<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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE 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 March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION................................................................... 1
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 25
PART II -- OTHER INFORMATION...................................................................... 26
ITEM 1. LEGAL PROCEEDINGS......................................................................... 26
ITEM 2. CHANGES IN SECURITIES..................................................................... 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 27
ITEM 5. OTHER INFORMATION......................................................................... 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 34
SIGNATURES........................................................................................ 35
</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."
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1998 1999
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................ $ 2,236 $ 4,047
Accounts receivable, net of allowance for doubtful accounts of
$1,995 and $1,776, respectively ............................... 22,716 21,959
Escrowed investments held to maturity ............................ 30,923 15,450
Interest receivable on escrowed investments ...................... 791 177
Receivable from affiliate ........................................ 7,086 7,721
Prepaids ......................................................... 695 1,572
Other current assets ............................................. 217 231
--------- ---------
Total current assets .......................................... 64,664 51,157
Intangible assets, net ........................................... 507,500 484,829
Property and equipment, net ...................................... 340,028 341,484
Deferred income taxes ............................................ 12,598 14,294
Investments and other non-current assets ......................... 3,867 6,539
--------- ---------
Total assets .................................................. $ 928,657 $ 898,303
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt ................................ $ 500 $ 1,000
Accounts payable and accrued liabilities ......................... 29,507 26,508
Payable to affiliates ............................................ 4,702 5,093
Deferred revenue ................................................. 18,946 17,828
Accrued interest ................................................. 17,958 9,724
--------- ---------
Total current liabilities ..................................... 71,613 60,153
Deferred channel launch revenue .................................. 6,485 5,808
Long-term debt ................................................... 884,000 885,500
Other non-current liabilities .................................... 1,247 3,941
--------- ---------
Total liabilities ............................................. 963,345 955,402
--------- ---------
Commitments and contingencies
Minority interest
Mandatorily redeemable preferred shares .......................... 14,184 14,430
PARTNERS' CAPITAL
Preferred limited partnership interest ........................... 24,888 24,888
Junior preferred limited partnership interest .................... (1,423) (1,423)
General and limited partners' capital ............................ (70,487) (93,144)
Note receivable from general partner ............................. (1,850) (1,850)
--------- ---------
Total partners' capital ....................................... (48,872) (71,529)
--------- ---------
Total liabilities and partners' capital ....................... $ 928,657 $ 898,303
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 4
INTERMEDIA CAPITAL PARTNERS IV, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
-------- --------
<S> <C> <C>
REVENUES
Basic and cable services ............................... $ 46,012 $ 51,911
Pay service ............................................ 10,112 10,644
Other service .......................................... 9,228 15,090
-------- --------
65,352 77,645
-------- --------
COSTS AND EXPENSES
Program fees ........................................... 15,301 18,068
Other direct expenses .................................. 6,606 7,483
Selling, general and administrative expenses ........... 13,130 15,485
Management and consulting fees ......................... 838 838
Depreciation and amortization .......................... 32,772 41,770
-------- --------
68,647 83,644
-------- --------
Loss from operations ................................... (3,295) (5,999)
-------- --------
OTHER INCOME (EXPENSE)
Interest and other income ............................ 1,203 673
Interest expense ..................................... (19,519) (18,458)
Other expense ........................................ (305) (61)
-------- --------
(18,621) (17,846)
Loss before income tax benefit and minority interest ... (21,916) (23,845)
Income tax benefit ..................................... 1,595 1,696
-------- --------
Net loss before minority interest ...................... (20,321) (22,149)
Minority interest ...................................... (229) (246)
-------- --------
Net loss ............................................... $(20,550) $(22,395)
OTHER COMPREHENSIVE INCOME:
Unrealized holding loss on available-for-sale
securities .......................................... (262)
-------- --------
Comprehensive loss ..................................... $(20,550) $(22,657)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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<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, 1997 ......... $ 24,888 $ $ $(20,751) $ (1,850) $ 2,287
Conversion of Limited Partner
Interest to Junior Preferred
Limited Partner Interest ........... (1,423) 1,423
Net loss ............................. (51,434) (51,434)
Other comprehensive income ........... 275 275
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ......... 24,888 (1,423) (70,487) (1,850) (48,872)
Net loss (unaudited) ................. (22,395) (22,395)
Other comprehensive income (unaudited) (262) (262)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999
(unaudited) ........................ $ 24,888 $ (1,423) $ $(93,144) $ (1,850) $(71,529)
======== ======== ======== ======== ======== ========
</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>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $(20,550) $(22,395)
Minority interest ................................... 229 246
Loss on disposal of fixed assets .................... 4
Depreciation and amortization ....................... 33,160 42,172
Changes in assets and liabilities:
Accounts receivable ............................ 2,093 757
Receivable from affiliates ..................... (652) (635)
Prepaids ....................................... (1,047) (877)
Interest receivable on escrowed investments .... 952 614
Other current assets ........................... 51 (14)
Deferred income taxes .......................... (1,595) (1,696)
Investments and other non-current assets ....... 138 (2,934)
Accounts payable and accrued liabilities ....... (5,749) (1,249)
Payable to affiliates .......................... 644 391
Deferred revenue ............................... 2,218 (1,199)
Accrued interest ............................... (8,229) (8,234)
Deferred channel launch revenue ................ (331) (596)
Other non-current liabilities .................. 11 2,694
-------- --------
Cash flows from operating activities ................ 1,347 7,045
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment .............................. (23,534) (22,644)
Intangible assets ................................... (836) (63)
Proceeds from maturity of escrowed investments ...... 14,508 15,473
-------- --------
Cash flows from investing activities ................ (9,862) (7,234)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ........................ 10,500 2,000
-------- --------
Cash flows from financing activities ................ 10,500 2,000
-------- --------
Net change in cash and cash equivalents ................ 1,985 1,811
Cash and cash equivalents, beginning of period ......... 6,388 2,236
-------- --------
Cash and cash equivalents, end of period ............... $ 8,373 $ 4,047
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 7
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. THE COMPANY AND BASIS OF PRESENTATION
InterMedia Capital Partners IV, L.P. ("ICP-IV"), 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 March 31, 1999, ICP-IV's systems served the following number of
basic subscribers and passed the following number of homes:
<TABLE>
<CAPTION>
Basic Homes
Subscribers Passed
------- -------
<S> <C> <C>
Nashville/Mid-Tennessee Cluster ..... 343,020 532,531
Greenville/Spartanburg Cluster ...... 153,526 246,834
Knoxville/East Tennessee Cluster .... 105,738 153,106
------- -------
Total ........................ 602,284 932,471
======= =======
</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
March 31, 1999 and its results of operations and cash flows for the three months
ended March 31, 1999. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of results that may be expected for the
year ending December 31, 1999. 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,
1998.
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 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective
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<PAGE> 8
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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.
2. ACQUISITIONS, SALE AND EXCHANGE 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 7--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 AT&T Broadband & Internet Services ("AT&TBIS"),
formerly Tele-Communications, Inc.
Affiliates of AT&TBIS 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, AT&TBIS 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. AT&TBIS's
original capital contribution related to the converted interest was $18,057. The
conversion of the 5.4% limited partner interest was recorded at book value of
$1,423 at March 31, 1998. After giving effect to the conversion, AT&TBIS 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, AT&TBIS owns a 99.999% limited partner interest in IP, and effective
August 5, 1997, AT&TBIS owns a 99.997% limited partner interest in ICM-IV (see
Note 7--Related Party Transactions).
AT&TBIS 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 AT&TBIS's substantial continuing interest in
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<PAGE> 9
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
RMG, IPWT and the Greenville/Spartanburg System after the Company's
acquisitions, the acquired assets of these entities have been accounted for at
their historical basis as of the acquisition date. Results of operations for
these entities have been included in the Company's consolidated results only
from the acquisition date.
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. The sale resulted in a gain of $10,006.
Exchange
On December 31, 1998, the Company exchanged certain of its cable system
assets located in an around central and eastern Tennessee ("Exchanged Assets"),
serving approximately 16,000 basic subscribers, for cable system assets located
in and around eastern and western Tennessee, serving approximately 15,500 basic
subscribers, and cash of $736. The exchange resulted in a gain of $42,113,
calculated as the difference between the fair value of the assets received and
the net book value of the Exchanged Assets, plus net proceeds received of $736.
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 four 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 5 -- Long-term Debt). The fair value and maturities of
U.S. Treasury Notes held in escrow are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Matures within 1 year.......... $ 30,923 $ 31,584 $ 15,450 $ 16,009
</TABLE>
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<PAGE> 10
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The fair values of the investments are based on quoted market prices.
4. @HOME WARRANTS
Under a distribution agreement with At Home Corporation ("@Home") the
Company provides high-speed Internet access to subscribers over the Company's
distribution network in certain of its cable television systems. In January
1999, the Company and certain of its affiliates entered into related agreements
whereby @Home would issue to the Company and its affiliates warrants to purchase
shares of @Home's Series A Common Stock ("@Home Stock") at an exercise price of
ten dollars and fifty cents per share. Under the provisions of the agreements,
management estimates that the Company may purchase up to 610,000 shares of @Home
Stock. The warrants become vested and exercisable, subject to certain forfeiture
and other conditions, based on operational targets which include offering the
@Home service by the Company in its service areas and obtaining specified
numbers of @Home subscribers over the remaining six year term of the @Home
distribution agreement. As of and for the three months ended March 31, 1999
investments and other service revenue include $2,964 representing the fair
market value of warrants to purchase 23,138 shares of @Home Stock.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Bank revolving credit facility, $450,000 commitment
as of March 31, 1999, interest currently at LIBOR
plus 0.88% (6.03%) or ABR (7.75%) payable quarterly,
matures July 1, 2004 .................................... $ 373,000 $ 375,000
Bank term loan, interest at LIBOR plus 1.75% (6.88%)
payable quarterly, matures January 1, 2005 .............. 219,500 219,500
11 1/4% senior notes, interest payable semi-annually,
due August 1, 2006 ...................................... 292,000 292,000
--------- ---------
884,500 886,500
Less current portion of long-term debt ..................... (500) (1,000)
--------- ---------
Long-term debt ............................................. $ 884,000 $ 885,500
========= =========
</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 $450,000 of available credit.
Revolving credit facility commitments are permanently reduced semiannually by
increments ranging from $22,500 to $47,500 through maturity on July 1, 2004. The
term loan requires semiannual principal payments of $500 starting January 1,
1999 through January 1, 2004, and final principal payments in two equal
installments of $107,250 on July 1, 2004 and January 1, 2005. Advances under the
Bank Facility are available under interest rate options related to the base rate
of the administrative agent for the Bank Facility ("ABR") or LIBOR. Interest
rates on
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<PAGE> 11
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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. 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, 1998, the interest rates were 6.00%, 6.06%,
6.50% and 7.75% on borrowings of $181,000, $182,000, $6,000 and $4,000,
respectively, outstanding under the revolving credit facility. At March 31,
1999, the interest rates were 6.06%, 6.00%, 5.88% and 7.75% on borrowings of
$182,000, $181,000, $6,000 and $6,000, 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 6.3225% and
receives quarterly interest payments equal to LIBOR. The differential to be paid
or received in connection with an individual swap agreement is accrued as
interest rates change over the period to which the payments or receipts relate.
The agreements expire between May 1999 and February 2000.
The estimated fair value of the interest rate swaps is based on the
current value in the market for transactions with similar terms and adjusted for
the holding period. At December 31, 1998 and March 31, 1999, the fair market
value of the interest rate swaps was $(4,217) and $(2,914), 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, 1998 and March 31, 1999, ICP-IV has $31,714 and
$15,627, 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.
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<PAGE> 12
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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, 1998 and March 31, 1999 is $327,040 and $328,500,
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, 1998 and March 31, 1999
approximate their fair value.
6. COMMITMENTS AND CONTINGENCIES
The Company is committed to provide cable television services under
franchise agreements with remaining terms of up to eighteen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
Current Federal Communications Commission ("FCC") regulations require
that cable television operators obtain permission to retransmit major network
and certain local television station signals. The Company has entered into
long-term retransmission agreements with all applicable stations in exchange for
in-kind and/or other consideration.
The Company has been named in several certified class actions in various
jurisdictions concerning its late fee charges and practices. Certain cable
systems owned by the Company charge late fees to customers who do not pay their
cable bills on time. These late fee cases challenge the amount of the late fees
and the practices under which they are imposed. The Plaintiffs raise claims
under state consumer protection statutes, other state statutes, and common law.
Plaintiffs generally allege that the late fees charged by the Company's cable
systems in the States of Tennessee, South Carolina and Georgia are not
reasonably related to the costs incurred by the cable systems as a result of
late payment. Plaintiffs seek to require cable systems to reduce their late fees
on a prospective basis and to provide compensation for alleged excessive late
fee charges for past periods. These cases are either at the early stages of the
litigation process or are subject to a case management order that sets forth a
process leading to mediation. Based upon the facts available management believes
that, although no assurances can be given as to the outcome of these actions,
the ultimate disposition of these matters should not have a material adverse
effect upon the financial condition of the Company.
Under existing Tennessee laws and regulations, the Company pays an
Amusement Tax in the form of a sales tax on programming service revenues
generated in Tennessee in excess of charges for the basic and expanded basic
levels of service. Under the existing statute, only the service charges or fees
in excess of the charges for the "basic cable" television service package are
not exempt from the Amusement Tax. Related regulations clarify the definition of
basic cable to include two tiers of service, which the Company's management and
other operators in Tennessee have interpreted to mean both the basic and
expanded basic levels of service.
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<PAGE> 13
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The Tennessee Department of Revenue ("TDOR") has proposed legislation
which would replace the Amusement Tax under the existing statute with a new
sales tax on all cable service revenues in excess of twelve dollars per month.
The new tax would be computed at a rate approximately equal to the existing
effective tax rate.
Unless the Company and other cable operators in Tennessee support the
proposed legislation, the TDOR has suggested that it would assess additional
taxes on prior years' expanded basic service revenue. The TDOR can issue an
assessment for prior periods up to three years. The Company estimates that the
amount of such an assessment, if made for all periods not previously audited,
would be approximately $17 million. The Company's management believes that it is
possible but not likely that the TDOR can make such an assessment and prevail in
defending it.
The Company's management believes it has made a valid interpretation of
the current Tennessee statute and regulations and that it has properly
determined and paid all sales taxes due. The Company further believes that the
legislative history of the current statute and related regulations, as well as
the TDOR's history of not making assessments based on audits of prior periods,
support the Company's interpretation. The Company and other cable operators in
Tennessee are aggressively defending their past practices on calculation and
payment of the Amusement Tax and are discussing with the TDOR modifications to
their proposed legislation which would clarify the statute and would minimize
the impact of such legislation on the Company's results of operations.
The Company is subject to other claims and litigation 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.
7. RELATED PARTY TRANSACTIONS
InterMedia Management, Inc. ("IMI") is the managing member of InterMedia
Capital Management, LLC ("ICM-IV LLC"), the .001% 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 $1,804 and $1,437 for the three months ended March 31, 1998
and 1999, respectively. Receivable from affiliates at December 31, 1998 and
March 31, 1999 includes $179 and $710, 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.
Effective January 1, 1998, IMI also provides certain management services
to ICP-IV and its subsidiaries for a per annum fee of $3,350, of which IMI will
defer 20% per annum, payable in each following year, in order to support the
Company's debt. Prior to January 1, 1998, ICM-IV provided such management
services to the Company for the same per annum fee of $3,350.
As an affiliate of AT&TBIS, ICP-IV is able to purchase programming
services from a subsidiary of AT&TBIS. 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 AT&TBIS's ownership in ICP-IV significantly decrease.
Programming fees charged by the AT&TBIS subsidiary
-11-
<PAGE> 14
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
for the three months ended March 31, 1998 and 1999 amounted to $11,203 and
$12,703, respectively. Payable to affiliates includes programming fees payable
to the AT&TBIS subsidiary of $4,032 and $4,255 as of December 31, 1998 and March
31, 1999, respectively.
On January 1, 1998 an affiliate of AT&TBIS 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, AT&TBIS is entitled to
varying percentage shares of the incremental growth in annual cash flow from
advertising sales above specified targets. Management fees charged by the
AT&TBIS subsidiary for the three months ended March 31, 1998 and 1999 amounted
to $81 and $135, respectively. Receivable from affiliates at December 31, 1998
and March 31, 1999 includes $6,907 and $7,011, respectively, of receivables from
AT&TBIS for advertising sales.
8. CHANNEL LAUNCH REVENUE
During 1997 and 1998 the Company received payments from certain
programmers to launch and promote their new channels. Of the total amount
received, the Company recognized advertising revenue of $217 during the three
months ended March 31, 1999 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 from five and ten years. The Company amortized $309 and $479 of the
remaining payments during the three months ended March 31, 1998 and 1999,
respectively.
9. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
During the three months ended March 31, 1998 and 1999, the Company paid
interest of $27,360 and $26,290, respectively.
10. SUBSEQUENT EVENT
Pending Sales and Exchange
On April 20, 1999 the Company entered into agreements with affiliates of
Charter Communications, Inc. ("Charter") to sell certain of its cable television
systems serving approximately 286,000 basic subscribers in and around western
and eastern Tennessee and Gainesville, Georgia and to exchange its cable systems
serving approximately 120,000 basic subscribers in and around Greenville and
Spartanburg, South Carolina for Charter systems serving approximately 140,000
basic subscribers located in Indiana, Kentucky, Utah and Montana ("Charter
Transactions"). The Charter Transactions include the sale of all of the Class A
Common Stock of RMG. Also, the Company executed agreements, subject to consents
from the preferred and limited partners of ICP-IV, which provide for payment of
cash distributions to the preferred and limited partners, other than AT&TBIS, of
approximately $510 million for redemption of their partner interests ("Final
Equity Distributions") upon completion of the Charter Transactions. Expected net
proceeds from the Charter Transactions of approximately $850 million and the
Final Equity Distributions are subject to certain adjustments. The Company
expects to close the Charter Transactions and make the Final Equity
Distributions during the third or fourth quarter of 1999. Consummation of the
Charter
-12-
<PAGE> 15
INTERMEDIA CAPITAL PARTNERS IV, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Transactions are subject to a number of conditions including regulatory and
lender consents. Use of proceeds from the Charter Transactions, including the
Final Equity Distributions, are also subject to lender consents.
Assuming consummation of the Charter Transactions, expected net proceeds
from the Charter Transactions combined with cash flows from operations will not
be sufficient to meet the Company's obligations under its Bank Facility and the
Notes and its obligations to make the Final Equity Distributions. Upon
consummation of the Charter Transactions and the Final Equity Distributions,
AT&TBIS will own 99.999% of the partner interests in the Company. It is the
understanding of the Company's management that AT&TBIS will address the
Company's on-going liquidity needs after the closing of the Charter Transactions
and the Final Equity Distributions.
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<PAGE> 16
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, 1998. 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
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 AT&TBIS, (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
acquisition 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 AT&TBIS had a significant ownership interest. Because of
AT&TBIS'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.
Pending Sales and Exchange
On April 20, 1999 the Company entered into agreements with affiliates of
Charter Communications, Inc. ("Charter") to sell certain of its cable television
systems serving approximately 286,000 basic subscribers in and
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<PAGE> 17
around western and eastern Tennessee and Gainesville, Georgia and to exchange
its cable systems serving approximately 120,000 basic subscribers in and around
Greenville and Spartanburg, South Carolina for Charter systems serving
approximately 140,000 basic subscribers located in Indiana, Kentucky, Utah and
Montana ("Charter Transactions"). The Charter Transactions include the sale of
all of the Class A Common Stock of RMG. Also, the Company executed agreements,
subject to consents from the preferred and limited partners of ICP-IV, which
provide for payment of cash distributions to the preferred and limited partners,
other than AT&TBIS, of approximately $510 million for redemption of their
partner interests ("Final Equity Distributions") upon completion of the Charter
Transactions. Expected net proceeds from the Charter Transactions of
approximately $850 million and the Final Equity Distributions are subject to
certain adjustments. The Company expects to close the Charter Transactions and
make the Final Equity Distributions during the third or fourth quarter of 1999.
Consummation of the Charter Transactions are subject to a number of conditions
including regulatory and lender consents. Use of proceeds from the Charter
Transactions, including the Final Equity Distributions, are also subject to
lender consents. Upon consummation of the Charter Transactions and the Final
Equity Distributions, AT&TBIS will own 99.999% of the partner interests in the
Company.
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 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 direct broadcast satellite ("DBS") service providers,
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 continue
to materialize or the extent of its effect on the Company.
-15-
<PAGE> 18
Transactions with Affiliates
Due to AT&TBIS's equity ownership in the Company, the Company is able to
purchase programming services from Satellite Services, Inc. ("SSI"), a
subsidiary of AT&TBIS. 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 AT&TBIS could adversely affect the financial position and
results of operations of the Company. During the three months ended March 31,
1998 and 1999 the Company paid 73.2% and 70.3%, respectively, of its program
fees to SSI.
The Company and its affiliated entities, InterMedia Partners 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, the managing 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
$1.8 million and $1.4 million to the Company for the three months ended March
31, 1998 and 1999, respectively.
IMI also 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."
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<PAGE> 19
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 March 31,
-------------------------------------------------------------------------
1998 1999
------------------------------- -------------------------------
Percentage Percentage
Amount of Revenue Amount of Revenue
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue .................................. $ 65,352 100.0% $ 77,645 100.0%
Costs and Expenses:
Program fees ........................... 15,301 23.4 18,068 23.3
Other direct expenses(1) ............... 6,606 10.1 7,483 9.6
Selling, general and administrative
expenses(2) .......................... 13,130 20.1 15,485 19.9
Management and consulting fees ......... 838 1.3 838 1.1
Depreciation and amortization .......... 32,772 50.1 41,770 53.8
--------- --------- --------- ---------
Loss from operations ..................... (3,295) (5.0) (5,999) (7.7)
Interest and other income ................ 1,203 1.8 673 0.9
Interest expense ......................... (19,519) (29.9) (18,458) (23.8)
Other expense ............................ (305) (0.5) (61) (0.1)
Income tax benefit ....................... 1,595 2.4 1,696 2.2
Minoity interest ......................... (229) (0.4) (246) (0.3)
--------- --------- --------- ---------
Net loss ................................. $ (20,550) (31.4)% $ (22,395) (28.8)%
========= ========= ========= =========
Other Data:
EBITDA(3) ................................ $ 29,477 45.1% $ 35,771 46.1%
</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 months ended March 31, 1999
increased to $77.6 million as compared with $65.4 million for the three months
ended March 31, 1998 due primarily to i) basic subscriber rate increases which
resulted in increased revenue of approximately $4.7 million, ii) increased
number of basic subscribers
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<PAGE> 20
due to household growth, which accounted for approximately $1.2 million of the
increased revenue, iii) $0.5 million increase in pay per view revenue, and iv) a
$5.9 million increase in other service revenue. The increase in other service
revenue is due primarily to increases in advertising sales, digital installation
and converter revenues and data service revenues generated from providing
high-speed Internet access over the Company's broadband network. The Company
began offering data and digital services to its subscribers in September 1997
and March 1998, respectively. Other service revenue for the three months ended
March 31, 1999 also includes $3.0 million of income recognized for @Home
warrants exercisable by the Company as of March 31, 1999 pursuant to its
agreements with @Home (see Note 4--@Home Warrants to the Condensed Consolidated
Financial Statements).
The Company served approximately 602,300 basic subscribers at March 31,
1999 compared to 583,500 basic subscribers at March 31, 1998. Average monthly
basic service revenue per basic subscriber for the three months ended March 31,
1999 was $29.13 compared to $26.47 for the three months ended March 31, 1998.
The increase represents rate increases implemented by the Company's cable
systems during 1998 and the three months ended March 31, 1999, 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 months ended March 31, 1999 increased to
$18.1 million, as compared with $15.3 million for the three months ended March
31, 1998 due primarily to higher rates charged by certain programmers and
increased number of channels offered by certain of the Company's systems to
their basic subscribers. Average monthly program cost per basic subscriber for
the three months ended March 31, 1999 was $10.14 compared to $8.80 for the three
months ended March 31, 1998. Program fees for the three months ended March 31,
1999 represent 28.9% of basic and pay service revenues compared to 27.3% for the
three months ended March 31, 1998. The increase as a percentage of basic and pay
service revenues reflects the impact of program fee rate increases outpacing
revenue growth for the period.
Other Direct Expenses
Other direct expenses increased to $7.5 million for the three months
ended March 31, 1999 compared to $6.6 million for the three months ended March
31, 1998. The increase is due primarily to an increase in non-capitalizable
installation activities, including reconnects, disconnects and relocation of
cable outlets, and increases resulting from employee incentive compensation
programs. Other direct expenses as a percentage of total revenues remained
relatively constant at 9.6% for the three months ended March 31, 1999 compared
to 10.1% for the three months ended March 31, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 1999 increased to $15.5 million compared to $13.1 million
for the three months ended March 31, 1998 due primarily to (i) increased payroll
costs due to annual wage increases and employee incentive compensation programs,
and (ii) increased marketing expenses. SG&A as a percentage of total revenues
remained relatively constant at 19.9% for the three months ended March 31, 1999
compared to 20.1% for the three months ended March 31, 1998.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March
31, 1999 increased to $41.8 million compared to $32.8 million for the three
months ended March 31, 1998 due primarily to (i) capital expenditures of $94.3
million for the twelve months ended March 31, 1999 and (ii) increases in
property and
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<PAGE> 21
equipment and intangible assets balances which resulted from the exchange of
certain cable system assets in December 1998, offset by (iii) 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 for the three months ended March 31, 1999
decreased to $0.7 million compared to $1.2 million for the three months ended
March 31, 1998. The decrease is due primarily to a decrease in interest income
earned on the escrowed investments held to be used by the Company to make
semi-annual interest payments on the Notes, which resulted from decreases in the
escrowed investment balances.
Interest Expense
Interest expense decreased to $18.5 million for the three months ended
March 31, 1999 compared to $19.5 million for the three months ended March 31,
1998 due primarily to lower interest rates during the three months ended March
31, 1999 compared to the same period in 1998, offset by higher debt balances.
Net Loss
The Company's net loss for the three months ended March 31, 1999
increased to $22.4 million from $20.6 million for the three months ended March
31, 1998. The increase is due primarily to an increase in depreciation and
amortization expense, offset by an increase in EBITDA and a decrease in interest
expense.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain statement of cash flows
information of the Company (in thousands) for the three months ended March 31,
1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Statement of Cash Flows Data:
Cash flows from operating activities ... $ 1,347 $ 7,045
Cash flows from investing activities ... (9,862) (7,234)
Cash flows from financing activities ... 10,500 2,000
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998
The Company's cash balance increased by $2.0 million from $6.4 million
as of January 1, 1998 to $8.4 million as of March 31, 1998.
Cash Flows From Operating Activities
The Company generated cash flows from operating activities of $1.3
million for the three months ended March 31, 1998 reflecting (i) income from
operations of $29.5 million before non-cash charges to income for depreciation
and amortization of $32.8 million; (ii) interest and other income received of
$2.2 million, primarily from
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<PAGE> 22
its escrowed investments; (iii) interest paid of $27.4 million; and (iv) other
working capital uses and non-operating expenses of $3.0 million.
Cash Flows From Investing Activities
The Company purchased property and equipment of $23.5 million during the
three months ended March 31, 1998 consisting primarily of cable system upgrades
and rebuilds, plant extensions, converters and initial subscriber installations.
During the three months ended March 31, 1998 the Company also paid approximately
$0.8 million for the right to provide cable services to several multiple
dwelling units in Nashville and Greenville/Spartanburg.
The Company received $14.5 million in proceeds from maturity of its
escrowed investments on January 31, 1998. These proceeds and related interest
received were used to fund interest payment obligations on the Notes of $16.4
million on February 1, 1998.
Cash Flows From Financing Activities
The Company's cash flows from financing activities for the three months
ended March 31, 1998 represented net borrowings of $10.5 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 maturity of its escrowed investments and related
accrued interest, as described above, borrowings from the bank revolving credit
facility and cash available from operations.
THREE MONTHS ENDED MARCH 31, 1999
The Company's cash balance increased by $1.8 million from $2.2 as of
January 1, 1999 to $4.0 million as of March 31, 1999.
Cash Flows from Operating Activities
The Company generated cash flows from operating activities of $7.0
million for the year ended March 31, 1999 reflecting (i) income from operations
of $35.8 million before non-cash charges to income for depreciation and
amortization of $41.8 million; (ii) interest and other income received of $1.3
million, primarily from the escrowed investments; (iii) interest paid of $26.3
million; and (iv) other net working capital uses and non-operating expenses of
$3.8 million.
Cash Flows from Investing Activities
The Company purchased property and equipment of $22.6 million during the
three months ended March 31, 1999 consisting primarily of cable system upgrades
and rebuilds, plant extensions, converters and initial subscriber installations.
The Company received $15.5 million in proceeds from maturity of its
escrowed investments on January 31, 1999. These proceeds and related interest
received were used to fund interest payment obligations on the Notes of $16.4
million on February 1, 1999.
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<PAGE> 23
Cash Flows from Financing Activities
The Company's cash flows from financing activities for the three months
ended March 31, 1999 represented net borrowings of $2.0 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's most significant capital needs are to service its debt and
to finance cable system upgrades and rebuilds, plant extensions and purchases of
converters and other customer premise equipment. Planned capital expenditures
also provide for initial subscriber installations, purchases of digital and
advertising insertion equipment and replacement purchases of machinery and
equipment.
To make the most efficient use of its capital, management continually
reassesses the need for modifications in system architecture and detailed
technical specifications by considering the Company's current system technical
profile, the technological changes in the cable industry, additional revenue
potential, competition, cost effectiveness and requirements under franchise
agreements.
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 currently provides for borrowings up to $450.0 million in the
aggregate, with permanent semi-annual commitment reductions, and matures in
2004. As of March 31, 1999, the Company had $375.0 million outstanding under the
revolving credit facility, leaving availability of $75.0 million. Prior to
January 1, 1999, the Company had 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 continues to
make available.
Management believes that, with the Company's ability to 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 and principal
payments and planned capital expenditures over the next several years. 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. 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%. 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
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<PAGE> 24
Facility also requires IP-IV to pay quarterly a commitment fee of 0.25% or
0.375% per year, depending on the senior leverage ratio of IP-IV, on the unused
portion of available credit.
The obligations of IP-IV under the Bank Facility are secured by a first
priority pledge of the capital stock and/or partnership interests of IP-IV's
subsidiaries, a negative pledge on other assets of IP-IV and subsidiaries and a
pledge of any 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 March 31, 1999 the Company was in compliance with all of
the debt covenants as provided by the Bank Facility and the Indenture.
Pending Sales and Exchange and Equity Distributions
Assuming consummation of the Charter Transactions, expected net proceeds
from the Charter Transactions of approximately $850 million combined with cash
flows from operations will not be sufficient to meet the Company's obligations
under its Bank Facility and the Notes and its obligations to make the Final
Equity Distributions. Upon consummation of the Charter Transactions and the
Final Equity Distributions, AT&TBIS will own 99.999% of the partner interests in
the Company. It is the understanding of the Company's management that AT&TBIS
will address the Company's on-going liquidity needs after the closing of the
Charter Transactions and the Final Equity Distributions.
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
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<PAGE> 25
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 problem. The Company has completed a review of its computer and operating
systems to identify those systems that could be affected by the year 2000
problem and has developed an implementation plan to resolve the issues.
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 its 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, inventories, and an
assessment 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 completed the process of requesting compliance letters
from all vendors and manufacturers which supply to the Company the items
identified in the Company's year 2000 inventories. Based on the responses
received from these vendors and information made publicly available on vendors'
year 2000 Web sites, the following summarizes vendors' representations regarding
the year 2000 status for items that the Company's management believes could have
a significant impact on operations if such items are not year 2000 compliant by
the end of 1999:
<TABLE>
<CAPTION>
Percent of Items Inventoried
-----------------------------------------
Year 2000 Distribution Internal
Readiness Systems Systems
- --------- ------------ --------
<S> <C> <C>
Ready 86% 74%
Ready by end of 1999 13% 22%
Status unknown 0% 4%
Not compliant 1% 0%
</TABLE>
Of these items, the Company plans to replace those that are not compliant and
those for which the status is unknown.
Representatives from the Company's year 2000 project management team
have attended year 2000 conferences held by AT&TBIS 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.
The Company has completed 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 its subscribers. Specifically, the
Company completed its review of vendor confirmation letters, performed risk
assessments by component of all items inventoried, reviewed system dependencies,
developed detailed estimates of remediation costs, assessed timing for
remediation activities and made detailed remediation decisions. The Company is
continuing its remediation, testing and implementation efforts. In addition, by
June 1999 the Company expects to have completed remediation of its financial
information and related systems.
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<PAGE> 26
The Company's overall progress by phase is as follows:
<TABLE>
<CAPTION>
Complete
Expected --------------------------
Completion Distribution Internal
Phase Date Systems Systems
- -------------------------------------------------------------------
<S> <C> <C> <C>
Assessment May 1999 95% 90%
Remediation June 1999 52% 0%
Testing August 1999 20% 60%
Implementation August 1999 52% 0%
</TABLE>
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such phases will be
completed on such dates. The Company intends to conduct on site inspections of
items inventoried and audits of remediation and implementation activities at a
number of its cable systems during the second quarter of 1999.
Year 2000 expenditures for the three months ended March 31, 1998 and
1999 were not material to the Company's results of operations. Management of the
Company currently estimates that year 2000 expenditures for 1999 will be at
least $4.0 million. Although no assurances can be given, management currently
expects that (i) cash flows from operations will be sufficient to fund the costs
associated with year 2000 compliance and (ii) the total projected cost
associated with the Company's year 2000 program will not be material to the
Company's financial position, results of operations or cash flows.
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 second quarter
of 1999. Although the Company is in the process of researching the year 2000
readiness of its suppliers and vendors, the Company can make no representation
regarding the year 2000 compliance status of systems outside its control and
currently cannot assess the effect on it of any non-compliance by such systems
or parties.
AT&TBIS manages the Company's advertising business and related services.
AT&TBIS 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 AT&TBIS's year 2000 program, refer to AT&TBIS's most
recent filings with the Securities and Exchange Commission.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations or support
functions, including the ability to provide premium, pay-per-view or satellite
delivered programming services to subscribers, customer billing and account
information, scheduling of installation and repair calls, insertion of
advertising spots in the Company's programming, and security and fire
protection. The Company expects to address detailed contingency planning for all
such significant risks during the second quarter of 1999.
Despite the Company's best efforts, there is no assurance that all
material risks associated with year 2000 issues will have been adequately
identified and corrected by the end of 1999.
If critical systems related to the Company's operations are not
successfully remediated, the Company could face claims of breach of obligations
to provide cable services under local franchise agreements, breach of
programming contracts with respect to signal carriage, breach of contracts for
cable system sales or exchanges, potential deemed violations of "must carry"
requirements under FCC rules and regulations, and potential claims by
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<PAGE> 27
investors or creditors for financial losses suffered as a result of year 2000
non-compliance. The Company cannot predict the likelihood that any such claims
might materialize or the extent of potential losses from any such claims.
(For a description of the above risks and uncertainties, see the Certain
Factors Affecting Future Results section under Item 5 of PART II.)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing activities. The Company manages interest
rate risk by maintaining a mix of fixed and variable rate debt that will lower
borrowing costs within reasonable risk parameters. Interest rate swap agreements
are used to effectively convert variable rate debt to fixed rate debt. At
December 31, 1998 and March 31, 1999, the Company had interest rate swap
agreements to pay quarterly interest at fixed rates ranging from 6.28% to
6.3225% and receive quarterly interest at variable rate equal to LIBOR on $120.0
million notional amount of indebtedness, which represented approximately 20.3%
and 20.2% of the Company's underlying debt subject to variable interest rates at
December 31, 1998 and March 31, 1999, respectively. During the three months
ended March 31, 1998 and 1999, the Company's net payments pursuant to the
interest rate swap agreements were $0.2 and $0.3 million, respectively.
Based on the Company's variable-rate debt and related interest rate swap
agreements outstanding at March 31, 1999, each 100 basis point increase or
decrease in the level of interest rates would increase or decrease the Company's
quarterly interest expense and related cash payments by approximately $1.2
million. Such potential increases or decreases are based on certain simplifying
assumptions, including a constant level of variable-rate debt and related
interest rate swap contracts during the period and, for all maturities, an
immediate, across-the-board increase or decrease in the level of interest rates
with no other subsequent changes for the remainder of the period.
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<PAGE> 28
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named in several certified class actions in various
jurisdictions concerning its late fee charges and practices. Certain cable
systems owned by the Company charge late fees to customers who do not pay their
cable bills on time. These late fee cases challenge the amount of the late fees
and the practices under which they are imposed. The Plaintiffs raise claims
under state consumer protection statutes, other state statutes, and the common
law. Plaintiffs generally allege that the late fees charged by the Company's
cable systems in the States of Tennessee, South Carolina and Georgia are not
reasonably related to the costs incurred by the cable systems as a result of the
late payment. Plaintiffs seek to require cable systems to reduce their late fees
on a prospective basis and to provide compensation for alleged excessive late
fee charges for past periods. These cases are either at the early stages of the
litigation process or are subject to a case management order that sets forth a
process leading to mediation. Based upon the facts available management believes
that, although no assurances can be given as to the outcome of these actions,
the ultimate disposition of these matters should not have a material adverse
effect upon the financial condition of the Company.
Under existing Tennessee laws and regulations, the Company pays an
Amusement Tax in the form of a sales tax on programming service revenues
generated in Tennessee in excess of charges for the basic and expanded basic
levels of service. Under the existing statute, only the service charges or fees
in excess of the charges for the "basic cable" television service package are
not exempt from the Amusement Tax. Related regulations clarify the definition of
basic cable to include two tiers of service, which the Company's management and
other operators in Tennessee have interpreted to mean both the basic and
expanded basic levels of service.
The Tennessee Department of Revenue ("TDOR") has proposed legislation
which would replace the Amusement Tax under the existing statute with a new
sales tax on all cable service revenues in excess of twelve dollars per month.
The new tax would be computed at a rate approximately equal to the existing
effective tax rate.
Unless the Company and other cable operators in Tennessee support the
proposed legislation, the TDOR has suggested that it would assess additional
taxes on prior years' expanded basic service revenue. The TDOR can issue an
assessment for prior periods up to three years. The Company estimates that the
amount of such an assessment, if made for all periods not previously audited,
would be approximately $17 million. The Company's management believes that it is
possible but not likely that the TDOR can make such an assessment and prevail in
defending it.
The Company's management believes it has made a valid interpretation of
the current Tennessee statute and regulations and that it has properly
determined and paid all sales taxes due. The Company further believes that the
legislative history of the current statute and related regulations, as well as
the TDOR's history of not making assessments based on audits of prior periods,
support the Company's interpretation. The Company and other cable operators in
Tennessee are aggressively defending their past practices on calculation and
payment of the Amusement Tax and are discussing with the TDOR modifications to
their proposed legislation which would clarify the statute and would minimize
the impact of such legislation on the Company's results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
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<PAGE> 29
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 March 31, 1999, the Company's total debt balance was
approximately $886.5 million and partners' capital was a deficit balance of
approximately $71.5 million. In addition, subject to the restrictions in the
bank debt agreements and 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 capital expenditures; (ii) the
Company's ability to obtain additional debt financing in the future for working
capital, capital expenditures or acquisitions 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, and will be
affected by prevailing economic conditions and financial, business and other
factors, many of which are beyond the Company's control. Based upon expected
increases in revenue and cash flow, the Company anticipates that its cash flow,
together with available borrowings, including borrowings under the 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
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<PAGE> 30
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 and has
substantially completed the Capital Improvement Program. Although the Company
has and will continue to upgrade portions of its systems over the next several
years, there can be no assurance that the Company's upgrades 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., 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
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<PAGE> 31
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 capital requirements. The Company's inability
to make its 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 announced its plans to launch its Digital Subscriber Line 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 (the "1996 Act") 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 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
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<PAGE> 32
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.
Among other things, the 1996 Act eliminated rate regulation for CPS packages for
all cable television systems effective March 31, 1999. 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,
1997 and 1998 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. In addition, the House of Representatives
recently passed the "Satellite Copyright, Competition and Consumer Protection
Act" (the "Satellite Act") which authorizes, in part, DBS carriers to provide
local broadcast television stations within the station's designated market
areas, while implementing retransmission consent and phased-in must carry
requirements by January 1, 2002 for such local network distribution. The U.S.
Senate is considering similar legislation and is expected to pass its own bill
shortly. 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 ("IP"), InterMedia Partners II, L.P. ("IP-II"), 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 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,
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<PAGE> 33
and will likely develop additional relationships in the future with AT&TBIS,
which could give rise to conflicts of interest.
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 AT&TBIS
The Company's relationship with AT&TBIS currently enables the Company to
(i) purchase programming services and equipment from a subsidiary of AT&TBIS at
rates that management believes are generally lower than the Company could obtain
through arm's-length negotiations with third parties, (ii) share in AT&TBIS's
marketing test results, (iii) share in the results of AT&TBIS's research and
development activities and (iv) consult with AT&TBIS'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 AT&TBIS's ownership in the Company significantly decrease. The
loss of the relationship with AT&TBIS 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 AT&TBIS 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
-31-
<PAGE> 34
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.
YEAR 2000
The Company has developed a plan to review, assess and resolve its year
2000 problem. The Company has completed a review of its computer and operating
systems to identify those systems that could be affected by the year 2000
problem and has developed an implementation plan to resolve the issues.
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 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 its 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, inventories, and an assessment 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 completed the process of requesting compliance letters
from all vendors and manufacturers which supply to the Company the items
identified in the Company's year 2000 inventories. Based on the responses
received from these vendors and information made publicly available on vendors'
year 2000 Web sites, the following summarizes vendors' representations regarding
the year 2000 status for items that the Company's management believes could have
a significant impact on operations if such items are not year 2000 compliant by
the end of 1999:
<TABLE>
<CAPTION>
Percent of Items Inventoried
-----------------------------------------
Year 2000 Distribution Internal
Readiness Systems Systems
- --------- ------- -------
<S> <C> <C>
Ready 86% 74%
Ready by end of 1999 13% 22%
Status unknown 0% 4%
Not compliant 1% 0%
</TABLE>
Of these items, the Company plans to replace those that are not compliant and
those for which the status continues to be unknown.
Representatives from the Company's year 2000 project management team
have attended year 2000 conferences held by AT&TBIS 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.
The Company has completed 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 its subscribers. Specifically,
-32-
<PAGE> 35
the Company completed its review of vendor confirmation letters, performed risk
assessments by component of all items inventoried, reviewed system dependencies,
developed detailed estimates of remediation costs, assessed timing for
remediation activities and made detailed remediation decisions. The Company is
continuing its remediation, testing and implementation efforts. In addition, by
June 1999 the Company expects to have completed remediation of its financial
information and related systems.
The Company's overall progress by phase is as follows:
<TABLE>
<CAPTION>
Complete
Expected --------------------------
Completion Distribution Internal
Phase Date Systems Systems
- -------------------------------------------------------------------
<S> <C> <C> <C>
Assessment May 1999 95% 90%
Remediation June 1999 52% 0%
Testing August 1999 20% 60%
Implementation August 1999 52% 0%
</TABLE>
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such phases will be
completed on such dates. The Company intends to conduct on site inspections of
items inventoried and audits of remediation and implementation activities at a
number of its cable systems during the second quarter of 1999.
Year 2000 expenditures for the three months ended March 31, 1998 and
1999 were not material to the Company's results of operations. Management of the
Company currently estimates that year 2000 expenditures for 1999 will be at
least $4.0 million. Although no assurances can be given, management currently
expects that (i) cash flows from operations will be sufficient to fund the costs
associated with year 2000 compliance and (ii) the total projected cost
associated with the Company's year 2000 program will not be material to the
Company's financial position, results of operations or cash flows.
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 second quarter
of 1999. Although the Company is in the process of researching the year 2000
readiness of its suppliers and vendors, the Company can make no representation
regarding the year 2000 compliance status of systems outside its control and
currently cannot assess the effect on it of any non-compliance by such systems
or parties.
AT&TBIS manages the Company's advertising business and related services.
AT&TBIS 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 AT&TBIS's year 2000 program, refer to AT&TBIS's most
recent filings with the Securities and Exchange Commission.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations or support
functions, including the ability to provide premium, pay-per-view or satellite
delivered programming services to subscribers, customer billing and account
information, scheduling of installation and repair calls, insertion of
advertising spots in the Company's programming, and security and fire
protection. The Company expects to address detailed contingency planning for all
such significant risks during the second quarter of 1999.
-33-
<PAGE> 36
Despite the Company's best efforts, there is no assurance that all
material risks associated with year 2000 issues will have been adequately
identified and corrected by the end of 1999.
If critical systems related to the Company's operations are not
successfully remediated, the Company could face claims of breach of obligations
to provide cable services under local franchise agreements, breach of
programming contracts with respect to signal carriage, breach of contracts for
cable system sales or exchanges, potential deemed violations of "must carry"
requirements under FCC rules and regulations, and potential claims by investors
or creditors for financial losses suffered as a result of year 2000
non-compliance. The Company cannot predict the likelihood that any such claims
might materialize or the extent of potential losses from any such claims.
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 27)....................
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 March 31, 1999.
-34-
<PAGE> 37
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: May 13, 1999.
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
substitution and resubstitution, 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 Officer and Sole May 13, 1999
- -------------------------- Director of InterMedia Management, Inc.
Robert J. Lewis (principal executive officer)
/s/ EDON V. SMITH Chief Financial Officer of InterMedia May 13, 1999
- -------------------------- Management, Inc.
Edon V. Smith (principal financial officer)
/s/ THOMAS R. STAPLETON Vice President of InterMedia Management, May 13, 1999
- --------------------------
Thomas R. Stapleton Inc.
(principal accounting officer)
</TABLE>
-35-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,047
<SECURITIES> 15,450
<RECEIVABLES> 21,959
<ALLOWANCES> (1,776)
<INVENTORY> 0
<CURRENT-ASSETS> 51,157
<PP&E> 341,484<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 898,303
<CURRENT-LIABILITIES> 60,153
<BONDS> 0
14,430
0
<COMMON> 0
<OTHER-SE> (71,529)
<TOTAL-LIABILITY-AND-EQUITY> 898,303
<SALES> 77,645
<TOTAL-REVENUES> 77,645
<CGS> 25,551<F2>
<TOTAL-COSTS> 83,644
<OTHER-EXPENSES> 61
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,458
<INCOME-PRETAX> (23,845)
<INCOME-TAX> (1,696)
<INCOME-CONTINUING> (22,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,395)
<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>
