone and other companies provide facilities for the transmission
and distribution to homes and businesses of interactive personal computer
services, including Internet access services and Web TV services, as well as
data and other non-video services. The Company currently markets standard
Internet Service Provider services and high-speed Internet access and data
services in several areas served by its cable systems, and plans to continue to
roll-out such services in additional markets. The high-speed cable modems
currently used by the Company are capable of providing access to interactive
online information services, including the Internet, at speeds up to 100 times
faster than those of conventional or ISDN modems used by other service
providers. Competitors in this area include local exchange companies (also known
as local exchange carriers or "LECs"), Internet service providers, long distance
carriers, satellite companies, other cable companies, consumer electronics
companies and others, many of whom have more substantial financial resources
than the Company. Several parties recently requested the FCC to fully deregulate
packet-switched networks to allow the provision of high-speed broadband services
without regard to present Local Access Transport Area or "LATA" boundaries and
other regulatory restrictions, and the Company expects that competition in the
Internet access and interactive services area will be significant. The Company
cannot predict the likelihood of success of the broadband services offered by
the Company's competitors or the impact on the Company of such competitive
ventures.
BellSouth Telecommunications, Inc. ("BellSouth") applied for cable
franchises in certain of the Company's franchise areas in 1996 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 but continues to pursue the provision of
wireless cable services in certain areas in the Southeast. On October 22, 1996
the Tennessee Cable Telecommunications Association ("TCTA") and the Cable
Television Association of Georgia ("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. 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.
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Overbuilds. Since the Systems generally operate under non-exclusive
franchises, other operators may obtain franchises to build competing cable
television systems. The Cable Television Consumer Protection and Competition Act
of 1992 (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. In Georgia, a
number of municipalities have constructed cable television systems and are
providing cable services, Internet access services and data services in
competition with the existing cable companies. The electric utility departments
for these municipalities typically operate the majority of these municipally
owned cable systems. On behalf of its member entities, the CTAG is supporting
legislation which would ensure fair competition between municipalities and cable
companies. The proposed legislation seeks, in part, to prohibit the
cross-subsidization of the cable business by the municipal electric business and
to generally ensure a level competitive playing field. In Tennessee, the
municipal electric utility association and the rural electric cooperative
association, on behalf of their members, are supporting legislation which will
repeal a current ban on their ability to provide cable services, Internet access
services and data services. The TCTA is opposing this legislation on behalf of
its member entities. Should the ban be repealed, several municipalities
throughout Tennessee, including a few municipalities in the Company's service
areas that have expressed an interest in constructing a cable system, may
provide competing cable services. The outcome of the legislative efforts in
Georgia and Tennessee cannot be predicted at this time but could have a material
effect on the ability of cable companies to provide competitive cable, Internet
and other services. The Company is not aware of any material 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 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. The FCC has recently adopted a final Table of
Allotments and Rules for the assignment of channels for high definition
television ("HDTV"). 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 of the FCC, 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.
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 1992 Cable Act and
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
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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.
The Systems hold numerous franchises, all of which are non-exclusive
and 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. Recently, a federal appellate court held that
a cable operator's gross revenue includes all revenue received from subscribers,
without deduction, and overturned an FCC order which had held that a cable
operator's gross revenue does not include money collected from subscribers that
is allocated to pay local franchise fees. Operators who relied on the FCC's
order and did not permit required franchise fee payments may, in some
circumstances, "pass through" such underpayments to subscribers.
As of December 31, 1997, six franchises relating to approximately
1.4% 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 six franchises are currently in
informal renewal negotiations. The Company and the local franchising authorities
are operating under extensions of previous franchises while renewal negotiations
continue. During the next five years the renewal process must commence for
approximately 33% of the Company's franchises relating to approximately 23% 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.
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 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
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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. The FCC subsequently
adopted an order which made permanent its deferral of the full 17.0% rate
reduction, and consequently these systems will not be required to reduce their
rates by the full competitive differential previously implemented by the FCC.
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 1997 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. From January 1, 1995 through
December 31, 1996, cable operators could charge basic subscribers up to $.20 per
channel for channels added after May 14, 1994. Adjustments to monthly rates
during this period were capped at $1.20 plus an additional $.30 to cover
programming license fees for those channels. During 1997, cable operators could
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
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 and 1997 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,
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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. The FCC, Congress and local franchising authorities continue to
be concerned that cable rates are rising too rapidly. The FCC has begun to
explore ways of addressing this issue, and a bill was recently introduced in
Congress which would repeal the deregulation of CPS tiers now scheduled for
March 1999. The outcome of this bill cannot be predicted at this time.
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 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 that order will be until the FCC completes
all of its rulemaking proceedings under the 1996 Act, court appeals are
concluded and state regulators complete implementation of the FCC's regulations.
The Eighth Circuit Court of Appeals has overturned many of the interconnection
rules affecting LECs, including the pricing rules, dialing parity rules, certain
rules governing unbundled elements and the "pick and choose" rule (which allows
carriers to request that the incumbent LEC make available to them any
interconnection, service or network element contained in an approved agreement
to which the LEC was a party, under the same terms and conditions). While the
Eighth Circuit's decision remains in effect, on January 26, 1998, the United
States Supreme Court agreed to hear several appeals from that decision. The
Supreme Court will hear oral argument in its October 1998 term, and it is not
expected to issue its decision until late 1998 or early 1999. Many states have
applied the FCC's interpretations of the 1996 Act as guidelines, even though
many FCC interconnection rules are not in effect.
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 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,
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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 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 pursuant to the requirements of the 1996 Act.
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
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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. In
March 1997 the U.S. Supreme Court affirmed a District of Columbia three-judge
court decision upholding the constitutional validity of the 1992 Cable Act's
mandatory signal carriage requirements. 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 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). The FCC will soon initiate a rulemaking
proceeding on the carriage of broadcast television signals in HDTV and digital
formats. The Company cannot predict the ultimate outcome of this proceeding
which could have a material effect on the number of services that a cable
operator will be required to carry.
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. 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. The new leased access rate formula has been appealed by a party
seeking even lower rates for leased access.
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 may be 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.
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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.
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 and 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
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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 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 revise the existing formula for the calculation of pole attachment
and conduit occupancy rates charged to cable system operators. These revisions
may increase the fees paid by cable operators to utilities for pole attachments
and conduit space to be utilized for cable services and/or telecommunications
services, as applicable.
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. The FCC recently prescribed 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 recently adopted new procedural
guidelines governing the disposition of home run wiring (a line running to an
individual subscriber's unit from a common feeder or riser cable) in MDUs.
Owners of MDU buildings can use these new rules to require cable operators
without contracts to provide cable service to either sell, abandon or remove
home run wiring which may carry voice as well as video communications and
terminate service to MDU subscribers unless operators retain rights under common
or state law or maintain ownership rights in the home run wiring. The FCC is
also holding a proceeding to determine whether it should restrict the use of
"exclusive" contracts to provide cable service in MDU buildings. The outcome of
this proceeding cannot be predicted, but it could have a material effect on the
Company's ability to serve more MDU buildings and retain MDU subscribers.
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
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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.
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, 1997, the Company has approximately 920 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, 1997, the Company's total debt balance was
approximately $876.5 million and partners' capital balance was approximately
$2.3 million. Earnings were inadequate to cover fixed charges by approximately
$74.8 million for the year ended December 31, 1997. 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 InterMedia Partners IV, Capital Corp.) 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 $76.7 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 Revolving 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 assurance
that any of these strategies could be effected on satisfactory terms, if at all.
Management believes that substantial growth in revenues
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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 InterMedia
Partners IV, Capital Corp. ("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 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 $76.7 million in additional capital
through 2001 to fully implement the Capital Improvement Program. See Item 7
"Management's Discussion and Analysis of 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 2002 of approximately $130.9 million,
principally for line extensions and other capital requirements. 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
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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. See
Item 13 "Certain Relationships and Related Transactions -- Management by ICM-IV
LLC."
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, LMDS 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 but continues
to pursue the provision of wireless cable services in certain cities in the
Southeast. On October 22, 1996 the TCTA and the CTAG 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 TRA concerning certain 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 BellSouth 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 1992 Cable Act imposed substantial regulation on the
cable television industry, including rate regulation, and significant portions
of the 1992 Cable Act remain in effect despite the enactment of the 1996 Act and
remain highly relevant to the Company's operations.
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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 and 1997 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.
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 remaining 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. The FCC, Congress and local franchising authorities continue
to be concerned that cable rates are rising too rapidly. The FCC has begun to
explore ways of addressing this issue, and a bill was recently introduced in
Congress which would repeal the deregulation of CPS tiers now scheduled for
March 1999. The outcome of this bill cannot be predicted at this time. 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 ("IP-I"), InterMedia Partners II,
L.P. ("IP-II"), InterMedia Partners III, L.P. ("IP-III"), and their consolidated
subsidiaries and its other affiliates. InterMedia Management, Inc. ("IMI"),
which is wholly owned by Robert J. Lewis, provides administrative services at
cost to the Company and to the operating companies of IP-I and IP-III and their
consolidated subsidiaries (together the "Related InterMedia Entities").
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 IP-II 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
Six franchises relating to approximately 1.4% of the basic
subscribers served by the Systems have expired as of December 31, 1997. The
terms of these franchises require the Company to negotiate the renewals of such
franchises with the local franchising authorities, and all six 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. Failure to obtain franchise renewals or the imposition of new or
different conditions could have a material adverse effect on the Company. 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 "Item 1
Business -- 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."
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PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, 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 1997 (the "Exchange Notes") are securities for which there is a limited
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. NationsBanc Capital Markets, Inc. ("NationsBanc")
and Toronto Dominion Securities (USA) Inc. ("Toronto Dominion") have made a
market in the Notes, however such market making activities may be discontinued
at any time without notice. Accordingly, there can be no assurance as to the
continued development or liquidity of any market for the Exchange Notes. The
Exchange Notes could trade at 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 a
market for the Exchange Notes will continue to develop or that such a market
would not be subject to similar disruptions.
YEAR 2000
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company relies on third party software for all significant
information systems applications. The Company has initiated formal
communications with all of its significant suppliers in determining the impact
on the Company if those third parties fail to remediate their own Year 2000
issues. Representations have been received from all of the Company's primary
suppliers indicating that they are either fully compliant or have plans in place
to ensure compliance. The Company will incur internal staff costs as well as
consulting and other expenses related to enhancements necessary to prepare the
systems for the year 2000. The expense of the Year 2000 project as well as the
related potential effect on the Company's earnings is not expected to have a
material effect on its financial position or results of operations. There can be
no assurance that the Company's third party suppliers will all be fully
compliant and the failure of the Company or its primary suppliers to resolve the
Year 2000 issue adequately could have a material adverse effect on the Company.
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.
22
<PAGE> 23
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 years ended December 31, 1996 and 1997
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.
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.
23
<PAGE> 24
THE COMPANY
(IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
-------------- ------------ --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................................... $ -- $ 106,417 $ 251,671
Operating expenses:
Program fees.................................................... -- (22,881) (53,903)
Other operating costs........................................... -- (35,043) (78,213)
Depreciation and amortization................................... -- (64,707) (130,428)
-------------- ------------ -------------
Loss from operations.............................................. -- (16,214) (10,873)
Interest and other income......................................... -- 6,398 5,148
Gain on sale of cable system...................................... 10,006
Gain on sale of investments....................................... -- 286
Interest expense.................................................. -- (37,742) (78,185)
Other expense..................................................... -- (1,216) (853)
-------------- ------------ -------------
Loss before income taxes.......................................... -- (48,488) (74,757)
Income tax benefit................................................ -- 2,596 4,026
-------------- ------------ -------------
Net loss before extraordinary items............................... -- (45,892) (70,731)
Extraordinary gain on early extinguishments of debt,
net of tax...................................................... -- 18,483 --
Minority interest................................................. -- (320) (882)
-------------- ------------ -------------
Net loss.......................................................... $ -- $ (27,729) $ (71,613)
============== ============ ============
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets...................................................... $ 707 $ 996,699 $ 970,764
Total debt........................................................ -- 846,000 876,500
Total partners' capital (deficit)................................. (625) 73,816 2,287
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(1)......................................................... $ -- $ 48,493 $ 119,555
EBITDA margin(1).................................................. -- 45.6% 47.5%
Cash flows from operating activities.............................. $ -- $ 37,697 $ 58,627
Cash flows from investing activities.............................. -- (557,013) (91,209)
Cash flows from financing activities.............................. -- 528,086 30,200
Capital expenditures (excluding acquisitions)..................... -- 38,167 129,573
Ratio of earnings to fixed charges(2)............................. -- -- --
OPERATING STATISTICAL DATA (AT END OF PERIOD, EXCEPT AVERAGES):
Homes passed...................................................... -- 852,043 873,821
Basic subscribers................................................. -- 573,655 577,633
Basic penetration................................................. -- 67.3% 66.1%
Average monthly revenue per basic subscriber(3)................... $ -- $ 30.71 $ 36.17
</TABLE>
24
<PAGE> 25
PREVIOUSLY AFFILIATED ENTITIES (4)
(IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................ $ 9,616 $ 32,581 $ 57,685 $ 73,049 $ 128,971
Operating expenses:
Program fees....................... (1,644) (4,933) (9,376) (13,189) (24,684)
Other operating costs.............. (4,536) (12,766) (20,215) (25,675) (47,360)
Management and consulting
fees ............................ -- (177) (465) (585) (815)
Depreciation and
amortization..................... (15,884) (56,511) (66,940) (68,216) (70,154)
------------ ------------- ------------- ------------- -------------
Total operating
expenses.................... (22,064) (74,387) (96,996) (107,665) (143,013)
------------ ------------- ------------- ------------- -------------
Loss from operations.................. (12,448) (41,806) (39,311) (34,616) (14,042)
Interest and other income............. 7 8,793 8,898 1,442 1,172
Gain (loss) on disposal of
fixed assets....................... -- (2) (1,967) (1,401) (63)
Interest expense...................... (8,640) (32,357) (44,760) (44,278) (48,835)
Other expense......................... -- (8) (508) (194) (644)
Equity in net loss of
investee........................... -- (4,900) -- -- --
------------ ------------- ------------- ------------- -------------
Loss before income tax
benefit ........................... (21,081) (70,280) (77,648) (79,047) (62,412)
Income tax benefit.................... 13,756 21,656 19,020 17,502
------------ ------------- ------------- ------------- -------------
Net loss ............................ $ (21,081) $ (56,524) $ (55,992) $ (60,027) $ (44,910)
============ ============= ============= ============= =============
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.......................... $ 67,732 $ 430,716 $ 357,652 $ 275,058 $ 590,494
Total debt............................ 92,877 408,655 431,896 403,500 411,219
Total equity (deficit)................ (27,881) (73,808) (129,800) (166,977) 37,249
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(1)............................. $ 3,436 $ 14,705 $ 27,629 $ 33,600 $ 56,112
EBITDA margin(1)...................... 35.7% 45.1% 47.9% 46.0% 43.5%
Cash flows from operating
activities......................... 3,627 4,993 (12,186) (112) 8,107
Cash flows from investing
activities......................... (3,460) (4,937) (30,838) 4,871 (24,614)
Cash flows from financing
activities......................... (37) -- 12,692 (4,784) 18,066
Capital expenditures
(excluding acquisitions)........... 3,350 9,842 11,334 12,432 26,301
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
Basic subscribers..................... 42,374 150,733 211,745 227,050 354,436
Basic penetration..................... 64.5% 66.0% 68.7% 68.3% 70.4%
Premium service units................. 18,128 78,868 128,732 151,528 265,216
Premium penetration................... 42.8% 52.3% 60.8% 66.7% 74.8%
Average monthly revenue per
basic subscriber(3)................ $ 18.83 $ 25.20 $ 27.86 $ 27.85 $ 31.08
<CAPTION>
SEVEN
MONTHS
ENDED PERIOD
JULY 31, 1/1/96--
1995 7/30/96
------------- --------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenue ............................ $ 72,578 $ 81,140
Operating expenses:
Program fees....................... (13,923) (17,080)
Other operating costs.............. (25,663) (30,720)
Management and consulting
fees ............................ (530) (398)
Depreciation and
amortization..................... (41,141) (36,507)
------------- -------------
Total operating
expenses.................... (81,257) (84,705)
------------- -------------
Loss from operations.................. (8,679) (3,565)
Interest and other income............. 888 209
Gain (loss) on disposal of
fixed assets....................... 39 (14)
Interest expense...................... (28,157) (47,545)
Other expense......................... (656) (123)
Equity in net loss of
investee........................... -- --
------------- -------------
Loss before income tax
benefit ........................... (36,565) (51,038)
Income tax benefit.................... 8,642 14,490
------------- -------------
Net loss ............................ $ (27,923) $ (36,548)
============= =============
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.......................... $ 578,870
Total debt............................ 423,659
Total equity (deficit)................ 10,150
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(1)............................. $ 32,462 $ 32,942
EBITDA margin(1)...................... 44.7% 40.6%
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
Capital expenditures
(excluding acquisitions)........... 9,745 18,588
Ratio of earnings to fixed
charges(2)......................... -- --
OPERATING STATISTICAL DATA (AT
END OF PERIOD, EXCEPT
AVERAGES):
Homes passed.......................... 497,130 512,926
Basic subscribers..................... 345,039 360,057
Basic penetration..................... 69.4% 70.2%
Premium service units................. 258,928 264,541
Premium penetration................... 75.0% 73.5%
Average monthly revenue per
basic subscriber(3)................ $ 31.67 $ 32.35
</TABLE>
25
<PAGE> 26
NOTES TO SELECTED FINANCIAL DATA
(1) Earnings before interest, income taxes, depreciation and amortization, gain
(loss) on sale of investments, gain (loss) on sale of cable system,
extraordinary gain on early extinguishments of debt, other income
(expense), minority interest 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 years ended December 31, 1996 and 1997 were inadequate to cover
fixed charges by $48,488 and $74,757, respectively. 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> 27
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, 1997, primarily as a result of internal
subscriber growth and rate increases. 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. Operating, general and
administrative expenses have also increased as a result of subscriber growth,
and for 1995 also due to costs related to implementing rate regulation. These
factors have 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 567,200 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 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
27
<PAGE> 28
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 position and results of operations 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 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."
28
<PAGE> 29
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 year ended December 31, 1995 and the period from
January 1, 1996 through July 30, 1996, IPWT and RMH paid, in the aggregate,
81.4% 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 years ended December 31,
1996 and 1997, the Company paid 76.7% and 76.3%, respectively, of its program
fees to SSI.
The Company and its affiliated entities InterMedia Partners, a
California limited partnership, and InterMedia Partners III, 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. Effective August 5, 1997, IMI owns 95.0% of the equity interests in ICM-IV
LLC, the managing general partner of the Company, and IMI is wholly owned by
Robert J. Lewis. (See Item 13. "Certain Relationships and Related
Transactions.") Prior to August 5, 1997, IMI was wholly owned by the former
managing general partner of ICM-IV, the former 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 and $6.3 million to the Company
for the years ended December 31, 1996 and 1997, respectively, $0.6 million and
$0.4 million to IPWT in 1995 and the first seven months of 1996, respectively,
and $2.4 million and $1.5 million to RMH in 1995 and the first seven months of
1996, respectively.
ICM-IV provides certain management services to the Company for an
annual fee of one percent of the Company's total non-preferred capital
contributions.
In February 1997 Leo J. Hindery, Jr. was appointed president of TCI.
As part of Mr. Hindery's transition to TCI, substantially all 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, have been converted
or sold. Pursuant to these transactions, Mr. Hindery no longer holds a
controlling interest in IMI or ICM-IV. (See Item 13. "Certain Relationships and
Related Transactions.")
RESULTS OF OPERATIONS -- THE COMPANY
As described above, the Company acquired all of its cable television
systems during the year ended December 31, 1996 ("1996 Acquisitions"). 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. As a result, the comparability of the Company's results of
operations for the years ended 1996 and 1997 is affected by the 1996
Acquisitions.
29
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997
---------------------- ----------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ...................................................................... $ 106,417 100.0% $ 251,671 100.0%
Costs and Expenses:
Program fees ............................................................... (22,881) (21.5) (53,903) (21.4)
Other direct expenses(1) ................................................... (13,148) (12.4) (26,529) (10.5)
Selling, general and administrative expenses(2) ............................ (20,337) (19.1) (48,334) (19.2)
Management and consulting fees ............................................. (1,558) (1.5) (3,350) (1.3)
Depreciation and amortization .............................................. (64,707) (60.8) (130,428) (51.8)
--------- ----- --------- -----
Loss from operations ......................................................... (16,214) (15.3) (10,873) (4.3)
Interest and other income .................................................... 6,398 6.0 5,148 2.0
Gain on sale of cable system ................................................. 10,006 4.0
Gain on sale of investments .................................................. 286 0.3
Interest expense ............................................................. (37,742) (35.5) (78,185) (31.1)
Other expense ................................................................ (1,216) (1.1) (853) (0.3)
Income tax benefit ........................................................... 2,596 2.4 4,026 1.6
Extraordinary gain on early extinguishment of debt, net of tax ............... 18,483 17.4
Minority interest ............................................................ (320) (0.3) (882) (0.4)
--------- ----- --------- -----
Net loss ..................................................................... $ (27,729) (26.1) $ (71,613) (28.5)
========= ===== ========= =====
Other Data:
EBITDA(3) .................................................................... $ 48,493 45.6% $ 119,555 47.5%
</TABLE>
- ----------
(1) Other direct 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, gain (loss) on sale
of cable system, 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 Consolidated Financial Statements included elsewhere in
this Form 10-K.
Revenues
The Company's revenues for the year ended December 31, 1997 increased
to $251.7 million as compared with $106.4 million for the year ended December
31, 1996 due primarily to the 1996 Acquisitions. Total revenues for the year
ended December 31, 1997 included non-recurring advertising revenue of $2.0
million, earned from certain programmers to promote and launch their new
services. The Company also recognized $1.5 million of revenues, representing a
portion of the remaining proceeds received during 1997 from such programmers to
launch their new services.
The Company served approximately 577,600 basic subscribers at
December 31, 1997, compared to approximately 573,700 at December 31, 1996. The
December 31, 1997 basic subscriber count reflects a reduction of approximately
7,400 basic subscribers resulting from the Company's sale of its cable
television assets located in and around Royston and Toccoa, Georgia on December
5, 1997. (See Note 3--"Acquisitions and Sale of Cable Properties" to the
Company's Consolidated Financial Statements.) The increase in basic subscribers
resulted primarily from household growth. The Company's basic subscriber
penetration decreased from 67.3% to 66.1% at December 31, 1996 and 1997,
respectively. Average monthly basic service revenue per basic subscriber for
the year ended December 31, 1997 was $24.67 compared to $22.32 for 1996. The
increase represents rate increases implemented by the Company's cable systems
during 1997 and higher effective basic service rates for the systems acquired
in July and August 1996, compared to those systems acquired during the six
30
<PAGE> 31
months ended June 30, 1996. A substantial portion of the basic service rate
increases was supported by additional channels made available through the
Company's Capital Improvement Program. Average monthly pay service revenue per
pay unit for the year ended December 31, 1997 was $7.76, compared to $8.75 for
1996. The decrease is due primarily to marketing promotions offered by the
Company and the impact of the systems acquired in July and August 1996 with
lower average pay service revenue per pay unit than those systems acquired
during the first six months of 1996.
Program Fees
Program fees for the year ended December 31, 1997 increased to $53.9
million, as compared with $22.9 million for the year ended December 31, 1996 due
primarily to the 1996 Acquisitions. Program fees for the year ended December 31,
1997 represent 25.3% of basic and pay service revenues compared to 25.1% for the
year ended December 31, 1996.
Other Direct Expenses
Other direct expenses, which include costs related to technical
personnel, franchise fees and repairs and maintenance, amounted to $26.5 million
for the year ended December 31, 1997 compared to $13.1 million for the year
ended December 31, 1996. The increase is primarily a result of the 1996
Acquisitions. Other direct expenses as a percentage of total revenues, before
launch support revenue, decreased to 10.7% for the year ended December 31, 1997
compared to 12.4% for the year ended December 31, 1996. The decrease from 1996
is due primarily to a decrease in franchise fee expense. During 1997 certain of
the Company's systems began passing through franchise fee expenses to their
subscribers. Other direct expenses for the year ended December 31, 1997 include
expenses incurred in connection with the Company's consolidation of its
regional operations.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 1997 increased to $48.3 million compared to $20.3 million for
the year ended December 31, 1996 due primarily to the 1996 Acquisitions. SG&A
expenses as a percentage of total revenues, before non-recurring launch revenue,
remained relatively constant at 19.5% for the year ended December 31, 1997
compared to 19.1% for the year ended December 31, 1996. SG&A expenses for the
year ended December 31, 1997 include expenses incurred in connection with the
Company's consolidation of its regional operations.
Management and Consulting Fees
Management and consulting fees of $1.6 million and $3.4 million for
the years ended December 31, 1996 and 1997, respectively, represent fees charged
by ICM-IV. ICM-IV provides management services to the Company for a per annum
fee of 1.0% of the Company's total non-preferred capital contributions.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31,
1997 increased to $130.4 million compared to $64.7 million for the year ended
December 31, 1996 as a result of the 1996 Acquisitions and capital expenditures
of $129.6 million for the year ended December 31, 1997, offset by the Company's
use of an accelerated depreciation method that results in higher deprecation
expense being recognized in the earlier years and lower expense in the later
years.
Interest and Other Income
Interest and other income of $5.1 million for the year ended December
31, 1997 is comprised primarily of $4.0 million of interest income earned on the
escrowed securities. Interest and other income also includes $0.4 million of
interest income earned on cash and cash equivalents and $0.4 million of rental
income recognized from a cable plant leasing arrangement. 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 escrowed securities
from July 30, 1996 through December 31, 1996, and (iv) interest earned on cash
and cash equivalents of $0.9 million.
31
<PAGE> 32
Gain on Sale of Cable System
The gain on sale of cable system of $10.0 million for the year ended
December 31, 1997 resulted from the Company's sale of its cable assets serving
subscribers in and around Royston and Toccoa, Georgia in December 1997.
Interest Expense
Interest expense increased to $78.2 million for the year ended
December 31, 1997 compared to $37.7 million for the year ended December 31, 1996
due primarily to the 1996 Acquisitions and higher debt balances during 1997
compared to the same periods in 1996. Interest expense for the year ended
December 31, 1997 includes 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. 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 1996 and interest on borrowings outstanding under the 11.25%
senior notes and bank debt during the last five months of 1996.
Income Tax Benefit
As partnerships, the tax attributes of ICP-IV and its subsidiaries
other than RMG and IPCC accrue to the partners. Income tax benefit of $2.6
million and $4.0 million for the year ended December 31, 1996 and 1997,
respectively, has been recorded based on RMG's stand alone tax provision. The
increase in income tax benefit from 1996 to 1997 is due primarily to the
following: (i) an increase in RMG's loss before income tax benefit, reflecting
twelve months' results in 1997 versus five months in 1996 as a result of the
1996 Acquisitions, (ii) an increase in RMG's effective tax rate, (iii)
non-recurring equity distribution income of $2.9 million recognized in July
1996, offset by (iv) a $10.0 million gain recognized on sale of certain of RMG's
cable television assets in December 1997. Prior to ICP-IV's acquisition of RMG
on July 30, 1996, the Company had no income tax expense or benefit.
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 of $0.3 million and $0.9 million for the year ended
December 31, 1996 and 1997, respectively, represents five months' and twelve
months' accrued dividends, respectively, on RMG's mandatorily redeemable
preferred stock held by a subsidiary of TCI as the minority shareholder of RMG's
common stock. The mandatorily redeemable preferred stock was issued to TCI upon
ICP-IV's acquisition of RMG on July 30, 1996.
Net Loss
The Company's net loss for the year ended December 31, 1997 increased
to $71.6 million from $27.7 million for the year ended December 31, 1996. The
increase is due primarily to the following: (i) the 1996 Acquisitions, which
resulted in significantly higher depreciation, amortization and interest
expenses relative to increased revenues, (ii) a non-recurring equity
distribution income of $2.9 million received from a former investee of RMG in
August 1996, and (iii) an extraordinary gain of $18.5 million recognized in 1996
for the early extinguishment of long-term debt that was assumed in connection
with the acquisitions of RMG and IPWT, offset by (iv) a gain on sale of cable
television assets in December 1997 of $10.0 million.
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> 33
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>
PERIOD FROM
SEVEN MONTHS ENDED JANUARY 1, 1996 TO
JULY 31, 1995 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 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 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 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> 34
(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 Consolidated
Financial Statements included elsewhere in this Form 10-K.
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 Expenses. Other direct 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
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 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 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.
34
<PAGE> 35
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 General Electric Capital Corporation
("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.
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
35
<PAGE> 36
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 Expenses. Other direct 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 expenses increased due to internal subscriber
growth.
Other direct expenses as a percentage of revenues remained relatively
constant for the two 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.
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 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.
36
<PAGE> 37
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 years ended December 31, 1996
and 1997. The Company consummated acquisitions of cable television systems in
January, February, May, July and August 1996. 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 1997
----------- -----------
<S> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities............... $ 37,697 $ 58,627
Cash flows from investing activities............... (557,013) (91,209)
Cash flows from financing activities............... 528,086 30,200
</TABLE>
YEAR ENDED DECEMBER 31, 1996
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) income 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.
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.
37
<PAGE> 38
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.
YEAR ENDED DECEMBER 31, 1997
The Company's cash balance decreased by $2.4 million from $8.8
million as of January 1, 1997 to $6.4 million as of December 31, 1997.
Cash Flows from Operating Activities
The Company generated cash flows from operating activities of $58.6
million for the year ended December 31, 1997 reflecting (i) income from
operations of $119.6 million before non-cash charges to income for depreciation
and amortization of $130.4 million; (ii) interest and other income received of
$5.9 million, primarily from its escrowed investments; (iii) interest paid of
$75.0 million; (iv) $5.3 million in deferred revenue relating to payments
received from certain programmers to launch and promote their new services; and
(v) other working capital sources, net of other expenses of $2.8 million.
Cash Flows from Investing Activities
The Company purchased property and equipment of $129.6 million during
the year ended December 31, 1997 consisting primarily of cable system upgrades
and rebuilds, plant extensions, converters and initial subscriber installations.
During the year ended December 31, 1997, the Company also paid approximately
$0.4 million for the right to provide cable services to a multiple dwelling unit
in Nashville and a multiple dwelling unit in Greenville/Spartanburg.
The Company received $28.2 million in proceeds from sale of its
escrowed investments upon maturity on January 31 and July 31, 1997. These
proceeds and related interest received were used to fund interest payment
obligations on the Notes of $33.0 million during the year ended December 31,
1997. The Company also received $11.2 million in proceeds from sale of certain
of its cable television assets in and around Royston and Toccoa, Georgia in
December 1997.
Cash Flows from Financing Activities
The Company's cash flows from financing activities for the year ended
December 31, 1997 consisted primarily of net borrowings of $30.5 million under
the bank revolving credit facility.
The Company funded its capital expenditures and interest payments on
the 11.25% senior notes, the bank term loan and the revolving credit facility
primarily with proceeds from the sale of certain of its cable television assets
located in and around Royston and Toccoa, Georgia, the sale of its escrowed
investments and related accrued interest, as described above, borrowings from
the bank revolving credit facility and cash available from operations.
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 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.
38
<PAGE> 39
<TABLE>
<CAPTION>
SEVEN MONTHS PERIOD FROM
ENDED JANUARY 1, 1996
JULY 31, 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
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995
--------------------- ------------------
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> 40
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; (iv) payments received from affiliates of $9.7
million; and (v) 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; (ii) interest received of $4.1
million, (iii) interest payments on long-term obligations of $40.4 million; and
(iv) 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 interest
payments on the RMG Notes. Interest is paid on the RMG Notes semiannually on
April 1 and October 1.
40
<PAGE> 41
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 (as discussed below), 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 semi-annual commitment reductions beginning in 1999, and matures in
2004. As of December 31, 1997, the Company had $364.5 million outstanding under
the Revolving Credit Facility, leaving availability of $110.5 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 and the Term Loan 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, as defined. Effective
October 20, 1997, pursuant to an amendment to the revolving credit facility and
term loan agreement, interest rates on borrowings under the Term Loan vary from
LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75%.
Interest rates vary also on borrowings under the Revolving Credit Facility from
LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25%. Prior to the
amendment, interest rates on borrowings under the Term Loan were at LIBOR plus
2.375% or ABR plus 1.125%; and, interest rates on borrowings under the Revolving
Credit Facility varied from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to ABR
plus 0.50%. Interest periods are specified as one, two or three months for LIBOR
loans. The Bank Facility requires quarterly interest payments, or more frequent
interest 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.
41
<PAGE> 42
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,
1997 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 $76.7 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 2002 of approximately
$130.9 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.
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.
YEAR 2000
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer
42
<PAGE> 43
programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company relies on
third party software for all significant information systems applications. The
Company has initiated formal communications with all of its significant
suppliers in determining the impact on the Company if those third parties fail
to remediate their own Year 2000 issues. Representations have been received from
all of the Company's primary suppliers indicating that they are either fully
compliant or have plans in place to ensure compliance. The Company will incur
internal staff costs as well as consulting and other expenses related to
enhancements necessary to prepare the systems for the year 2000. The expense of
the Year 2000 project as well as the related potential effect on the Company's
earnings is not expected to have a material effect on its financial position or
results of operations.
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; and
competitors' product introductions and enhancements.
(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
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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 1997....................... 47
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997....................................................... 48
Consolidated Statements of Changes in Partners' Capital for the years
ended December 31, 1996 and 1997................................................. 49
Consolidated Statements of Cash Flows for the years ended 50
December 31, 1996 and 1997.......................................................
Notes to Consolidated Financial Statements......................................... 51
Schedule I -- Condensed Financial Information of Registrant........................ 122
Schedule II -- Valuation and Qualifying Accounts................................... 127
PREDECESSOR BUSINESSES:
PREVIOUSLY AFFILIATED ENTITIES
Report of Independent Accountants.................................................. 63
Combined Balance Sheet as of December 31, 1995..................................... 64
Combined Statements of Operations for the years ended
December 31, 1994 and 1995, and the period from January 1, 1996 65
to July 30, 1996.................................................................
Combined Statement of Changes in Equity for the years ended
December 31, 1994 and 1995, and for the period from January 1, 66
1996 to July 30, 1996............................................................
Combined Statements of Cash Flows for the years ended
December 31, 1994 and 1995 and the period from January 1, 1996 67
to July 30, 1996.................................................................
Notes to Combined Financial Statements............................................. 68
ROBIN MEDIA HOLDINGS, INC.
Report of Independent Accountants.................................................. 79
Consolidated Balance Sheet as of December 31, 1995................................. 80
Consolidated Statements of Operations for the years ended
December 31, 1994 and 1995, and the period from January 1, 1996
to July 30, 1996................................................................. 81
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............................................................
Consolidated Statements of Cash Flows for the years ended 82
December 31, 1994 and 1995, and the period from January 1, 1996
to July 30, 1996................................................................. 83
Notes to Consolidated Financial Statements......................................... 84
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
Report of Independent Accountants.................................................. 91
Balance Sheet as of December 31, 1995.............................................. 92
Statements of Operations for the years ended December 31, 1994 and
1995, and the period from January 1, 1996 to July 30, 1996....................... 93
Statement of Changes in Partners' Capital for the years ended
December 31, 1994 and 1995, and for the period from January 1, 94
1996 to July 30, 1996............................................................
Statements of Cash Flows for the years ended December 31, 1994
and 1995, and the period from January 1, 1996 to July 30, 1996................... 95
Notes to Financial Statements...................................................... 96
TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC.
AND TCI OF PIEDMONT, INC.
Independent Auditors' Report....................................................... 102
Combined Balance Sheet as of December 31, 1995..................................... 103
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..................................... 104
Combined Statements of Cash Flows for the period from January 27,
1995 to December 31, 1995 and for the period from January 1, 105
1996 to July 30, 1996............................................................
Notes to Combined Financial Statements............................................. 106
</TABLE>
45
<PAGE> 46
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, 1996 and 1997, and the results of their operations and their cash
flows for the years then ended, 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 the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
February 27, 1998
46
<PAGE> 47
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................... $ 8,770 $ 6,388
Accounts receivable, net of allowance for doubtful accounts of
$2,130 and $1,685, respectively ................... 17,539 23,163
Escrowed investments held to maturity ........................ 28,237 29,359
Interest receivable on escrowed investments .................. 2,194 1,418
Receivable from affiliate .................................... 923 686
Prepaids ..................................................... 2,768 599
Other current assets ......................................... 232 359
--------- ---------
Total current assets .............................. 60,663 61,972
Escrowed investments held to maturity ........................ 60,518 31,148
Intangible assets, net ....................................... 631,732 550,726
Property & equipment, net .................................... 232,410 310,455
Deferred income taxes ........................................ 9,910 14,221
Other non-current assets ..................................... 1,466 2,242
--------- ---------
Total assets ...................................... $ 996,699 $ 970,764
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities ..................... $ 28,973 $ 32,708
Payable to affiliates ........................................ 3,408 3,813
Deferred revenue ............................................. 11,753 15,856
Accrued interest ............................................. 20,322 22,076
--------- ---------
Total current liabilities ......................... 64,456 74,453
Deferred channel launch revenue .............................. 4,154
Long-term debt ............................................... 846,000 876,500
Other non-current liabilities ................................ 70 131
--------- ---------
Total liabilities ................................. 910,526 955,238
--------- ---------
Commitments and contingencies
Minority interest
Mandatorily redeemable preferred shares ...................... 12,357 13,239
PARTNERS' CAPITAL
Preferred limited partnership interest ....................... 24,888 24,888
General and limited partners' capital ........................ 50,778 (20,751)
Note receivable from partner ................................. (1,850) (1,850)
--------- ---------
Total partners' capital ........................... 73,816 2,287
--------- ---------
Total liabilities and partners' capital ........... $ 996,699 $ 970,764
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
47
<PAGE> 48
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
REVENUES
Basic and cable services..................................................................... $ 73,392 $ 171,622
Pay service.................................................................................. 17,932 41,054
Other service................................................................................ 15,093 38,995
----------- -----------
106,417 251,671
----------- -----------
COSTS AND EXPENSES
Program fees................................................................................. 22,881 53,903
Other direct expenses........................................................................ 13,148 26,529
Depreciation and amortization................................................................ 64,707 130,428
Selling, general and administrative expenses................................................. 20,337 48,334
Management and consulting fees............................................................... 1,558 3,350
----------- -----------
122,631 262,544
----------- -----------
Loss from operations......................................................................... (16,214) (10,873)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income................................................................. 6,398 5,148
Gain on sale of cable system.............................................................. 10,006
Gain on sale of investments............................................................... 286
Interest expense.......................................................................... (37,742) (78,185)
Other expense............................................................................. (1,216) (853)
----------- -----------
(32,274) (63,884)
----------- -----------
Loss before income tax benefit, extraordinary items and minority interest.................... (48,488) (74,757)
Income tax benefit........................................................................... 2,596 4,026
----------- -----------
Net loss before extraordinary items and minority interest.................................... (45,892) (70,731)
Extraordinary gain on early extinguishments of debt, net of tax.............................. 18,483
Minority interest............................................................................ (320) (882)
----------- -----------
Net loss .................................................................................... $ (27,729) $ (71,613)
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
48
<PAGE> 49
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.......................................... (311) (27,418) (27,729)
------------ ------------ -------------- --------- ------------
Balance at December 31, 1996...................... 24,888 716 50,062 (1,850) 73,816
Cash contributions................................ 84 84
Transfer and conversion of General Partner
Interest to Limited Partner Interest........... (799) 799
Net loss.......................................... (1) (71,612) (71,613)
------------ ------------ -------------- --------- ------------
Balance at December 31, 1997...................... $ 24,888 $ $ (20,751) $ (1,850) $ 2,287
============ ============ ============== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
49
<PAGE> 50
<TABLE>
<CAPTION>
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1996 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $ (27,729) $ (71,613)
Minority interest ............................................. 320 882
Loss on disposal of fixed assets .............................. 324 263
Depreciation and amortization ................................. 65,905 131,830
Gain on sale of investment .................................... (286)
Gain on sale of cable system .................................. (10,006)
Extraordinary gain on early extinguishments of debt, net of tax (18,483)
Changes in assets and liabilities:
Accounts receivable ....................................... (2,798) (5,569)
Receivable from affiliate ................................. 151 237
Prepaids .................................................. (1,922) 2,169
Interest receivable ....................................... (2,633) 776
Other current assets ...................................... 8 (127)
Deferred income taxes ..................................... (2,596) (4,311)
Other non-current assets .................................. 379 (776)
Accounts payable and accrued liabilities .................. 4,826 4,395
Payable to affiliates ..................................... 1,531 405
Deferred revenue .......................................... 394 4,103
Accrued interest .......................................... 20,322 1,754
Deferred channel launch revenue ........................... 4,154
Other non-current liabilities ............................. (16) 61
--------- ---------
Cash flows from operating activities .......................... 37,697 58,627
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of cable systems, net of cash acquired .............. (415,806)
Proceeds from sale of cable system ............................ 11,157
Purchase of RMG Class A Common Stock .......................... (329)
Property and equipment ........................................ (38,167) (129,573)
Intangible assets ............................................. (37) (1,041)
Notes receivable .............................................. (15,000)
Purchases of escrowed investments ............................. (88,755)
Proceeds from maturity of escrowed investments ................ 28,248
Proceeds from sale of investment .............................. 1,081
--------- ---------
Cash flows from investing activities .......................... (557,013) (91,209)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .................................. 850,000 30,500
Repayment of long-term debt ................................... (369,504)
Call premium and other fees on early extinguishment of debt ... (4,716)
Contributed capital ........................................... 190,550 84
Partner distribution .......................................... (119,775)
Debt issue costs .............................................. (17,479) (384)
Syndication costs ............................................. (990)
--------- ---------
Cash flows from financing activities .......................... 528,086 30,200
--------- ---------
Net change in cash ................................................ 8,770 (2,382)
Cash and cash equivalents, beginning of period .................... 8,770
--------- ---------
Cash and cash equivalents, end of period .......................... $ 8,770 $ 6,388
========= =========
See accompanying notes to consolidated financial statements
50
</TABLE>
<PAGE> 51
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, 1997, 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........... 332,769 525,140
Greenville/Spartanburg Cluster............ 144,484 203,519
Knoxville/East Tennessee Cluster.......... 100,380 145,162
-------- --------
Total........................... 577,633 873,821
======== ========
</TABLE>
During 1996, ICP-IV 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. InterMedia Capital Management, LLC ("ICM-IV LLC"), the .001%
general partner of ICP-IV, is the .01% general partner of IP-IV (see Note
13 -- Related Party Transactions).
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 cumulative loss before income tax benefit, extraordinary
items and minority interest of $123,245, non-cash charges have aggregated
$198,322. These charges consist of $72,550 of depreciation of property and
equipment, $125,185 of amortization of intangible assets, predominately related
to franchise rights and goodwill, and $587 of loss on disposal of fixed assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include 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.
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.
51
<PAGE> 52
Escrowed investments held to maturity
Escrowed investments held to maturity are carried at amortized cost
and consist of U.S. Treasury Notes with maturities ranging from one to nineteen
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 9 -- 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 systems 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 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 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.
Costs associated with potential acquisitions are initially deferred.
For acquisitions which are completed, related costs are capitalized as part of
the purchase price of assets acquired. 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 systems 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.
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
52
<PAGE> 53
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 amended and restated partnership agreement, dated August 5, 1997,
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 a certain limited 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassifications
Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
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.
53
<PAGE> 54
Escrowed investments: The fair value of the escrowed
investments held to maturity is based on quoted market prices (see
Note 4).
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 (see Note 9).
3. ACQUISITIONS AND SALE OF CABLE PROPERTIES
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
InterMedia Capital Management IV, L.P. ("ICM-IV"), the former 1.1% general
partner of ICP-IV (see Note 13 -- Related Party Transactions).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 as of the acquisition date approximately 360,100 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.
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:
54
<PAGE> 55
<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 serving approximately 147,600 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 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 Board Opinion 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 serving as of the acquisition dates approximately
59,600 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>
55
<PAGE> 56
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.
Sale
On December 5, 1997, the Company sold its cable television assets
serving approximately 7,400 basic subscribers in and around Royston and Toccoa,
Georgia. The sale resulted in a gain, calculated as follows:
<TABLE>
<S> <C>
Proceeds from sale .......... $ 11,212
Net book value of assets sold (1,206)
--------
Gain on sale ................ $ 10,006
========
</TABLE>
4. ESCROWED INVESTMENTS HELD TO MATURITY
The Company's escrowed investments (see Note 9) held to maturity
consist of U.S. Treasury Notes with fair value amounts and maturities as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1997
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Matures within 1 year................. $ 28,237 $ 28,333 $ 29,359 $ 29,805
Matures between 1 and 2 years......... 60,518 61,019 31,148 31,552
------------ ------------ ------------ ------------
Total...................... $ 88,755 $ 89,352 $ 60,507 $ 61,357
============ ============ ============ ============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Franchise rights............................ $ 577,786 $ 577,921
Goodwill.................................... 78,760 78,828
Debt issue costs............................ 17,479 17,863
Other....................................... 294 614
------------ -------------
674,319 675,226
Accumulated amortization.................... (42,587) (124,500)
------------ -------------
$ 631,732 $ 550,726
============ =============
</TABLE>
56
<PAGE> 57
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
----------- -------
<S> <C> <C>
Land....................................... $ 3,089 $ 3,204
Cable television plant..................... 192,888 251,034
Buildings and improvements................. 2,977 3,369
Furniture and fixtures..................... 1,999 3,595
Equipment and other........................ 15,255 17,045
Construction in progress................... 38,489 101,368
----------- ----------
254,697 379,615
Accumulated depreciation................... (22,287) (69,160)
----------- ----------
$ 232,410 $ 310,455
=========== ==========
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
----------- ----------
<S> <C> <C>
Accounts payable........................... $ 1,391 $ 3,969
Accrued program costs...................... 1,431 2,442
Accrued franchise fees..................... 4,895 5,636
Accrued copyright fees..................... 1,064 1,089
Accrued capital expenditures............... 8,720 8,060
Accrued payroll costs...................... 1,973 2,640
Accrued property and other taxes........... 2,829 3,174
Other accrued liabilities.................. 6,670 5,698
----------- ----------
$ 28,973 $ 32,708
=========== ==========
</TABLE>
8. CHANNEL LAUNCH REVENUE
During the year ended December 31, 1997, the Company received
payments of $8,014 from certain programmers to launch and promote their new
channels. Of the total amount received, the Company recognized advertising
revenue of $1,998 for advertisements provided by the Company to promote the new
channels. The remaining payments received from the programmers are being
amortized over the respective terms of the program agreements which range
between five and ten years. $1,487 was amortized and recorded as other service
revenue for the year ended December 31, 1997.
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
----------- -------
<S> <C> <C>
Bank revolving credit facility, $475,000
commitment as of December 31, 1997, interest
currently at LIBOR plus 1.00% (6.75%) or ABR
(8.5%) payable quarterly,
matures July 1, 2004........................................ $ 334,000 $ 364,500
Bank term loan; interest at LIBOR plus 2.00%
(7.75%) payable quarterly, matures
January 1, 2005............................................. 220,000 220,000
11 1/4% senior notes, interest payable semi-annually,
due August 1, 2006.......................................... 292,000 292,000
----------- ----------
$ 846,000 $ 876,500
=========== ==========
</TABLE>
57
<PAGE> 58
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. Effective October 20, 1997, pursuant to an amendment
to the revolving credit facility and term loan agreement, interest rates on
borrowings under the term loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or
ABR plus 0.50% to ABR plus 0.75% based on the Company's ratio of senior debt to
annualized quarterly operating cash flow ("Senior Debt Ratio"). Interest rates
vary also on borrowings under the revolving credit facility from LIBOR plus
0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25% based on the Company's
Senior Debt Ratio. Prior to the amendment, interest rates on borrowings under
the term loan were at LIBOR plus 2.375% or ABR plus 1.125%; and, interest rates
on borrowings under the revolving credit facility varied from LIBOR plus 0.75%
to LIBOR plus 1.75% or ABR to ABR plus 0.50% based on the Senior Debt Ratio. 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, 1997, the interest rates were 6.75% and 8.50% on
borrowings of $347,000 and $17,500, respectively, outstanding under the
revolving credit facility. At December 31, 1996, the interest rates on
borrowings under the revolving credit facility and the term loan were 7.25% and
8.88%, respectively.
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 is based on the
current value in the market for transactions with similar terms and adjusted for
the holding period. At December 31, 1996 and 1997, the fair market value of the
interest rate swaps was $(2,700) and $(2,198), respectively.
Borrowings under the Bank Facility are secured by the capital stock
and partnership interests of IP-IV's subsidiaries, a negative pledge on other
assets of IP-IV and subsidiaries and a pledge of any intercompany notes.
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.
As of December 31, 1996 and 1997, ICP-IV has $90,949 and $61,925,
respectively, 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.
58
<PAGE> 59
Annual maturities of long-term debt at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998 ................................... $
1999 ................................... 1,000
2000 ................................... 1,000
2001 ................................... 45,500
2002 ................................... 83,500
Thereafter ............................. 745,500
-----------
$876,500
===========
</TABLE>
Based on recent trading prices of the Notes, the fair value of these
securities at December 31, 1997 is $324,500. Borrowings under the Bank Facility
are at rates that would be otherwise currently available to the Company.
Accordingly, the carrying amounts of bank borrowings outstanding as of December
31, 1997 approximate their fair value.
10. MANDATORILY REDEEMABLE PREFERRED SHARES
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).
11. 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 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 and 1997.
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 continues to conduct rulemaking proceedings 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.
12. COMMITMENTS AND CONTINGENCIES
The Company is committed to provide cable television services under
franchise agreements with remaining terms of up to nineteen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
59
<PAGE> 60
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 position 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, 1997 for the next five years and
thereafter under these leases are as follows:
<TABLE>
<S> <C>
1998.............................. $ 694
1999.............................. 373
2000.............................. 313
2001.............................. 293
2002.............................. 263
Thereafter........................ 1,417
---------------
$ 3,353
===============
</TABLE>
Rent expense, including pole rental agreements, was $2,157 and $4,564
for the years ended December 31, 1996 and 1997, respectively.
13. RELATED PARTY TRANSACTIONS
ICM-IV provides certain management services to 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.
InterMedia Management, Inc. ("IMI") is the managing member of ICM-IV
LLC, a newly formed limited liability company, which was appointed the managing
general partner of ICP-IV effective August 5, 1997. Prior to August 5, 1997, IMI
was wholly owned by the former managing general partner of ICM-IV, the former
general partner of ICP-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. Administrative fees charged by IMI were $3,036 and $6,310 for the years
ended December 31, 1996 and 1997, respectively. Receivable from affiliate
represents advances to IMI, net of administrative fees charged by IMI, and
operating expenses paid by IMI on behalf ICP-IV's subsidiaries.
On August 5, 1997, ICM-IV LLC purchased from ICM-IV a .001% general
partner interest in ICP-IV. ICM-IV's remaining 1.123% general partner interests
in ICP-IV were converted to limited partner interests, and ICM-IV LLC was
appointed the managing general partner of the Company.
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 years ended December 31, 1996 and 1997 amounted to $17,538 and $41,128,
respectively. Payable to affiliates includes programming fees payable to the TCI
subsidiary of $3,353 and $3,556 at December 31, 1996 and 1997, respectively.
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 and 1997 the
note balance outstanding including accrued interest has been eliminated in
consolidation.
60
<PAGE> 61
14. INCOME TAXES
Income tax benefit is included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Continuing operations.......................... $ 2,596 $ 4,026
Extraordinary loss (see Note 15)............... 1,790
-------------- ---------------
$ 4,386 $ 4,026
============== ===============
</TABLE>
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Current federal................................ $ $ (285)
Deferred federal............................... 4,257 3,813
Deferred state................................. 129 498
------------- ---------------
$ 4,386 $ 4,026
============= ===============
</TABLE>
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Property and equipment......................... $ (8,617) $ (6,786)
Intangible assets.............................. (11,287) (8,336)
--------------- ---------------
(19,904) (15,122)
Loss carryforward ............................. 29,814 29,058
Alternative minimum tax
credit carryforward............................ 285
-------------- ---------------
$ 9,910 $ 14,221
============== ===============
</TABLE>
At December 31, 1996 and 1997, RMG had net operating loss
carryforwards for federal income tax purposes aggregating $87,689 and $85,464,
respectively, 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 the tax basis of
RMG's net assets, management believes it is more likely than not that the
deferred tax assets related to 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>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Tax benefit at federal statutory rate.......... $ 10,810 $ 25,417
Partnership losses exempt from income taxes.... (5,287) (20,963)
State taxes, net of federal benefit............ 127 498
Goodwill amortization.......................... (1,209) (2,056)
Realization of acquired tax benefit............ 346
Other.......................................... (55) 784
--------------- ---------------
$ 4,386 $ 4,026
============== ===============
</TABLE>
61
<PAGE> 62
15. EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
As described in Note 3 - Acquisitions and Sale of Cable Properties,
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.
16. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
During the years ended December 31, 1996 and 1997, the Company paid
interest of $16,222 and $75,029, respectively.
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 with RMH and IPWT
acquisitions................................................... (2,228)
-----------------
Net cash paid.................................................... $ 415,806
==================
</TABLE>
In connection with the Company's sale of its cable television assets
located in Royston and Toccoa, Georgia in December 1997, as described in Note 3,
net cash proceeds received were as follows:
<TABLE>
<S> <C>
Proceeds from sale............................................... $ 11,212
Receivable from buyer ........................................... (55)
------------------
Net proceeds received from buyer ............................. $ 11,157
==================
</TABLE>
17. 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> 63
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
63
<PAGE> 64
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.
64
<PAGE> 65
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.
65
<PAGE> 66
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.
66
<PAGE> 67
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.
67
<PAGE> 68
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 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.
68
<PAGE> 69
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.
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.
69
<PAGE> 70
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>
YEARS
-----
<S> <C>
Cable television plant........................................... 5-10
Buildings and
improvement................................................... 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-
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>
70
<PAGE> 71
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.
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>
71
<PAGE> 72
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.
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
</TABLE>
72
<PAGE> 73
<TABLE>
<S> <C>
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
RMG's 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.
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.
73
<PAGE> 74
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)
============ ============ ============ =============
<CAPTION>
IPWT: GENERAL LIMITED
---- PARTNER PARTNER
------- -------
<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............................... 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)
============= ============ =============
<CAPTION>
TCIC ACCUMULATED
TCI GREENVILLE/SPARTANBURG: INVESTMENT DEFICIT
--------------------------- ---------- -----------
<S> <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
74
<PAGE> 75
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 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, 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.
75
<PAGE> 76
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,
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.
76
<PAGE> 77
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
1994 1995 TO JULY 30, 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.
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
1994 1995 TO JULY 30, 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>
77
<PAGE> 78
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.
78
<PAGE> 79
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
79
<PAGE> 80
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.
80
<PAGE> 81
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
FOR THE YEAR ENDED 1996
DECEMBER 31, TO JULY 30,
1994 1995 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.
81
<PAGE> 82
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.
82
<PAGE> 83
ROBIN MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
FOR THE YEAR ENDED 1996
DECEMBER 31, 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.
83
<PAGE> 84
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.
84
<PAGE> 85
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 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
85
<PAGE> 86
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.
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.
86
<PAGE> 87
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.
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
87
<PAGE> 88
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.
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
88
<PAGE> 89
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. 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.
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.
89
<PAGE> 90
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>
PERIOD FROM
FOR THE YEAR ENDED 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>
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.
90
<PAGE> 91
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
91
<PAGE> 92
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.
92
<PAGE> 93
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------------------- JANUARY 1, 1996
1994 1995 TO JULY 30, 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.
93
<PAGE> 94
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.
94
<PAGE> 95
INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996,
1994 1995 TO JULY 30, 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.
95
<PAGE> 96
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.
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
96
<PAGE> 97
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.
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).
97
<PAGE> 98
Allocation of profit 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>
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
98
<PAGE> 99
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
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.
99
<PAGE> 100
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.
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.
100
<PAGE> 101
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.
101
<PAGE> 102
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
102
<PAGE> 103
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.
103
<PAGE> 104
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.
104
<PAGE> 105
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.
105
<PAGE> 106
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.
106
<PAGE> 107
Considerable management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such estimates.
(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.
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.
107
<PAGE> 108
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>
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>
108
<PAGE> 109
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.
109
<PAGE> 110
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
In August 1997, ICM-IV LLC, a Delaware limited liability company,
succeeded ICM-IV, a California limited partnership, as the General Partner of
ICP-IV. Leo J. Hindery, Jr. had held a controlling interest in ICM-IV. In
February 1997 Mr. Hindery was appointed President of TCI and as part of Mr.
Hindery's transition, his interests in IMI, the Managing Member of ICM-IV LLC,
and Managing General Partner of ICM-IV, as well as various other management
partnerships for the Related InterMedia Entities were purchased by Robert J.
Lewis. Through ICM-IV, Mr. Hindery had managed ICP-IV and its subsidiaries. Mr.
Hindery no longer holds a controlling interest in ICM-IV or IMI. As general
partner, ICM-IV LLC has responsibility for the overall management of the
business and operations of the Company. Pursuant to the terms of ICP-IV's
agreement of limited partnership amended and restated as of August 5, 1997 and
amended as of December 19, 1997 (the "Partnership Agreement"), ICM-IV receives
an annual fee for management services rendered under the supervision of the
General Partner. The principal offices of ICM-IV LLC 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"), whose
managing general partner is IMI, provides day-to-day management of the Company's
business and operations. The five most senior non-operating executives of IMI
are:
<TABLE>
<CAPTION>
NAME Age Position
---- --- --------
<S> <C> <C>
Robert J. Lewis............................... 67 President and Chief Executive Officer
*Leo J. Hindery, Jr............................ 50 President and Chief Executive Officer
Edon V. Hartley............................... 38 Senior Executive Director, Chief Financial Officer
**Derek Chang................................... 30 Treasurer
Rodney M. Royse............................... 31 Vice President and Senior Executive Director,
Business Development
Thomas R. Stapleton........................... 44 Vice President and Senior Executive Director, Chief
Accounting Officer
*** Grace de Latour............................... 49 Executive Director of Human Resources
Donna Dearman................................. 42 Executive Director of Human Resources
</TABLE>
110
<PAGE> 111
The five officers of IPCC are:
<TABLE>
<CAPTION>
NAME Age Position
---- --- --------
<S> <C> <C>
Robert J. Lewis.............................. 67 President and Chief Executive Officer
*Leo J. Hindery, Jr........................... 50 President
Edon V. Hartley.............................. 38 Senior Executive Director, Chief Financial Officer
**Derek Chang.................................. 30 Secretary and Treasurer
Rodney M. Royse.............................. 31 Vice President and Senior Executive Director,
Business Development
Thomas R. Stapleton.......................... 44 Vice President, Assistant Secretary and Senior
Executive Director, Chief Accounting Officer
Bruce J. Stewart............................. 33 Vice President, Legal Affairs
</TABLE>
*Leo J. Hindery, Jr. is the founder and was the Managing General
Partner of ICM-IV and ICM and President of IMI and IPCC. Mr. Hindery is also the
founder and was the Managing General Partner of InterMedia Partners, a
California limited partnership, and all of the other Related Intermedia
Entities. Before launching InterMedia Partners in 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 was no longer Managing General Partner of ICM-IV or any other management
partnerships of the Related InterMedia Entities.
Robert J. 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. Mr. Lewis acquired 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."
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 was 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 departed from
ICM, IMI and IPCC in April of 1997.
Rodney M. Royse is Vice President and Senior Executive Director,
Business Development of ICM, IMI and 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 Vice President and Senior Executive Director,
Chief Accounting Officer of ICM, IMI and IPCC, and 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 was 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
111
<PAGE> 112
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. Ms. de Latour departed from ICM, IMI and IPCC in August,
1997.
Donna Dearman is the Executive Director of Human Resources of ICM,
IMI and IPCC. Ms. Dearman joined IMI in 1989 as a payroll and benefits
specialist. She was later promoted to the position payroll manager, then
benefits manager and lastly Regional Human Resources Manager before succeeding
Ms. de Latour as Executive Director of Human Resources.
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............................. 49 Executive Director of Operations
F. Steven Crawford.......................... 49 Senior Executive Director, Chief Operating Officer
Julaine A. Smith............................ 41 Controller
Bruce J. Stewart............................ 33 General Counsel and Executive Director of
Communications
*****Barbara J. Wood............................. 46 Executive Director of Budgets and Regulatory
Affairs
Kenneth A. Wright........................... 42 Executive Director of Engineering and
Telecommunications
Donna K. Young.............................. 49 Development Executive Director of Marketing
and Ad Sales
</TABLE>
****Terry C. Cotten was 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.
Mr. Cotten departed from IMI in August 1997.
F. Steven Crawford is the Chief Operating Officer and Senior
Executive Director 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.
112
<PAGE> 113
*****Barbara J. Wood was 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. Ms. Wood departed from IMI in April
1997.
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 LLC" and "-- Services to be
Rendered to the Company by IMI."
113
<PAGE> 114
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 IMI as a group.
<TABLE>
<CAPTION>
NAMES AND ADDRESSES OF BENEFICIAL OWNERS TYPE OF INTEREST PERCENTAGE
---------------------------------------- ---------------- ----------
<S> <C> <C>
Tele-Communications, Inc....................... Limited Partner 48.7%
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.............. Limited Partner 6.3%(2)
Third Plaza Trust and Fourth Plaza Trust
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 IMI as a Group (5 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) Robert J. Lewis is the sole shareholder of IMI and holds the controlling
interest in ICM-IV LLC. See Item 13 "Certain Relationships and Related
Transactions -- The Related InterMedia Entities." No executive of IMI or
IPCC holds a direct interest in ICP-IV.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CHANGE IN MANAGING GENERAL PARTNER
In February 1997 Leo J. Hindery, Jr. was appointed president of TCI.
As part of Mr. Hindery's transition to TCI, substantially all of Mr. Hindery's
interests in ICM-IV and its general partner IMI, as well as in various other
management partnerships for the Related InterMedia Entities, were converted or
sold. Pursuant to these transactions, Mr. Hindery no longer holds a controlling
interest in IMI or ICM-IV and ICM-IV is no longer the managing general partner
of the Company.
114
<PAGE> 115
On August 5, 1997, Robert J. Lewis purchased from Mr. Hindery all of
the outstanding stock of IMI for $0.025 million. IMI retained its .002% general
partner interest in ICM-IV and was appointed managing general partner of ICM-IV.
Concurrently, Mr. Hindery withdrew as managing general partner of ICM-IV and
converted his general partner interest in ICM-IV to a limited partner interest,
and TCI purchased substantially all of the limited partner interests in ICM-IV.
IMI owns 95% of the equity interests in ICM-IV LLC. ICM-IV LLC
purchased from ICM-IV a .001% general partner interest in ICP-IV and the .01%
managing general partner interests in certain of ICP-IV's subsidiaries for
approximately $0.090 million. ICM-IV's remaining general partner interests in
ICP-IV were converted to limited partner interests, and ICM-IV LLC was appointed
the managing general partner of the Company.
ICP-IV and its subsidiaries' various senior debt and partnership
agreements have been amended to reflect the change in the Managing General
Partner of the Company. In addition, pursuant to the transactions described
above, certain arrangements have been entered into that would cause a change in
the Managing General Partner. In the event that Mr. Lewis dies or Mr. Hindery
leaves his employment with TCI, Mr. Hindery has the right to repurchase all of
the stock of IMI from Mr. Lewis and thereby will hold a controlling interest in
IMI which controls the Managing General Partner. In addition, the limited
partners, have the right to remove the Managing General Partner in certain
circumstances.
INTERMEDIA PARTNERS IV, CAPITAL CORP.
IPCC is the wholly owned subsidiary of the Company and was formed
solely for the purpose of serving as a co-issuer of the Notes. The Notes are the
joint and several obligation of the Company and IPCC. Separate financial
statements and other disclosure concerning IPCC have not been provided because
IPCC's financial position is not deemed to be material and it does not have any
operations.
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 had managed ICP-IV and its subsidiaries.
Upon completion of his transition to TCI, Mr. Hindery no longer holds a
controlling interest in IMI, IPCC, ICM-IV, or any of the Related InterMedia
Entities or their respective management partnerships. 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 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
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. Lewis is now
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 (the "Services Agreements").
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
115
<PAGE> 116
will affect the level of IMI costs charged to the Company. The Company believes
that the terms of the Services 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 Administrative Fee (as defined herein) payable
to ICM-IV. The payment to such affiliate of any such amount in excess of the
ICM-IV Administrative Fee requires the approval of 70.0% in interest of the
limited partners.
MANAGEMENT BY ICM-IV LLC
ICM-IV LLC manages the Company's cable systems and such management is
administered by ICM-IV under ICM-IV LLC's supervision pursuant to ICP-IV's
Partnership Agreement. ICM-IV has assigned its rights and obligations to ICM
with regard to administering the management of the Company's cable systems. The
Partnership Agreement provides that this management relationship continues in
effect with respect to each cable television system owned by the Company. ICM-IV
LLC 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 "Administrative 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 Administrative 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 Administrative 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.
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."
116
<PAGE> 117
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 contribution agreement (the "G/S Contribution
Agreement") by and among ICP-IV and TCI of Greenville, Inc., TCI of Piedmont,
Inc. and TCI of Spartanburg, Inc., each of which is a wholly owned subsidiary of
TCI, 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 a 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 years ended December 31, 1996 and 1997 amounted to $17.5
million and $41.1 million, respectively.
117
<PAGE> 118
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 Statement Schedules -- See Index to Financial
Statements on page 44 of this Form 10-K.
(3) Exhibits -- See Index to Exhibits on page 119 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, 1997.
118
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
------ ------- --------------
<S> <C> <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).......................................
*** 3.3 Amended and Restated Agreement of Limited Partnership of InterMedia Capital
Partners IV, L.P. dated as of August 5, 1997 by and among InterMedia Capital
Management, LLC, InterMedia Capital Management IV, L.P. and various other
limited partners..........................................................................
*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...................................................................................
*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)..................................................................
*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).....................................................................................
</TABLE>
119
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
------ ------- --------------
<S> <C> <C>
*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.......................
*** 10.12 Consent and Second Amendment to Revolving Credit and Term Loan Agreement,
dated as of July 30, 1996 and amended as of August 6, 1996, dated as of
February 28, 1997 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.......................................
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 121)...................................................
27.1 Schedule of Financial Data for InterMedia Capital Partners IV, L.P........................
</TABLE>
- ----------
* 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.
*** Incorporated by reference to the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
file No. 333-11893.
120
<PAGE> 121
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,
LLC, its General Partner
By: InterMedia Management, Inc., its
Managing Member
By: /s/ ROBERT J. LEWIS
-----------------------------------
Robert J. Lewis
President
Date: March 27, 1998.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Robert J. Lewis 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
- --------- ----- ----
<S> <C> <C>
/s/ ROBERT J. LEWIS President, Chief Executive Officer and Sole Director of March 27, 1998
- ---------------------------------------------- InterMedia Management, Inc. (principal executive
Robert J. Lewis
officer)
/s/ EDON V. HARTLEY Chief Financial Officer of InterMedia Management, Inc. March 27, 1998
- ---------------------------------------------- (principal financial officer)
Edon V. Hartley
/s/ THOMAS R. STAPLETON Vice President of InterMedia Management, Inc. March 27, 1998
- ---------------------------------------------- (principal accounting officer)
Thomas R. Stapleton
</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.
121
<PAGE> 122
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
INTERMEDIA CAPITAL PARTNERS IV, L.P.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
<S> <C> <C>
ASSETS
Escrowed investments held to maturity.................................................... $ 28,237 $ 29,359
Interest receivable on escrowed investments.............................................. 2,189 1,412
-------------- --------------
Total current assets.......................................................... 30,426 30,771
Escrowed investments held to maturity.................................................... 60,518 31,148
Intangible assets, net................................................................... 11,833 11,101
Investment in IP-IV...................................................................... 276,909 234,955
-------------- --------------
Total assets.................................................................. $ 379,686 $ 307,975
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued interest......................................................................... $ 13,870 $ 13,688
-------------- --------------
Total current liabilities..................................................... 13,870 13,688
Long-term debt........................................................................... 292,000 292,000
-------------- --------------
Total liabilities............................................................. 305,870 305,688
-------------- --------------
Commitments and contingencies
PARTNERS' CAPITAL
Preferred limited partnership interest................................................... 24,888 24,888
General and limited partners' capital.................................................... 50,778 (20,751)
Note receivable from partner............................................................. (1,850) (1,850)
-------------- --------------
Total partners' capital....................................................... 73,816 2,287
-------------- --------------
Total liabilities and partners' capital....................................... $ 379,686 $ 307,975
============== ==============
</TABLE>
See accompanying notes to the condensed financial information
122
<PAGE> 123
INTERMEDIA CAPITAL PARTNERS IV, L.P.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996 1997
-------------- ---------
<S> <C> <C>
Revenues ................................................................................ $ $
Loss from operations.....................................................................
Other income (expense):
Interest income .................................................................. 2,189 3,968
Interest expense ................................................................. (14,138) (33,543)
Equity in net loss of IP-IV ...................................................... (15,780) (42,038)
-------------- --------------
Net loss ................................................................................ $ (27,729) $ (71,613)
============== ==============
</TABLE>
See accompanying notes to condensed financial information
123
<PAGE> 124
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..................................... (311) (27,418) (27,729)
------------- ----------- ------------- ---------------- ----------
Balance at December 31, 1996................. 24,888 716 50,062 (1,850) 73,816
Cash contributions .......................... 84 84
Transfer and conversion of
General Partner Interest to
Limited Partner Interest.................. (799) 799
Net loss .................................... (1) (71,612) (71,613)
------------- ----------- ------------- ---------------- ----------
Balance at December 31, 1997.................$ 24,888 $ $ (20,751) $ (1,850) $ 2,287
============= =========== ============= ================ ==========
</TABLE>
See accompanying notes to condensed financial information
124
<PAGE> 125
INTERMEDIA CAPITAL PARTNERS IV, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (27,729) $ (71,613)
Equity in net loss of IP-IV............................................. 15,780 42,038
Amortization expense.................................................... 268 732
Changes in assets and liabilities:
Interest receivable................................................... (2,189) 777
Accounts payable and accrued liabilities.............................. (3)
Payable to affiliate.................................................. (625)
Accrued interest...................................................... 13,870 (182)
--------------------- --------------------
Cash flows from operating activities....................................... (628) (28,248)
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in IP-IV.................................................... (260,304) (84)
Purchases of escrowed investments....................................... (88,755)
Proceeds from maturity of escrowed investments ......................... 28,248
--------------------- --------------------
Cash flows from investing activities....................................... (349,059) 28,164
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from long-term debt.......................................... 292,000
Contributed capital..................................................... 190,550 84
Partner distribution.................................................... (119,775)
Debt issue costs........................................................ (12,098)
Syndication costs....................................................... (990)
--------------------- --------------------
Cash flows from financing activities....................................... 349,687 84
--------------------- --------------------
Net change in cash.........................................................
Cash and cash equivalents, beginning of period.............................
Cash and cash equivalents, end of period................................... $ $
===================== ====================
</TABLE>
See accompanying notes to condensed financial information.
125
<PAGE> 126
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS 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, escrowed investments held to maturity
and significant provisions of long-term obligations and guarantees of ICP-IV.
126
<PAGE> 127
SCHEDULE II
INTERMEDIA CAPITAL PARTNERS IV, L.P.
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>
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, BAD DEBT OTHER DECEMBER 31,
DESCRIPTION 1997 EXPENSE ACCOUNTS(2) WRITE-OFFS 1997
----------- ------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts................... $ 2,130 $ 4,260 $ (8) $ (4,697) $ 1,685
</TABLE>
- ----------
(1) Represents allowance for doubtful accounts balance assumed in connection
with the Company's acquisitions of cable television systems during 1996.
(2) Represents allowance for doubtful accounts balance sold in connection with
the Company's sale of certain of its cable television assets in December
1997.
127
<PAGE> 1
EXHIBIT 12.1
THE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Pre-tax loss from continuing operations..................... $(48,488) $(74,757)
-------- --------
Fixed charges:
Interest expense and amortization of debt discount and
premium on all indebtedness............................ 37,742 78,185
Rentals:
Rent expense(1)........................................... 719 1,521
Preferred dividend requirement............................ 496 882
-------- --------
Total fixed charges............................... 38,957 80,588
-------- --------
Earnings before income taxes and fixed charges.............. $ (9,531) $ 5,831
======== ========
Ratio of earnings to fixed charges(2)....................... -- --
======== ========
</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.
(2) The Company's earnings for the years ended December 31, 1996 and 1997 were
inadequate to cover fixed charges by $48,488 and $74,757, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1020817
<NAME> INTERMEDIA CAPITAL PARTNER IV, L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 6,388
<SECURITIES> 60,507
<RECEIVABLES> 23,163
<ALLOWANCES> (1,685)
<INVENTORY> 0
<CURRENT-ASSETS> 61,972
<PP&E> 310,455<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 970,764
<CURRENT-LIABILITIES> 74,453
<BONDS> 0
13,239
0
<COMMON> 0
<OTHER-SE> 2,287
<TOTAL-LIABILITY-AND-EQUITY> 970,764
<SALES> 251,671
<TOTAL-REVENUES> 251,671
<CGS> 80,432<F2>
<TOTAL-COSTS> 262,544
<OTHER-EXPENSES> 853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,185
<INCOME-PRETAX> (74,757)
<INCOME-TAX> (4,026)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,613)
<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>
