<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE 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
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
--- ---
<PAGE> 2
INTERMEDIA CAPITAL PARTNERS IV, L.P.
INDEX TO REPORT ON FORM 10-Q
For the Quarter Ended September 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 12
PART II -- OTHER INFORMATION........................................................................ 22
ITEM 1. LEGAL PROCEEDINGS............................................................. 22
ITEM 2. CHANGES IN SECURITIES......................................................... 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 22
ITEM 5. OTHER INFORMATION............................................................. 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 28
SIGNATURES.......................................................................................... 29
</TABLE>
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 OPERATING STRATEGIES, CAPITAL
EXPENDITURES, 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 PART II, ITEM 5 "OTHER INFORMATION."
-i-
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................ $ 6,388 $ 5,000
Accounts receivable, net of allowance for doubtful accounts of $1,685 and
$2,012, respectively............................................................. 23,163 24,206
Escrowed investments held to maturity................................................ 29,359 30,923
Interest receivable on escrowed investments.......................................... 1,418 323
Receivable from affiliates........................................................... 686 6,391
Prepaids............................................................................. 599 1,463
Other current assets................................................................. 359 353
----------- ------------
Total current assets............................................................. 61,972 68,659
Escrowed investments held to maturity................................................ 31,148
Intangible assets, net............................................................... 550,726 492,384
Property & equipment, net............................................................ 310,455 334,161
Deferred income taxes................................................................ 14,221 17,857
Other non-current assets............................................................. 2,242 2,212
----------- ------------
Total assets..................................................................... $ 970,764 $ 915,273
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt.................................................... $ $ 1,000
Accounts payable and accrued liabilities............................................. 32,708 25,588
Payable to affiliates................................................................ 3,813 4,562
Deferred revenue..................................................................... 15,856 19,708
Accrued interest..................................................................... 22,076 14,125
----------- ------------
Total current liabilities........................................................ 74,453 64,983
Deferred channel launch revenue...................................................... 4,154 6,980
Long-term debt....................................................................... 876,500 883,000
Other non-current liabilities........................................................ 131 1,359
----------- ------------
Total liabilities................................................................ 955,238 956,322
----------- ------------
Commitments and contingencies........................................................
Minority interest....................................................................
Mandatorily redeemable preferred shares.............................................. 13,239 13,938
PARTNERS' CAPITAL
Preferred limited partnership interest............................................... 24,888 24,888
Junior preferred limited partnership interest........................................ (1,423)
General and limited partners' capital................................................ (20,751) (76,602)
Note receivable from general partner................................................. (1,850) (1,850)
----------- -------------
Total partners' capital.......................................................... 2,287 (54,987)
----------- ------------
Total liabilities and partners' capital.......................................... $ 970,764 $ 915,273
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
-1-
<PAGE> 4
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1997 1998 1997 1998
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES
Basic and cable services............................................ $ 43,444 $ 48,363 $ 127,124 $ 142,284
Pay service......................................................... 10,601 9,772 30,817 29,750
Other service....................................................... 9,790 11,228 28,641 32,086
----------- ----------- ---------- ---------
63,835 69,363 186,582 204,120
COSTS AND EXPENSES
Program fees........................................................ 13,849 15,628 40,244 46,183
Other direct expenses............................................... 6,995 7,274 20,336 20,680
Selling, general and administrative expenses........................ 11,893 12,133 35,476 38,095
Management and consulting fees...................................... 838 838 2,513 2,513
Depreciation and amortization....................................... 30,648 33,584 97,051 100,344
----------- ----------- ---------- ---------
64,223 69,457 195,620 207,815
----------- ----------- ---------- ---------
Loss from operations................................................ (388) (94) (9,038) (3,695)
----------- ----------- ---------- ---------
OTHER INCOME (EXPENSE)
Interest and other income......................................... 1,217 918 3,998 3,041
Interest expense.................................................. (19,754) (19,833) (58,631) (59,105)
Other expense..................................................... (134) (72) (436) (452)
----------- ----------- ---------- ---------
(18,671) (18,987) (55,069) (56,516)
----------- ----------- ---------- ---------
Loss before income tax benefit and minority interest................ (19,059) (19,081) (64,107) (60,211)
Income tax benefit.................................................. 1,338 947 4,801 3,636
----------- ----------- ---------- ---------
Net loss before minority interest................................... (17,721) (18,134) (59,306) (56,575)
Minority interest................................................... (225) (240) (653) (699)
----------- ----------- ---------- ---------
Net loss ........................................................ $ (17,946) $ (18,374) $ (59,959) $ (57,274)
=========== =========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
-2-
<PAGE> 5
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNIOR
PREFERRED PREFERRED
LIMITED LIMITED GENERAL LIMITED NOTES
PARTNER PARTNER PARTNER PARTNERS RECEIVABLE TOTAL
---------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Conversion of Limited Partner
Interest to Junior Preferred
Limited Partner Interest (unaudited). (1,423) 1,423
Net loss (unaudited)................... (57,274) (57,274)
-------- -------- ----- --------- -------- --------
Balance at September 30, 1998
(unaudited).......................... $ 24,888 $ (1,423) $ $ (76,602) $ (1,850) $(54,987)
======== ======== ===== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE> 6
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (59,959) $(57,274)
Minority interest................................................... 653 699
Loss (gain) on disposal of fixed assets............................. (25) 112
Depreciation and amortization....................................... 98,072 101,499
Changes in assets and liabilities:
Accounts receivable............................................ (1,777) (1,043)
Interest receivable on escrowed investments.................... 1,627 1,095
Receivable from affiliates..................................... 542 (5,705)
Prepaids....................................................... 1,677 (864)
Other current assets........................................... (102) 6
Deferred income taxes.......................................... (4,801) (3,636)
Other non-current assets....................................... (785) 30
Accounts payable and accrued liabilities....................... 205 (3,888)
Payable to affiliates.......................................... 121 749
Deferred revenue............................................... 2,063 2,243
Accrued interest............................................... (6,166) (7,951)
Deferred channel launch revenue................................ 5,778 4,435
Other non-current liabilities.................................. 45 1,228
--------- ---------
Cash flows from operating activities................................ 37,168 31,735
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment.............................................. (81,889) (68,867)
Intangible assets................................................... (614) (1,340)
Proceeds from maturity of escrowed investments...................... 28,248 29,584
--------- ---------
Cash flows from investing activities................................ (54,255) (40,623)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt........................................ 13,000 7,500
Contributed capital ................................................ 84
Debt issue costs.................................................... (215)
--------- ---------
Cash flows from financing activities................................ 12,869 7,500
--------- ---------
Net change in cash and cash equivalents................................. (4,218) (1,388)
Cash and cash equivalents, beginning of period.......................... 8,770 6,388
--------- ---------
Cash and cash equivalents, end of period................................ $ 4,552 $ 5,000
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE> 7
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 September 30, 1998, 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
----------- --------
<S> <C> <C>
Nashville/Mid-Tennessee Cluster............................. 339,003 537,074
Greenville/Spartanburg Cluster.............................. 146,408 207,541
Knoxville/East Tennessee Cluster............................ 101,492 151,503
------- --------
Total.............................................. 586,903 896,118
======= ========
</TABLE>
The accompanying unaudited interim consolidated financial statements
include the accounts of ICP-IV and its directly and indirectly majority-owned
subsidiaries, InterMedia Partners IV, Capital Corp. ("IPCC"), IP-IV, InterMedia
Partners Southeast ("IPSE"), InterMedia Partners of West Tennessee, L.P.
("IPWT"), and Robin Media Group, Inc. ("RMG"). ICP-IV and its majority-owned
subsidiaries are collectively referred to as the "Company." All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and are presented in accordance with the rules and regulations of the Securities
and Exchange Commission applicable to interim financial information.
Accordingly, certain footnote disclosures have been condensed or omitted. In the
Company's opinion, the interim unaudited consolidated financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the Company's financial position as of
September 30, 1998, its results of operations for the three and nine months
ended September 30, 1998 and cash flows for the nine months ended September 30,
1998. The results of operations for these periods are not necessarily indicative
of results that may be expected for the year ending December 31, 1998. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto contained
in its Form 10-K for the year ended December 31, 1997.
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.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, (FAS 130) which establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses).
FAS 130 is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company's total comprehensive loss for
all periods presented herein did not differ from those amounts reported as net
loss in the consolidated statements of operations.
-5-
<PAGE> 8
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of FAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
Certain prior period amounts have been reclassified in the accompanying
financial statements to conform with the 1998 presentation.
2. 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 6--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").
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 debt which was simultaneously
repaid by the Company with proceeds from the Financing. On March 31, 1998, TCI
converted 5.4% of its limited partner interest in ICP-IV into a $26,458 junior
preferred limited partner interest in ICP-IV with a preferred return of 12.75%
compounded annually and senior in priority to the limited partner interest,
other than the preferred limited partner interest. The conversion of the 5.4%
limited partner interest was recorded at book value at March 31, 1998. After
giving effect to the conversion, TCI owns a 49.6% non-preferred limited partner
interest in ICP-IV, including a 3.8% limited partner interest held by InterMedia
Partners, a California limited partnership ("IP") and a 1.2% interest held by
ICM-IV. Effective January 2, 1998, TCI owns a 99.999% limited partner interest
in IP, and effective August 5, 1997, TCI owns a 99.997% limited partner interest
in ICM-IV (see Note 6--Related Party Transactions).
TCI held substantial direct and indirect ownership interests in each of
RMH, IPWT and the Greenville/Spartanburg System prior to July 30, 1996. 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
-6-
<PAGE> 9
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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.
On August 1, 1996, the Company acquired certain cable television
systems of Viacom serving as of the acquisition date 147,500 basic subscribers
in metropolitan Nashville, Tennessee (the "Nashville System") for an aggregate
purchase price of $315,333. 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 acquisition.
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.
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.
Exchange
On July 22, 1998, the Company entered into an Asset Exchange Agreement
under which the Company would exchange certain of its cable systems serving
approximately 16,200 basic subscribers in certain areas of Tennessee for
approximately 15,500 basic subscribers in other areas of Tennessee plus $750.
The exchange is expected to close by December 31, 1998.
3. ESCROWED INVESTMENTS HELD TO MATURITY
The Company's escrowed investments held to maturity are carried at
amortized cost and consist of U.S. Treasury Notes with maturities ranging from
one to seven 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 through
August 1, 1999 (see Note 4 -- Long-term Debt). The fair value and maturities of
U.S. Treasury Notes held in escrow are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
-------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Matures within 1 year................. $ 29,359 $ 29,805 $ 30,923 $ 31,689
Matures between 1 and 2 years......... 31,148 31,552
--------- --------- --------- ---------
Total........................ $ 60,507 $ 61,357 $ 30,923 $ 31,689
========= ========= ========= =========
</TABLE>
The fair values of the investments are based on quoted market prices.
-7-
<PAGE> 10
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
---------- ----------
<S> <C> <C>
Bankrevolving credit facility, $475,000 commitment as of September
30, 1998, interest currently at LIBOR plus 0.875%
or ABR payable quarterly, matures July 1, 2004 ............. $ 364,500 $ 372,000
Bank term loan, interest at LIBOR plus 1.75% (7.56%)
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
---------- ----------
Total debt...................................................... 876,500 884,000
Less current portion............................................ (1,000)
---------- ----------
Total long-term debt............................................ $ 876,500 $ 883,000
========== ==========
</TABLE>
The Company's bank debt is outstanding under the revolving credit
facility and term loan agreement executed by IP-IV and dated July 30, 1996. The
revolving credit facility currently provides for $475,000 of available credit.
Starting January 1, 1999, revolving credit facility commitments will be
permanently reduced semiannually by increments ranging from $22,500 to $47,500
through maturity on July 1, 2004. The term loan requires semiannual principal
payments of $500 starting January 1, 1999 through January 1, 2004, and final
principal payments in two equal installments of $107,250 on July 1, 2004 and
January 1, 2005. Advances under the Bank Facility are available under interest
rate options related to the base rate of the administrative agent for the Bank
Facility ("ABR") or LIBOR. 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 Debt Ratio is greater than
4.0:1.0 and at 0.25% when the Senior Debt 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 September 30, 1998, the interest rates were 6.63%,
6.56% and 8.25% on borrowings of $357,000, $10,000 and $5,000, respectively,
outstanding under the revolving credit facility.
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 6.32% and
receives quarterly interest payments equal to LIBOR. The differential to be paid
or received in connection with an individual swap agreement
-8-
<PAGE> 11
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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, 1997 and September 30, 1998, the fair market
value of the interest rate swaps was approximately $(2,198) and $(5,448),
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, 1997 and September 30, 1998, ICP-IV has $61,925 and
$31,246, 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.
Based on recent trading prices of the Notes, the fair value of these
securities at December 31, 1997 and September 30, 1998 is $324,500 and $324,120,
respectively. 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 and September 30, 1998
approximate their fair value.
5. 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.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Company has entered and expects to continue to enter 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.
-9-
<PAGE> 12
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS
ICM-IV provides certain management services to ICP-IV and its
subsidiaries for a per annum fee of $3,350, of which ICM-IV defers 20% per
annum, payable in each following year, in order to support the Company's bank
debt.
InterMedia Management, Inc. ("IMI") is the managing member of
InterMedia Capital Management, LLC ("ICM-IV LLC"), the .001% 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 $1,448 and $1,138 for the three months
ended September 30, 1997 and 1998, respectively, and $4,536 and $4,341 for the
nine months ended September 30, 1997 and 1998, respectively. Receivable from
affiliates at December 31, 1997 and September 30, 1998 includes $686 and $1,587,
respectively, of advances to IMI, net of administrative fees charged by IMI and
operating expenses paid by IMI on behalf of 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. Such volume rates may not continue to be available in the future
should TCI's ownership in ICP-IV significantly decrease. Programming fees
charged by the TCI subsidiary for the three months ended September 30, 1997 and
1998 amounted to $10,292 and $11,869, respectively, and $30,585 and $34,839 for
the nine months ended September 30, 1997 and 1998, respectively. Payable to
affiliates includes programming fees payable to the TCI subsidiary of $3,556 and
$4,059 as of December 31, 1997 and September 30, 1998, respectively.
On January 1, 1998 an affiliate of TCI entered into an agreement with
the Company to manage the Company's advertising business and related services
for an annual fixed fee per advertising sales subscriber, as defined by the
agreement. In addition to the annual fixed fee, TCI will be entitled to varying
percentage shares of the incremental growth in annual cash flow from advertising
sales above specified targets. Management fees charged by the TCI subsidiary for
the three and nine months ended September 30, 1998 amounted to $73 and $218,
respectively. Receivable from affiliates at September 30, 1998 includes $4,804
of receivables from TCI for advertising sales.
7. CHANNEL LAUNCH REVENUE
During the nine months ended September 30, 1997 and 1998, the Company
received payments of $8,014 and $3,270, respectively, from certain programmers
to launch and promote their new channels. Also during the nine months ended
September 30, 1998, the Company recorded a receivable of $2,768 from a
programmer to launch and promote its new channel. Of the total amount received,
the Company recognized advertising revenue of $174 and $1,627 during the three
and nine months ended September 30, 1997, respectively, 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.
-10-
<PAGE> 13
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
8. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine months ended September 30, 1997 and 1998, the Company
paid interest of $63,776 and $65,901, respectively.
-11-
<PAGE> 14
ITEM 2. 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 and should be read in
conjunction with the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Form 10-K for the
year ended December 31, 1997. 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.
OVERVIEW
The Company generates 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 Company has reported net losses primarily caused by high levels of
depreciation and amortization and interest expense. 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 and Sale of Cable Properties
During the year ended December 31, 1996 the Company acquired cable
television systems serving as of the acquisition dates 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
Nashville System on August 1, 1996, and (iv) the purchases of cable television
systems serving approximately 59,600 basic subscribers at various dates during
1996 (the "Miscellaneous Acquisitions").
The Miscellaneous Acquisitions and the purchase of the Nashville System
have been accounted for as purchases in accordance with APB16.
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 49.6% limited partner in
ICP-IV (as discussed in Note 2 to the Consolidated Financial Statements included
herein), 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.
On December 5, 1997, the Company sold its cable television assets
serving approximately 7,400 basic subscribers in and around Royston and Toccoa,
Georgia.
Rate Regulation and Competition
The Company's operations are regulated by the Federal Communications
Commission ("FCC") and local franchise authorities under the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the
Telecommunications Act of 1996 (the "1996 Act"). Certain of the Company's cost
of service cases justifying rates for the CPS or expanded basic tier of service
are pending before the FCC. Additionally, pursuant
-12-
<PAGE> 15
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. Management believes that the Company has substantially complied
in all material respects with related FCC regulations and the outcome of these
proceedings will not have a material adverse effect on the Company.
The Company is subject to competition from alternative providers of
video services, including wireless service providers and local telephone
companies. Specifically, the Company is subject to increasing competition in the
Multiple Dwelling Unit market from various entities, including satellite master
antenna television ("SMATV") companies and other franchised cable operators
which are offering bundled services including cable, Internet access and
telephony. 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 areas in the
Southeast. On October 22, 1996 the Tennessee Cable Telecommunications
Association and the Cable Television Association of Georgia filed a formal
complaint with the FCC challenging certain 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 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. In addition, BellSouth has
recently announced plans to launch its Digital Subscriber Line ("DSL") services
which will compete with the Company's high speed Internet access services. See
Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results
- -- Competition in Cable Television Industry; Rapid Technological Change."
The Company cannot predict the extent to which competition will
materialize or the extent of its effect on the Company.
Transactions with Affiliates
Due to TCI's equity ownership in the Company, the Company is able to
purchase programming services from Satellite Services, Inc. ("SSI"), a
subsidiary of TCI. 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. The loss of the
relationship with TCI could adversely affect the financial position and results
of operations of the Company. During the three months ended September 30, 1997
and 1998, the Company paid 74.3% and 75.9%, respectively, of its program fees to
SSI. During the nine months ended September 30, 1997 and 1998, the Company paid
76.0% and 75.4%, respectively, of its program fees to SSI.
The Company and its affiliated entities, InterMedia Partners, a
California limited partnership, InterMedia Partners III, L.P. and InterMedia
Capital Partners VI, L.P. and their consolidated subsidiaries (together the
"Related InterMedia Entities") have entered into agreements ("Administrative
Agreements") with IMI, pursuant to which IMI provides accounting, operational,
marketing, engineering, legal, regulatory compliance and other administrative
services at cost. IMI is the managing member of ICM-IV LLC, a limited liability
company formed in 1997, 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. 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 $1.4 million and $1.1 million to the Company
for the three months ended September 30, 1997 and 1998, respectively, and $4.5
million and $4.3 million for the nine months ended September 30, 1997 and 1998,
respectively.
ICM-IV provides certain management services to the Company for an
annual fee of $3,350. See Part II, Item 5 "Other Information -- Certain Factors
Affecting Future Results -- Related Party Transactions."
-13-
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, statement of
operations and other data of the Company expressed in dollar amounts (in
thousands) and as a percentage of revenue.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------
1997 1998
------------------------ -----------------------
Percentage Percentage
Amount of Revenue Amount of Revenue
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue...................................... $ 63,835 100.0% $ 69,363 100.0%
Costs and Expenses:
Program fees.............................. 13,849 21.7 15,628 22.5
Other direct expenses(1).................. 6,995 11.0 7,274 10.5
Selling, general and administrative
expenses(2)............................. 11,893 18.6 12,133 17.5
Management and consulting fees............ 838 1.3 838 1.2
Depreciation and amortization............. 30,648 48.0 33,584 48.4
---------- ------ ---------- -------
Loss from operations......................... (388) (0.6) (94) (0.1)
Interest and other income.................... 1,217 1.9 918 1.3
Interest expense............................. (19,754) (30.9) (19,833) (28.6)
Other expense................................ (134) (0.2) (72) (0.1)
Income tax benefit........................... 1,338 2.1 947 1.4
Minority interest............................ (225) (0.4) (240) (0.3)
---------- ------ ---------- -------
Net loss..................................... $ (17,946) (28.1)% $ (18,374) (26.5)%
---------- ------ ---------- -------
Other Data:
EBITDA(3).................................... $ 30,260 47.4% $ 33,490 48.3%
</TABLE>
-14-
<PAGE> 17
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------
1997 1998
------------------------ ------------------------
Percentage Percentage
Amount of Revenue Amount of Revenue
---------- ------ ---------- -------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue...................................... $ 186,582 100.0% $ 204,120 100.0%
Costs and Expenses:
Program fees.............................. 40,244 21.6 46,183 22.6
Other direct expenses(1).................. 20,336 10.9 20,680 10.1
Selling, general and administrative
expenses(2)............................. 35,476 19.0 38,095 18.7
Management and consulting fees............ 2,513 1.3 2,513 1.2
Depreciation and amortization............. 97,051 52.0 100,344 49.2
---------- ------ ---------- -------
Loss from operations......................... (9,038) (4.8) (3,695) (1.8)
Interest and other income.................... 3,998 2.1 3,041 1.5
Interest expense............................. (58,631) (31.4) (59,105) (29.0)
Other expense................................ (436) (0.2) (452) (0.2)
Income tax benefit........................... 4,801 2.6 3,636 1.8
Minority interest............................ (653) (0.3) (699) (0.3)
---------- ------ ---------- -------
Net loss..................................... $ (59,959) (32.1)% $ (57,274) (28.1)%
========== ====== ========== =======
Other Data:
EBITDA(3).................................... $ 88,013 47.2% $ 96,649 47.3%
</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, 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 the related Consolidated Statements of Cash Flows and
should not be considered in isolation or as a substitute for measures
of performance in accordance with generally accepted accounting
principles. For information concerning cash flows from operating,
investing and financing activities, see Unaudited Financial Statements
included elsewhere in this Report.
Revenues
The Company's revenues for the three and nine months ended September
30, 1998 increased to $69.4 million and $204.1 million, respectively, as
compared with $63.8 million and $186.6 million for the same periods ended
September 30, 1997, respectively, due primarily to (i) basic subscriber rate
increases which resulted in increased revenue of approximately $4.5 million and
$13.0 million for the three and nine month periods, respectively, (ii) increased
number of basic subscribers due to household growth, which accounted for
approximately $1.1 million and $4.0 million for the three and nine month
periods, respectively, and (iii) an increase of approximately $1.4 million and
$3.5 million in other service revenue for the three and nine month periods,
respectively, offset by (i) decreases of approximately $0.8 million and $1.0
million in pay service revenues for the three and nine month periods,
respectively, which resulted primarily from moving a program from pay service to
expanded basic service during the three months ended September 30, 1997, offset
by increased pay-per-view revenue for the nine month period, and (ii) a decrease
of approximately $0.6 million and $2.0 million in total revenues for the three
and nine month periods, respectively, as a result of the Company's sale of its
cable television assets located in and around
-15-
<PAGE> 18
Royston and Toccoa in December 1997. The increase in other service revenues is
due primarily to increases in advertising sales, converter rental income, and
data service revenues generated from providing high-speed Internet access over
the Company's broadband network, offset by non-recurring advertising revenue
earned from certain programmers to promote and launch their new services during
the three and nine months ended September 30, 1997. Prior to September 1997, the
Company did not offer high-speed Internet access services to its subscribers.
The Company served approximately 586,900 basic subscribers at September
30, 1998, compared to 582,700 basic subscribers at September 30, 1997. Average
monthly basic service revenue per basic subscriber for the three and nine months
ended September 30, 1998 was $27.49 and $27.08, respectively, compared to $24.92
and $24.42 for the same periods ended September 30, 1997, respectively. The
increase represents rate increases implemented by certain of the Company's cable
systems in September 1997 and during 1998, including rate increases for
additional channels offered by certain of the cable systems which have been
upgraded pursuant to the Company's Capital Improvement Program.
Program Fees
Program fees for the three and nine months ended September 30, 1998
increased to $15.6 million and $46.2 million, respectively, as compared with
$13.8 million and $40.2 million for the same periods ended September 30, 1997,
respectively, due primarily to higher rates charged by certain programmers,
increased number of basic subscribers and increased number of channels offered
by certain of the Company's systems to their basic subscribers, offset by
decreased number of pay units.
Average monthly basic program costs per basic subscriber for the three
and nine months ended September 30, 1998 were $5.73 and $5.56, respectively,
compared to $4.48 and $4.39 for the three and nine months ended September 30,
1997, respectively. Program fees for the three and nine months ended September
30, 1998 represent 26.9% and 26.8%, respectively, of basic and pay service
revenues compared to 25.6% and 25.5% for the three and nine months ended
September 30, 1997, respectively. The increases as a percentage of basic and pay
service revenues reflect the impact of program fee rate increases outpacing
revenue growth for the periods.
Other Direct Expenses
Other direct expenses increased to $7.3 million and $20.7 million for
the three and nine months ended September 30, 1998, respectively, compared to
$7.0 million and $20.3 million for the three and nine months ended September 30,
1997, respectively, as a result of (i) an increase in payroll expense due
primarily to wage increases and (ii) increased outside labor costs due primarily
to an increase in non-capitalizable installation activities, including
reconnects, disconnects and relocation of cable outlets, offset by a decrease in
franchise fee expense which resulted from passing through franchise fees to
subscribers by certain of the Company's cable systems beginning late 1997. Other
direct expenses as a percentage of total revenues remained relatively constant
at 10.5% and 10.1% for the three and nine months ended September 30, 1998,
respectively, compared to 11.0% and 10.9% for the same periods ended September
30, 1997, respectively.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the three and
nine months ended September 30, 1998 increased to $12.1 million and $38.1
million, respectively, compared to $11.9 million and $35.5 million for the same
periods ended September 30, 1997, respectively, due primarily to (i)
non-recurring billing conversion expenses incurred by certain of the Company's
cable systems in early 1998, (ii) increased payroll costs due to annual wage
increases as well as non-recurring market rate adjustments for certain of the
Company's job positions, (iii) increased marketing expenses for the nine month
period resulting from increased promotions of the Company's new data and digital
services as well as its newly rebuilt cable systems, and (iv) expenses incurred
by certain of the Company's systems to identify illegal tapping of its cable
services, offset by a decrease in provision for bad debt. SG&A as a percentage
of total revenues decreased to 17.5% and 18.7% for the three and nine months
ended September 30, 1998, respectively, compared to 18.6% and 19.0% for the same
periods ended September 30, 1997, respectively, reflecting the impact of revenue
growth outpacing increases in SG&A expenses.
-16-
<PAGE> 19
Depreciation and Amortization
Depreciation and amortization expense for the three and nine months
ended September 30, 1998 increased to $33.6 million and $100.3 million,
respectively, compared to $30.6 million and $97.1 million for the same periods
ended September 30, 1997, respectively, as a result of capital expenditures of
$116.6 million for the twelve months ended September 30, 1998, offset by the
Company's 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.
Interest and Other Income
Interest and other income is comprised primarily of interest income
earned on the escrowed investments held to be used by the Company to make
semi-annual interest payments on the Notes. Interest and other income for the
three and nine months ended September 30, 1998 decreased to $0.9 million and
$3.0 million, respectively, compared to $1.2 million and $4.0 million for the
three and nine months ended September 30, 1997, respectively, due primarily to
decreases in the escrowed investment balances.
Income Tax Benefit
As partnerships, the tax attributes of ICP-IV and its subsidiaries
other than RMG accrue to the partners. Income tax benefit of $0.9 million and
$3.6 million for the three and nine months ended September 30, 1998,
respectively, and $1.3 million and $4.8 million for the three and nine months
ended September 30, 1997, respectively, has been recorded based on RMG's stand
alone tax provision. The decreases are due primarily to decreases in RMG's
losses before income tax benefit due primarily to increases in income from
operations and decreases in intercompany interest expense for the three and nine
month periods.
Net Loss
The Company's net loss for the three months ended September 30, 1998
increased to $18.4 million from $17.9 million for the same period in 1997 due
primarily to a decrease in interest and other income and decreased income tax
benefit, offset by a decrease in loss from operations. Net loss for the nine
months ended September 30, 1998 decreased to $57.3 million from $60.0 million
for the same period in 1997 due primarily to the decrease in loss from
operations, offset by a decrease in interest and other income, an increase in
interest expense and a decrease in income tax benefit.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain statement of cash flows
information of the Company (in thousands) for the nine months ended September
30, 1997 and 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Statement of Cash Flows Data:
Cash flows from operating activities.................. $ 37,168 $ 31,735
Cash flows from investing activities.................. (54,255) (40,623)
Cash flows from financing activities.................. 12,869 7,500
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company's cash balance decreased by $4.2 million from $8.8 million
as of January 1, 1997 to $4.6 million as of September 30, 1997.
-17-
<PAGE> 20
Cash Flows From Operating Activities
The Company generated cash flows from operating activities of $37.2
million for the nine months ended September 30, 1997 reflecting (i) income from
operations of $88.0 million before non-cash charges to income for depreciation
and amortization of $97.1 million; (ii) interest and other income received of
$5.6 million, primarily from escrowed investments; (iii) interest paid of $63.8
million; (iv) $5.8 million in deferred revenue relating to payments received
from certain programmers to launch and promote their new services; and (v) other
working capital sources of $1.6 million, net of non-operating expenses.
Cash Flows From Investing Activities
The Company purchased property and equipment of $81.9 million during
the nine months ended September 30, 1997 consisting primarily of cable system
upgrades and rebuilds, plant extensions, converters and initial subscriber
installations.
The Company received $28.2 million in proceeds from maturity of its
escrowed investments during the nine months ended September 30, 1997. These
proceeds and related interest received were used to fund interest payment
obligations on the Notes of $33.0 million during the nine months ended September
30, 1997. During the nine months ended September 30, 1997, the Company paid
approximately $0.3 million for the right to provide cable services to a multiple
dwelling unit in Greenville/Spartanburg.
Cash Flows From Financing Activities
The Company's cash flows from financing activities for the nine months
ended September 30, 1997 consisted primarily of net borrowings of $13.0 million
under the bank revolving credit facility, which were used, along with cash
available from operations, to fund the Company's capital requirements.
NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company's cash balance decreased by $1.4 million from $6.4 million
as of January 1, 1998 to $5.0 million as of September 30, 1998.
Cash Flows From Operating Activities
The Company generated cash flows from operating activities of $31.7
million for the nine months ended September 30, 1998 reflecting (i) income from
operations of $96.6 million before non-cash charges to income for depreciation
and amortization of $100.3 million; (ii) interest and other income received of
$4.1 million, primarily from its escrowed investments; (iii) $3.0 million in
deferred revenue relating to payments received during the nine months ended
September 30, 1998 from a certain programmer to launch and promote its new
service; (iv) interest paid of $65.9 million; and (v) other working capital uses
and non-operating expenses of $6.1 million, which includes $4.8 million of
receivables from TCI at September 30, 1998 for advertising sales.
Cash Flows From Investing Activities
The Company purchased property and equipment of $68.9 million during
the nine months ended September 30, 1998 consisting primarily of cable system
upgrades and rebuilds, plant extensions, converters and initial subscriber
installations. During the nine months ended September 30, 1998, the Company also
paid approximately $1.3 million for the right to provide cable services to
several multiple dwelling units in Nashville and Greenville/Spartanburg.
The Company received $30.0 million in proceeds from maturity of its
escrowed investments during the nine months ended September 30, 1998. These
proceeds and related interest received were used to fund interest payment
obligations on the Notes of $32.9 million during the nine months ended September
30, 1998.
-18-
<PAGE> 21
Cash Flows From Financing Activities
The Company's cash flows from financing activities for the nine months
ended September 30, 1998 represented net borrowings of $7.5 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 maturity of its escrowed investments and
related accrued interest, as described above, borrowings from the bank revolving
credit facility and cash available from operations.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
The Company will continue to make substantial expenditures for
technological upgrades and rebuilds over the next year under its Capital
Improvement Program and will continue to make other capital expenditures for
plant extensions, converters and initial subscriber installations over the next
several years.
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 Company's 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 September 30, 1998, the Company had $372.0 million outstanding
under the revolving credit facility, leaving availability of $103.0 million.
Prior to January 1, 1999, the Company has no mandatory amortization requirements
under the Bank Facility.
Management believes that the Company will be able to realize growth in
revenue over the next several years through a combination of household growth,
effective rate increases 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 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. See Part
II, Item 5 "Other Information -- Certain Factors Affecting Future Results --
Substantial Leverage; Deficiency of Earnings to Cover Fixed Charges"; and "--
Future Capital Requirements."
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.
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
-19-
<PAGE> 22
a pledge of any intercompany notes. The obligations of IP-IV under the Bank
Facility are guaranteed by IP-IV's subsidiaries.
The Bank Facility and the Indenture, as defined herein, 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 September 30, 1998 the Company was in compliance with all
of the debt covenants as provided by the Bank Facility and the Indenture.
COMMITMENTS AND CONTINGENCIES
The Company has continuing commitments under franchise agreements and
FCC regulations and is subject to litigation and other claims in the ordinary
course of business. See Note 5 to the Consolidated Financial Statements included
herein. See Part II, Item 5 "Other Information -- Certain Factors Affecting
Future Results -- Regulation of the Cable Television Industry" and "--
Expiration of Franchises."
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.
YEAR 2000
The Company has developed a plan to review, assess and resolve its year
2000 issue. The Company is in the process of conducting 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. Generally, 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 systems being evaluated include all internal use software and
devices and those systems and devices that manage the distribution of the
Company's video and data services to subscribers. The Company has established a
year 2000 project management team and is utilizing both internal and external
resources to assess, remediate, test and implement systems for year 2000
readiness. The Company has completed internal surveys and inventories of its
data and voice networks, engineering systems, facilities, hardware and software
supporting distribution of the Company's services, and other equipment and
systems potentially impacted by the year 2000 problem.
The Company has reviewed information made publicly available on a
significant number of vendors' year 2000 Web sites and is currently in the
process of requesting compliance letters from all significant vendors and
-20-
<PAGE> 23
manufacturers. Representatives from the Company's year 2000 project management
team have attended year 2000 conferences held by TCI in addition to conferences
hosted by a major industry technical association and have reviewed related
remediation information received on a number of software products, hardware,
equipment and systems.
By the end of 1998 the Company expects to complete the assessment of
its internal hardware and software systems and those systems and devices that
manage the distribution of the Company's video and data services to subscribers.
Specifically, the Company expects to receive and complete its review of vendor
confirmation letters, perform risk assessments by component of all items
inventoried, identify system dependencies, develop detailed estimates of
remediation costs, assess timing for remediation activities and make detailed
remediation decisions. During early to mid-1999, the Company will continue its
remediation, testing and implementation efforts. The Company will address
contingency plans based on the results of these efforts. Also by early 1999 the
Company will have completed remediation of its financial information and related
systems.
The Company relies heavily on certain significant third party vendors,
such as its billing service vendor, to provide services to its subscribers. The
Company's billing service vendor has disclosed that it has completed its
remediation efforts and system testing. Integration testing with certain other
vendors' products is expected to be completed by the end of the first quarter of
1999.
Effective January 1, 1998 TCI manages the Company's advertising
business and related services. TCI is in the process of remediating systems that
control the commercial advertising in its and the Company's cable operations.
For updated information regarding the status of TCI's year 2000 program, refer
to TCI's most recent filings with the Securities and Exchange Commission.
Management of the Company has not yet determined the total cost
associated with its year 2000 project and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material, although there can be no assurance that the total expense of the year
2000 project will not have an adverse effect on the Company's financial
position. Additionally, there can be no assurance that the Company's third party
suppliers will all be fully compliant. 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.
(For a description of the above risks and uncertainties, see the
Certain Factors Affecting Future Results section under Item 5 of PART II.)
-21-
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
INTERMEDIA PARTNERS IV, CAPITAL CORP.
InterMedia Partners IV, Capital Corp., a Delaware corporation ("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.
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 September 30, 1998, the Company's total debt balance was
approximately $884.0 million and partners' capital had a deficit balance of
approximately $55.0 million. In addition, subject to the restrictions in the
indenture for the Notes (the "Indenture"), ICP-IV and its subsidiaries (other
than IPCC) may incur additional indebtedness from time to time to finance
acquisitions and capital expenditures or for general corporate purposes. The
high level of the Company's indebtedness will have important consequences,
including: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for general
corporate purposes or for the Capital Improvement Program; (ii) the Company's
ability to obtain additional debt financing in the future for working capital,
capital expenditures, acquisitions or for the Capital Improvement Program may be
limited; and (iii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in the industry and economic conditions
generally. See "-- Future Capital Requirements."
There can be no assurance that the Company will generate earnings in
future periods sufficient to cover its fixed charges, including its debt service
obligations with respect to the Notes. In the absence of such earnings or other
financial resources, the Company could face substantial liquidity problems.
ICP-IV's ability to pay interest on the Notes and to satisfy its other debt
obligations will depend upon its future operating performance, including the
successful implementation of the Capital Improvement Program, 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
-22-
<PAGE> 25
borrowings, including borrowings under the Bank 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 Part I, Item 2
"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.
See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
The Notes are the general obligations of ICP-IV and IPCC and rank pari
passu with all senior indebtedness of ICP-IV and IPCC, if any. The Company's
operations are conducted through the direct and indirect subsidiaries of 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
-23-
<PAGE> 26
services to the extent they become technologically viable and economically
practicable. The Company has completed upgrading certain of its existing systems
and is currently upgrading certain of its other systems with a digital-capable,
high-capacity, broadband hybrid fiber/coaxial network architecture to accomplish
these objectives. Although the Company anticipates that it will continue to
upgrade portions of its systems over the next year, there can be no assurance
that the Company's upgrade of its cable television systems will allow it to
remain competitive with competitors that either do not rely on cable into the
home (e.g., direct broadcast satellite ("DBS") service and multipoint
multichannel distribution service ("MMDS") systems) or have access to
significantly greater amounts of capital and an existing communications network
(e.g., certain telephone companies). The Company's business requires continuing
investment to finance capital expenditures and related expenses for expansion of
the Company's subscriber base and system development. There can be no assurance
that the Company will be able to fund its various planned 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.
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 in 1996, 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.
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, Local Multipoint Distribution Service ("LMDS") and
other new technologies. Other new technologies may become competitive with
services that cable communications systems can offer. For example, Bell South
has recently announced plans to launch its Digital Subscriber Line ("DSL")
services which will compete with the Company's high speed Internet access
services. 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 adopted a final Table of Allotments and Rules for the assignment of channels
for high definition television ("HDTV"). 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.
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 Tennessee Cable Telecommunications
Association ("TCTA") and the Cable Television Association of Georgia filed a
formal complaint with the FCC challenging certain acts and practices that
BellSouth is taking in connection with its deployment of video distribution
facilities in certain areas of Tennessee and Georgia. In addition, the TCTA also
filed a petition
-24-
<PAGE> 27
for investigation with the Tennessee Regulatory Authority 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.
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
(the "1996 Act"). Among other things, the 1996 Act reduces in some
circumstances, and by March 31, 1999 will eliminate, rate regulation for CPS
packages for all cable television systems and immediately eliminates regulation
of this service tier for small cable operators. The FCC is undertaking numerous
rulemaking proceedings to interpret and implement the provisions of the 1996
Act. The 1996 Act and the FCC's implementing regulations could have a
significant effect on the cable television industry. In addition, the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") imposed substantial regulation on the cable television industry, including
rate regulation, and significant portions of the 1992 Act remain in effect
despite the enactment of the 1996 Act and remain highly relevant to the
Company's operations.
The Company elected the benchmark or cost-of-service methodologies to
justify its basic and CPS tier rates in effect prior to May 15, 1994, but relied
primarily upon the cost-of-service methodology to justify regulated service
rates in effect after May 14, 1994. The FCC released a series of orders in 1996
and 1997 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. For example, a bill was introduced in
Congress which would repeal the deregulation of CPS tiers now scheduled for
March 1999. Another bill was also recently introduced in Congress which would
permit DBS companies to carry the signals of local broadcast television stations
within the stations' designated market area. Under this bill, however, the local
broadcast television stations could not impose any must-carry requirements or
other obligations which are required of cable operators. The outcome of these
bills or other similar bills 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.
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"), InterMedia Partners II, L.P.
("IP-II"), InterMedia Partners III, L.P. ("IP-III"), InterMedia Capital Partners
VI, L.P. ("ICP-VI"), and their consolidated subsidiaries and its other
affiliates. IMI, which is majority owned by Robert J. Lewis, provides
administrative services at cost to the Company and to the operating companies of
IP, IP-III and ICP-VI 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.
-25-
<PAGE> 28
EXPIRATION OF FRANCHISES
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.
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,
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. 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 Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Transactions with Affiliates."
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 the
market for the Exchange Notes will continue to develop, or that such a market
would not be subject to similar disruptions.
-26-
<PAGE> 29
YEAR 2000
The Company has developed a plan to review, assess and resolve its year
2000 issue. The Company is in the process of conducting 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. Generally, 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 systems being evaluated include all internal use software and
devices and those systems and devices that manage the distribution of the
Company's video and data services to subscribers. The Company has established a
year 2000 project management team and is utilizing both internal and external
resources to assess, remediate, test and implement systems for year 2000
readiness. The Company has completed internal surveys and inventories of its
data and voice networks, engineering systems, facilities, hardware and software
supporting distribution of the Company's services, and other equipment and
systems potentially impacted by the year 2000 problem.
The Company has reviewed information made publicly available on a
significant number of vendors' year 2000 Web sites and is currently in the
process of requesting compliance letters from all significant vendors and
manufacturers. Representatives from the Company's year 2000 project management
team have attended year 2000 conferences held by TCI in addition to conferences
hosted by a major industry technical association and have reviewed related
remediation information received on a number of software products, hardware,
equipment and systems.
By the end of 1998 the Company expects to complete the assessment of
its internal hardware and software systems and those systems and devices that
manage the distribution of the Company's video and data services to subscribers.
Specifically, the Company expects to receive and complete its review of vendor
confirmation letters, perform risk assessments by component of all items
inventoried, identify system dependencies, develop detailed estimates of
remediation costs, assess timing for remediation activities and make detailed
remediation decisions. During early to mid-1999, the Company will continue its
remediation, testing and implementation efforts. The Company will address
contingency plans based on the results of these efforts. Also by early 1999 the
Company will have completed remediation of its financial information and related
systems.
The Company relies heavily on certain significant third party vendors,
such as its billing service vendor, to provide services to its subscribers. The
Company's billing service vendor has disclosed that it has completed its
remediation efforts and system testing. Integration testing with certain other
vendors' products is expected to be completed by the end of the first quarter of
1999.
Effective January 1, 1998 TCI manages the Company's advertising
business and related services. TCI is in the process of remediating systems that
control the commercial advertising in its and the Company's cable operations.
For updated information regarding the status of TCI's year 2000 program, refer
to TCI's most recent filings with the Securities and Exchange Commission.
Management of the Company has not yet determined the total cost
associated with its year 2000 project and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material, although there can be no assurance that the total expense of the year
2000 project will not have an adverse effect on the Company's financial
position. Additionally, there can be no assurance that the Company's third party
suppliers will all be fully compliant. 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.
-27-
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
------- ------- --------------
<S> <C> <C>
24.1 Power of Attorney (included on page 29).................................
27.1 Schedule of Financial Data for InterMedia Capital
Partners IV, L.P........................................................
</TABLE>
(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 September 30, 1998.
-28-
<PAGE> 31
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: November 12, 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. Smith, 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>
<S> <C> <C>
/s/ ROBERT J. LEWIS President, Chief Executive November 12, 1998
- ----------------------------- Officer and Sole Director
Robert J. Lewis of InterMedia
Management, Inc.
(principal executive
officer)
/s/ EDON V. SMITH Chief Financial Officer November 12, 1998
- ----------------------------- of InterMedia
Edon V. Smith Management, Inc.
(principal financial
officer)
/s/ THOMAS R. STAPLETON Vice President November 12, 1998
- ----------------------------- of InterMedia
Thomas R. Stapleton Management, Inc.
(principal accounting
officer)
</TABLE>
-29-
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
------- ------- --------------
<S> <C> <C>
24.1 Power of Attorney (included on page 29).................................
27.1 Schedule of Financial Data for InterMedia Capital
Partners IV, L.P........................................................
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,000
<SECURITIES> 30,923
<RECEIVABLES> 24,206
<ALLOWANCES> (2,012)
<INVENTORY> 0
<CURRENT-ASSETS> 68,659
<PP&E> 334,161<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 915,273
<CURRENT-LIABILITIES> 64,983
<BONDS> 0
13,938
0
<COMMON> 0
<OTHER-SE> (54,987)
<TOTAL-LIABILITY-AND-EQUITY> 915,273
<SALES> 69,363
<TOTAL-REVENUES> 69,363
<CGS> 22,902<F2>
<TOTAL-COSTS> 69,457
<OTHER-EXPENSES> 72
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,833
<INCOME-PRETAX> (19,081)
<INCOME-TAX> (947)
<INCOME-CONTINUING> (18,374)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,374)
<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>
